<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 11, 1998
REGISTRATION NO. 333-67715
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 1
To
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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VERIO INC.
(Exact name of Registrant as specified in its charter)
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<TABLE>
<S> <C> <C>
DELAWARE 7375 84-1339720
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer Identification
of incorporation or organization) Classification Code Number) Number)
</TABLE>
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VERIO INC.
8005 SOUTH CHESTER STREET, SUITE 200
ENGLEWOOD, COLORADO 80112
(303) 645-1900
(Address, including zip code, and telephone number, including area code
of Registrant's principal executive offices)
JUSTIN L. JASCHKE
CHIEF EXECUTIVE OFFICER
VERIO INC.
8005 SOUTH CHESTER STREET, SUITE 200
ENGLEWOOD, COLORADO 80112
(303) 645-1900
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to:
<TABLE>
<S> <C> <C>
GAVIN B. GROVER, ESQ. CARLA HAMRE DONELSON JACQUELINE A. DAUNT, ESQ.
MORRISON & FOERSTER LLP GENERAL COUNSEL FENWICK & WEST LLP
425 MARKET STREET VERIO INC. TWO PALO ALTO SQUARE
SAN FRANCISCO, CALIFORNIA 94105 8005 SOUTH CHESTER STREET, SUITE 200 PALO ALTO, CALIFORNIA 94306
(415) 268-7000 ENGLEWOOD, COLORADO 80112 (650) 494-0600
(303) 645-1900
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: At the effective time of the merger (the "Merger") of a wholly-owned
subsidiary of the Registrant with Best Internet Communications, Inc., a
California corporation ("Best"), pursuant to the Amended and Restated Merger
Agreement dated as of November 17, 1998, which shall occur as soon as
practicable after the effective date of this Registration Statement and the
satisfaction of all other conditions to the closing of the Merger.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ] ____________________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering: [ ] ____________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
[BEST LOGO/LETTERHEAD]
, 1998
To the Shareholders of Best Internet Communications, Inc.:
You are cordially invited to attend a Special Meeting of Shareholders (the
"Special Meeting") of Best Internet Communications, Inc., a California
corporation ("Best"), on December , 1998, at 10 A.M., Pacific Time, which will
be held at the corporate offices of Best, located at 345 East Middlefield Road,
Mountain View, California 94043.
The purpose of the Special Meeting is for you to consider and vote upon a
proposal to approve and adopt an Amended and Restated Agreement and Plan of
Merger dated as of November 17, 1998 (the "Merger Agreement"), by and among
Verio Inc., a Delaware corporation ("Verio"), Purple Acquisition, Inc., a
California corporation and a wholly-owned subsidiary of Verio ("Merger Sub"),
and Best. Best recently merged with Hiway Technologies, Inc., a Florida
corporation, and the resulting entity is referred to herein as "Hiway." Pursuant
to the Merger Agreement, Merger Sub will be merged with and into Hiway, with
Hiway as the surviving company (the "Merger").
At the effective time of the Merger (the "Effective Time"), each
outstanding share of common stock, no par value per share, of Hiway ("Hiway
Common Stock") will be converted into cash and a fraction of a share of the
common stock, $0.001 par value per share, of Verio ("Verio Common Stock"), as
follows:
- The total consideration to be paid or issued with respect to each share
of Hiway Common Stock in connection with the Merger (the "Per Share
Price") will be equal to the quotient of (i) approximately $254.72
million, adjusted as described below (the "Total Consideration Value"),
divided by (ii) the number of shares of Hiway Common Stock outstanding on
the date the Merger is closed (the "Closing Date"), on a fully diluted
basis.
- The amount of cash payable with respect to each share of Hiway Common
Stock (the "Per Share Cash Amount") will be equal to the quotient of (i)
$176.0 million, divided by (ii) the total number of shares of Hiway
Common Stock outstanding on the Closing Date.
- The fraction of a share of Verio Common Stock issuable with respect to
each share of Hiway Common Stock (the "Common Stock Exchange Ratio") will
be equal to the quotient of (i) the amount by which the Per Share Price
exceeds the Per Share Cash Amount, divided by (ii) $16.00.
The Total Consideration Value will be finally determined pursuant to the
Merger Agreement at the Effective Time, taking into account, among other things,
the amount, if any, of certain excess expenses and payments that may be incurred
or made by Hiway related to the Merger and Hiway's previously proposed initial
public offering ("Excess Expenses") and the proceeds that would be receivable by
Hiway upon the exercise of certain options and warrants to purchase Hiway Common
Stock. In addition, the actual value of the shares of Verio Common Stock to be
issued in connection with the Merger will depend upon, among other things, the
actual value of Verio Common Stock at the Closing Date, which may vary both
before and after the Closing Date. See "Risk Factors -- Potential Fluctuation of
Value of Consideration Received" and "The Merger Agreement -- Merger
Consideration" at page 15 and page 50, respectively, of the accompanying Proxy
Statement/Prospectus for a more detailed discussion of the consideration to be
received in the Merger. Cash will be paid in lieu of fractional shares.
Each Hiway option or warrant will be assumed by Verio and become an option
or warrant to purchase, at the same aggregate exercise price and on
substantially the same terms and conditions as the Hiway option or warrant, that
number of shares of Verio Common Stock which the holder thereof would have been
entitled to receive had such option or warrant been exercised prior to the
Effective Time and had the Total Consideration Value been paid entirely in
shares of Verio Common Stock. The aggregate number of shares of Verio Common
Stock subject to the resulting options and warrants (the "Option
Consideration"), divided by the aggregate number of shares of Hiway Common Stock
subject to the Hiway options and warrants at the Effective Time, is referred to
herein as the "Option Exchange Ratio."
<PAGE> 3
The exact amount of cash and shares of Verio Common Stock payable with
respect to the Hiway Common Stock and the aggregate potential Option
Consideration cannot be determined until the Effective Time. However, based upon
Hiway's capitalization as of November 13, 1998, and assuming that there are no
Excess Expenses, (i) the Per Share Cash Amount will be approximately $4.90 and
the Common Stock Exchange Ratio will be approximately 0.0875, and (ii) the
Option Exchange Ratio will be approximately 0.3940. Thus, of the approximately
4.92 million shares of Verio Common Stock potentially issuable in connection
with the Merger (based on such assumptions), approximately 3.14 million will be
issued in connection with the conversion of outstanding shares of Hiway Common
Stock and approximately 1.78 million will be reserved for issuance upon the
exercise of options or warrants to purchase Hiway Common Stock assumed by Verio.
Additional examples of how the actual amount of cash and exchange ratios
will be determined are included in the accompanying Proxy Statement/Prospectus,
which you are urged to read carefully.
The Board of Directors of Hiway has retained BT Alex. Brown Incorporated,
an investment banking firm, to act as its financial advisor in connection with
the Merger. BT Alex. Brown Incorporated has delivered to the Board of Directors
of Hiway its written opinion, dated November 20, 1998, to the effect that, as of
such date, the Common Stock Exchange Ratio and the Per Share Cash Amount, taken
together, were fair, from a financial point of view, to the holders of Hiway
Common Stock.
The Merger is subject to the approval of the shareholders of Hiway and a
number of other conditions. Attached to the accompanying Proxy
Statement/Prospectus is a form of proxy relating to a proposal (the "Hiway
Merger Proposal") to authorize and approve the Merger and the Merger Agreement.
AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND THE HIWAY MERGER PROPOSAL. YOUR BOARD OF
DIRECTORS BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT ARE FAIR TO, AND IN
THE BEST INTERESTS OF, HIWAY AND ITS SHAREHOLDERS, AND UNANIMOUSLY RECOMMENDS
THAT YOU VOTE "FOR" APPROVAL OF THE HIWAY MERGER PROPOSAL.
The accompanying Proxy Statement/Prospectus provides detailed information
concerning the proposed Merger and additional information concerning Verio and
Hiway, which you are urged to read carefully. The complete text of the Merger
Agreement is attached as Appendix A to the Proxy Statement/Prospectus.
As a holder of Hiway Common Stock, you may have certain dissenters' rights
with respect to the proposed Merger. In order to exercise such rights, you must
abstain from voting or vote against approval of the Hiway Merger Proposal. Your
dissenters' rights are governed by specific legal provisions contained in
Chapter 13 of the California General Corporation Law (the "CGCL"). A summary of
certain provisions of Chapter 13 of the CGCL pertaining to the rights of
dissenting shareholders in connection with the Merger is included in the
enclosed Proxy Statement/Prospectus in the section entitled "Dissenters' Rights
of Hiway Shareholders." The complete text of Chapter 13 of the CGCL is set forth
as Appendix D to the accompanying Proxy Statement/Prospectus.
<PAGE> 4
It is important that your shares of Hiway Common Stock be represented at
the Special Meeting regardless of the number of shares you hold. The required
vote of Hiway shareholders to approve the Hiway Merger Proposal is based upon
the number of outstanding shares of Hiway Common Stock and not the number of
shares which are actually voted. Accordingly, the failure to submit a proxy card
or to vote in person at the Special Meeting, and the abstention from voting by a
shareholder, will each have the same effect as a vote "AGAINST" approval of the
Hiway Merger Proposal. THEREFORE, PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR
PROXY CARD AS SOON AS POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING. You may revoke your proxy at any time prior to its exercise by filing a
written notice of such revocation with the Secretary of Hiway or by signing and
delivering to such Secretary a proxy bearing a later date. In addition, you may
attend the Special Meeting and vote your shares in person if you wish, even
though you have previously returned your proxy.
Sincerely yours,
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<PAGE> 5
BEST INTERNET COMMUNICATIONS, INC.
345 EAST MIDDLEFIELD ROAD
MOUNTAIN VIEW, CALIFORNIA 94043
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To the Shareholders of Best Internet Communications, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of the Shareholders of Best
Internet Communications, Inc., a California corporation ("Best"), will be held
at Best's corporate offices, located at 345 East Middlefield Road, Mountain
View, California 94043, on December , 1998, at 10 A.M., Pacific Time, for the
following purposes:
1.To approve and adopt an Amended and Restated Agreement and Plan of Merger
dated as of November 17, 1998 (the "Merger Agreement"), by and among
Verio Inc., a Delaware corporation ("Verio"), Purple Acquisition, Inc., a
California corporation and a wholly-owned subsidiary of Verio ("Merger
Sub"), and Best. Best recently merged with Hiway Technologies, Inc., a
Florida corporation, and the resulting entity is referred to herein as
"Hiway." Pursuant to the Merger Agreement, Merger Sub will be merged with
and into Hiway, with Hiway as the surviving company (the "Merger").
At the effective time of the Merger (the "Effective Time"), each
outstanding share of common stock, no par value per share, of Hiway
("Hiway Common Stock") will be converted into cash and a fraction of a
share of the common stock, $0.001 par value per share, of Verio ("Verio
Common Stock"), as follows:
- The total consideration to be paid or issued with respect to each share
of Hiway Common Stock in connection with the Merger (the "Per Share
Price") will be equal to the quotient of (i) approximately $254.72
million, adjusted as described below (the "Total Consideration Value"),
divided by (ii) the number of shares of Hiway Common Stock outstanding
on the date the Merger is closed (the "Closing Date"), on a fully
diluted basis.
- The amount of cash payable with respect to each share of Hiway Common
Stock (the "Per Share Cash Amount") will be equal to the quotient of
(i) $176.0 million, divided by (ii) the total number of shares of Hiway
Common Stock outstanding on the Closing Date.
- The fraction of a share of Verio Common Stock issuable with respect to
each share of Hiway Common Stock (the "Common Stock Exchange Ratio")
will be equal to the quotient of (i) the amount by which the Per Share
Price exceeds the Per Share Cash Amount, divided by (ii) $16.00.
The Total Consideration Value will be finally determined pursuant to the
Merger Agreement at the Effective Time, taking into account, among other
things, the amount, if any, of certain excess expenses and payments that
may be incurred or made by Hiway related to the Merger and Hiway's
previously proposed initial public offering ("Excess Expenses") and the
proceeds that would be receivable by Hiway upon the exercise of certain
options and warrants to purchase Hiway Common Stock. In addition, the
actual value of the shares of Verio Common Stock to be issued in
connection with the Merger will depend upon, among other things, the
actual value of Verio Common Stock at the Closing Date, which may vary
both before and after the Closing Date. The accompanying Proxy Statement/
Prospectus describes these and other risks that you should consider. Cash
will be paid in lieu of fractional shares.
Each Hiway option or warrant will be assumed by Verio and become an
option or warrant to purchase, at the same aggregate exercise price and
on substantially the same terms and conditions as the Hiway option or
warrant, that number of shares of Verio Common Stock which the holder
thereof would have been entitled to receive had such option or warrant
been exercised prior to the Effective Time and had the entire Total
Consideration Value been paid entirely in shares of Verio Common Stock.
The aggregate number of shares of Verio Common Stock subject to the
resulting options and warrants (the
<PAGE> 6
"Option Consideration"), divided by the aggregate number of shares of
Hiway Common Stock subject to the Hiway options and warrants at the
Effective Time, is referred to herein as the "Option Exchange Ratio."
The exact amount of cash and shares of Verio Common Stock payable with
respect to the Hiway Common Stock and the aggregate potential Option
Consideration cannot be determined until the Effective Time. However,
based upon Hiway's capitalization as of November 13, 1998, and assuming
that there are no Excess Expenses, (i) the Per Share Cash Amount will be
approximately $4.90 and the Common Stock Exchange Ratio will be
approximately 0.0875, and (ii) the Option Exchange Ratio will be
approximately 0.3940.
The Merger is described more completely in the accompanying Proxy
Statement/Prospectus, and a copy of the Merger Agreement is attached as
Appendix A thereto. The Proxy Statement/Prospectus also contains
additional examples of the determination of the actual amounts of cash
and shares of Verio Common Stock to be issued in the Merger; and
2.To transact any other business which may properly come before the meeting
and any adjournments or postponements thereof.
The Board of Directors has fixed the close of business on December , 1998
as the record date for the determination of the holders of Hiway Common Stock
entitled to notice of, and to vote at, the Special Meeting. The required vote of
the Hiway shareholders to approve and adopt the Merger Agreement is based upon
the number of outstanding shares of Hiway Common Stock and not the number of
shares which are actually voted. Accordingly, the failure to submit a proxy card
or to vote in person at the Special Meeting and the abstention from voting by a
shareholder will each have the same effect as a vote "AGAINST" approval of the
Hiway Merger Proposal. The Merger Agreement and other matters related thereto
are more fully described in the accompanying Proxy Statement/Prospectus and the
appendices thereto, which form a part of this Notice.
All shareholders are cordially invited and encouraged to attend the Special
Meeting. In any event, to ensure your representation at the Special Meeting,
please carefully read the accompanying Proxy Statement/ Prospectus and complete,
sign, date and return the enclosed proxy card in the reply envelope provided.
Should you receive more than one proxy because your shares are registered in
different names and addresses, each proxy should be returned to ensure that all
your shares will be voted. If you attend the Special Meeting and vote by ballot,
your proxy will be revoked automatically and only your vote at the Special
Meeting will be counted. The prompt return of your proxy card will assist us in
preparing for the Special Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
Arthur L. Cahoon
Chief Executive Officer
Mountain View, California
December , 1998
<PAGE> 7
VERIO INC.
PROSPECTUS
AND
BEST INTERNET COMMUNICATIONS, INC.
PROXY STATEMENT
This Proxy Statement/Prospectus ("Proxy Statement/Prospectus") is being
furnished to holders of common stock, no par value per share ("Hiway Common
Stock"), of Best Internet Communications, Inc., a California corporation
("Best"), in connection with the solicitation of proxies by the Board of
Directors of Best for use at a Special Meeting of Shareholders of Best to be
held on December , 1998, at 10 A.M., Pacific Time, at the corporate offices of
Best located at 345 East Middlefield Road, Mountain View, California 94043 (the
"Hiway Special Meeting"). This Proxy Statement/Prospectus also is being
furnished to holders of options and warrants to purchase shares of Hiway Common
Stock. Best recently merged with Hiway Technologies, Inc., a Florida
corporation, and the resulting entity is referred to herein as "Hiway."
This Proxy Statement/Prospectus relates to the Amended and Restated
Agreement and Plan of Merger dated as of November 17, 1998 (as the same may be
amended, supplemented or modified, the "Merger Agreement"), by and among Verio
Inc., a Delaware corporation ("Verio"), Purple Acquisition, Inc., a California
corporation and a wholly-owned subsidiary of Verio ("Merger Sub"), and Hiway.
The Merger Agreement amends and restates in its entirety an Agreement and Plan
of Merger, dated as of July 28, 1998, by and among Verio, Merger Sub and Hiway
(the "Initial Merger Agreement"). Pursuant to the Merger Agreement, Merger Sub
will be merged with and into Hiway, with Hiway as the surviving company, which
will be a wholly-owned subsidiary of Verio (the "Merger"). A copy of the Merger
Agreement is attached as Appendix A to this Proxy Statement/Prospectus.
At the effective time of the Merger (the "Effective Time"), each
outstanding share of Hiway Common Stock will be converted into cash and a
fraction of a share of the common stock, $0.001 par value per share ("Verio
Common Stock"), of Verio, as follows:
- The total consideration to be paid or issued with respect to each share
of Hiway Common Stock in connection with the Merger (the "Per Share
Price") will be equal to the quotient of (i) approximately $254.72
million, adjusted as described herein (the "Total Consideration Value"),
divided by (ii) the number of shares of Hiway Common Stock outstanding on
the date the Merger is closed (the "Closing Date"), on a fully diluted
basis.
- The amount of cash payable with respect to each share of Hiway Common
Stock (the "Per Share Cash Amount") will be equal to the quotient of (i)
$176.0 million, divided by (ii) the total number of shares of Hiway
Common Stock outstanding on the Closing Date.
- The fraction of a share of Verio Common Stock issuable with respect to
each share of Hiway Common Stock (the "Common Stock Exchange Ratio") will
be equal to the quotient of (i) the amount by which the Per Share Price
exceeds the Per Share Cash Amount, divided by (ii) $16.00.
The Total Consideration Value will be finally determined pursuant to the
Merger Agreement at the Effective Time, taking into account, among other things,
the amount, if any, of certain excess expenses and
(Continued on following page)
SEE "RISK FACTORS" AT PAGE 14 FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED
BY HIWAY SHAREHOLDERS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS DECEMBER , 1998.
<PAGE> 8
payments that may be incurred or made by Hiway related to the Merger and Hiway's
previously proposed initial public offering ("Excess Expenses") and the proceeds
that would be receivable by Hiway upon the exercise of certain options and
warrants to purchase Hiway Common Stock. The actual value of the shares of Verio
Common Stock to be issued with respect to each share of Hiway Common Stock (and
thus the actual value of the Total Consideration Value at the Effective Date)
will depend upon, among other things, the actual value of Verio Common Stock at
the Closing Date, which may vary both before and after the Closing Date. See
"Risk Factors -- Potential Fluctuation of Value of Consideration Received" and
"The Merger Agreement -- Merger Consideration" for a more detailed discussion of
the consideration to be received in the Merger. Cash will be paid in lieu of
fractional shares.
Each Hiway option or warrant will be assumed by Verio and become an option
or warrant to purchase, at the same aggregate exercise price and on
substantially the same terms and conditions as the Hiway option or warrant, that
number of shares of Verio Common Stock which the holder thereof would have been
entitled to receive had such option or warrant been exercised prior to the
Effective Time and had the Total Consideration Value been paid entirely in
shares of Verio Common Stock. The aggregate number of shares of Verio Common
Stock subject to the resulting options and warrants (the "Option
Consideration"), divided by the aggregate number of shares of Hiway Common Stock
subject to the Hiway options and warrants at the Effective Time, is referred to
herein as the "Option Exchange Ratio."
The exact amount of cash and shares of Verio Common Stock payable with
respect to the Hiway Common Stock and the aggregate potential Option
Consideration cannot be determined until the Effective Time. However, based upon
Hiway's capitalization as of November 13, 1998, and assuming that there are no
Excess Expenses, (i) the Per Share Cash Amount will be approximately $4.90 and
the Common Stock Exchange Ratio will be approximately 0.0875, and (ii) the
Option Exchange Ratio will be approximately 0.3940.
Additional examples of how the actual amount of cash and exchange ratios
will be determined are included in this Proxy Statement/Prospectus under the
heading "The Merger Agreement -- Merger Consideration," starting at page 50,
which you are urged to read carefully.
Verio has filed a Registration Statement on Form S-4 under the Securities
Act of 1933, as amended, with the Securities and Exchange Commission (the
"Commission") covering the shares of Verio Common Stock to be issued in
connection with the Merger. This Proxy Statement/Prospectus also constitutes the
prospectus of Verio with respect to such shares and has been filed as part of
such Registration Statement. Consummation of the Merger is subject to various
conditions, including adoption of the Merger Agreement at the Hiway Special
Meeting by the holders of a majority of the outstanding shares of Hiway Common
Stock entitled to vote thereon.
Verio Common Stock is listed and traded on the Nasdaq National Market
("Nasdaq") under the symbol "VRIO." On December , 1998, the closing sale price
for Verio Common Stock as reported on Nasdaq was $ per share.
All information contained in this Proxy Statement/Prospectus with respect
to Verio has been provided by Verio. All information contained in this Proxy
Statement/Prospectus with respect to Hiway has been provided by Hiway. This
Proxy Statement/Prospectus is first being mailed to shareholders of Hiway on or
about December , 1998. Any shareholder of Hiway who has given a proxy may
revoke it at any time prior to its exercise. See "The Hiway Special
Meeting -- Record Date; Voting Rights; Proxies."
<PAGE> 9
AVAILABLE INFORMATION
Under the rules and regulations of the Commission, the solicitation of
proxies from the shareholders of Hiway to approve the Merger Agreement and the
consummation of the Merger constitute an offering of the Verio Common Stock to
be issued in connection with the Merger. Accordingly, Verio has filed with the
Commission a Registration Statement on Form S-4 (including all amendments,
exhibits, annexes and schedules thereto, the "Registration Statement"), pursuant
to the Securities Act of 1933, as amended (the "Securities Act"), with respect
to such offering. This Proxy Statement/Prospectus constitutes the prospectus of
Verio that is filed as part of the Registration Statement. Other parts of the
Registration Statement are omitted from this Proxy Statement/Prospectus in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement. Statements
made in this Proxy Statement/Prospectus as to the contents of any contract,
agreement or other document are not necessarily complete, and, in each instance,
reference is made to the copy of the document filed as an exhibit to the
Registration Statement for a more complete description of the matters involved,
and each such statement shall be deemed qualified in its entirety by such
reference. The Registration Statement, including exhibits filed as a part
thereof, is available at the Commission for inspection and copying as set forth
below.
Verio is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed may be
inspected and copied at the public reference facilities of the Commission
located at Room 1024, Judiciary Plaza, 450 Fifth Street, NW, Washington D.C.
20549, and at the Commission's Regional Offices at Seven World Trade Center,
Suite 1300, New York, New York 10048, and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials also can
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, NW, Washington, D.C. 20549 at prescribed rates. The Commission maintains
a Web site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding Verio. Verio Common Stock is quoted
on Nasdaq.
i
<PAGE> 10
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
WITH RESPECT TO THE MATTERS DESCRIBED IN THIS PROXY STATEMENT/ PROSPECTUS OTHER
THAN THOSE CONTAINED HEREIN. ANY INFORMATION OR REPRESENTATIONS WITH RESPECT TO
SUCH MATTERS NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY VERIO OR HIWAY. THIS PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, SECURITIES,
OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO OR
FROM WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OF AN OFFER OR
SOLICITATION OF A PROXY IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF VERIO OR
HIWAY SINCE THE DATE HEREOF OR THAT THE INFORMATION IN THIS PROXY
STATEMENT/PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
ii
<PAGE> 11
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
AVAILABLE INFORMATION....................................... i
SUMMARY..................................................... 1
The Companies............................................. 1
Verio.................................................. 1
Hiway.................................................. 2
Merger Sub............................................. 2
Hiway Special Meeting..................................... 3
Time, Place and Date................................... 3
Purpose................................................ 3
Votes Required; Record Date............................ 3
The Merger................................................ 3
General................................................ 3
Conversion of Shares; Exchange Ratios.................. 3
Conditions to the Merger............................... 5
Termination............................................ 6
Accounting Treatment................................... 6
Dissenters' Rights........................................ 6
Surrender of Stock Certificates........................... 6
Recommendation of the Hiway Board of Directors............ 6
Risk Factors.............................................. 7
Opinion of Hiway Financial Advisor........................ 7
Interests of Certain Persons in the Merger................ 7
Material Federal Income Tax Consequences.................. 7
Comparison of Rights of Verio Stockholders and Hiway
Shareholders........................................... 7
Summary Historical and Pro Forma Financial Data of
Verio.................................................. 8
Selected Historical Financial Data of Hiway............... 10
Selected Unaudited Pro Forma Condensed Combined Financial
Data................................................... 11
Comparative Per Share Data................................ 12
Comparative Per Share Prices and Dividend Policies........ 12
RISK FACTORS................................................ 14
Uncertainties Associated with the Integration of Hiway.... 14
Potential Fluctuation of Value of Consideration
Received............................................... 15
Limitations of Fairness Opinion........................... 15
Financial Information Concerning Acquisitions; Integration
Expenses............................................... 16
Dependence Upon Channel Partners.......................... 16
Management of Growth; Integration of Acquisitions and
Investments............................................ 17
Risks Associated with International Operations and
Expansion.............................................. 18
Changes in the Rights of Hiway Shareholders............... 18
Interests of Certain Persons in the Merger................ 19
Shares Eligible for Future Sale........................... 19
History of Losses; No Assurance of Profitability.......... 20
Substantial Indebtedness; Effect of Financial Leverage.... 20
Risks Associated with Financing Arrangements.............. 21
Requirements for Additional Capital....................... 21
Competition; Pricing Fluctuation.......................... 21
Dependence Upon Implementation of Network Infrastructure;
Establishment and Maintenance of Peering
Relationships.......................................... 23
Challenges of Growth by Acquisitions...................... 23
Fluctuations in Operating Results......................... 23
Dependence on Key Personnel............................... 24
</TABLE>
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<TABLE>
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Risk of System Failure.................................... 24
Security Risks............................................ 24
Potential Liability for Information Disseminated Over
Network; Regulatory Matters............................ 25
Dependence on the Internet; Risks of Technology Trends and
Evolving Industry Standards............................ 26
Dependence Upon Suppliers; Limited Sources of Supply...... 26
Year 2000 Compliance...................................... 27
Effect of Antitakeover Provisions......................... 28
Forward-Looking Statements................................ 28
THE HIWAY SPECIAL MEETING................................... 29
Date, Time, Place and Purpose............................. 29
Record Date; Voting Rights; Proxies....................... 29
Solicitation of Proxies................................... 30
Quorum.................................................... 30
Required Vote............................................. 30
THE MERGER.................................................. 32
General................................................... 32
Effective Time............................................ 33
Conversion of Shares; Procedures for Exchange of Stock
Certificates........................................... 33
Background of the Merger.................................. 34
Recommendation of the Hiway Board; Reasons for the
Merger................................................. 37
Opinion of Hiway Financial Advisor........................ 41
Interests of Certain Persons in the Merger................ 45
Material Federal Income Tax Consequences.................. 46
Accounting Treatment...................................... 47
Stock Ownership Following the Merger...................... 47
Regulatory Approvals...................................... 47
Resale Restrictions....................................... 48
THE MERGER AGREEMENT........................................ 50
The Merger................................................ 50
Effective Time of the Merger.............................. 50
Merger Consideration...................................... 50
Stock Options and Warrants................................ 52
Representations and Warranties............................ 53
Certain Covenants......................................... 53
Conditions................................................ 55
Termination............................................... 55
Amendment; Waiver......................................... 56
Expenses.................................................. 56
VOTING AGREEMENTS........................................... 56
DISSENTERS' RIGHTS OF HIWAY SHAREHOLDERS.................... 57
COMPARATIVE PER SHARE PRICES AND DIVIDEND POLICIES.......... 58
DESCRIPTION OF CAPITAL STOCK................................ 59
Verio Capital Stock....................................... 59
Verio Warrants............................................ 60
Verio Registration Rights................................. 60
Hiway Capital Stock....................................... 62
COMPARISON OF RIGHTS OF VERIO STOCKHOLDERS AND HIWAY
SHAREHOLDERS.............................................. 62
General................................................... 62
Amendment of Charter Documents............................ 62
</TABLE>
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Election and Number of Directors; Filling Vacancies;
Removal................................................ 63
Stockholders Meetings and Written Consents................ 64
Preferred Stock........................................... 64
Business Combinations..................................... 65
Limitation of Liability of Directors...................... 65
Indemnification of Directors and Officers................. 66
Dissenters' Rights........................................ 67
Dividends................................................. 67
Stockholder Voting........................................ 68
Inspection of Stockholder List............................ 68
Loans to Officers and Employees........................... 68
Interested Director Transactions.......................... 68
Stockholder Derivative Suit............................... 69
Dissolution............................................... 69
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
OF VERIO.................................................. 70
BUSINESS OF VERIO........................................... 84
Overview.................................................. 84
Industry Background....................................... 84
The Verio Solution........................................ 86
The Verio Strategy........................................ 86
The Verio Organization.................................... 88
Products and Services..................................... 88
Marketing................................................. 91
Sales and Distribution.................................... 92
Technology and Network Operations......................... 93
National Support Services................................. 96
NTT Strategic Relationship................................ 97
Subsidiary Ownership Structure............................ 97
Competition............................................... 98
Properties................................................ 99
Employees................................................. 99
Trademarks and Trade Names................................ 99
Legal Proceedings......................................... 100
CAPITALIZATION OF VERIO..................................... 101
SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL
DATA OF VERIO............................................. 102
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF VERIO........................ 104
Overview.................................................. 104
Results of Operations..................................... 106
Quarterly Results of Operations........................... 110
Liquidity and Capital Resources........................... 111
New Accounting Standards.................................. 113
Forward-Looking Statements................................ 114
CERTAIN TRANSACTIONS OF VERIO............................... 115
Transactions with Directors and Executive Officers........ 115
Other Transactions........................................ 115
PRINCIPAL STOCKHOLDERS OF VERIO............................. 117
</TABLE>
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MANAGEMENT OF VERIO AFTER THE MERGER........................ 120
Directors and Executive Officers of Verio................. 120
Committees of the Verio Board............................. 125
Directors and Executive Officers of Merger Sub............ 125
COMPENSATION OF DIRECTORS AND CERTAIN EXECUTIVE OFFICERS OF
VERIO..................................................... 125
Compensation of Verio Directors........................... 125
Executive Compensation of Verio........................... 126
Employment Agreements..................................... 127
Compensation Protection Agreements........................ 128
Stock Option and Incentive Plans.......................... 129
1996 Stock Option Plan................................. 129
1997 California Stock Option Plan...................... 130
1998 Stock Incentive Plan.............................. 131
1998 Employee Stock Purchase Plan...................... 132
1998 Non-Employee Director Stock Incentive Plan........ 133
401(k) Plan............................................... 134
Compensation Committee Interlocks and Insider
Participation.......................................... 135
Limitation on Liability and Indemnification Matters....... 135
BUSINESS OF HIWAY........................................... 136
SELECTED CONSOLIDATED FINANCIAL DATA OF HIWAY............... 137
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF HIWAY........................ 138
Overview.................................................. 138
Quarterly Results of Operations........................... 140
Years Ended December 31, 1995, 1996 and 1997 and Nine
Months Ended September 30, 1997 and 1998............... 143
Liquidity and Capital Resources........................... 144
Factors Affecting Results of Operations and Financial
Condition.............................................. 145
Recent Accounting Pronouncements.......................... 146
Year 2000 Issues.......................................... 147
PRINCIPAL SHAREHOLDERS OF HIWAY............................. 148
OTHER MATTERS............................................... 149
LEGAL MATTERS............................................... 149
EXPERTS..................................................... 149
GLOSSARY OF TERMS........................................... 151
</TABLE>
APPENDICES
APPENDIX A -- Amended and Restated Agreement and Plan of Merger
APPENDIX B -- Form of Proxy of Hiway
APPENDIX C -- Opinion of BT Alex. Brown Incorporated
APPENDIX D -- Chapter 13 of the California General Corporation Law
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement/ Prospectus and the Appendices hereto. This summary does
not purport to contain a complete statement of all material information relating
to the Merger Agreement, the Merger and the other matters discussed herein, and
is subject to, and is qualified in its entirety by, the more detailed
information and financial statements contained in or attached to this Proxy
Statement/Prospectus. Shareholders of Hiway should carefully read this Proxy
Statement/Prospectus in its entirety. Capitalized terms used in this Proxy
Statement/Prospectus, which are not otherwise defined herein, have the
respective meanings ascribed to them in "Glossary of Terms."
This Proxy Statement/Prospectus contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"), including statements regarding Verio's and Hiway's expectations, beliefs,
intentions or strategies regarding the future. The safe harbor provisions
provided in Section 27A of the Securities Act and Section 21E of the Exchange
Act apply only to forward-looking statements made by Verio and not Hiway. All
forward-looking statements included in this Proxy Statement/ Prospectus with
respect to Verio are based on information available to Verio as of the date
hereof, and all forward-looking statements included in this Proxy
Statement/Prospectus with respect to Hiway are based on information available to
Hiway as of the date hereof. Neither Verio nor Hiway assumes any obligation to
update any such forward-looking statements. It is important to note that Verio's
and Hiway's actual results may differ materially from the results discussed in
the forward-looking statements. Among the factors that could cause actual
results to differ materially are the factors detailed in "Risk Factors" below.
THE COMPANIES
Verio. Verio is a leading provider of comprehensive business Internet
services -- including broadband connectivity, Web hosting solutions, virtual
private networks ("VPNs"), e-commerce and other enhanced Internet
services -- with an emphasis on serving the small and medium sized business
market. Verio believes that small and medium sized businesses represent an
attractive target market for the provision of Internet services due to this
market's low current penetration levels and customer churn rates, and the
expanding Internet needs of these businesses. Because of their limited internal
technical resources and operating scale, small and medium sized businesses are
increasingly looking to outsource Internet and Information Technology ("IT")
functions at a reasonable cost. These businesses also typically require hands-on
local support to help analyze their needs, configure solutions and provide
ongoing technical support. Verio believes that these businesses currently are
underserved by both the local and other national Internet service providers
("ISPs"). While the other national ISPs typically lack the local presence to
provide customized hands-on support, the local ISPs often lack the requisite
scale and resources to provide a full range of services at acceptable quality
and pricing levels. Verio further believes it has a unique competitive advantage
in serving small and medium sized business customers through the combination of
the technical expertise and hands-on support provided through its local sales
and engineering personnel with the quality and economic efficiency of Verio's
national network, operational infrastructure and financial strength.
Since its inception in March 1996, Verio has rapidly established critical
mass and a global presence through the acquisition, integration and growth of
over 45 ISPs that provide a comprehensive range of business Internet services.
Verio integrates the operations it acquires into regional operating units with
centralized regional management, connecting their regional networks to Verio's
high bandwidth, "tier one" national backbone, and providing them with Verio's
national support services, in order to capture economies of scale and
operational efficiencies while improving reliability, quality and scalability.
Verio currently provides locally based sales and engineering support for its
connectivity, Web hosting and other enhanced services in 39 of the top 50
metropolitan statistical areas ("MSAs") in the U.S., and provides Web hosting
services to customers in over 100 countries.
In addition to basic Internet connectivity, businesses are increasingly
capitalizing on the power of the Internet by establishing domain-based Web sites
(such as www.yourcompany.com) and adopting additional enhanced Internet services
to expand their markets, increase productivity and reduce costs. With its recent
acquisition (the "TABNet Acquisition") of NTX, Inc., d/b/a TABNet ("TABNet") and
its proposed
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acquisition of Hiway in the Merger, Verio significantly accelerates and expands
its ability to provide Web hosting and other value-added services to its target
market. Together with its acquisition of Internet Servers, Inc. ("iServer") at
the end of 1997, these acquisitions establish Verio as the largest Web hosting
company in the world based on the number of domain names hosted, and
significantly increase Verio's customer base. As of October 31, 1998, including
all acquisitions completed as of that date, Verio served over 160,000 customer
accounts, including over 80,000 hosted Web sites, with combined pro forma
revenues of approximately $35.7 million for the three months ended September 30,
1998. The completion of the Merger would bring Verio's total customer accounts
to over 250,000, the number of Web sites hosted to over 180,000 and its pro
forma combined revenues for the three months ended September 30, 1998 to
approximately $46.2 million. The consummation of the proposed Merger, together
with the completed acquisitions of iServer and TABNet, would accomplish Verio's
goal of deriving at least half of its total revenue from enhanced services.
These acquisitions would also create in Verio a powerful sales engine, driven by
preferential marketing agreements with leading Internet portal companies,
private label relationships with major telecommunications companies, an
established telemarketing operations, direct sales through over 200 sales
professionals, and a worldwide indirect distribution channel of over 4,000
resellers in the U.S. and over 100 other countries. In addition, Verio has
acquired, through the iServer and TABNet acquisitions, and expects to acquire,
through the proposed Merger, key proprietary technologies that significantly
differentiate Verio's Web hosting platform from other providers. See "Business
of Verio."
As used herein, the term "Verio" refers to Verio Inc., a Delaware
corporation (formerly known as World-Net Access, Inc.), and its subsidiaries.
Verio(TM) and the Verio logo are trademarks of Verio. This Proxy
Statement/Prospectus may contain trademarks, trade names and service marks of
other parties.
Verio's executive offices are located at 8005 South Chester Street, Suite
200, Englewood, Colorado 80112, and its telephone number at that address is
(303) 645-1900.
Hiway. Hiway is a leading global provider of Web hosting and related
enhanced Internet services to small and medium sized businesses. Hiway focuses
on delivering high-quality, reliable and flexible services that are backed by
24X7 customer support and can be scaled to host millions of Web sites. Hiway's
services enable its customers to deploy, expand and update Web sites more
rapidly and cost-effectively than internally developed solutions. Hiway offers
its solutions directly and through value-added resellers (third-party dealers
that resell and support the services of another company) ("VARs") and original
equipment manufacturers (large companies that offer the services of another
company to their established customer bases under their own brand names)
(commonly referred to as "OEMs"). Hiway's OEMs include three of the five
regional Bell operating companies ("RBOCs").
Hiway was formed in May 1998 through the merger (the "Best/Hiway Merger")
of Best Internet Communications, Inc., a California corporation ("Best"), which
was incorporated in September 1994, and Hiway Technologies, Inc., a Florida
corporation ("Hiway Florida"), which was incorporated in April 1995. As used
herein, "Hiway" refers to the entity resulting from the Best/Hiway Merger. Prior
to the Best/Hiway Merger, Hiway Florida was a leading provider of shared server
Web hosting domestically and, through its established network of VARs,
internationally. Hiway Florida also had begun to expand its distribution
channels by entering into relationships with RBOCs and other OEMs. Best was a
leading provider of shared server Web hosting bundled with dial-up Internet
access in the California market prior to the Best/Hiway Merger, and also offered
stand-alone high-speed Internet connectivity and co-location Web hosting
services. See "Business of Hiway."
Hiway Technologies(R) and Best Internet Communications(R) are registered
trademarks of Hiway. Hiway(TM), HWAY(TM), A Home For Your Page(TM) and
RapidSite(TM) are trademarks of Hiway.
Hiway's executive offices are located at 5050 Blue Lake Drive, Suite 100,
Boca Raton, Florida 33431, and its telephone number at that address is (561)
989-8574.
Merger Sub. Merger Sub is a California corporation organized by Verio for
the purpose of effecting the Merger. It has no material assets and has not
engaged in any activities except in connection with the Merger.
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Merger Sub's executive offices are located at 8005 South Chester Street, Suite
200, Englewood, Colorado 80112.
HIWAY SPECIAL MEETING
Time, Place and Date. A special meeting of shareholders of Hiway will be
held at Best's corporate offices on December , 1998 at 10 A.M., Pacific Time
(including any and all adjournments or postponements thereof, the "Hiway Special
Meeting").
Purpose. At the Hiway Special Meeting, holders of common stock, no par
value per share, of Hiway ("Hiway Common Stock") will vote to approve a proposal
(the "Hiway Merger Proposal") to approve and adopt the Merger Agreement and the
Merger. Shareholders of Hiway may also vote upon any other matters that may
properly come before the meeting.
All shares of Hiway Common Stock represented by properly executed proxies
will be voted at the Hiway Special Meeting in accordance with the directions on
the proxies. If no direction is indicated, the shares will be voted "FOR" the
Hiway Merger Proposal. Any Hiway shareholder giving a proxy may revoke his or
her proxy at any time before its exercise at the Hiway Special Meeting by (i)
filing written notice of such revocation with the Secretary of Hiway or (ii)
signing and delivering to such Secretary a proxy bearing a later date. However,
the mere presence at the Hiway Special Meeting of a Hiway shareholder who has
delivered a valid proxy will not of itself revoke that proxy. See "The Hiway
Special Meeting -- Record Date; Voting Rights; Proxies."
Votes Required; Record Date. Approval of the Hiway Merger Proposal requires
the approval of the holders of a majority of the outstanding shares of Hiway
Common Stock entitled to vote thereon. Only holders of Hiway Common Stock at the
close of business on December , 1998 (the "Hiway Record Date") are entitled to
notice of and to vote at the Hiway Special Meeting. As of the Hiway Record Date,
directors and executive officers of Hiway and their affiliates were beneficial
owners of an aggregate of shares of Hiway Common Stock (exclusive of
any shares issuable upon the exercise of stock options or warrants remaining
unexercised as of such date), or approximately % of the shares of
Hiway Common Stock that were issued and outstanding as of such date. Certain
shareholders of Hiway, holding in the aggregate approximately % of the
shares of Hiway Common Stock outstanding as of the Hiway Record Date, have each
entered into a Voting Agreement and Irrevocable Proxy with Verio pursuant to
which each such shareholder has agreed to vote, and has executed an irrevocable
proxy in favor of Verio to vote, all shares of Hiway Common Stock over which
such shareholder has voting power for approval of the Hiway Merger Proposal. See
"The Hiway Special Meeting -- Required Vote" and "Voting Agreements."
THE MERGER
General. Pursuant to the Merger Agreement, and subject to the terms and
conditions thereof, at the Effective Time, Merger Sub will be merged with and
into Hiway, with Hiway as the surviving company.
Conversion of Shares; Exchange Ratios. At the effective time of the Merger
(the "Effective Time"), (i) each outstanding share of Hiway Common Stock will be
converted into cash and a fraction of a share of the common stock, $0.001 par
value per share, of Verio ("Verio Common Stock") and (ii) each outstanding
option or warrant to purchase Hiway Common Stock will be assumed by Verio and
become an option or warrant to purchase Verio Common Stock on substantially the
same terms and conditions as the Hiway option or warrant. See "The
Merger -- General."
At the Effective Time, each outstanding share of Hiway Common Stock will be
converted into cash and a fraction of a share of Verio Common Stock, as follows:
- The total consideration to be paid or issued with respect to each share
of Hiway Common Stock in connection with the Merger (the "Per Share
Price") will be equal to the quotient of (i) approximately $254.72
million, adjusted as described herein (the "Total Consideration Value"),
divided by (ii) the number of shares of Hiway Common Stock outstanding on
the date the Merger is closed (the "Closing Date"), on a fully diluted
basis.
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<PAGE> 18
- The amount of cash payable with respect to each share of Hiway Common
Stock (the "Per Share Cash Amount") will be equal to the quotient of (i)
$176.0 million, divided by (ii) the total number of shares of Hiway
Common Stock outstanding on the Closing Date.
- The fraction of a share of Verio Common Stock issuable with respect to
each share of Hiway Common Stock (the "Common Stock Exchange Ratio") will
be equal to the quotient of (i) the amount by which the Per Share Price
exceeds the Per Share Cash Amount, divided by (ii) $16.00.
The Total Consideration Value will be finally determined pursuant to the
Merger Agreement at the Effective Time, taking into account, among other things,
the amount, if any, of certain excess expenses and payments that may be incurred
or made by Hiway related to the Merger and Hiway's previously proposed initial
public offering ("Excess Expenses") and the proceeds that would be receivable by
Hiway upon the exercise of certain options and warrants to purchase Hiway Common
Stock. The actual value of the shares of Verio Common Stock to be issued in
connection with the Merger (and thus the actual value of the Total Consideration
Value at the Effective Date) will depend upon, among other things, the actual
value of Verio Common Stock at the Closing Date, which may vary both before and
after the Closing Date. See "Risk Factors -- Potential Fluctuation of Value of
Consideration Received" and "The Merger Agreement -- Merger Consideration" for a
more detailed discussion of the consideration to be received in the Merger. Cash
will be paid in lieu of fractional shares.
Each Hiway option or warrant will be assumed by Verio and become an option
or warrant to purchase, at the same aggregate exercise price and on
substantially the same terms and conditions as the Hiway option or warrant, that
number of shares of Verio Common Stock which the holder thereof would have been
entitled to receive had such option or warrant been exercised prior to the
Effective Time and had the Total Consideration Value been paid entirely in
shares of Verio Common Stock. The aggregate number of shares of Verio Common
Stock subject to the resulting options and warrants (the "Option
Consideration"), divided by the aggregate number of shares of Hiway Common Stock
subject to the Hiway options and warrants at the Effective Time, is referred to
herein as the "Option Exchange Ratio."
The exact amount of cash and shares of Verio Common Stock payable with
respect to the Hiway Common Stock and the aggregate potential Option
Consideration (the "Merger Consideration") cannot be determined until the
Effective Time. Pursuant to the formula for determining the Total Consideration
Value, as described above, the Total Consideration Value, as well as the Per
Share Cash Amount, the Common Stock Exchange Ratio and the Option Exchange
Ratio, will be affected by several factors that will not be known until the
Closing Date or the Effective Time. First, the Total Consideration Value will be
decreased by the amount of any Excess Expenses, which will result in a decrease
in the Common Stock Exchange Ratio and the Option Exchange Ratio. Second, the
Total Consideration Value, and the Per Share Cash Amount, the Common Stock
Exchange Ratio and the Option Exchange Ratio, will be affected by changes in the
capitalization of Hiway prior to the Closing Date. Pursuant to the Merger
Agreement, Hiway generally has agreed not to issue or sell any capital stock or
other securities prior to the Effective Time. However, Hiway may issue options
to purchase shares of Hiway Common Stock to its employees in the ordinary course
of its business, provided, that Hiway may not issue options to purchase in
excess of 150,000 shares of Hiway Common Stock in the aggregate. Additionally,
Hiway may issue shares of Hiway Common Stock pursuant to the exercise of option
grants previously made to its employees in the ordinary course of its business
that were outstanding when the Merger Agreement first was signed, as well as
pursuant to the exercise of warrants that were outstanding at that time. If, for
example, Hiway issues additional shares of Hiway Common Stock pursuant to the
exercise of outstanding options or warrants, or grants additional options to
purchase shares of Hiway Common Stock, then the Total Consideration Value will
be increased to reflect the increased proceeds receivable from the exercise of
such options or warrants (assuming such options or warrants remain outstanding
at, or are exercised prior to, the Closing Date), and the Common Stock Exchange
Ratio and the Option Exchange Ratio will be decreased to reflect the change in
the Total Consideration Value and the increase in the number of shares on a
fully diluted basis (provided that the average exercise price per share for such
options and warrants does not exceed a certain amount). If Hiway issues
additional shares of Hiway Common Stock, then the Per Share Cash Amount, the
Common Stock Exchange Ratio and the Option Exchange Ratio will be decreased.
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The following are examples of the determination of the Common Stock
Exchange Ratio, the Per Share Cash Amount and the Option Exchange Ratio, based
on certain specified assumptions:
- Assuming that the capitalization of Hiway as of November 13, 1998,
remains unchanged at the Closing Date, and that there are no Excess
Expenses, (i) the Per Share Cash Amount will be approximately $4.90,
and the Common Stock Exchange Ratio will be approximately 0.0875, and
(ii) the Option Exchange Ratio will be approximately 0.3940.
- Assuming that the capitalization of Hiway as of November 13, 1998
remains unchanged at the Closing Date, but that there are $2.0 million
in Excess Expenses, (i) the Per Share Cash Amount would be
approximately $4.90, and the Common Stock Exchange Ratio would be
approximately 0.0844, and (ii) the Option Exchange Ratio would be
approximately 0.3909.
- Assuming that there are no Excess Expenses, but that Hiway issues an
additional 100,000 options with an average exercise price of $6.00 per
share prior to the Closing Date, but that otherwise the capitalization
of Hiway as of November 13, 1998, remains unchanged as at the Closing
Date, (i) the Per Share Cash Amount would be approximately $4.90, and
the Common Stock Exchange Ratio would be approximately 0.0875, and
(ii) the Option Exchange Ratio would be approximately 0.3940.
- Assuming that there are no Excess Expenses, but that options or
warrants to purchase 200,000 shares of Hiway Common Stock are
exercised prior to the Closing Date, at an average exercise price of
$3.05 per share, but that otherwise the capitalization of Hiway as of
November 13, 1998, remains unchanged as at the Closing Date, (i) the
Per Share Cash Amount would be approximately $4.88, and the Common
Stock Exchange Ratio would be approximately 0.0892, and (ii) the
Option Exchange Ratio would be approximately 0.3940.
The numbers in the examples in this Proxy Statement/Prospectus have been
rounded for purposes of clarity of description only. The actual Common Stock
Exchange Ratio, Per Share Cash Amount and Option Exchange Ratio will be
calculated in accordance with the terms of the Merger Agreement.
For additional information regarding the determination of the Merger
Consideration and the Per Share Cash Amount, the Common Stock Exchange Ratio and
the Option Exchange Ratio, see "The Merger -- General" and "The Merger
Agreement -- Merger Consideration."
Of the approximately 4.92 million shares of Verio Common Stock potentially
issuable in connection with the Merger (based on such assumptions),
approximately 3.14 million will be issued in connection with the conversion of
outstanding shares of Hiway Common Stock and approximately 1.78 million will be
reserved for issuance upon the exercise of options or warrants to purchase Hiway
Common Stock assumed by Verio, assuming the capitalization of Hiway as of
November 13, 1998 remains unchanged as of the Closing Date. See "The
Merger -- General" and "-- Stock Ownership Following the Merger" and "The Merger
Agreement -- Merger Consideration."
Conditions to the Merger. The obligations of Verio and Hiway to effect the
Merger are subject to the satisfaction or waiver of certain conditions,
including, among others: (i) the effectiveness of the Registration Statement at
the Effective Time; and (ii) approval of the Hiway Merger Proposal by Hiway's
shareholders.
The obligation of each of Verio and Merger Sub to effect the Merger is
subject to the satisfaction or waiver of additional conditions specified in the
Merger Agreement, including, among other things: (i) certain members of Hiway's
management having executed lockup agreements; (ii) certain employees of Hiway
having executed Noncompete Agreements (as defined below); (iii) there not having
been any material adverse change in Hiway's business, condition, assets,
liabilities, operations or financial performance since the date of the Merger
Agreement; (iv) the holders of no more than 10% of the outstanding shares of
Hiway Common Stock having demanded or being eligible to demand dissenters'
rights; (v) the termination of the employment agreements between Hiway and
certain officers of Hiway; and (vi) the receipt of various other consents from
third parties. The obligation of Hiway to effect the Merger is subject to the
satisfaction of additional conditions specified in the Merger Agreement,
including, among other things, there not having been
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<PAGE> 20
any material adverse change in Verio's business, condition, assets, liabilities,
operations or financial performance since the date of the Merger Agreement
(provided that a decrease in the trading price of Verio Common Stock shall not
of itself be considered a material adverse change). The parties' obligations to
close the Merger are independent of any fluctuations (including any material
decline) in the amount of the Merger Consideration as a result of fluctuations
in the value of the portion of the Merger Consideration payable in Verio Common
Stock, and no re-solicitation of the approval of the holders of Hiway Common
Stock would occur if any such fluctuation occurred following the initial
solicitation and receipt of the requisite approval of the Merger. See "Risk
Factors -- Potential Fluctuation of Value of Consideration Received" and "The
Merger Agreement -- Conditions."
Termination. The Merger Agreement may be terminated and the Merger
abandoned at any time prior to the Effective Time, whether before or after
approval by the shareholders of Hiway, (i) by mutual consent of Verio and Hiway,
(ii) by either Verio or Hiway, if there has been any material breach of a
covenant or obligation of Hiway or a shareholder of Hiway, on the one hand, or
by Verio, on the other hand, (iii) by either Verio or Hiway, if the Merger has
not been consummated by February 28, 1999 or (iv) by Verio, if approval of the
shareholders of Hiway required for the consummation of the Merger has not been
obtained at a duly held meeting of shareholders or at any adjournment thereof.
In the event the Merger Agreement is terminated, all further obligations of
Verio, Hiway and Merger Sub under the Merger Agreement shall terminate;
provided, however, that each party shall remain subject to specified provisions
in the Merger Agreement relating to, among other things, the payment of fees and
expenses and the confidential treatment of certain information, and each party
shall continue to be bound by the terms of the Nondisclosure Agreement between
Verio and Hiway dated as of July 15, 1998. See "The Merger
Agreement -- Termination."
Accounting Treatment. The Merger is expected to be accounted for under the
purchase method of accounting, in accordance with generally accepted accounting
principles. See "The Merger -- Accounting Treatment."
DISSENTERS' RIGHTS
Holders of Hiway Common Stock who abstain from voting to approve or adopt
the Merger Agreement or vote against approval and adoption of the Merger
Agreement and who comply with all other applicable requirements of Chapter 13 of
the California General Corporation Law (the "CGCL") will have the right to
receive payment in cash of the "fair market value" of their shares of Hiway
Common Stock. The procedure for perfecting dissenters' rights is summarized
under the caption "Dissenters' Rights of Hiway Shareholders," and the pertinent
provisions of Chapter 13 of the CGCL are included as Appendix D to this Proxy
Statement/ Prospectus.
SURRENDER OF STOCK CERTIFICATES
Verio has authorized Norwest Shareowner Services to act as exchange agent
(the "Exchange Agent") under the Merger Agreement. As soon as reasonably
practical after the Effective Time, the Exchange Agent will send a letter of
transmittal to each Hiway shareholder. The letter of transmittal will contain
instructions with respect to the surrender of certificates representing Hiway
Common Stock to be exchanged for Verio Common Stock. See "The
Merger -- Conversion of Shares; Procedures for Exchange of Stock Certificates."
HIWAY SHAREHOLDERS SHOULD NOT FORWARD CERTIFICATES OF HIWAY COMMON STOCK TO
THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL LETTERS. HIWAY
SHAREHOLDERS SHOULD NOT RETURN SHARE CERTIFICATES WITH THE ENCLOSED PROXY.
RECOMMENDATION OF THE HIWAY BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF HIWAY (THE "HIWAY BOARD") HAS UNANIMOUSLY
APPROVED THE HIWAY MERGER PROPOSAL. THE HIWAY BOARD BELIEVES THAT THE TERMS OF
THE MERGER AGREEMENT ARE FAIR TO, AND IN THE BEST
6
<PAGE> 21
INTERESTS OF, HIWAY AND ITS SHAREHOLDERS, AND UNANIMOUSLY RECOMMENDS THAT
HOLDERS OF HIWAY COMMON STOCK VOTE "FOR" APPROVAL OF THE HIWAY MERGER PROPOSAL.
See "The Merger -- Background of the Merger" and "-- Recommendation of the Hiway
Board; Reasons for the Merger."
RISK FACTORS
The Merger and the business of Verio and Hiway after the Merger will be
subject to a number of risks, including: uncertainties associated with the
integration of Hiway into Verio; the potential fluctuation of value of
consideration received; limitations of fairness opinion; financial information
concerning acquisitions and integration expenses; dependence upon channel
partners; risks associated with international operations and expansion; changes
in the rights of Hiway shareholders; the number of shares of Verio Common Stock
eligible for future sale; Verio's history of losses, with no assurance of
profitability; substantial indebtedness and effect of financial leverage; risks
associated with financial arrangements; requirements for additional capital;
competition and price fluctuation; dependence upon implementation of network
infrastructure and establishment and maintenance of peering relationships;
challenges of growth by acquisitions; fluctuations in operating results;
dependence on key personnel; risk of system failure; security risks; potential
liability for information disseminated over network and regulatory matters;
dependence on the Internet and risks of technology trends and evolving industry
standards; dependence upon suppliers and limited sources of supply; year 2000
compliance; and the effect of anti-takeover provisions. In considering whether
to approve the Hiway Merger Proposal, Hiway shareholders should carefully review
and consider the information contained in "Risk Factors."
OPINION OF HIWAY FINANCIAL ADVISOR
BT Alex. Brown Incorporated ("BT Alex. Brown"), one of the investment
banking firms retained by the Hiway Board to act as its financial advisor in
connection with the Merger, has rendered its written opinion dated November 20,
1998 to the Hiway Board to the effect that as of November 19, 1998, the Common
Stock Exchange Ratio and the Per Share Cash Amount, taken together, were fair
from a financial point of view to the holders of Hiway Common Stock. The full
text of the opinion of BT Alex. Brown (the "BT Alex. Brown Opinion"), which sets
forth the assumptions made and matters considered, is attached as Appendix C to
this Proxy Statement/Prospectus. Holders of Hiway Common Stock are urged to, and
should, read such opinion in its entirety. See "The Merger -- Opinion of Hiway
Financial Advisor."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the Hiway Board with respect to the
Hiway Merger Proposal, shareholders of Hiway should be aware that certain
members of the management of Hiway have interests in the Merger that are in
addition to the interests of shareholders of Hiway generally. These interests
arise from, among things, (i) payments that Hiway will make in connection with
the termination of existing employment contracts and in connection with the
execution of the Noncompete Agreements, (ii) the appointment of Arthur L.
Cahoon, Chairman and Chief Executive Officer of Hiway, as a director of Verio,
and (iii) indemnification and insurance arrangements. Since payments to these
executives, which are anticipated to total approximately $4.4 million, will be
accounted for in calculating whether there are any Excess Expenses that reduce
the Merger Consideration, it is possible that these payments could contribute to
a reduction in the Merger Consideration. See "The Merger -- Interests of Certain
Persons in the Merger" and "The Merger Agreement -- Merger Consideration."
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the merger of Merger Sub into Hiway will
be treated as a sale of Hiway Common Stock by Hiway shareholders to Verio in
exchange for the Merger Consideration. Hiway shareholders will recognize gain or
loss equal to the difference between their tax basis in the Hiway Common Stock
surrendered and the amount of cash and the fair market value (as of the
effective date of the Merger) of the Verio Common Stock received. See "The
Merger -- Material Federal Income Tax Consequences."
COMPARISON OF RIGHTS OF VERIO STOCKHOLDERS AND HIWAY SHAREHOLDERS
The rights of Hiway shareholders are currently governed by the CGCL and
Hiway's Articles of Incorporation and Bylaws. Upon consummation of the Merger,
Hiway shareholders will become stockholders
7
<PAGE> 22
of Verio, which is a Delaware corporation, and their rights as Verio
stockholders will be governed by the Delaware General Corporate Law (the "DGCL")
and Verio's Restated Certificate of Incorporation and Bylaws. For a discussion
of the various differences between the rights of shareholders of Hiway and
stockholders of Verio, see "Comparison of Rights of Verio Stockholders and Hiway
Shareholders."
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA OF VERIO
The summary historical consolidated financial data of Verio as of December
31, 1997, and for the period from inception (March 1, 1996) to December 31,
1996, and the year ended December 31, 1997 have been derived from the audited
Consolidated Financial Statements of Verio included elsewhere in this Proxy
Statement/Prospectus. The summary historical consolidated financial data as of
September 30, 1998 and for the nine-month periods ended September 30, 1997 and
1998 have been derived from unaudited Consolidated Financial Statements of
Verio, also included herein.
The information set forth below should be read in conjunction with the
Unaudited Pro Forma Condensed Combined Financial Statements and the historical
Consolidated Financial Statements of Verio and the notes thereto included
elsewhere in this Proxy Statement/Prospectus. Results of operations for the
period from inception to December 31, 1996, the year ended December 31, 1997 and
the nine-month periods ended September 30, 1997 and 1998 are not necessarily
indicative of results of operations for future periods. Verio'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.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations of Verio."
SUMMARY CONSOLIDATED FINANCIAL DATA OF VERIO
(Amounts in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
YEAR ENDED --------------------------------------
PERIOD FROM INCEPTION DECEMBER 31, 1997 HISTORICAL
(MARCH 1, 1996) TO ------------------------- ------------------------ PRO FORMA
DECEMBER 31, 1996 HISTORICAL PRO FORMA(1) 1997 1998 1998(1)
--------------------- ---------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenue............... $ 2,365 $ 35,692 $ 99,098 $ 22,287 $ 83,543 $ 101,127
Total costs and expenses.... 8,645 75,981 161,569 47,474 148,727 174,236
-------- ---------- ---------- ---------- ----------- -----------
Loss from operations........ $ (6,280) $ (40,289) $ (62,471) $ (25,187) $ (65,184) $ (73,109)
======== ========== ========== ========== =========== ===========
Interest expense............ $ (115) $ (11,826) $ (58,543) $ (5,899) $ (22,860) $ (57,531)
======== ========== ========== ========== =========== ===========
Loss before extraordinary
item...................... $ (5,122) $ (46,069) $ (114,858) $ (27,022) $ (78,118) $ (121,036)
======== ========== ========== ========== =========== ===========
Net loss attributable to
common stockholders....... $ (5,145) $ (46,329) $ (27,201) $ (88,306)
======== ========== ========== ===========
Loss per common
share -- basic and
diluted:
Loss per common share
before extraordinary
item.................... $ (5.29) $ (40.47) $ (100.34) $ (24.11) $ (4.49) $ (6.93)
======== ========== ========== ========== =========== ===========
Loss per common share....... $ (5.29) $ (40.47) $ (100.34) $ (24.11) $ (5.06)
======== ========== ========== ========== ===========
Weighted average common
shares outstanding --basic
and diluted............... 971,748 1,144,685 1,144,685 1,128,004 17,462,447 17,462,447
OTHER DATA:
EBITDA(2)................... $ (5,611) $ (29,665) $ (30,779) $ (18,450) $ (38,366) $ (40,594)
Capital expenditures (3).... 3,430 14,547 11,002 15,327
CASH FLOW INFORMATION:
Net cash used by operating
activities................ (2,326) (35,323) (20,462) (36,257)
Net cash used by investing
activities................ (9,123) (120,330) (89,375) (119,312)
Net cash provided by
financing activities...... 77,916 161,772 163,002 328,895
</TABLE>
8
<PAGE> 23
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1997 1997 1997 1997 1998 1998 1998
--------- -------- ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
QUARTERLY STATEMENT OF
OPERATIONS DATA:
Total revenue................... $ 4,414 $ 8,249 $ 9,624 $ 13,405 $ 21,198 $ 28,541 $ 33,804
Total costs and expenses........ 10,006 17,103 20,365 28,507 35,916 49,868 62,944
------- ------- -------- -------- -------- -------- --------
Loss from operations............ $(5,592) $(8,854) $(10,741) $(15,102) $(14,718) $(21,327) $(29,140)
======= ======= ======== ======== ======== ======== ========
Net loss attributable to common
stockholders.................. $(4,677) $(9,274) $(13,250) $(19,128) $(28,383) $(26,316) $(33,606)
======= ======= ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1998
AS OF -------------------
DECEMBER 31, PRO
1997 ACTUAL FORMA(1)
------------ -------- --------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 72,586 $245,912 $627,356
Restricted cash and securities.............................. 40,554 21,397 21,397
Goodwill, net............................................... 83,216 210,047 217,000
Total assets................................................ 246,471 562,329 962,787
Long-term debt and capital lease obligations, net of
discount.................................................. 142,321 274,452 674,452
Redeemable preferred stock.................................. 97,249 -- --
Stockholders' equity (deficit).............................. (27,001) 234,607 234,607
</TABLE>
- ---------------
(1) Pro forma for the September 30, 1998 Completed Acquisitions (as defined in
the Unaudited Pro Forma Condensed Combined Financial Statements of Verio),
and the acquisition of WWW-Service Online-Dienstleistungen AG ("WWW") (the
"WWW Acquisition") as if they had occurred on September 30, 1998 for balance
sheet purposes and on January 1, 1997 for statement of operations data
purposes. The pro forma information also includes the effects of the
issuance of $400 million principal amount of 11 1/4% Senior Notes due 2008
(the "November 1998 Notes") but does not include the effects of the Merger.
See "Unaudited Pro Forma Condensed Combined Financial Statements of Verio"
and the notes thereto.
(2) EBITDA represents earnings (loss) from operations before interest, taxes,
depreciation, amortization and provision for loss on write-offs of
investments in ISPs and fixed assets and includes non-cash stock option
compensation and severance costs of $3.0 million and $6.7 million on a
historical and pro forma basis, respectively, for the nine months ended
September 30, 1998. The primary measure of operating performance is net
earnings (loss). Although EBITDA is a measure commonly used in Verio's
industry, it should not be construed as an alternative to net earnings
(loss), determined in accordance with generally accepted accounting
principles ("GAAP"), as an indicator of operating performance or as an
alternative to cash flows from operating activities, determined in
accordance with GAAP. In addition, the measure of EBITDA presented herein by
Verio may not be comparable to other similarly titled measures of other
companies.
(3) Excludes equipment and leasehold improvements acquired in business
acquisitions.
9
<PAGE> 24
SELECTED HISTORICAL FINANCIAL DATA OF HIWAY
The summary historical consolidated financial data of Hiway as of September
30, 1998, and for the years ended December 31, 1995, 1996 and 1997, and the
nine-month periods ended September 30, 1997 and 1998 have been derived from the
Consolidated Financial Statements of Hiway included elsewhere in this Proxy
Statement/Prospectus.
The information set forth below should be read in conjunction with such
financial statements and the notes thereto. Results of operations for the year
ended December 31, 1997 and the nine months ended September 30, 1998 are not
necessarily indicative of results of operations for future periods. Hiway'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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Hiway."
SUMMARY CONSOLIDATED FINANCIAL AND OTHER OPERATING DATA OF HIWAY
(Amounts in Thousands, Except Per Share and Other Operating Data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues..................................... $ 2,011 $12,217 $26,185 $18,453 $29,073
Income (loss) from operations................ $ (539) $ 783 $ 4,871 $ 3,990 $ 2,597
Historical net income (loss)................. $ (551) $ 592 $ 4,435 $ 3,674 $ 2,473
Historical diluted net income (loss) per
share(2)................................... $ (0.03) $ 0.02 $ 0.13 $ 0.11 $ 0.07
Pro forma net income (loss)(1)............... $ (551) $ 560 $ 2,871 $ 2,379 $ 1,729
Pro forma diluted net income (loss) per
share(2)................................... $ (0.03) $ 0.02 $ 0.08 $ 0.07 $ 0.05
Shares used in computing diluted net income
(loss) per share(2)........................ 16,871 28,509 34,877
OTHER OPERATING DATA:
Web hosting accounts at end of period........ N/A 35,000 68,000
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------
ACTUAL
------------------
<S> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 3,569
Working capital............................................. (90)
Total assets................................................ 26,677
Long-term debt and capital lease obligations, less current
portion................................................... 5,136
Total stockholders' equity.................................. 12,056
</TABLE>
- ---------------
(1) See Note 18 of Notes to Consolidated Financial Statements of Hiway for an
explanation of the determination of pro forma net income (loss), which
reflects a provision for income taxes as if Hiway Florida was a corporation
subject to income taxes.
(2) See Note 19 of Notes to Consolidated Financial Statements of Hiway for an
explanation of the determination of the number of shares used in computing
pro forma diluted net income (loss) per share.
10
<PAGE> 25
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following selected unaudited pro forma condensed combined financial
data are derived from the Unaudited Pro Forma Condensed Combined Financial
Statements of Verio and notes thereto appearing elsewhere herein, which give
effect to the Merger as a purchase, and should be read in conjunction with such
Unaudited Pro Forma Condensed Combined Financial Statements and notes thereto
and the separate historical Consolidated Financial Statements and related notes
thereto of Verio and Hiway, respectively, included in or attached to this Proxy
Statement/Prospectus. See "Unaudited Pro Forma Condensed Combined Financial
Statements of Verio." For purposes of the unaudited pro forma operating data,
Verio's consolidated financial statements for the fiscal year ended December 31,
1997, and for the nine month period ended September 30, 1998, have been combined
with Hiway's consolidated financial statements for the same periods. The pro
forma balance sheet information also includes the effects of the issuance of the
November 1998 Notes.
The unaudited pro forma information is presented for comparative purposes
only and does not purport to be indicative of the operating results or financial
position that would have occurred if the Merger had been consummated at the
beginning of the periods presented, nor is such information necessarily
indicative of the future operating results or financial position of Verio and
Hiway.
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED(1)
--------------------------------------
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue............................................... $ 125,283 $ 130,200
Total costs and expenses.................................... 207,154 218,916
----------- ----------
Loss from operations........................................ $ (81,871) $ (88,716)
=========== ==========
Interest expense............................................ $ (58,685) $ (57,556)
=========== ==========
Loss before extraordinary item.............................. $ (134,333) $ (136,668)
=========== ==========
Loss per common share before extraordinary item -- basic and
diluted................................................... $ (22.15) $ (6.11)
=========== ==========
Weighted average common shares outstanding -- basic and
diluted................................................... 6,064,685 22,382,447
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
------------------------
PRO FORMA AS
ADJUSTED(1)
------------------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 450,925
Restricted cash and securities.............................. 21,397
Goodwill, net............................................... 459,664
Total assets................................................ 1,052,128
Long-term debt and capital lease obligations, net of current
portions.................................................. 680,506
Stockholders' equity........................................ 309,327
</TABLE>
- ---------------
(1) As adjusted to give effect to the Merger and the issuance of the November
1998 Notes as if the Merger and the issuance of the November 1998 Notes had
occurred on September 30, 1998 for balance sheet purposes and as if the
Merger and the issuance of the November 1998 Notes had occurred on January
1, 1997 for statement of operations data purposes. Assumes the issuance of
4.92 million shares of Verio Common Stock on a fully-diluted basis in the
Merger. See "Unaudited Pro Forma Condensed Combined Financial Statements of
Verio" and the notes thereto.
11
<PAGE> 26
COMPARATIVE PER SHARE DATA
The following table presents unaudited pro forma combined and unaudited pro
forma equivalent per share data of Verio and Hiway after giving effect to the
September 30, 1998 Completed Acquisitions, the WWW Acquisition and the Merger
using the purchase method of accounting, assuming the acquisitions and the
Merger had been effective during all periods presented. The pro forma equivalent
data for Hiway have been calculated by multiplying the Verio pro forma combined
amounts by an assumed Common Stock Exchange Ratio of 0.0875. The consideration
to be paid by Verio in the Merger is subject to adjustment based on the amount
of Excess Expenses and changes in Hiway's capitalization prior to completion of
the Merger. See "The Merger Agreement -- Merger Consideration" and "Risk
Factors -- Potential Fluctuation of Value of Consideration Received." The pro
forma data do not purport to be indicative of the results of future operations
or the results that would have occurred had the Merger been consummated at the
beginning of the periods presented. The information set forth below should be
read in conjunction with the historical financial statements and notes thereto
of Verio and Hiway incorporated by reference in this Proxy Statement/
Prospectus, and the unaudited pro forma condensed combined financial statements
included elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
AS OF OR FOR
AS OF OR FOR THE NINE MONTHS
THE YEAR ENDED ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
<S> <C> <C>
HISTORICAL -- VERIO COMMON STOCK
Net income (loss) per share -- basic and diluted.... $(40.47) $(5.06)
Book value per share(1)............................. $ 3.43 $ 7.15
HISTORICAL -- HIWAY COMMON STOCK
Net income per share:
Historical:
Basic.......................................... $ 0.15 $ 0.07
Diluted........................................ $ 0.13 $ 0.07
Pro Forma:
Basic.......................................... $ 0.10 $ 0.05
Diluted........................................ $ 0.08 $ 0.05
Book value per share(1)............................. $ 0.26 $ 0.34
PRO FORMA COMBINED NET LOSS PER SHARE
Per Verio share..................................... $(22.15) $(6.11)
Equivalent Hiway share(2)........................... $ (1.94) $(0.53)
PRO FORMA COMBINED BOOK VALUE PER SHARE(3)
Per Verio share..................................... $ 6.37 $ 8.20
Equivalent Hiway share(2)........................... $ 0.56 $ 0.72
</TABLE>
- ---------------
(1) The historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock and preferred stock, on an as
if converted basis, outstanding at the end of the period.
(2) The Hiway equivalent pro forma combined per share amounts are calculated by
multiplying the combined pro forma per share amounts of Verio by the assumed
Common Stock Exchange Ratio of 0.0875.
(3) The pro forma combined book value per share is computed by dividing pro
forma stockholders' equity by the pro forma number of shares of common stock
outstanding at the end of each period.
COMPARATIVE PER SHARE PRICES AND DIVIDEND POLICIES
Verio Common Stock is listed and traded on Nasdaq under the symbol "VRIO."
Verio Common Stock has traded under that symbol since May 12, 1998, the date of
its initial public offering. Prior to that time, there was no public market for
Verio Common Stock.
12
<PAGE> 27
The following table sets forth the high and low sale prices per share of
Verio Common Stock for the periods indicated, as reported by Nasdaq. There is no
public market for Hiway Common Stock.
<TABLE>
<CAPTION>
VERIO COMMON STOCK
--------------------
HIGH LOW
------- -------
<S> <C> <C>
Calendar 1998:
Second Quarter............................................ $30.00 $16.50
Third Quarter............................................. 31.875 18.00
Fourth Quarter (through December )...................... [ ] [ ]
</TABLE>
The following table sets forth the closing sale price of Verio Common Stock
on November 16, 1998, the last trading day prior to the public announcement of
the Merger Agreement, and December , 1998, the latest practicable date
preceding the mailing of this Proxy Statement/Prospectus. The "equivalent per
share price" of Hiway Common Stock as of such dates equals the sum of (i) the
closing sale price of Verio Common Stock on such dates multiplied by an assumed
Common Stock Exchange Ratio of 0.0875 plus (ii) an assumed Per Share Cash Amount
of $4.90. See "The Merger Agreement -- Merger Consideration."
<TABLE>
<CAPTION>
VERIO HIWAY EQUIVALENT
COMMON STOCK PER SHARE VALUE
------------ ----------------
<S> <C> <C>
November 16, 1998....................................... $16.00 $6.32
December , 1998....................................... [ .] [ .]
</TABLE>
Because the Common Stock Exchange Ratio is determined with respect to a
fixed number of shares of Verio Common Stock (subject to adjustment for certain
matters, as described herein, not related to the market price of Verio Common
Stock), and because the market price of Verio Common Stock is subject to
fluctuation, the market value of the shares of Verio Common Stock that holders
of Hiway Common Stock will receive in the Merger may increase or decrease prior
to and following the Merger. HOLDERS OF HIWAY COMMON STOCK ARE URGED TO OBTAIN
CURRENT MARKET QUOTATIONS OF VERIO COMMON STOCK. NO ASSURANCE CAN BE GIVEN AS TO
THE FUTURE PRICES OR MARKETS FOR VERIO COMMON STOCK. More recent market quotes
may be obtained on the World Wide Web at http://www.nasdaq.com.
Hiway Florida paid cash dividends on its shares in the amount of $125,000
in 1996 and $3.0 million in 1997. However, Hiway does not anticipate paying any
cash dividends in the foreseeable future. Furthermore, Hiway's banking
arrangement with Silicon Valley Bank, Hiway is not permitted to declare or pay
any dividends without the bank's prior consent. Verio has never declared or paid
cash dividends on shares of Verio Common Stock. Verio's ability to pay dividends
is limited by covenants imposed under the indenture, dated June 24, 1997 (the
"1997 Indenture"), under which the $100.0 million principal amount of 13 1/2%
Senior Notes due 2004 (the "1997 Notes") were issued, the indenture, dated March
25, 1998 (the "March 1998 Indenture"), under which the $175.0 million principal
amount of 10 3/8% Senior Notes due 2005 (the "March 1998 Notes") were issued,
the indenture, dated November 25, 1998 (the "November 1998 Indenture"), under
which the November 1998 Notes were issued, and the Bank Facility (as defined
below). Neither Hiway nor Verio currently anticipates paying any dividends on
their common stock in the foreseeable future. See "Comparative Per Share Prices
and Dividend Policies."
13
<PAGE> 28
RISK FACTORS
The following risk factors, as well as the other information in this Proxy
Statement/Prospectus, should be considered carefully in evaluating the Hiway
Merger Proposal and the acquisition of the Verio Common Stock offered hereby.
This Proxy Statement/Prospectus contains statements which constitute
forward-looking statements within the meaning of the Reform Act. The safe harbor
provisions provided in Section 27A of the Securities Act and Section 21E of the
Exchange Act apply only to forward-looking statements made by Verio and not
Hiway. These statements appear in a number of places and include statements
regarding the intent, belief or current expectations of Verio and Hiway and
their respective directors and officers primarily with respect to the future
operating performance of Verio and Hiway, respectively. Such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and actual results may differ materially from those in the
forward-looking statements as a result of various factors. The accompanying
information contained in this Proxy Statement/Prospectus, including the
information set forth below, identifies important factors that could cause such
differences. See "-- Forward-Looking Statements" below.
For periods following the Merger, references to the services, business,
financial results or financial condition of Verio, and references to the
"combined company," should be considered to refer to Verio and its subsidiaries,
including Hiway, unless the context otherwise requires.
UNCERTAINTIES ASSOCIATED WITH THE INTEGRATION OF HIWAY
The acquisition of Hiway by Verio involves a number of risks, including:
assimilation of new operations and personnel into Verio; the diversion of
resources from Verio's existing business to facilitate the integration;
integration of Verio's and Hiway's respective equipment, service offerings,
networks and technologies, financial and information systems and brand names;
coordination of geographically separated facilities and work forces; management
challenges associated with the integration of Verio and Hiway; coordination of
their respective sales, marketing and service development efforts; assimilation
of new management personnel; and maintenance of standards, controls, procedures
and policies. The process of integrating Hiway's operations, including its
personnel, could cause interruption of, or loss in momentum in the activities of
Verio's business and operations, including those of the business acquired.
Further, employees of Verio and Hiway who may be key to the integration effort
or Verio's ongoing operations may choose not to continue to work for Verio or
Hiway following the closing of the Merger.
In connection with the Merger, Verio expects to incur significant expenses
associated with the integration of the acquired business with its own, including
costs relating to the elimination of duplicate systems and facilities, possible
severance and employee relocation, and other integration costs. The aggregate
amount of these expenses is not yet determinable, but could be significant.
Factors that could increase such costs include delays in the completion of the
Merger, any unexpected employee turnover, unforeseen delays in addressing
duplicate facilities once the acquisition has been completed and the associated
costs of hiring temporary employees, and any additional fees and charges to
obtain consents, regulatory approvals or permits. There can be no assurance that
Verio will realize the benefits and strategic objectives sought through the
Merger. Additionally, Verio expects to record charges to operations for
in-process research and development relating to the Merger, and these charges,
which will be recorded in the period of the acquisition, also may be
significant. The amounts of these charges are not presently determinable. Costs
associated with the Merger, or liabilities and expenses associated with the
operations of Hiway, that exceed the expectations of Verio, could have a
material adverse effect on Verio's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Verio -- Liquidity and Capital Resources."
In addition, Hiway itself was formed in May 1998 through the Best/Hiway
Merger. Hiway is still in the early stages of integrating the operations of Best
and Hiway Florida, two companies that prior to the Best/ Hiway Merger had
operated independently. It is likely that this integration effort will continue
after consummation of the Merger. In the course of that integration effort, it
is possible that facts or circumstances may be discovered by Verio that were not
known or apparent prior to the time that Verio executed the Merger Agreement or
during its due diligence review of Hiway. There can be no assurance that
difficulties will not be
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encountered in integrating the operations of Hiway, or that the specific
benefits expected from the integration of Hiway Florida and Best in the
Best/Hiway Merger will be achieved or that any anticipated cost savings will be
realized by Verio.
POTENTIAL FLUCTUATION OF VALUE OF CONSIDERATION RECEIVED
The Merger Consideration to be received in respect of each share of Hiway
Common Stock will be comprised of both cash, in an amount equal to the Per Share
Cash Amount, and a fraction of a share of Verio Common Stock, equal to the
Common Stock Exchange Ratio. The actual Common Stock Exchange Ratio will be
determined at the Effective Time by reference to a fixed aggregate number of
shares of Verio Common Stock to be delivered to all Hiway shareholders in
exchange for their shares of Hiway Common Stock (with such aggregate number of
shares of Verio Common Stock subject to adjustment only in limited circumstances
not related to the value of Verio Common Stock). See "The Merger
Agreement -- Merger Consideration." As a result, the value of such consideration
depends largely upon the value of Verio Common Stock, which may change
significantly between the date of this Proxy Statement/Prospectus and the
Closing Date (and in subsequent periods). There is no minimum trading price as a
condition to Hiway's obligation to consummate the Merger. The parties'
obligations to close are independent of any fluctuations (including any material
decline) in the amount of the Merger Consideration as a result of fluctuations
in the value of the portion of the Merger Consideration payable in Verio Common
Stock, and no re-solicitation of the approval of the holders of Hiway Common
Stock would occur if any such fluctuation occurred following the initial
solicitation and receipt of the requisite approval of the Merger.
The market price of Verio Common Stock has fluctuated significantly in the
past, and the market price of Verio Common Stock is likely to continue to be
highly volatile. For example, the highest and lowest closing sale prices of
Verio Common Stock for the 90 days preceding November 30, 1998 were $25.00 and
$13.00, respectively. To date, the trading volume in Verio's stock has been
relatively low. Significant price fluctuations can occur as a result of a small
number of shares being traded and, therefore, if the low trading volumes
experienced to date continue, such fluctuations could occur in the future. There
can be no assurance that the sales price of Verio Common Stock will not
fluctuate or decline significantly in the future. In addition, the U.S. equity
markets have from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for the stocks of
technology companies. These broad market fluctuations may materially adversely
affect the market price of Verio Common Stock in future periods, including prior
or subsequent to the consummation of the Merger. Such fluctuations and
variations in the price of Verio Common Stock and the broader market may be the
result of many factors, including changes in the business, operations or
prospects of Verio, announcements of technological innovations and new products
by competitors, new contractual relationships with strategic partners by Verio
or its competitors, proposed acquisitions by Verio or its competitors, financial
results that fail to meet public market analyst expectations of performance,
market assessments of the likelihood that the Merger will be consummated and the
timing thereof, regulatory considerations and general market and economic
conditions in the U.S. and throughout the world. Shareholders of Hiway are urged
to obtain current market quotations for Verio Common Stock. No assurance can be
given as to the market prices of Verio Common Stock at any time before or after
the Effective Time.
In addition, the actual Per Share Cash Amount and Common Stock Exchange
Ratio will depend upon the actual capitalization of Hiway at the Effective Time.
Thus, the actual Per Share Cash Amount and Common Stock Exchange Ratio cannot be
determined at this time, and may vary from the assumed numbers used herein. See
"The Merger Agreement -- Merger Consideration."
LIMITATIONS OF FAIRNESS OPINION
The BT Alex. Brown Opinion was prepared for the use of the Hiway Board and
does not constitute a recommendation to holders of Hiway Common Stock as to how
they should vote in connection with the Merger. The BT Alex. Brown Opinion does
not address the relative merits of the Merger and any other transactions or
business strategies discussed by the Hiway Board as alternatives to the Merger
Agreement or the underlying business decision of the Hiway Board to proceed with
and effect the Merger. In addition, the
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BT Alex. Brown Opinion is subject to a number of additional conditions,
limitations and assumptions. See "The Merger -- Opinion of Hiway Financial
Advisor."
FINANCIAL INFORMATION CONCERNING ACQUISITIONS; INTEGRATION EXPENSES
The ISPs targeted by Verio for acquisition typically do not have audited
financial statements and have varying degrees of internal controls and detailed
financial information. Accordingly, the pro forma and other financial
information in this Proxy Statement/Prospectus includes financial information
concerning certain recently completed acquisitions for which audited financial
statements may not be available. In particular, this is the case with respect to
the recent WWW Acquisition. There can be no assurance that a subsequent audit by
Verio will not reveal matters of significance, including with respect to
revenues, expenses and liabilities, contingent or otherwise, of these companies.
Verio's business strategy involves the continued and potentially rapid
acquisition of additional ISPs. Verio expects that, from time to time in the
future, it will enter into additional acquisition agreements, the pro forma
effect of which is not known and cannot be predicted. Verio's completion of
additional acquisitions may have a material impact on the financial information
set forth herein. To date all of Verio's business acquisitions have been
accounted for under the purchase method. On a pro forma basis, after giving
effect to the Merger and the WWW Acquisition, Verio has recorded gross goodwill
relating to acquisitions totaling approximately $475.3 million, which generally
will be amortized over a ten-year period from the date of the acquisitions.
There can be no assurance as to the number, timing or size of future
acquisitions, including the amount of additional goodwill that will be recorded,
if any, or the effect any such acquisitions would have on Verio's operating or
financial results.
Verio is in the process of completing valuations of the assets acquired and
liabilities assumed in connection with certain of Verio's acquisitions
(including TABNet), including the evaluation of in-process research and
development programs. Verio expects that additional such evaluations will be
undertaken with respect to in-process research and development programs that are
underway at Hiway, after the Merger is consummated. These valuations will be
used in determining the final purchase accounting adjustments for these
acquisitions. Accordingly, the purchase accounting adjustments for these
acquisitions reflected in the pro forma financial statements included in this
Proxy Statement/Prospectus are likely to be revised and such adjustments may be
significant. Verio expects to record a charge to operations for in-process
research and development relating to certain of its recently completed
acquisitions, including TABNet, as well as Hiway. The amounts of such charges
are not presently determinable, but could be material. Verio is aware that the
Commission is reviewing the assumptions and methodologies heretofore commonly
used by companies in calculating such charges. In Verio's valuation of the
assets acquired and liabilities assumed and, in particular, in the valuation of
in-process research and development, Verio intends to follow recent guidance
published by the Commission.
Since the completion of substantially all of the Buyouts during the first
six months of 1998, Verio has focused considerable effort on, and incurred
significant expense in connection with, the consolidation of the ownership and
management and integration of the operations of the ISPs it has acquired to
date. During the three months ended September 30, 1998, Verio recorded one-time
expenses totaling approximately $3.4 million primarily in connection with
Verio's network and operational consolidation and integration strategy,
including approximately $1.9 million primarily related to the elimination of
approximately 250 positions which are no longer necessary due to the integration
of these functions into Verio's national services, and other costs associated
with personnel relocation and the cancellation of Internet access contracts and
the closure of redundant POP facilities of acquired ISPs. Verio continues to
incur costs for system upgrades and integration of TABNet's operations onto
Verio's network, customer care, billing and financial systems, and expects to
incur similar expenses associated with the integration of additional ISP and Web
hosting operations it acquires (including Hiway). Verio anticipates that these
expenses could be significant.
DEPENDENCE UPON CHANNEL PARTNERS
Verio uses multiple distribution channels to market its products and
services, and has three partner programs that permit its regional operations to
adapt a formal indirect distribution strategy to their respective markets. These
partner programs include, among others, computer and telecommunications
resellers, VARs,
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OEMs, systems integrators, Web designers and advertising agencies (collectively,
the "Channel Partners"). Verio has over 2,500 formal and informal Channel
Partner relationships, and consummation of the Merger would increase Verio's
worldwide indirect distribution channel to over 4,000 Channel Partners in the
U.S. and over 100 other countries. Hiway has sought to develop its reseller
channel through RapidSite, which manages Hiway's network of domestic and
international VARs, and through the establishment and development of its OEM
relationships. Verio intends to continue the development of RapidSite after the
Merger and to pursue OEM relationships as an indirect sales channel.
In markets where Verio does not focus its direct sales force, it is
dependent on third parties to stimulate demand for its products and services.
Although Verio attempts to provide incentives to its Channel Partners, the
failure of Verio's services to be commercially accepted in certain markets,
particularly the international markets, whether as a result of a Channel
Partner's performance or otherwise, could cause Verio's current Channel Partners
to discontinue their relationships with Verio, and Verio may not be successful
in establishing additional Channel Partner relationships in the future. The loss
of Channel Partners, the failure of such parties to perform under agreements
with Verio, or the inability to attract other Channel Partners with the
expertise and industry experience required to market Verio's products and
services could have a material adverse effect on Verio's business, financial
condition and results of operations. Conflicts may develop between Verio's
direct sales force efforts and those of its Channel Partners as well as among
different Channel Partners. Such conflicts could affect Verio's relationship
with various Channel Partners. Furthermore, to the extent that Verio realizes
increased sales through Channel Partners, such sales would usually be at
discounted rates, and the resulting revenues and gross margin realized by Verio
will be less than if Verio had sold the same services directly. See "Business of
Verio -- Sales and Distribution."
MANAGEMENT OF GROWTH; INTEGRATION OF ACQUISITIONS AND INVESTMENTS
Verio is currently experiencing a period of rapid expansion with the
acquisition and integration of its regional operations and additional ISPs. The
rapid growth of Verio's business and its product and service offerings has
placed, and is likely to continue to place, a significant strain on Verio's
managerial, operating, financial and other resources. Verio's future performance
will depend, in part, upon its ability to manage its growth effectively, which
will require that Verio implement additional management information systems
capabilities, further develop its operating, administrative and financial and
accounting systems and controls, improve coordination between engineering,
accounting, finance, marketing and operations, and hire and train additional
personnel. Failure by Verio to develop adequate operational and control systems
or to attract and retain highly qualified management, financial, technical,
sales and marketing and customer care personnel could materially adversely
affect Verio's ability to generate internal growth within its regional
operations or integrate the ISPs it acquires. In conjunction with its efforts to
integrate the operations of the ISPs it has acquired, Verio has effected the
Buyout (as defined below) of all but one of the ISPs in which it did not
initially acquire a 100% ownership interest (other than V-I-A Internet, Inc.
("VIANet"), in which Verio holds a minority interest and has no right to Buyout
the remaining equity and no present plan of integrating with its other
operations). While Verio anticipates that it will recognize various economies
and efficiencies of scale as a result of the integration of the operations of
the ISPs it has acquired, the process of consolidating the businesses and
implementing the strategic integration of Verio and its regional operations may
take a significant period of time, will place a significant strain on Verio's
resources, and could subject Verio to additional expenses during the integration
process. The timing and amount of expenditures related to Verio's cost-savings
initiatives and integration of the operations of Verio's ISPs may be difficult
to predict. Verio may increase near-term expenditures in order to accelerate the
integration and consolidation of acquired operations with the goal of achieving
longer-term cost savings and improved profitability. There can be no assurance
that these projected long-term cost savings and improvements in profitability
can or will be realized. As a result, there can be no assurance that Verio will
be able to integrate the ISPs it has acquired successfully or in a timely manner
in accordance with its strategic objectives. Failure to integrate its ISPs or to
manage effectively the growth of Verio would have a material adverse effect on
Verio's business, financial condition and results of operations.
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Furthermore, Verio's performance will depend on the internal growth
generated through ISP operations. The timing and sustainability of any such
internal growth from Verio's ISP operations is difficult to predict and may
depend upon a variety of factors including Verio's development of necessary
operating, administrative, financial and accounting systems and controls and
Verio's ability to attract and retain highly qualified management, financial,
technical, sales and marketing, and customer care personnel. Failure by Verio to
manage effectively these and other factors affecting internally generated growth
in its ISP operations could have a material adverse effect on Verio's business,
financial condition and results of operation.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND EXPANSION
With Verio's recent Web hosting acquisitions, Verio now provides Web
hosting services to customers in over 100 countries, and one of Verio's goals is
to expand its international presence. There can be no assurance that acceptance
of the Internet or demand for Internet connectivity, Web hosting and other
enhanced Internet services will increase significantly in any international
markets. Verio however believes that, in light of substantial anticipated
competition, it will be necessary to move quickly into international markets in
order to effectively obtain market share, and there can be no assurance that
Verio will be able to do so. Verio may experience difficulty in managing
international operations as a result of difficulties in locating effective
foreign partners, competition, technical problems, distance and language and
cultural differences, and there can be no assurance that Verio or its
international partners, if any, will be able to successfully market and operate
Verio's services in foreign markets. If revenue from international operations is
not adequate to cover the investments in such activities, Verio's business,
results of operations and financial condition could be materially and adversely
affected.
There are certain risks inherent in doing business on an international
level, such as changes in regulatory requirements, export restrictions,
imposition of tariffs, trade barriers, difficulties in staffing and managing
foreign operations, fluctuations in currency exchange rates, differing
technology standards, longer payment cycles, problems in collecting accounts
receivable, difficulty in enforcing contracts, political and economic
instability, seasonal reductions in business activity in certain other parts of
the world, potentially adverse tax consequences and general economic conditions,
including inflation. In addition, 11 of the 15 member countries of the European
Union are scheduled to establish fixed conversion rates between their existing
sovereign currencies and the euro, and to adopt the euro as their common legal
currency (the "Euro Conversion"), effective January 1, 1999. As Verio is only in
the initial stages of entering the European markets, Verio has not commenced any
assessment of the effects of the Euro Conversion, and is unsure of the potential
impact that the Euro Conversion may have on Verio's business, financial
condition or results of operations. Furthermore, certain foreign governments,
such as Germany, have enforced laws and regulations related to content
distributed over the Internet that are more strict than those currently in place
in the U.S. (see "-- Potential Liability for Information Disseminated Over
Network; Regulatory Matters"). There can be no assurance that one or more of
such factors will not have a material adverse effect on Verio's international
operations and, consequently, on Verio's business, results of operations and
financial condition.
CHANGES IN THE RIGHTS OF HIWAY SHAREHOLDERS
Hiway is incorporated in the State of California, and the rights of
shareholders of Hiway are currently governed by the CGCL, the Articles of
Incorporation of Hiway and the Bylaws of Hiway. Upon consummation of the Merger,
holders of shares of Hiway Common Stock will become holders of Verio Common
Stock, and their rights as stockholders of Verio will be governed by the DGCL,
the Restated Certificate of Incorporation of Verio and the Bylaws of Verio.
Verio and Hiway are both currently subject to the U.S. securities laws, and
Verio is subject to the rules and regulations of Nasdaq.
Certain differences between the rights of the shareholders of Hiway and the
stockholders of Verio arise from differences between the CGCL and the DGCL, as
well as from the differences between the corporate governing instruments of the
two companies and the rules and regulations of the regulatory bodies governing
the two companies. These differences may have a material effect on the rights of
shareholders of Hiway to nominate, vote for and remove directors, approve
certain corporate actions, receive dividends, and inspect corporate records,
among other things. See "Comparison of Rights of Verio Stockholders and Hiway
Shareholders."
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
Shareholders of Hiway should be aware that certain members of the
management of Hiway, including members of the Hiway Board, have interests in the
Merger that are in addition to the interests of shareholders of Hiway generally.
In particular, the Hiway Executive Officers are entitled to receive certain
payments in connection with the termination of the Hiway Employment Agreements
(which provide for certain rights and payments upon any "Change of Control" of
Hiway), and in consideration of their obligations under the Noncompete
Agreements, as each of those terms is defined, and as more fully described,
under "The Merger -- Interests of Certain Persons in the Merger." These
payments, which are anticipated to total approximately $4.4 million, will be
included in the determination of Excess Expenses, and so may result in a
decrease in the Common Stock Exchange Ratio and the Option Exchange Ratio. See
"The Merger Agreement -- Merger Consideration."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of Verio's initial public offering in May 1998 (the "Verio
IPO"), Verio, its directors and officers, and certain stockholders agreed not to
offer, sell or contract to sell, or otherwise dispose of, directly or
indirectly, or announce an offering of, any shares of Verio Common Stock or any
securities convertible into, or exchangeable, for shares of Verio Common Stock
for a period of six months from May 11, 1998, the date of the prospectus
relating to the Verio IPO (the "Prospectus Date"), without the prior written
consent of Smith Barney Inc., the lead underwriter in the Verio IPO. As a
result, on November 12, 1998, approximately 15.6 million shares of Verio Common
Stock became freely tradable without further restriction or registration under
the Securities Act, subject to the limitations of Rule 144 ("Rule 144") under
the Securities Act.
In addition, in connection with the NTT Investment (as defined below),
Nippon Telegraph and Telephone Corporation ("NTT") agreed not to offer, sell or
contract to sell, or otherwise dispose of, directly or indirectly, or announce
an offering of, any of the 4,493,877 shares of Verio Common Stock purchased by
NTT pursuant to the NTT Investment (the "NTT Shares") for a period of six months
from the Prospectus Date, without the prior written consent of Smith Barney Inc.
The NTT Shares are "restricted shares" and NTT will not be entitled to sell such
shares in the public securities market without registration except pursuant to
Rule 144 (or Rule 145, as applicable) or any other applicable exemption under
the Securities Act.
In connection with the Buyouts and acquisitions that involved the issuance
of shares of Verio Series D-1 Preferred Stock (which converted automatically
into Verio Common Stock upon consummation of the Verio IPO), Verio entered into
market standoff agreements with holders of the Series D-1 Preferred Stock that
was issued, which restrictions expire in one-third increments on the six,
twelve, and eighteen month anniversaries of May 11, 1998, which was the date of
the prospectus in connection with Verio's IPO. Following the six-month,
twelve-month and eighteen-month lockup periods, approximately 738,171, 738,171
and 738,171 additional shares of Verio Common Stock, respectively, have or will
become immediately saleable, subject to the limitations imposed by Rule 144
which could be applicable to certain holders of such Verio Common Stock.
Verio has filed registration statements on Form S-8 to register shares of
Verio Common Stock reserved for issuance under its equity incentive plans. As of
September 30, 1998, options to purchase approximately 4,633,084 shares of Verio
Common Stock were outstanding under Verio's stock option plans.
Sales of substantial amounts of Verio Common Stock in the public market
after consummation of the Merger could materially adversely affect prevailing
market prices for Verio Common Stock. Verio has outstanding 32,941,678 shares of
Verio Common Stock as of October 31, 1998. Although the exact number of shares
of Verio Common Stock issuable in the Merger cannot be determined until the
Effective Time, based on Hiway's capitalization as of November 13, 1998, and
assuming no Excess Expenses, Verio will issue 3,141,249 additional shares of
Verio Common Stock in the Merger. See "The Merger Agreement -- Merger
Consideration." The shares of Verio Common Stock issued in the Merger will be
eligible for immediate sale in the public market, subject to the limitations of
Rule 145 applicable to affiliates and the Lockup Agreements to be entered into
by the Hiway Executive Officers (as defined below) which prohibit such persons
from
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disposing of Verio Common Stock for a period of six months following the Closing
Date. See "The Merger -- Resale Restrictions."
HISTORY OF LOSSES; NO ASSURANCE OF PROFITABILITY
Verio was formed in March 1996. Verio has incurred net losses since its
inception, and management expects to incur significant additional losses as
Verio continues its investment and acquisition program as well as the building
of its national network operations. For the period from inception to December
31, 1996 (the "1996 Period"), the year ended December 31, 1997, and the
nine-month period ended September 30, 1998, Verio reported net losses of $5.1
million, $46.3 million, and $88.3 million, respectively. From inception through
September 30, 1998, Verio reported cumulative cash used by operating activities
of $73.9 million. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Verio." Verio expects to generate
negative operating cash flow for at least the next several years while it
continues to acquire, invest in and integrate the operations of ISPs. The extent
to which Verio experiences negative cash flow will depend upon a number of
factors, including the number and size of its acquisitions and investments, the
expenses and time required to effectively integrate acquired operations and
capture operating efficiency, the ability to generate increasing revenues and
cash flow, the amount of expenditures incurred at the corporate and national
level, and any potential adverse regulatory developments. Verio will be
dependent on various financing sources to fund its growth as well as continued
losses from operations. There can be no assurance that Verio will achieve or
sustain positive operating cash flow or generate net income in the future. To
achieve profitability, Verio must, among other things, develop and market
products and services which are accepted on a broad commercial basis. Given
Verio's limited operating history, there can be no assurance that Verio will
ever achieve broad commercial acceptance or profitability. See "-- Competition;
Pricing Fluctuation" and "-- Dependence on the Internet; Risks of Technology
Trends and Evolving Industry Standards" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Verio -- Liquidity
and Capital Resources." Verio's profitability also will be affected as a result
of Verio's recording of compensation expense in an aggregate amount of
approximately $10.6 million in connection with the granting of options
subsequent to February 28, 1998, which compensation expense will be recorded
over the forty-eight month vesting period of those options. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Verio -- Results of Operations -- Stock-Based Compensation."
SUBSTANTIAL INDEBTEDNESS; EFFECT OF FINANCIAL LEVERAGE
Verio has indebtedness that is substantial in relation to its stockholders'
equity and cash flow. As of September 30, 1998, Verio had an aggregate of
approximately $274.5 million of long-term indebtedness outstanding, representing
54% of total capitalization, and would have had approximately $280.5 million of
long-term indebtedness outstanding after giving pro forma effect to the WWW
Acquisition and the Merger, representing 48% of total pro forma capitalization.
After giving effect to Verio's issuance of the November 1998 Notes, and assuming
consummation of the Merger, long-term indebtedness will be approximately $680.5
million, representing approximately 69% of total pro forma capitalization. In
addition, Verio has executed a credit agreement providing for $70.0 million of
revolving credit facility (the "Bank Facility"), none of which has been drawn as
of October 31, 1998. See "-- Requirements for Additional Capital." On a
historical basis, Verio's earnings have been insufficient to cover its fixed
charges, and, as a result of Verio's substantial indebtedness, Verio's fixed
charges are expected to exceed its earnings for the foreseeable future.
Substantial leverage poses the risk that Verio may not be able to generate
sufficient cash flow to service its indebtedness, or to adequately fund its
operations. Verio has experienced a substantial decrease in EBITDA, from $(5.6)
million in the 1996 Period to $(29.7) million in 1997. EBITDA as a percentage of
revenue improved from (237%) to (83%) from the 1996 Period to the year ended
December 31, 1997. However, there can be no assurance that this trend will
continue, or that Verio will be able to increase its revenue and leverage the
investments it has made in national services and systems, the national network,
and operating overhead, to achieve sufficient cash flow to meet its debt service
obligations. In particular, there can be no assurance that Verio's operating
cash flow will be sufficient to pay (i) the $13.5 million in annual interest
(beginning in June 2000 following the termination of the interest escrow
arrangement for the 1997 Notes) on the $100.0 million principal amount of 1997
Notes that remain outstanding after the repurchase of $50.0 million principal
amount of the 1997 Notes held by Brooks Fiber Properties, Inc. ("Brooks") (the
"Refinancing"),
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(ii) the $18.2 million in annual interest on the March 1998 Notes, or (iii) the
$45.0 million in annual interest on the November 1998 Notes, or to meet its debt
service obligations under the Bank Facility, if drawn upon. The leveraged nature
of Verio also could limit the ability of Verio to effect future financings or
may otherwise restrict Verio's operations and growth.
RISKS ASSOCIATED WITH FINANCING ARRANGEMENTS
Verio's Bank Facility is secured by the capital stock of Verio's operating
subsidiaries. The Bank Facility requires that Verio satisfy certain financial
covenants and currently prohibits the payment of dividends and the repurchase of
capital stock of Verio without the lenders' consent. Verio's secured lenders
would be entitled to foreclose upon those assets in the event of a default under
the Bank Facility and to be repaid from the proceeds of the liquidation of those
assets before the assets would be available for distribution to the holders of
Verio's capital stock in the event that Verio is liquidated. In addition, the
collateral security arrangements under Verio's Bank Facility may adversely
affect Verio's ability to obtain additional borrowings.
REQUIREMENTS FOR ADDITIONAL CAPITAL
Verio's operations have required and will continue to require substantial
capital for investments in regional operations, including the acquisition of or
investments in additional ISPs, the deployment of Verio's national network and
infrastructure and the funding of capital expenditures for expansion of services
and operating losses. Verio may need additional amounts to fund its operating
losses and those of its subsidiaries, which amounts cannot be determined. Over
the longer term, it is likely that Verio will require substantial additional
funds to continue to fund Verio's investment and acquisition program as well as
product development, marketing, sales and customer support capabilities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Verio -- Liquidity and Capital Resources."
Verio expects to meet its additional capital needs with the proceeds from
sales or issuance of equity securities, credit facilities and other borrowings,
lease financings and sales of additional debt securities. The failure to raise
and generate sufficient funds may require Verio to delay or abandon some of its
planned future expansion or expenditures, which could have a material adverse
effect on Verio's growth and its ability to compete in the Internet industry. No
assurance can be given that Verio will have sufficient cash flow available to
maintain its current or future growth plans or operations.
COMPETITION; PRICING FLUCTUATION
The market for Internet connectivity and related services is extremely
competitive. Verio anticipates that competition will continue to intensify as
the use of the Internet grows. The tremendous growth and potential market size
of the Internet access market has attracted many new start-ups as well as
existing businesses from different industries. Current and prospective
competitors include, in addition to other national, regional and local ISPs,
long distance and local exchange telecommunications companies, cable television
companies, direct broadcast satellite and wireless communications providers, and
on-line service providers. Verio believes that a reliable national network,
knowledgeable salespeople and the quality of technical support currently are the
primary competitive factors in Verio's targeted market, and that price is
usually secondary to these factors.
Verio's current primary competitors include other ISPs with a significant
national presence which focus on business customers, such as UUNet, GTE
Internetworking (formerly BBN), PSINet, Concentric Network and Intermedia/DIGEX.
While Verio believes that its level of local service and support and target
market focus distinguish it from these competitors, some of these competitors
have a significantly greater market presence, brand recognition, and financial,
technical and personnel resources than Verio, and have extensive coast-to-coast
Internet backbones. Verio also competes with unaffiliated regional and local
ISPs in its targeted geographic regions.
All of the major long distance companies (also known as interexchange
carriers or IXCs), including AT&T, MCI/WorldCom, Cable & Wireless/InternetMCI,
and Sprint, offer Internet access services and compete with Verio. The recent
sweeping reforms in the federal regulation of the telecommunications industry
have created greater opportunities for local exchange carriers ("LECs"),
including the Regional Bell
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Operating Companies ("RBOCs"), to enter the Internet connectivity market. In
order to address the Internet connectivity requirements of the current business
customers of long distance and local carriers, Verio believes that there is a
move toward horizontal integration through acquisitions of, joint ventures with,
and the wholesale purchase of connectivity from, ISPs. The
MCI/WorldCom/MFS/UUNet consolidation, Cable & Wireless' acquisition of
InternetMCI, the Intermedia/DIGEX merger and GTE's acquisition of BBN are
indicative of this trend. Accordingly, Verio expects that it will experience
increased competition from the traditional telecommunications carriers. Many of
these telecommunications carriers, in addition to their substantially greater
network coverage, market presence, and financial, technical and personnel
resources, also have large existing commercial customer bases. Furthermore,
telecommunications providers may have the ability to bundle Internet access with
basic local and long distance telecommunications services. Such bundling of
services may have an adverse effect on Verio's ability to compete effectively
with the telecommunications providers and may result in pricing pressure on
Verio that would have an adverse effect on Verio's business, financial condition
and results of operations.
Many of the major cable companies have announced that they are exploring
the possibility of offering Internet connectivity, relying on the viability of
cable modems and economical upgrades to their networks. MediaOne Group and TCI
have recently announced trials to provide Internet cable service to their
residential customers in select areas. Several announcements also have recently
been made by other alternative service companies approaching the Internet
connectivity market with various wireless terrestrial and satellite-based
service technologies. These include Hughes Network System's DirecPC that
provides high-speed data through direct broadcast satellite technology; CAI
Wireless System's announcement of an MMDS wireless cable operator launching data
services via 2.5 to 2.7 GHz and high-speed wireless modem technology;
Cellularvision's announcement that it is offering Internet access via high-speed
wireless LMDS technology; and Winstar, which currently offers high-speed
Internet access to business customers over the 38 GHz spectrum.
The predominant on-line service providers, including America Online,
CompuServe, Microsoft Network and Prodigy, have all entered the Internet access
business by engineering their current proprietary networks to include Internet
access capabilities. Verio competes to a lesser extent with these on-line
service providers.
Recently, there have been several announcements regarding the deployment
and planned deployment of broadband services for high speed Internet access by
cable and telephone companies through new technologies such as cable modems and
various Digital Subscriber Line ("DSL") technologies. While these providers
initially targeted the residential consumer, recently a number of DSL providers
have also announced their intent to offer DSL services to Verio's target market
of small and medium sized businesses, which may significantly affect the pricing
of Verio's service offerings. Further, a number of DSL providers have recently
launched their services in conjunction with ISPs (including Verio), allowing
ISPs to offer Internet connectivity over DSL circuits. These DSL circuits, which
provide higher speed and lower latency Internet connections than a standard
dial-up phone connection, may compete with Verio's dedicated connectivity
offerings.
As a result of an increase in the number of competitors, and vertical and
horizontal integration in the industry, Verio currently encounters and expects
to encounter significant pricing pressure and other competition in the future.
Advances in technology, as well as changes in the marketplace and the regulatory
environment, are constantly occurring, and Verio cannot predict the effect that
ongoing or future developments may have on Verio or the pricing of its products
and services. See "-- Fluctuations in Operating Results," "-- Potential
Liability for Information Disseminated Over Network; Regulatory Matters" and
"-- Dependence on the Internet; Risk of Technology Trends and Evolving Industry
Standards."
In connection with the OSP Agreement (as defined in "Business of
Verio -- NTT Strategic Relationship") between Verio and NTT, further details of
which have been agreed to by Verio and NTT in a subsequent Strategic Partner
Services Agreement, NTT is entitled to "most favored customer" status and
pricing concessions in connection with the service provided by Verio under those
agreements. NTT and Verio are continuing to negotiate the specific terms of
these arrangements. See "Business of Verio -- NTT Strategic Relationship" and
"Certain Transactions of Verio -- Other Transactions."
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DEPENDENCE UPON IMPLEMENTATION OF NETWORK INFRASTRUCTURE; ESTABLISHMENT AND
MAINTENANCE OF PEERING RELATIONSHIPS
Verio's success will depend upon its ability to complete the implementation
of and to continue to expand its national network infrastructure and support
services in order to supply sufficient geographic reach, capacity, reliability
and security at an acceptable cost. The continued development and expansion of
Verio's national network will require that it enter into additional agreements,
on acceptable terms and conditions, with the various providers of infrastructure
capacity and equipment and support services. No assurance can be given that any
or all of the requisite agreements can be obtained on satisfactory terms and
conditions. See "Business of Verio -- Technology and Network
Operations -- Peering Relationships."
In addition, the establishment and maintenance of peering relationships
with other ISPs is necessary in order to exchange traffic with other ISPs
without having to pay transit costs. The basis on which the large national ISPs
make peering available or impose settlement charges is evolving as the provision
of Internet access and related services has expanded and the dominance of a
small group of national ISPs has driven industry peering practice. Recently,
companies that have previously offered peering have cut back or eliminated
peering relationships and are establishing new, more restrictive criteria for
peering. Furthermore, if increasing requirements associated with maintaining
peering with the major national ISPs develop, Verio may have to comply with
those additional requirements in order to continue to maintain its peering
relationships. Verio also anticipates that future expansions and adaptations of
its network infrastructure may be necessary in order to respond to growth in the
number of customers served, increased demands to transmit larger amounts of data
and changes to its customers' product and service requirements. The expansion
and adaptation of Verio's network infrastructure will require substantial
financial, operational and managerial resources. There can be no assurance that
Verio will be able to expand or adapt its network infrastructure to meet the
industry's evolving standards or its customers' growing demands and changing
requirements on a timely basis, at a commercially reasonable cost, or at all, or
that Verio will be able to deploy successfully any expanded and adapted network
infrastructure. Failure to maintain peering relationships or establish new ones,
if necessary, would cause Verio to incur additional operating expenditures which
would have a material adverse effect on Verio's business, financial condition
and results of operations.
CHALLENGES OF GROWTH BY ACQUISITIONS
Verio's business strategy is dependent, in part, upon its ability to
continue to successfully identify and acquire ISPs that meet Verio's acquisition
criteria. Verio is continuing to seek and evaluate business-focused ISPs in
order to deepen and broaden its market presence, to expand its strength in its
Internet connectivity and Web hosting core service platforms, and to add
additional enhanced service capabilities. Although Verio's acquisitions
initially were primarily smaller local and regional independent ISPs, Verio more
recently has also targeted the acquisition of larger businesses such as its
acquisition of TABNet and the proposed Merger. Verio expects that competition
for appropriate acquisition candidates may be significant. Verio may compete
with other communications companies with similar acquisition strategies, many of
which may be larger and have greater financial and other resources than Verio.
Competition for independent ISPs is based on a number of factors, including
price, terms and conditions, size and access to capital, ability to offer cash,
stock, or other forms of consideration and other matters. No assurance can be
given that Verio will be able to identify suitable ISPs successfully or, once
identified, will be able to consummate an acquisition of or an investment in
those targeted ISPs on terms and conditions acceptable to Verio. See
"-- Competition; Pricing Fluctuation" and "Business of Verio -- The Verio
Strategy." Further, Verio's ability to consummate transactions with ISPs that it
identifies will require significant financial resources. Failure to raise and
generate sufficient funds may require Verio to delay or abandon some of its
planned future expansion or expenditures, which could have a material adverse
effect on Verio's growth. See "-- Requirements for Additional Capital."
FLUCTUATIONS IN OPERATING RESULTS
Verio's operating results have fluctuated in the past and may in the future
fluctuate significantly depending upon a variety of factors, including the
incurrence of capital costs and the introduction of value-added enhanced
services and new services by Verio. Additional factors that may contribute to
the variability of Verio's operating results include: the pricing and mix of
services offered by Verio; Verio's customer retention
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rate; changes in pricing policies and product offerings by Verio's competitors;
growth in demand for network and Internet access services; the incurrence of
one-time costs associated with regional consolidation; and general
telecommunications services' performance and availability. Verio has also
experienced seasonal variation in Internet use and, therefore, revenue streams
may fluctuate accordingly. In response to competitive pressures, Verio may take
certain pricing or marketing actions that could have a material adverse effect
on Verio's business, financial condition and results of operations. See
"-- Competition; Pricing Fluctuation." As a result, variations in the timing and
amounts of revenues could have a material adverse effect on Verio's quarterly
operating results. Due to the foregoing factors, Verio believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and that such comparisons cannot be relied upon as indicators of
future performance. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Verio -- Results of Operations."
DEPENDENCE ON KEY PERSONNEL
Verio is highly dependent upon the efforts of its senior management team,
the loss of any of whom could impede the achievement of product development and
marketing objectives and could have a material adverse effect on Verio. Verio
believes that its future success will depend in large part on its ability to
attract and retain qualified technical and marketing personnel for whom there is
intense competition in the areas of Verio's activities. There can be no
assurance that Verio will be able to attract and retain the personnel necessary
for the development and integration of its business. Delays in hiring such
personnel could delay the achievement of development and marketing objectives.
The loss of the services of key personnel or the failure to attract additional
personnel as required could have a material adverse effect on Verio's business,
financial condition and results of operations.
RISK OF SYSTEM FAILURE
Verio's operations are dependent upon its ability to protect its network
infrastructure against damage from fire, earthquakes, floods, power loss,
telecommunications failures and similar events or to construct networks that are
not vulnerable to the effects of such events. Significant portions of Verio's
computer equipment, including components critical to the operation of its
Internet backbone, are located at Verio's facility in Englewood, Colorado and
the Network Operation Center ("NOC") of Verio located in Dallas, Texas and at
the NOCs of acquired companies, including Hiway. Despite precautions taken by
and planned by Verio, the occurrence of a natural disaster or other
unanticipated problem at Verio's NOC or at a number of Verio's national nodes
could cause interruptions in the services provided by Verio. The failure of a
local point of presence ("POP") would result in interruption of service to the
customers served by such POP until necessary repairs were effected or
replacement equipment were installed. Additionally, failure of Verio's
telecommunications providers to provide the data communications capacity
required by Verio as a result of natural disaster, operational disruption or for
any other reason could cause interruptions in the services provided by Verio.
Any damage or failure that causes interruptions in Verio's operations could have
a material adverse effect on Verio's business, financial condition and results
of operations.
Hiway currently offers to all its customers a 99.9% service level warranty,
under which Hiway guarantees that each customer's Web site would be available at
least 99.9% of the time in each calendar month for as long as the customer is
using Hiway's Web hosting services. If uptime falls below this level in any
month, Hiway would provide Web hosting services free of charge for that month.
Verio does not currently have a policy of providing a similar service warranty
to its customers. There can be no assurance, however, that Verio will not adopt
a service warranty policy in the future. To the extent that Verio provides such
a service warranty policy in the future, it could experience a material decline
in its revenues in connection with any system downtime experienced by its
customers or other material charges associated with such warranty coverage.
SECURITY RISKS
Despite the implementation of security measures by Verio, networks are
vulnerable to unauthorized access, computer viruses and other disruptive
problems. ISPs have in the past experienced, and may in the future experience,
interruptions in service as a result of the accidental or intentional actions of
Internet users,
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current and former employees or others. Unauthorized access could also
potentially jeopardize the security of confidential information stored in the
computer systems of Verio and its customers, which may result in liability of
Verio to its customers and also may deter potential subscribers. Although Verio
intends generally to continue to implement industry-standard security measures,
such measures have been circumvented in the past, and there can be no assurance
that measures implemented by Verio will not be circumvented in the future.
Eliminating computer viruses and alleviating other security problems may require
interruptions, delays or cessation of service to Verio's customers which could
have a material adverse effect on Verio's business, financial condition and
results of operations.
POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED OVER NETWORK; REGULATORY
MATTERS
The law relating to liability of on-line service providers and ISPs for
information carried on or disseminated through their networks is currently
unsettled. A number of lawsuits have sought to impose such liability for
defamatory speech and infringement of copyrighted materials. Although some
courts have ruled that the 1996 Telecommunications Act immunizes ISPs from
liability for defamatory material carried on their facilities, there can be no
assurance that other courts will take a similar approach. In one case, a state
court held that an on-line service provider could be found liable for defamatory
materials provided through its service, on the ground that the service provider
exercised active editorial control over postings to its service. Other courts
have held that on-line service providers and ISPs may, under certain
circumstances, be subject to damages for copying or distributing copyrighted
materials. In October 1998, new federal legislation was enacted that requires
ISPs to remove or disable access to allegedly infringing material when certain
notice requirements are met. This legislation provides certain liability
protections to ISPs that comply with its requirements, so long as the ISP takes
certain actions prescribed in the statute. Although the Supreme Court has
declared the Communications Decency Act, enacted in conjunction with the 1996
Telecommunications Act, to be unconstitutional as it applies to the transmission
of indecent on-line communications to minors, state and federal statutes
continue to prohibit the on-line distribution of obscene materials. Further
federal legislation was enacted in October 1998 that requires limitations be
imposed on access to pornography and other material deemed "harmful to minors."
Although this legislation has been challenged in court as a violation of the
First Amendment, it is not possible to predict the outcome of this case. The
imposition upon ISPs or Web server hosts of potential liability for materials
carried on or disseminated through their systems could require Verio to
implement measures to reduce its exposure to such liability. Such measures may
require the expenditure of substantial resources or the discontinuation of
certain product or service offerings, any of which could have a material adverse
effect on Verio's business, operating results and financial condition. Laws
relating to the regulation and liability of Internet access providers for
information carried or disseminated on their networks also are being considered
and implemented in other countries. Decisions, laws, regulations, and other
activities regarding regulation and content liabilities in other countries may
significantly impact the development and profitability of Verio's international
operations.
Although Verio is not currently subject to direct regulation by the Federal
Communications Commission (the "FCC") or any other federal or state agency
(other than regulations applicable to businesses generally), changes in the
regulatory environment relating to the Internet connectivity market, including
regulatory changes which directly or indirectly affect telecommunications costs
or increase the likelihood or scope of competition from the RBOCs or other
telecommunications companies, could affect the prices at which Verio may sell
its services. For example, proposed regulations at the FCC would require
discounted Internet connectivity rates for schools and libraries. Also, the FCC
is considering whether ISPs should be required to pay access charges to local
telephone companies for each minute that dial up users spend connected to ISPs
through telephone company switches, and some telephone companies have requested
similar relief from state regulatory commissions. The imposition of access
charges would affect Verio's costs of serving dial up customers and could have a
material adverse effect on Verio's business, operating results and financial
condition.
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DEPENDENCE ON THE INTERNET; RISKS OF TECHNOLOGY TRENDS AND EVOLVING INDUSTRY
STANDARDS
Verio's products and services are targeted toward users of the Internet,
which has experienced rapid growth. The market for Internet access and related
services is relatively new and characterized by rapidly changing technology,
evolving industry standards, changes in customer needs and frequent new product
and service introductions. Verio's future success will depend, in part, on its
ability to effectively use leading technologies, to continue to develop its
technical expertise, to enhance its current services, to develop new products
and services that meet changing customer needs, and to influence and respond to
emerging industry standards and other technological changes on a timely and
cost-effective basis. There can be no assurance that Verio will be successful in
effectively using new technologies, developing new services or enhancing its
existing services on a timely basis or that such new technologies or
enhancements will achieve market acceptance. Verio believes that its ability to
compete successfully is also dependent upon the continued compatibility and
interoperability of its services with products and architectures offered by
various vendors. There can be no assurance that Verio will be able to
effectively address the compatibility and interoperability issues raised by
technological changes or new industry standards. In addition, there can be no
assurance that services or technologies developed by others will not render
Verio's services or technology uncompetitive or obsolete. For example, Verio's
services rely on the continued widespread commercial use of Transmission Control
Protocol/ Internet Protocol ("TCP/IP"). Alternative open and proprietary
protocol standards that compete with TCP/IP, including proprietary protocols
developed by IBM and Novell, Inc., have been or are being developed. If the
market for Internet access services fails to develop, develops more slowly than
expected, or becomes saturated with competitors, or if the Internet access and
services offered by Verio and its ISPs are not broadly accepted, Verio's
business, operating results and financial condition will be materially adversely
affected.
In addition, critical issues concerning the commercial use of the Internet
remain unresolved and may impact the growth of Internet use, especially in the
business market targeted by Verio. Despite growing interest in the many
commercial uses of the Internet, many businesses have been deterred from
purchasing Internet access services for a number of reasons, including, among
others, inconsistent quality of service, lack of availability of cost-effective,
high-speed options, a limited number of local access points for corporate users,
inability to integrate business applications on the Internet, the need to deal
with multiple and frequently incompatible vendors, inadequate protection of the
confidentiality of stored data and information moving across the Internet, and a
lack of tools to simplify Internet access and use. In particular, numerous
published reports have indicated that a perceived lack of security of commercial
data, such as credit card numbers, has significantly impeded commercial
exploitation of the Internet to date, and there can be no assurance that
encryption or other technologies will be developed that satisfactorily address
these security concerns. Published reports have also indicated that capacity
constraints caused by growth in the use of the Internet may, unless resolved,
impede further development of the Internet to the extent that users experience
delays, transmission errors and other difficulties. Further, the adoption of the
Internet for commerce and communications, particularly by those individuals and
enterprises which have historically relied upon alternative means of commerce
and communication, generally requires the understanding and acceptance of a new
way of conducting business and exchanging information. In particular,
enterprises that have already invested substantial resources in other means of
conducting commerce and exchanging information may be particularly reluctant or
slow to adopt a new strategy that may make their existing personnel and
infrastructure obsolete. The failure of the market for business-related Internet
solutions to continue to develop would adversely impact Verio's business,
financial condition and results of operations.
DEPENDENCE UPON SUPPLIERS; LIMITED SOURCES OF SUPPLY
Verio relies on other companies to supply certain key components of its
network infrastructure, including telecommunications services and networking
equipment which, in the quantities and quality demanded by Verio, are available
only from limited sources. For example, Verio currently relies on Cisco Systems
to supply routers critical to Verio's network, and Verio could be adversely
affected if routers from Cisco were to become unavailable on commercially
reasonable terms. Qwest, Sprint, MCI and MFS, which are competitors of Verio,
are Verio's primary providers of data communications facilities and network
capacity. Verio also is dependent
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upon LECs, which often are competitors of Verio, to provide telecommunications
services and lease physical space to Verio for routers, modems and other
equipment. Verio has from time to time experienced delays in the provisioning of
telecommunications services, which can lead to the loss of customers or
prospective customers. There can be no assurance that, on an ongoing basis,
Verio will be able to obtain such services on the scale and within the time
frames required by Verio at a commercially reasonable cost, or at all. Failure
to obtain or to continue to make use of such services would have a material
adverse effect on Verio's business, operating results and financial condition.
YEAR 2000 COMPLIANCE
Verio and Hiway are aware of the issues associated with the programming
code in existing computer systems as the year 2000 approaches. The "Year 2000"
problem is concerned with whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or fail. The
Year 2000 problem is pervasive and complex, as virtually every company's
computer operations will be affected in some way.
Verio is currently engaged in a two-phase process to evaluate its internal
status with respect to the Year 2000 issue. In the first phase, which Verio
expects to complete in the fourth quarter of 1998, Verio is conducting an
assessment of its national systems in Denver, Colorado, Dallas, Texas and its
east operating region, including both IT systems and non-IT systems such as
hardware containing embedded technology, for Year 2000 compliance. Verio has
hired outside consultants and utilizes certain employees in its phase one
evaluation. To date, the costs and expenses of such outside consultants and
employees of Verio have not been material. While the remaining phase one costs
are difficult to estimate, Verio does not currently anticipate that such costs
will be material. To date, Verio has not discovered Year 2000 issues in the
course of its assessment that would have a material adverse effect on the
business, results of operations or financial condition of Verio. However, there
can be no assurance that Verio will not discover Year 2000 issues upon
completion of phase one.
Phase two of the process, which is expected to be completed during the
second quarter of 1999, will involve taking any needed corrective action to
bring systems into compliance and to develop a contingency plan in the event any
non-compliant critical systems remain by January 1, 2000. As part of this phase,
Verio will attempt to quantify the impact, if any, of the failure to complete
any necessary corrective action. Although Verio cannot currently estimate the
magnitude of such impact, if systems material to Verio's operations have not
been made Year 2000 compliant upon completion of this phase, the Year 2000 issue
could have a material adverse effect on Verio's business, results of operations
and financial condition. To date, the costs incurred by Verio with respect to
phase two have not been material. Future costs will remain difficult to estimate
until the completion of phase one. However, Verio does not currently anticipate
that such costs will be material.
Hiway has recently worked with an independent consultant to evaluate
Hiway's applications, services, operating systems, software, servers, networking
equipment and other hardware for Year 2000 compliance. This evaluation focused
on whether Hiway's operations or assets, including the provision of Web hosting
and Internet connectivity, accounting and customer billing, and other
infrastructure would encounter any problems as a result of the occurrence of the
Year 2000. The cost of this review was approximately $100,000. Hiway's total
Year 2000 project cost, including the correction of any problems that are found,
is expected to be less than $500,000.
Hiway's Year 2000 project is divided into three phases -- Assessment,
Remediation Planning and Remediation and Testing with progress tracked by phase
and function.
As testing for Year 2000 functionality of Verio's and Hiway's systems must
occur in a simulated environment, Verio and Hiway will not be able to test fully
all Year 2000 interfaces and capabilities prior to Year 2000. Failure of their
central database or proprietary billing software to be Year 2000 compliant may
have a material adverse impact on Verio's and Hiway's ability to provide
services and collect fees, which could result in a material adverse impact on
their respective business, financial condition and results of operations as
early as January 1999. In the event that Hiway faces Year 2000 problems as a
result of the failure of its internal systems, Hiway believes material exposure
would exist with respect to its provisioning and billing
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systems. In such an event, Hiway's contingency plan is to resort to manual
provisioning and billing systems estimated to cost $75,000 up-front plus $35,000
per month.
Hiway and Verio are in the process of evaluating the Year 2000 preparedness
of their respective telecommunications providers, on which they are critically
reliant for the connectivity to the Internet crucial to their Web hosting and
Internet connectivity services. If these telecommunications providers have Year
2000 problems that interfere with their ability to provide telecommunications
services, this could have a material adverse impact on Verio's and Hiway's
ability to provide their services. In the event of such a interruption in
service, Verio and Hiway would seek alternative sources of telecommunications
services. However, such services may not be available, in which case there could
be a material adverse impact on Verio's and Hiway's ability to provide their
services, resulting in a material adverse impact on their respective business,
financial condition and results of operations.
Similarly, Verio and Hiway are in the process of evaluating the Year 2000
preparedness of their utilities service providers. Failure of these electrical
utilities to provide service to Verio or Hiway also would have a significant
impact on their ability to provide services. In the event that electrical
service is interrupted, Verio and Hiway would rely on backup electrical
generation equipment maintained at their data centers. However, long term
reliance on such backup equipment could have a significant impact on Verio's and
Hiway's cost of providing services, resulting in a material adverse impact on
their business, financial condition and results of operations.
Finally, Verio and Hiway are in the process of evaluating the Year 2000
preparedness of their other significant vendors, VARs and OEMs. Failure of such
vendors, VARs or OEMs, or their telecommunications services or utilities
providers, to be Year 2000 compliant could have a material impact on their
ability to provide services to their customers, resulting in a material adverse
impact on Verio's and Hiway's business, financial condition and results of
operations.
Based on the steps being taken to address this issue and the progress to
date, Verio believes that the Year 2000 compliance expenses will not have a
material adverse effect on Verio's earnings. However, there can be no assurance
that Year 2000 problems will not occur with respect to Verio's or Hiway's
computer systems. Furthermore, the Year 2000 problem may impact other entities
with which Verio and Hiway transact business, and Verio and Hiway cannot predict
the effect of the Year 2000 problem on such entities or the resulting effect on
Verio and Hiway. As a result, if preventative and/or corrective actions by Verio
and Hiway or those with whom Verio and Hiway do business are not made in a
timely manner, the Year 2000 issue could have a material adverse effect on
Verio's or Hiway's business, financial condition and results of operations.
EFFECT OF ANTITAKEOVER PROVISIONS
Certain provisions of Verio's Restated Certificate of Incorporation and
Bylaws could discourage potential acquisition proposals and could delay or
prevent a change in control of Verio. Such provisions could diminish the
opportunities for a stockholder to participate in tender offers, including
tender offers at a price above the then current market value of Verio Common
Stock. Such provisions may also inhibit fluctuations in the market price of
Verio Common Stock that could result from takeover attempts. In addition, the
Verio Board, without further stockholder approval, may issue Verio's
Undesignated Preferred Stock, with such terms as the Verio Board may determine,
that could have the effect of delaying or preventing a change in control of
Verio. The issuance of Verio's Undesignated Preferred Stock could also adversely
affect the voting power of the holders of Verio Common Stock, including the loss
of voting control to others. Verio also is afforded the protections of Section
203 of the DGCL, which could delay or prevent a change in control of Verio or
could impede a merger, consolidation, takeover or other business combination
involving Verio or discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of Verio. See "Description of Capital
Stock" and "Comparison of Rights of Verio Stockholders and Hiway Shareholders."
FORWARD-LOOKING STATEMENTS
The statements contained in this Proxy Statement/Prospectus that are not
historical fact are "forward-looking statements" (as such term is defined in the
Reform Act). The safe harbor provisions provided in
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Section 27A of the Securities Act and Section 21E of the Exchange Act apply to
forward-looking statements made only by Verio and not Hiway. These statements
can be identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. Verio and Hiway wish to caution
the reader that these forward-looking statements addressing the timing, costs
and scope of Verio's acquisition of, or investments in, existing ISPs, the
revenue and profitability levels of the ISPs in which Verio invests, the
anticipated reduction in operating costs resulting from the integration and
optimization of those ISPs and other matters contained above and elsewhere in
this Proxy Statement/Prospectus regarding matters that are not historical facts,
are only predictions. No assurance can be given that the future results
indicated, whether expressed or implied, will be achieved. While sometimes
presented with numerical specificity, these projections and other
forward-looking statements are based upon a variety of assumptions relating to
the business of Verio or Hiway, as the case may be, which, although considered
reasonable by Verio or Hiway, as the case may be, may not be realized. Because
of the number and range of the assumptions underlying Verio's projections and
forward-looking statements, many of which are subject to significant
uncertainties and contingencies that are beyond the reasonable control of Verio
or Hiway, some of the assumptions inevitably will not materialize and
unanticipated events and circumstances may occur subsequent to the date of this
Proxy Statement/Prospectus. These forward-looking statements are based on
current expectations, and neither Verio nor Hiway assumes any obligation to
update this information. Therefore, the actual experience of Verio and Hiway and
results achieved during the period covered by any particular projections or
forward-looking statements may differ substantially from those projected.
Consequently, the inclusion of projections and other forward-looking statements
should not be regarded as a representation by Verio, Hiway or any other person
that these estimates and projections will be realized, and actual results may
vary materially. There can be no assurance that any of these expectations will
be realized or that any of the forward-looking statements contained herein will
prove to be accurate.
THE HIWAY SPECIAL MEETING
DATE, TIME, PLACE AND PURPOSE
The Hiway Special Meeting will be held on December , 1998, at 10 A.M.,
Pacific Time, at the corporate offices of Best, located at 345 East Middlefield
Road, Mountain View, California 94043.
At the Hiway Special Meeting, holders of Hiway Common Stock will consider
and vote upon the Hiway Merger Proposal and consequently to approve and adopt
the Merger Agreement and the Merger. Shareholders of Hiway will also consider
and vote on any other matter that may properly come before the meeting.
THE HIWAY BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE HIWAY
MERGER PROPOSAL, BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT ARE FAIR TO,
AND IN THE BEST INTERESTS OF, HIWAY AND ITS SHAREHOLDERS, AND UNANIMOUSLY
RECOMMENDS THAT HOLDERS OF SHARES OF HIWAY COMMON STOCK VOTE "FOR" APPROVAL OF
THE HIWAY MERGER PROPOSAL.
RECORD DATE; VOTING RIGHTS; PROXIES
Only holders of Hiway Common Stock at the close of business on December ,
1998 (the "Hiway Record Date") are entitled to notice of and to vote at the
Hiway Special Meeting. As of the Hiway Record Date, there were approximately
holders of record of Hiway Common Stock, and shares of Hiway
Common Stock issued and outstanding, each of which entitled the holder thereof
to one vote.
All shares of Hiway Common Stock represented by properly executed proxies
will, unless such proxies have been previously revoked, be voted in accordance
with the instructions indicated in such proxies. IF NO INSTRUCTIONS ARE
INDICATED, SUCH SHARES OF HIWAY COMMON STOCK WILL BE VOTED "FOR" APPROVAL OF THE
HIWAY MERGER PROPOSAL. Hiway does not know of any matters other than as
described in the Notice of Special Meeting that are to come before the Hiway
Special Meeting. If any other matter or matters are properly presented for
action at the Hiway Special Meeting, the persons named in the enclosed form of
proxy and
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acting thereunder will have the discretion to vote on such matters in accordance
with their best judgment. A shareholder who has given a proxy may revoke it at
any time prior to its exercise by giving written notice thereof to the Secretary
of Hiway, by signing and returning a later dated proxy or by voting in person at
the Hiway Special Meeting. However, mere attendance at the Hiway Special Meeting
will not in and of itself have the effect of revoking the proxy. Votes cast by
proxy or in person at the Hiway Special Meeting will be tabulated by the
inspector of election appointed for the meeting.
SOLICITATION OF PROXIES
Proxies are being solicited by and on behalf of the Hiway Board. Hiway will
bear all expenses in connection with such solicitation. In addition to
solicitation by use of the mails, proxies may be solicited by directors,
officers and employees of Hiway in person or by telephone, telegram or other
means of communication. Such directors, officers and employees will not be
additionally compensated for, but may be reimbursed for out-of-pocket expenses
incurred in connection with, such solicitation. Arrangements have also been made
with brokerage firms, banks, custodians, nominees and fiduciaries for the
forwarding of proxy and solicitation materials to owners of Hiway Common Stock
held of record by such persons, and in connection therewith such firms will be
reimbursed for reasonable expenses incurred in forwarding such materials.
QUORUM
The presence in person or by properly executed proxy of holders of a
majority of all of the issued and outstanding shares of Hiway Common Stock
entitled to vote is necessary to constitute a quorum at the Hiway Special
Meeting. For purposes of determining whether a quorum is present, the inspector
of election will include abstentions and broker non-votes.
REQUIRED VOTE
Approval of the Hiway Merger Proposal requires the affirmative vote of a
majority of the outstanding shares of Hiway entitled to vote thereon. For
purposes of determining whether the Hiway Merger Proposal has been approved, the
inspector of elections will exclude abstentions and broker non-votes from the
number of shares deemed to have been voted on such matter at the Hiway Special
Meeting. Accordingly, the failure to submit a proxy card or to vote in person at
the Special Meeting, and the abstention from voting by a shareholder, will each
have the same effect as a vote "AGAINST" approval of the Hiway Merger Proposal.
As of the Hiway Record Date, directors and executive officers of Hiway and
their affiliates were beneficial owners of an aggregate of shares of
Hiway Common Stock (exclusive of any shares issuable upon the exercise of stock
options or warrants remaining unexercised as of such date), or approximately
% of the shares of Hiway Common Stock that were issued and
outstanding as of such date.
Certain shareholders of Hiway (including each of the Hiway Executive
Officers (as defined below) and one additional individual), holding in the
aggregate approximately % of the Hiway Common Stock outstanding as of the
Hiway Record Date, have each entered into a Voting Agreement and Irrevocable
Proxy with Verio pursuant to which each has agreed to vote, and has executed an
irrevocable proxy in favor of Verio to vote, all shares of Hiway Common Stock
owned by such shareholder for approval of the Hiway Merger Proposal.
Accordingly, approval of the Hiway Merger Proposal is virtually certain,
assuming that all of the shares of Hiway Common Stock subject to such Voting
Agreements and Irrevocable Proxies are voted pursuant thereto. Execution of the
Voting Agreements and Irrevocable Proxies was required to induce Verio to enter
into the Merger Agreement. See "Voting Agreements."
HIWAY SHAREHOLDERS ARE URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION
PRESENTED IN THIS PROXY STATEMENT/PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND
PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
FAILURE TO RETURN THE PROXY WILL HAVE THE PRACTICAL EFFECT OF VOTING AGAINST THE
HIWAY MERGER PROPOSAL.
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Even if the Hiway Merger Proposal is approved by Hiway shareholders, it is
a condition to Verio's obligation to close the Merger that the holders of no
more than 10% of the outstanding shares of Hiway Common Stock shall have
demanded or be eligible to demand dissenters' rights. See "The Merger
Agreement -- Conditions" and "Dissenters' Rights of Hiway Shareholders." It thus
is important that you complete, date, sign and return the enclosed proxy
regardless of whether the Hiway Merger Proposal has been approved, since by
doing so you will no longer be eligible to exercise dissenters' rights.
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THE MERGER
This section of this Proxy Statement/Prospectus describes certain aspects
of the proposed Merger. To the extent that it relates to the Merger Agreement
and the terms of the Merger, the following description does not purport to be
complete and is qualified in its entirety by reference to the Merger Agreement,
which is attached as Appendix A to this Proxy Statement/Prospectus and is
incorporated herein by reference. All shareholders of Hiway are urged to read
the Merger Agreement.
GENERAL
The Merger Agreement provides that the Merger will be consummated if the
approval of Hiway shareholders required therefor is obtained and all other
conditions to the Merger are satisfied or waived as provided in the Merger
Agreement. Upon consummation of the Merger, Merger Sub will be merged with and
into Hiway, with Hiway being the surviving company.
At the Effective Time, each outstanding share of Hiway Common Stock will be
converted into cash and a fraction of a share of Verio Common Stock, as follows:
- The Per Share Price with respect to each share of Hiway Common Stock in
connection with the Merger will be equal to the quotient of (i)
approximately $254.72 million, adjusted as described herein (the "Total
Consideration Value"), divided by (ii) the number of shares of Hiway
Common Stock outstanding on the Closing Date, on a fully diluted basis.
- The Per Share Cash Amount payable with respect to each share of Hiway
Common Stock will be equal to the quotient of (i) $176.0 million, divided
by (ii) the total number of shares of Hiway Common Stock outstanding on
the Closing Date.
- The Common Stock Exchange Ratio with respect to each share of Hiway
Common Stock will be equal to the quotient of (i) the amount by which the
Per Share Price exceeds the Per Share Cash Amount, divided by (ii)
$16.00.
The Total Consideration Value will be finally determined pursuant to the
Merger Agreement at the Effective Time, taking into account, among other things,
the amount, if any, of Excess Expenses and the proceeds that would be receivable
by Hiway upon the exercise of certain options and warrants to purchase Hiway
Common Stock. In addition, the actual value of the shares of Verio Common Stock
to be issued in connection with respect to each share of Hiway Common Stock (and
thus the actual value of the Total Consideration Value at the Effective Date)
will depend upon, among other things, the actual value of Verio Common Stock at
the Closing Date, which may vary both before and after the Closing Date. See
"Risk Factors -- Potential Fluctuation of Value of Consideration Received" and
"The Merger Agreement -- Merger Consideration" for a more detailed discussion of
the consideration to be received in the Merger. Cash will be paid in lieu of
fractional shares.
Each Hiway option or warrant will be assumed by Verio and become an option
or warrant to purchase, at the same aggregate exercise price and on
substantially the same terms and conditions as the Hiway option or warrant, that
number of shares of Verio Common Stock which the holder thereof would have been
entitled to receive had such option or warrant been exercised prior to the
Effective Time and had the Total Consideration Value been paid in shares of
Verio Common Stock.
The exact amount of cash and shares of Verio Common Stock comprising the
Merger Consideration cannot be determined until immediately prior to the
Effective Time. However, based upon Hiway's capitalization as of November 13,
1998, and assuming that there are no Excess Expenses, (i) the Per Share Cash
Amount will be approximately $4.90 and the Common Stock Exchange Ratio will be
approximately 0.0875, and (ii) the Option Exchange Ratio will be approximately
0.3940. Additional examples of how the actual amount of cash and exchange ratios
will be determined are included below in this Proxy Statement/ Prospectus. See
"The Merger Agreement -- Merger Consideration."
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No fractional shares of Verio Common Stock will be issued pursuant to the
Merger. In lieu thereof, cash adjustments will be paid in an amount equal to the
product of (i) the fraction of a share of Verio Common Stock that would
otherwise be issuable multiplied by (ii) $16.00.
Notwithstanding the foregoing, all shares of Hiway Common Stock held in the
treasury of Hiway, by any subsidiary of Hiway, by Verio or by any subsidiary of
Verio will be cancelled and retired, without any consideration to be paid by
Verio.
EFFECTIVE TIME
The Effective Time will occur upon the filing of an agreement of merger
(the "Agreement of Merger") with the Secretary of State of the State of
California or at such later time as is specified in the Agreement of Merger. The
filing of the Agreement of Merger will occur upon satisfaction or waiver of the
conditions set forth in the Merger Agreement. The Merger Agreement may be
terminated by either party if the Merger has not been consummated on or before
February 28, 1999 and under certain other conditions. See "The Merger
Agreement -- Conditions" and "-- Termination."
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF STOCK CERTIFICATES
The conversion of shares of Hiway Common Stock (other than Dissenting
Shares, as defined below) into the right to receive the Merger Consideration
will occur automatically at the Effective Time.
As soon as reasonably practicable after the Effective Time, an exchange
agent (the "Exchange Agent") will mail to each holder of record of Hiway Common
Stock (i) a letter of transmittal and (ii) instructions for use in effecting the
surrender of the certificates representing shares of Hiway Common Stock ("Hiway
Stock Certificates") in exchange for cash and certificates representing shares
of Verio Common Stock. Upon surrender of a Hiway Stock Certificate to the
Exchange Agent together with such letter of transmittal, duly executed, the
holder of such Hiway Stock Certificate will be entitled to receive in exchange
therefor (i) a certificate representing that number of whole shares of Verio
Common Stock and (ii) a check representing the amount of cash, including that
amount of cash in lieu of fractional shares, if any, which such holder has the
right to receive in respect of the Hiway Stock Certificate so surrendered.
If any issuance or payment of the Merger Consideration in exchange for
shares of Hiway Common Stock is to be made to a person other than the Hiway
shareholder in whose name the Hiway Stock Certificate is registered at the
Effective Time, it will be a condition of such exchange that the Hiway Stock
Certificate so surrendered be properly endorsed or otherwise be in proper form
for transfer and that the Hiway shareholder requesting such issuance either pay
any transfer or other tax required or establish to the satisfaction of the
Exchange Agent that such tax has been paid or is not payable.
After the Effective Time, there will be no further transfers of Hiway
Common Stock on the stock transfer books of Hiway. If a Hiway Stock Certificate
is presented for transfer, it will be cancelled and the Merger Consideration
with respect to the shares of Hiway Common Stock represented by such Certificate
will be delivered in exchange therefor.
After the Effective Time and until surrendered, shares of Hiway Common
Stock (other than Dissenting Shares) will be deemed for all corporate purposes,
other than the payment of dividends and distributions, to evidence ownership of
the Merger Consideration with respect to such shares. No dividends or other
distributions, if any, payable to holders of Verio Common Stock will be paid to
the holders of any Hiway Stock Certificates until such Certificates are
surrendered. Upon surrender of such Certificates, all such declared dividends
and distributions which shall have become payable with respect to such Verio
Common Stock in respect of a record date after the Effective Time (if any) will
be paid to the holder of record of the full shares of Verio Common Stock
represented by the certificate issued in exchange therefor, without interest.
Neither the Exchange Agent nor any party to the Merger Agreement is liable
to a holder of shares of Hiway Common Stock for any cash or shares of Verio
Common Stock, or dividends thereon, or the cash payment for fractional interests
delivered to a public official pursuant to applicable escheat laws.
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In the event that any Hiway Stock Certificate has been lost, stolen or
destroyed, upon (i) the making of an affidavit of that fact by the person
claiming such Hiway Stock Certificate to be lost, stolen or destroyed, and (ii)
if required by Verio and/or the Exchange Agent, in its discretion, the posting
by such person of a bond in such sum as Verio and/or the Exchange Agent may
direct as indemnity, or such other form of indemnity as Verio and/or the
Exchange Agent may reasonably direct, against any claim that may be made against
Verio and/or the Exchange Agent with respect to such Hiway Stock Certificate,
the Exchange Agent will deliver in exchange for such Hiway Stock Certificate the
Merger Consideration with respect to the shares of Hiway Common Stock
represented by such Hiway Stock Certificate.
If a Hiway shareholder dissents from the Merger and demands appraisal of
any Hiway Common Stock in accordance with the provisions of Chapter 13 of the
CGCL, any Dissenting Shares of such shareholder will not be converted, but will
from and after the Effective Time represent only the right to receive such
consideration as may be determined to be due to the Hiway shareholder pursuant
to the CGCL; provided, however, that each share of Hiway Common Stock held by a
Hiway shareholder who, after the Effective Time, withdraws his demand for
appraisal or loses his rights of appraisal with respect to such shares of Hiway
Common Stock, in either case pursuant to the CGCL, will not be deemed to be
Dissenting Shares but will be deemed to be converted, as of the Effective Time,
into the right to receive the Merger Consideration. See "Dissenters' Rights of
Hiway Shareholders."
HIWAY SHAREHOLDERS SHOULD NOT FORWARD HIWAY STOCK CERTIFICATES TO THE
EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL LETTERS. HIWAY SHAREHOLDERS
SHOULD NOT RETURN HIWAY STOCK CERTIFICATES WITH THE ENCLOSED HIWAY PROXY.
BACKGROUND OF THE MERGER
During the summer of 1997 and prior to the Best/Hiway Merger, there were
informal meetings between Arthur L. Cahoon, Scott H. Adams, Steven J. Umberger
and William G. Nesbitt, respectively the Chairman, President, Chief Marketing
Officer and Secretary of Hiway Florida, and Justin L. Jaschke and Chris J.
DeMarche, respectively the Chief Executive Officer and Vice President and Chief
Technical Officer of Verio, regarding Verio's general consolidation strategy and
its strategy as related to Internet Web hosting services. Other than very
general discussions concerning valuation parameters, no specific discussions
took place at that time regarding the terms of a possible transaction.
In September, 1997, Best initiated discussions with prospective
underwriters concerning the possibility of an initial public offering.
In November, 1997, Hiway Florida initiated discussions with prospective
underwriters concerning the possibility of an initial public offering.
Commencing in October, 1997, representatives of Best and Hiway Florida
commenced discussions concerning a possible merger. These discussions culminated
in the signing of a merger agreement on April 15, 1998. The closing of the
Best/Hiway Merger occurred on May 27, 1998.
On June 10, 1998, Hiway caused a registration statement to be filed with
the Commission by Hiway Technologies, Inc., a Delaware corporation ("Hiway
Delaware"), with respect to a proposed initial public offering. On July 20,
1998, Hiway caused an amendment to such registration statement to be filed (such
registration statement and amendment, collectively, the "Hiway Registration
Statement"). Hiway Delaware is a wholly-owned subsidiary of Hiway, into which
Hiway intended to merge prior to any such initial public offering.
On June 5, 1998, Hiway engaged Bear, Stearns & Co. Inc. ("Bear Stearns") to
advise it in evaluating and negotiating strategic relationships in conjunction
with or as potential alternatives to an initial public offering.
On July 7, 1998, Ken Leonard, President of TABNet (which had recently been
acquired by Verio), called David S. Buzby, Chief Financial Officer of Hiway, and
encouraged him to contact Mr. Jaschke
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regarding a possible transaction. Shortly thereafter, Mr. Jaschke called Mr.
Cahoon and Mr. Buzby. Mr. Cahoon returned Mr. Jaschke's call and, during the
conversation, Mr. Jaschke and Mr. Cahoon discussed the potential strategic
benefits and synergies of combining Hiway and Verio, particularly considering
Verio's recent acquisition of TABNet. Additionally, Mr. Cahoon described the
status of Hiway's efforts to complete their proposed initial public offering,
including plans for Hiway's imminent "road show," and expressed his desire to
negotiate and complete any potential combination transaction with Verio prior to
the "road show."
During early July, Verio was engaged in discussions with third-party
financial advisors, including Lazard Freres, regarding possible strategic
acquisitions. On July 10, 1998, Verio retained Lazard Freres as its exclusive
financial advisor with respect to the possible acquisition of Hiway.
Mr. Jaschke and Sean Brophy, Vice President of Corporate Development of
Verio, representing Verio, and Mr. Cahoon and Mr. Buzby, representing Hiway, met
on July 14, 1998, to discuss a possible transaction between the two companies,
including an acquisition, and the possible benefits that might result from such
a transaction. During the meeting, Mr. Cahoon reiterated the progress of Hiway's
proposed initial public offering and the need for any potential acquisition of
Hiway by Verio to be completed quickly. Additionally, the parties discussed a
variety of terms concerning the possible acquisition of Hiway by Verio including
price, form of consideration and other material terms. No agreements were
reached other than to commence a due diligence review and to continue
discussions regarding possible transaction terms.
On July 15, 1998, Hiway and Verio executed a mutual non-disclosure
agreement. Representatives of Morrison & Foerster LLP, counsel to Verio,
commenced legal due diligence at the offices of Fenwick & West LLP, counsel to
Hiway. At the same time, representatives of Verio and Hiway and their respective
financial and other advisors met to conduct financial, technical and other due
diligence. Due diligence investigations continued through July 28, 1998, during
which time the parties negotiated the terms and conditions of the Merger
Agreement.
On July 20, 1998, representatives of Verio, including Mr. Jaschke and Mr.
Brophy, traveled to Florida to conduct operational due diligence at Hiway's
executive offices, including review of Hiway's back office systems, key
operational relationships and management and key technical personnel.
On July 22, 1998, James Zarley, Chief Operating Officer of Hiway, and Mr.
Adams met with Herbert Hribar, President and Chief Operating Officer of Verio,
and other Verio personnel in Verio's Dallas facility to evaluate Verio's back
office systems, network operation center and customer care center and to further
discuss operational aspects of the proposed merger of the companies.
On July 23, 1998, Mr. Cahoon visited Verio's Dallas facility and conducted
due diligence discussions with management of Verio.
On July 24, 1998, Verio's legal advisors circulated a preliminary draft of
the Initial Merger Agreement. Representatives of Verio and Hiway and their
legal, financial and other advisors met at the offices of Verio's legal advisors
on July 25, 1998, and continued over the next several days to conduct their due
diligence investigations, to discuss the possible terms of a combination of
their companies and to finalize the Initial Merger Agreement. Throughout this
period representatives of Hiway and Verio had informal discussions with the
members of their respective Boards of Directors.
On July 26, 1998, the Hiway Board met and discussed the results of Hiway's
due diligence investigation, the current proposed terms of the acquisition and
the advantages and disadvantages of the proposed acquisition by Verio and the
possible alternative of an initial public offering.
On July 27, 1998, Hiway retained BT Alex. Brown to provide advisory and
investment banking services with respect to the Merger.
On July 28, 1998 the Verio Board met to discuss and consider the Merger.
The Verio Board reviewed the then-current draft of the Initial Merger Agreement,
which had been circulated prior to the meeting. At the meeting, Lazard Freres
discussed with the Verio Board its financial analysis of Hiway and the
consideration to be paid by Verio in the Merger. After further discussion, the
Verio Board approved the Merger and the issuance of shares of Verio Common Stock
pursuant to the Initial Merger Agreement.
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On July 28, 1998 the Hiway Board met to discuss and consider the Merger.
The Hiway Board reviewed the then-current draft of the Initial Merger Agreement,
which had been circulated prior to the meeting. At the meeting, BT Alex. Brown
made a presentation regarding Verio and the consideration to be received by
Hiway shareholders in the Merger pursuant to the Initial Merger Agreement and
delivered its opinion to the Hiway Board to the effect that, as of such date,
the Common Stock Exchange Ratio and the Per Share Cash Amount, taken together,
were fair to the Hiway shareholders, from a financial point of view. After
further discussion, the Hiway Board approved the Initial Merger Agreement and
the Merger.
The Initial Merger Agreement and the Hiway Shareholder Voting Agreements
(as defined below) were executed late in the evening on July 28, 1998.
On July 29, 1998, Verio and Hiway issued a joint press release announcing
the execution of the Initial Merger Agreement and the proposed Merger.
On October 21, 1998, representatives of Hiway met with Hiway's legal
advisors to discuss the timing of the Merger and the decline in the value of the
consideration to be received by Hiway shareholders in the Merger under the terms
of the Initial Merger Agreement.
On October 29, 1998, the Hiway Board met to consider the value of the
consideration to be received by Hiway shareholders in the Merger in light of the
decline in the price of Verio Common Stock and to discuss Verio's reported
operating results and the progress on integration plans for the combined
companies. The Hiway Board directed Mr. Cahoon and Mr. Buzby to call Mr. Jaschke
in order to explore the possibility of mutually acceptable changes to the
Initial Merger Agreement.
Between October 30, 1998 and November 5, 1998, representatives of Hiway and
Verio discussed the consideration to be received by Hiway shareholders in the
Merger and the potential for amending the Initial Merger Agreement. These
discussions primarily addressed the value and mixture of cash and stock
consideration to be received by Hiway shareholders as a result of the Merger.
On November 5 and 6, 1998, the Hiway Board met to continue its discussion
of the mixture of cash and stock consideration to be received by Hiway
shareholders in the Merger.
On November 10 and 11, 1998, representatives of Verio, including Mr.
Jaschke and Mr. Brophy and Verio's legal and investment banking advisors, met in
Florida with representatives of Hiway, including each of the Hiway Board members
with the exception of Mr. Barry, Bear Stearns and Hiway's legal counsel, to
discuss possible amendments to the Initial Merger Agreement.
From November 13, 1998 to November 17, 1998, representatives of Verio and
Hiway, including Verio's legal and investment banking advisors and Hiway's legal
counsel and Bear Stearns, continued to discuss potential amendments to the
Initial Merger Agreement. Throughout this period, the aforementioned
representatives of Hiway and Verio had informal discussions with the members of
their respective Boards of Directors.
On November 15 and 16, 1998, the Hiway Board met to discuss the ongoing
negotiations with Verio regarding the Initial Merger Agreement.
On November 16, 1998, Hiway retained BT Alex. Brown to provide advisory and
investment banking services with respect to proposed amendments to the Initial
Merger Agreement.
On November 16, 1998, the Verio Board met to discuss and consider the
amendments to the Initial Merger Agrement proposed by management and reflected
in a draft of the revised Merger Agreement. Modifying the allocation of cash and
shares of Verio Common Stock to be paid as consideration in the Merger. At the
meeting, the Verio Board reviewed with its legal and financial advisors the
terms of the revised Merger Agreement, and approved the terms of the revised
Merger Agreement and the consideration to be paid by Verio in the Merger.
On November 17, 1998, the Hiway Board met to discuss and consider the terms
of the revised Merger Agreement. The Hiway Board reviewed the then-current draft
of the revised Merger Agreement, with its legal
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counsel and Bear Stearns and approved the revised Merger Agreement and the
Merger and determined that it was in the best interests of the Hiway
shareholders.
The revised Merger Agreement and the amended Hiway Shareholder Voting
Agreements were executed on November 17, 1998 and announced on November 18,
1998.
RECOMMENDATION OF THE HIWAY BOARD; REASONS FOR THE MERGER
THE HIWAY BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE HIWAY
MERGER PROPOSAL, BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT ARE FAIR TO,
AND IN THE BEST INTERESTS OF, HIWAY AND ITS SHAREHOLDERS, AND UNANIMOUSLY
RECOMMENDS THAT HOLDERS OF SHARES OF HIWAY COMMON STOCK VOTE "FOR" APPROVAL OF
THE HIWAY MERGER PROPOSAL.
The Hiway Board's decision to approve the Initial Merger Agreement was
based in significant part upon its assessment of the trends developing in the
Internet access and enhanced Internet services market, and the changes that may
come about in such market as a result of increasing competition, consolidation
and customer demands. The Hiway Board compared the benefits and associated risks
of the Initial Merger Agreement with those of continuing with Hiway's proposed
initial public offering. The Hiway Board observed that the highly fragmented
market for Internet access, Web hosting and other enhanced Internet services,
including Hiway's core Web hosting market, appeared to be consolidating. Verio
was viewed by the Hiway Board as having many of the significant resources and
expertise required to be a leader in this consolidation.
In determining whether to approve the Initial Merger Agreement and the
Merger, Hiway considered several strategic alternatives, including continuing
with its initial public offering or selling the company to another bidder. The
Hiway Board decided to suspend Hiway's initial public offering and approve the
Initial Merger Agreement after evaluating Hiway's value based upon each
transaction. Hiway considered the following five factors in weighing the value
of each transaction, deciding to suspend Hiway's initial public offering in
favor of the Merger and determining that the consideration to be received by
shareholders was fair:
- A comparison of the filing range for Hiway's initial public offering and
the per share value of the original Merger at the time of the Hiway
Board's original decision to approve the Merger;
- The signs of weakness in the market for initial public offerings,
particularly for Internet companies, in late July 1998;
- The benefits of the Merger that Hiway would not realize as an independent
company;
- The fact that Hiway, if it remained independent, would be required to
compete with Verio, a company with greater financial resources and
management experience than Hiway; and
- The fairness opinion delivered by BT Alex. Brown in connection with the
Initial Merger Agreement.
In evaluating the potential to sell Hiway to a bidder other than Verio, the
Hiway Board considered the following factors. Although several potential
acquirors from the Internet and telecommunications industries had approached
Hiway prior to and during the registration process for Hiway's initial public
offering, no entity other than Verio had made a formal written offer to acquire
Hiway. In addition, the values for Hiway suggested by other potential bidders in
their preliminary discussions with Hiway were below the value of Verio's offer
in the original Merger and resulted in less liquidity for Hiway's shareholders.
A potential merger with Verio was also considered to be complementary with
Hiway's long-term objectives and to provide an opportunity to attain the
following potential strategic benefits:
- The combination of Hiway's experience and customer base in the Web
hosting business with Verio's Internet access experience and nascent but
rapidly growing Web hosting business represented a strategic fit that
could allow the combined company to provide small and medium sized
businesses with a broader array of Internet access and enhanced Internet
services at lower costs, which could be
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achieved with economies of scale and a more efficient cost structure, thereby
strengthening the combined company's relationships with its customers.
- The combined entity could streamline overhead and eliminate duplicative
functions.
- The combined entity could benefit from the strength and experience of
Hiway's and Verio's respective management teams and the systems and
personnel that the combined entity could bring to bear in executing on
the strategy of acquiring and integrating companies in the combined
entity's markets and in realizing the benefits of such acquisitions.
- The combination of Hiway and Verio would create a combined company with
significantly greater resources and greater sales and marketing
capabilities than those of Hiway alone, and might enable Hiway to compete
more effectively with competitors in the consolidating and rapidly
changing market for Internet access and Web hosting.
- Verio's market presence, large customer base and broad sales and
distribution network offer expanded sales and marketing opportunities for
Hiway's products.
- Verio's nationwide Internet backbone and relationships with data
transport companies would enable Hiway to lower its data transport costs
and optimize data transfer.
- The combined entity could leverage Hiway's technological and Web hosting
expertise and international distribution network to market and sell a
broader array of products and services.
- The increased customer base of the combined entity could provide it with
better negotiating positions with respect to data technology and
transport suppliers, including MCI, Sprint, UUNet and Cisco, with respect
to the combined entity's Internet backbone and equipment.
The Hiway Board further evaluated the merits of an investment in Verio
Common Stock and concluded that Verio Common Stock has appreciation potential in
the long term. Further, since Verio is a larger company that is followed by a
greater number of stock analysts, it should represent a more immediately liquid
investment than would be the case for Hiway Common Stock if it pursued its own
public offering.
In the course of its deliberations, the Hiway Board reviewed with Hiway's
management a number of other factors relevant to the Initial Merger Agreement.
In particular, the Hiway Board considered, among other things:
- The proposed terms of the Merger.
- The likelihood of realizing superior benefits through alternative
business strategies, including continuation of Hiway's proposed initial
public offering.
- Information concerning Hiway's and Verio's respective businesses,
historical financial performances, operations and products, including the
following Commission filings made by, and analysts' reports regarding,
Verio: Amendment No. 4 to Form S-4 Registration Statement filed by Verio
with the Commission on July 14, 1998; Credit Suisse First Boston
Corporation, report dated July 8, 1998; Salomon Smith Barney, report
dated June 19, 1998; Donaldson Lufkin & Jenrette, report dated July 15,
1998.
- Management's oral due diligence reports regarding their visit to Verio's
Dallas facility, including the operations and systems related to the help
desk, provisioning, accounts receivable, billing and collection
functions.
- Discussions with Verio management regarding future strategy, products,
markets, and management and integration issues, for example, the
potential economies of scale and potential expansion to provision of
Hiway services nationwide using Verio's communications backbone.
- The stock price of Verio and the proposed range of values that Hiway
would use to begin the marketing process of its initial public offering.
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- Volatility and trading volume of Verio Common Stock and the lack of a
current public market for Hiway Common Stock.
- An analysis of the relative value that Hiway might contribute to the
future business and prospects of the combined organization.
- The compatibility of the management and businesses of Hiway and Verio and
the benefits described earlier that management hopes to attain through
the Merger.
- In connection with the Initial Merger Agreement, the detailed financial
analysis presented by BT Alex. Brown, including the opinion of BT Alex.
Brown dated July 28, 1998 that the Common Stock Exchange Ratio and the
Per Share Cash Amount, taken together, to be received by the holders of
Hiway Common Stock was fair, from a financial point of view, to the
holders of Hiway Common Stock, as of the date of such opinion.
Hiway's Board valued Hiway based upon using comparable public company
multiples of estimated 1998 revenues and estimated 1998 earnings, estimated 1999
revenues and estimated 1999 earnings. These comparables created a range of
values, based upon multiples of revenue and EBITDA. Revenue multiples ranged
from 2.6x to 12.5x, averaging 5.5x, based upon 1998 revenues, and 1.9x to 5.3x
averaging 3x, based upon 1999 revenues. EBITDA multiples ranged from 17.8x to
31.6x, averaging 24.7x, based upon 1998 EBITDA, and 9.7x to 23.9x, averaging
17x, based upon 1999 EBITDA. The higher valuations were created from multiples
of 1998 revenue performance and the lower valuations were generated from 1999
estimated revenue and earnings performance. When evaluating the range of
valuations, the Hiway Board took into consideration that Hiway's projected
revenue and earnings growth was slower than some of the estimates from the
comparable public companies. The Hiway Board also considered the amount and
timing of liquidity available from the Verio offer, compared to a public
offering or other alternatives. Differences with Verio were resolved during the
course of negotiations, including the proportion of cash and stock to be
received by Hiway's shareholders.
The Hiway Board also considered certain risks potentially arising in
connection with the Initial Merger Agreement, and the revised Merger Agreement,
including:
- The integration, management, financial and other risks associated with
Verio's acquisition strategy, since Verio has recently acquired
approximately 40 companies and expects to acquire additional companies in
the near future, and Verio has not yet proven that it can realize the
operational efficiencies and cost savings expected from these
acquisitions.
- Information concerning Hiway's and Verio's respective businesses,
historical financial performances, operations and products available
after the execution of the Initial Merger Agreement, including, but not
limited to, the following Commission filings made by, and analysts'
reports regarding, Verio: Form 10-Q filed by Verio with the Commission on
November 16, 1998; Deutsche Bank Securities, reports dated August 18,
1998 and October 27, 1998; Salomon Smith Barney, report dated July 29,
1998; Donaldson Lufkin & Jenrette, reports dated July 29, 1998 and
October 28, 1998; Wasserstein Perella Securities, reports dated October
19, October 28 and October 30, 1998.
- The specific integration risks related to Verio's acquisition of Hiway,
which presents certain unique integration challenges to Verio, including
as a result of Hiway's international operations and the early stage of
Hiway's integration efforts with respect to its own recent acquisition of
Best.
- The potential that expected operational synergies and expected cost
reductions will not result from the Merger.
- Verio's high degree of financial leverage and significant debt burden.
- Verio's history of losses and negative cash flows from operations.
- Verio's focus on acquisitions as a means for acquiring new products.
- Hiway's lack of autonomy with respect to management decisions following
the Merger.
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- The potential disruption of Hiway's business that might result from
employee, distributor and customer uncertainty and lack of focus
following announcement of the Merger in connection with integrating the
operations of Hiway and Verio.
- The possibility that the Merger might not be consummated.
- The effects of the public announcement of the Merger on Hiway's sales and
operating results and its ability to attract and retain key management,
marketing and technical personnel.
- The risk that the announcement of the Merger could result in decisions by
customers to defer purchases of products or services of Hiway or Verio.
- Given the significant volatility that the price of Verio Common Stock had
experienced to date and the immaturity of the public market for Verio
Common Stock due to the limited amount of time that had passed since the
Verio IPO on May 12, 1998, the risk that the price of Verio Common Stock
might decline prior to the Closing Date, thus reducing the value per
share to be received by Hiway's shareholders.
- The risk that the combined companies would not successfully integrate
their products and operations.
- The risk that the other benefits sought to be achieved by the Merger
would not be achieved.
- The limited trading volume of Verio Common Stock and its potential lack
of liquidity.
- The other risks set forth in Hiway's and Verio's independent filings with
the Commission.
In determining whether to approve the revised Merger Agreement and the
Merger, the Hiway Board considered the following factors:
- The volatility of the stock market in general and the price of Verio
Common Stock in particular.
- The alternatives available to Hiway in view of the existing terms and
conditions of the Initial Merger Agreement.
- The increased certainty of the value of the consideration to be received
by Hiway shareholders based upon the terms of the revised Merger
Agreement particularly in light of the increased cash component of the
Merger Consideration.
- The benefits of the Merger outlined in this Proxy Statement/Prospectus.
During its deliberations on whether to approve the Initial Merger Agreement
and the revised Merger Agreement, the Hiway Board considered the input of its
financial advisors, Bear Stearns, with respect to both agreements, and BT Alex.
Brown, with respect solely to the Initial Merger Agreement, Verio's historical
financial and operational results, expected pro forma financial and operational
results that might be achieved by the combined company following the Merger, and
publicly available reports from several investment banking analysts with respect
to the value of Verio Common Stock. In determining the value of Hiway in
connection with the Initial Merger Agreement, the Hiway Board relied upon the
expertise of its financial advisors and Hiway's management, who valued Hiway
using multiples, derived from the trading multiples of public companies in
similar industries, of estimated revenues and net income and projected revenue
and earnings growth rates.
When considering whether to approve the Initial Merger Agreement, the Hiway
Board assessed the price fluctuations in the price of Verio Common Stock since
Verio's IPO and concluded that the stock price would continue to be subject to
significant volatility. Nevertheless, based upon, in part, the fairness opinion
of BT Alex. Brown, due diligence investigations by Hiway's management, Verio's
long-term strategic plan, a review of the strategic benefits of the Merger and
analyst reports with respect to the long term value of Verio Common Stock, the
Hiway Board determined that the consideration to be received in the Merger was
fair to its shareholders. This fairness assessment was made on July 28, 1998 in
connection with the Hiway Board's approval of the Merger. In making its fairness
determination, the Hiway Board considered the risk of potential
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declines in the price of Verio Common Stock between signing the Initial Merger
Agreement and closing the Merger. The Hiway Board concluded that retaining the
upside potential in the price of Verio Common Stock justified the potential
downside risk, based upon the totality of information available to the Hiway
Board.
When considering whether to approve the revised Merger Agreement, the Hiway
Board evaluated the continuing volatility of the price of Verio Common Stock,
current analyst estimates for the future stock price performance of Verio Common
Stock and the results of continuing discussions with Verio management concerning
Verio's progress in implementing its business plan. The Hiway Board reviewed the
potential for further declines in the price of Verio Common Stock and concluded
that it was preferable to increase the cash and decrease the stock consideration
to be paid in the Merger. The amended Merger Agreement fixes a larger portion of
the purchase price to be paid in cash (an additional $75 million), thus
insulating the Hiway shareholders from further volatility in the Verio Common
Stock prior to closing, while retaining the upside potential represented by the
remaining Verio Common Stock to be issued in the Merger (approximately 4.92
million shares).
In evaluating the Initial Merger Agreement and amended Merger Agreement,
the Hiway Board considered the treatment of options and warrants to purchase
Hiway Common Stock in the Merger. Because the vesting period and aggregate
strike price for the options and warrants would not change as a result of the
Merger, the Hiway Board focused on the relative risk of Hiway Common Stock
versus Verio Common Stock. The Hiway Board determined that, under the structure
for the Initial Merger Agreement and amended Merger Agreement, option and
warrant holders faced a similar amount of relative risk with respect to either
stock given: the unproven nature of each company's business model; Verio's
potential for continued growth, especially taking into account the effects of
the Merger; Hiway's potential for growth and its historical profitability;
Verio's current level of operating losses and plans for achieving profitability;
Verio's position as a public company compared to Hiway's position as a company
that had not yet completed its initial public offering; and Verio's considerably
larger cash resources.
The Hiway Employment Agreements (as defined below) provide that in
connection with a termination of the officer in connection with a change of
control of Hiway, Hiway is required to pay salary and bonus compensation and
other benefits through the remaining term of the agreement. Verio required, as a
condition to the Merger, that these employment agreements be terminated and that
each officer enter into a non-competition agreement with Verio. The Hiway Board
did not consider the amounts paid under these employment termination and
non-competition arrangements to the officers of Hiway to be relevant to the
fairness of the Merger under the Initial Merger Agreement and amended Merger
Agreement. Specifically, the potential for payments in connection with the Hiway
Employment Agreements would be applicable in any change of control transaction,
and allowance for these payments was included in the threshold for Excess
Expenses after the value of Hiway had been negotiated. In addition, the Hiway
Board did not view the non-competition arrangements as impacting the fairness of
the Merger to the shareholders of Hiway as a group.
The foregoing discussion of the information and factors considered by the
Hiway Board is not intended to be exhaustive but is believed to include all
material factors considered by the Hiway Board. In view of the wide variety of
factors, both positive and negative, considered by the Hiway Board, the Hiway
Board did not find it practical to, and did not, quantify or otherwise assign
relative weights to the specific factors considered. After taking into
consideration all of the factors set forth above, the Hiway Board believes that
the Merger under the revised Merger Agreement is in the best interests of Hiway
and its shareholders and recommends approval of the Hiway Merger Proposal.
OPINION OF HIWAY FINANCIAL ADVISOR
Opinion of BT Alex. Brown. BT Alex. Brown has acted as one of the financial
advisors to Hiway in connection with the Merger. On November 20, 1998, BT Alex.
Brown delivered its opinion in writing that as of November 19, 1998, based upon
and subject to the assumptions made, matters considered and limitations set
forth in such opinion and summarized below, the Common Stock Exchange Ratio and
the Per Share Cash Amount, taken together, were fair, from a financial point of
view, to the holders of Hiway Common Stock. No limitations were imposed by the
Hiway Board upon BT Alex. Brown with respect to the investigations made or
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procedures followed by it in rendering its opinion. The Common Stock Exchange
Ratio and the Per Share Cash Amount were determined through negotiations between
Hiway management and Verio management. BT Alex. Brown did not recommend to Hiway
that any specific consideration constituted the appropriate consideration for
the Merger.
THE FULL TEXT OF BT ALEX. BROWN'S WRITTEN OPINION, DATED NOVEMBER 20, 1998
(THE "BT ALEX. BROWN OPINION"), WHICH SETS FORTH, AMONG OTHER THINGS, THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY
BT ALEX. BROWN IN CONNECTION WITH THE OPINION, IS ATTACHED AS APPENDIX C TO THIS
PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. HIWAY
SHAREHOLDERS ARE URGED TO READ THE BT ALEX. BROWN OPINION IN ITS ENTIRETY. THE
BT ALEX. BROWN OPINION WAS PREPARED FOR THE BENEFIT AND USE OF THE HIWAY BOARD
IN ITS CONSIDERATION OF THE MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO
HOLDERS OF HIWAY COMMON STOCK AS TO HOW THEY SHOULD VOTE IN CONNECTION WITH THE
MERGER. THE BT ALEX. BROWN OPINION DOES NOT ADDRESS THE RELATIVE MERITS OF THE
MERGER AND ANY OTHER TRANSACTIONS OR BUSINESS STRATEGIES DISCUSSED BY THE HIWAY
BOARD AS ALTERNATIVES TO THE MERGER AGREEMENT OR THE UNDERLYING BUSINESS
DECISION OF THE HIWAY BOARD TO PROCEED WITH AND EFFECT THE MERGER. THE SUMMARY
OF THE BT ALEX. BROWN OPINION SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE BT ALEX. BROWN
OPINION.
In connection with BT Alex. Brown's role as financial advisor to Hiway, and
in arriving at its opinion, BT Alex. Brown has, among other things, reviewed
certain publicly available financial information and other information
concerning Hiway and Verio, and certain internal analyses and other information
furnished to it by Hiway. BT Alex. Brown also held discussions with the members
of the senior management of Hiway regarding the business and prospects of Hiway.
In addition, BT Alex. Brown (i) compared certain financial information for Hiway
with similar information for companies whose securities are publicly traded,
(ii) reviewed the financial terms of certain recent business combinations, (iii)
reviewed the terms of a draft of the Merger Agreement and certain related
documents, and (iv) performed such other studies and analyses and considered
such other factors as it deemed appropriate.
Although BT Alex. Brown had been acting as lead managing underwriter in
Hiway's pending initial public offering, in preparing its opinion, BT Alex.
Brown did not assume responsibility for the independent verification of, and did
not independently verify, any information, whether publicly available or
furnished to it, concerning Hiway or Verio, including, without limitation, any
financial information, forecasts or projections, considered in connection with
the rendering of its opinion. Accordingly, in preparing of its opinion, BT Alex.
Brown assumed and relied upon the accuracy, completeness and fairness of all
such information. With respect to the information relating to the prospects of
Hiway, BT Alex. Brown assumed that such information reflects the best currently
available judgments and estimates of the management of Hiway as to the likely
future financial performance of Hiway. In addition, BT Alex. Brown neither
conducted, nor was BT Alex. Brown provided with, an independent evaluation or
appraisal of the assets of Hiway, nor was it furnished with any such evaluations
or appraisals. BT Alex. Brown assumed, with the consent of Hiway, for purposes
of BT Alex. Brown's analysis that the value of the Verio Common Stock to be
received in the Merger is equal to the closing trading price of the Verio Common
Stock as of November 19, 1998, and BT Alex. Brown expresses no opinion or view
on the value of the Verio Common Stock. The BT Alex. Brown Opinion was
necessarily based upon economic, market and other conditions as in effect on,
and the information made available to BT Alex. Brown as of, the date of such
opinion. BT Alex. Brown expresses no opinion as to the price at which the shares
of Verio Common Stock that are to be issued pursuant to the Merger will be
traded in the future. In addition, BT Alex. Brown expresses no opinion as to the
fair market value of Hiway Common Stock as of any date. Although subsequent
developments may affect the BT Alex. Brown Opinion, BT Alex. Brown assumes no
obligation to update, revise or reaffirm such opinion.
For purposes of rendering its opinion, BT Alex. Brown has assumed that, in
all respects material to its analysis, the representations and warranties of
Hiway and Verio contained in the Merger Agreement are true and correct, that
Hiway and Verio will each perform all of the covenants and agreements to be
performed by it under the Merger Agreement and all conditions to the obligations
of each of Hiway and Verio to consummate the Merger will be satisfied without
any waiver of any material terms or conditions by any party thereto. BT Alex.
Brown also has assumed that all material governmental, regulatory or other
approvals and consents
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required in connection with the consummation of the transactions contemplated by
the Merger Agreement will be obtained and that, in connection with obtaining any
necessary governmental, regulatory or other approvals and consents, or any
amendments, modifications or waivers to any agreements, instruments or orders to
which either Hiway or Verio is a party or subject or by which it is bound, no
limitations, restrictions or conditions will be imposed or amendments,
modifications or waivers made that would have a material adverse effect on Hiway
or Verio or materially reduce the contemplated benefits of the Merger to Hiway.
In connection with BT Alex. Brown's role as financial advisor to Hiway and
in arriving at its opinion, BT Alex. Brown was not authorized to solicit, and
did not solicit, interest from any other person with respect to the acquisition
of Hiway or any of its assets.
Set forth below is a brief summary of certain financial analyses performed
by BT Alex. Brown in connection with its opinion.
Analysis of Selected Publicly Traded Companies. BT Alex. Brown compared
certain financial information and commonly used valuation measurements for Hiway
to corresponding information and measurements for a group of six publicly traded
enhanced Internet services companies (consisting of Concentric Network
Corporation, EarthLink Network, Inc., Exodus Communications, Inc., Mindspring
Enterprises, Inc., OzEmail Limited, PSINet Inc. and Verio (collectively, the
"Selected Companies")). Such financial information and valuation measurements
included, among other things, (i) common equity market valuation; (ii) operating
performance; (iii) ratios of common equity market value as adjusted for debt and
cash ("Enterprise Value") and, with respect to Hiway, the Implied Enterprise
Value as derived from the Common Stock Exchange Ratio and the Per Share Cash
Amount (the "Implied Enterprise Value") to revenues and EBITDA; and (iv) ratios
of common equity market prices per share ("Equity Value") to earnings per share
("EPS") and earnings, respectively. To calculate the trading multiples for the
Selected Companies and the Equity Value for Hiway, BT Alex. Brown used publicly
available information concerning historical and projected financial performance
for the Selected Companies, and earnings estimates provided by the management of
Hiway for its baseline projected performance (the "Baseline Estimates") and its
alternate projected performance (the "Alternate Estimates"). The Alternate
Estimates, according to the management of Hiway, assume for calendar year 1999 a
lower rate of acquisition of new customers, higher customer acquisition costs,
higher connectivity and related telecommunications expenses and higher general
and administrative expense, all as compared to correlative assumptions used for
the Baseline Estimates. Unless specified otherwise, the Baseline Estimates were
used in the analyses that follow. BT Alex. Brown calculated that, on a trailing
twelve month basis, the multiple of Implied Enterprise Value to revenue was 7.0x
for Hiway, compared to a range of 3.8x to 22.8x, with a mean of 10.7x, for the
Selected Companies; the multiple of Implied Enterprise Value to calendar year
1998 revenue was 6.4x for Hiway, compared to a range of 3.4x to 16.5x, with a
mean of 8.6x, for the Selected Companies; the multiple of Implied Enterprise
Value to calendar year 1999 revenue was 4.1x for Hiway based on the Baseline
Estimates ("Hiway Baseline") and 4.9x for Hiway based on the Alternate Estimates
("Hiway Alternate"), compared to a range of 2.5x to 6.9x, with a mean of 4.4x,
for the Selected Companies; and the multiple of Implied Enterprise Value to
calendar year 1999 EBITDA was 21.7x for Hiway Baseline and 26.7x for Hiway
Alternate, compared to a range of 16.1x to 73.1x, with a mean of 24.1x, for the
Selected Companies. Based on the foregoing ranges of multiples, BT Alex. Brown
computed a range of valuations for Hiway of approximately $132 million to $864
million.
None of the Selected Companies utilized as a comparison is identical to
Hiway. Accordingly, BT Alex. Brown believes an analysis of publicly traded
comparable companies is not simply mathematical. Rather, it involves complex
considerations and qualitative judgments, reflected in the BT Alex. Brown
Opinion, concerning differences in financial and operating characteristics of
the comparable companies and other factors that could affect the public trading
value of the Selected Companies.
Analysis of Selected Precedent Transactions. BT Alex. Brown reviewed the
financial terms, to the extent publicly available, of eight proposed, pending or
completed mergers and acquisition transactions since February 7, 1995 involving
companies in the Internet service provider industry (the "Selected
Transactions"). The transactions reviewed were: iServer/Verio, Inc (announced on
December 31, 1997), Internex Information Services, Inc./Concentric Networks
(announced on February 2, 1998), TABNet/Verio, Inc. (announced
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on July 8, 1998), Global Center/Frontier (announced on March 2, 1998), NETCOM
On-Line Communications Services, Inc./ICG Communications (announced on October
13, 1997), CompuServe Corporation/ WorldCom Incorporated (announced on September
8, 1997), DIGEX, Incorporated/Intermedia Communications Inc. (announced on June
5, 1997), BBN Corporation/GTE Corporation (announced on May 6, 1997), CERFnet
Services, Inc./Teleport Communications Group, Inc. (announced on January 13,
1997), UUNET Technologies/MFS Communications Co., Inc. (announced on April 30,
1996), and The Pipeline Network Inc./Performance Systems International (PSINet)
(announced on February 7, 1995). BT Alex. Brown calculated various financial
multiples and premiums over market value based on certain publicly available
information for each of the Selected Transactions and compared them to
corresponding financial multiples for the Merger, based on the Common Stock
Exchange Ratio and the Per Share Cash Amount. BT Alex. Brown calculated that, on
a trailing twelve month basis, the multiple of Implied Enterprise Value to
revenue was 7.0x for Hiway, compared to a range of 1.3x to 16.8x, with a mean of
5.6x, for the Selected Transactions; the multiple of Implied Enterprise Value to
calendar year 1998 revenue was 6.4x for Hiway, compared to a range of 1.2x to
5.8x, with a mean of 2.6x, for a comparable period for the Selected
Transactions; the multiple of Implied Enterprise Value to calendar year 1999
revenue was 4.1x for Hiway Baseline and 4.9x for Hiway Alternate, compared to a
range of 1.1x to 3.9x, with a mean of 1.7x, for a comparable period for the
Selected Transactions; and the multiple of Implied Enterprise Value to calendar
year 1999 EBITDA was 21.7x for Hiway Baseline and 26.7x for Hiway Alternate,
compared to a range of 9.2x to 17.5x, with a mean of 12.1x, for a comparable
period for the Selected Transactions. Based on the foregoing ranges of
multiples, BT Alex. Brown computed a range of valuations for Hiway of
approximately $44 million to $615 million. All multiples for the Selected
Transactions were based on public information without taking into account
differing market and other conditions during the three-year period during which
the Selected Transactions occurred.
Because the reasons for, and circumstances surrounding, each of the
Selected Transactions were so diverse, and due to the inherent differences
between the operations and financial conditions of Hiway and the companies
involved in the Selected Transactions, BT Alex. Brown believes that a comparable
transaction analysis is not simply mathematical. Rather, it involves complex
considerations and qualitative judgments, reflected in the BT Alex. Brown
Opinion, concerning differences between the characteristics of these
transactions and the Merger that could affect the value of the subject companies
and their businesses and Hiway.
Pro Forma Contribution Analysis. BT Alex. Brown analyzed the relative
contribution of Hiway and Verio to the pro forma income statement of the
combined company, based on Hiway's management projections, in order to derive an
implied enterprise value for Hiway. This analysis showed that on a pro forma
combined basis (excluding (i) the effect of any synergies that may be realized
as a result of the Merger, and (ii) non-recurring expenses relating to the
Merger), based on the calendar year ending December 31, 1999 for Hiway and
Verio, Hiway and Verio would account for approximately 22.2% and 77.8%,
respectively, assuming Hiway Baseline and 19.2% and 80.8%, respectively,
assuming Hiway Alternate, of the combined company's pro forma calendar year 1998
revenue, resulting in a range of valuations for Hiway of approximately $220
million to $263 million.
Historical Financial Position. BT Alex. Brown reviewed and analyzed the
historical and current financial condition of Hiway and Verio, which included
(i) an assessment of each of Hiway's and Verio's recent financial statements;
(ii) an analysis of each of Hiway's and Verio's revenue, growth and operating
performance trends; and (iii) an assessment of each of Hiway's and Verio's
margin changes and leverage.
Pro Forma Merger Analysis. BT Alex. Brown analyzed certain pro forma
effects resulting from the Merger, including, among other things, the impact of
the Merger on the projected EPS of Verio for calendar year 1999, based on
internal estimates of the management of Hiway. The results of the pro forma
merger analysis, which was performed using a variety of assumed levels of
write-off relating to acquired in-process research and development, suggested
that the Merger would be generally dilutive to the fully diluted EPS of Verio in
calendar year 1999, not taking into account any potential synergies which may
result from the Merger. The actual results achieved by the combined company may
vary from projected results and the variations may be material.
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The foregoing summary describes all analyses and factors that BT Alex.
Brown deemed material in preparing the BT Alex. Brown Opinion, but is not a
comprehensive description of all analyses performed and factors considered by BT
Alex. Brown in connection with preparing the BT Alex. Brown Opinion. The
preparation of a fairness opinion is a complex process involving the application
of subjective business judgment in determining the most appropriate and relevant
methods of financial analysis and the application of those methods to the
particular circumstances and, therefore, is not readily susceptible to summary
description. BT Alex. Brown believes that its analyses must be considered as a
whole and that considering any portion of such analyses and of the factors
considered without considering all analyses and factors could create a
misleading view of the process underlying the BT Alex. Brown Opinion. In
arriving at its fairness determination, BT Alex. Brown did not assign specific
weights to any particular analyses.
In conducting its analyses and arriving at its opinions, BT Alex. Brown
utilized a variety of generally accepted valuation methods. The analyses were
prepared solely for the purpose of enabling BT Alex. Brown to provide its
opinion to the Hiway Board as to the fairness to the holders of Hiway Common
Stock of the Common Stock Exchange Ratio and the Per Share Cash Amount and do
not purport to be appraisals or necessarily reflect the prices at which
businesses or securities actually may be sold, which are inherently subject to
uncertainty. In connection with its analyses, BT Alex. Brown made, and was
provided by Hiway management with, numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond Hiway's or Verio's control. Analyses based on estimates or
forecasts of future results are not necessarily indicative of actual past or
future values or results, which may be significantly more or less favorable than
suggested by such analyses. Because such analyses are inherently subject to
uncertainty, being based upon numerous factors or events beyond the control of
Hiway, Verio or their advisors, none of Hiway, BT Alex. Brown or any other
person assumes responsibility if future results or actual values are materially
different from these forecasts or assumptions.
Hiway selected BT Alex. Brown as financial advisor in connection with the
Merger based on BT Alex. Brown having served as the lead managing underwriter in
Hiway's proposed IPO which constituted an alternative to the Merger, and based
upon BT Alex. Brown's qualifications, expertise, reputation and experience in
mergers and acquisitions. Hiway retained BT Alex. Brown in connection with the
Initial Merger Agreement. In connection with the revised Merger Agreement, Hiway
retained BT Alex. Brown pursuant to a letter agreement dated November 16, 1998
which supersedes the terms of the prior engagement. As compensation for BT Alex.
Brown's services in connection with the Merger, Hiway has agreed under the
revised engagement terms to pay BT Alex. Brown a fairness opinion fee of
$550,000 after delivery of the November 20, 1998 fairness opinion, has agreed to
reimburse BT Alex. Brown in connection with Hiway's initial public offering
effort, and has agreed to pay an additional cash fee of $1,000,000 if the Merger
is consummated. Hiway has also agreed to indemnify BT Alex. Brown and certain
related persons to the full extent lawful against certain liabilities, including
certain liabilities under the federal securities laws arising out of its
engagement or the Merger.
BT Alex. Brown is an internationally recognized investment banking firm
experienced in providing advice in connection with mergers and acquisitions and
related transactions. BT Alex. Brown regularly publishes research reports
regarding the Internet service provider industry, and the businesses and
securities of publicly-owned companies in the Internet service provider
industry. In the ordinary course of business, BT Alex. Brown and its affiliates
may actively trade securities of Verio for their own account or the account of
their customers and, accordingly, may from time to time hold a long or short
position in such securities.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Hiway Board with respect to the
Merger Agreement and the transactions contemplated thereby, shareholders of
Hiway should be aware that certain members of the management of Hiway, including
members of the Hiway Board, have interests in the Merger that are in addition to
the interests of shareholders of Hiway generally.
Termination of Employment Agreements. In July 1998, Hiway entered into
employment agreements (the "Hiway Employment Agreements") with each of Arthur L.
Cahoon, the Chief Executive Officer of
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Hiway, David S. Buzby, the Chief Financial Officer of Hiway, Scott H. Adams, the
President of Hiway, William G. Nesbitt, the Chief Technical Officer of Hiway,
Steven J. Umberger, the Chief Marketing Officer of Hiway, and James R. Zarley,
the Chief Operating Officer of Hiway (the "Hiway Executive Officers"). Pursuant
to the Hiway Employment Agreements, among other things, each executive officer
was to receive an annual salary in the initial amount of $160,000 and an annual
bonus equal to five percent of Hiway's EBITDA (calculated before such bonuses),
up to a maximum bonus of $140,000. The Hiway Employment Agreements were to be in
effect for three years, terminating December 31, 2000. The Hiway Employment
Agreements provided that each executive officer may terminate his employment
with Hiway following a "change in control" of Hiway (defined therein in a manner
that would include the Merger), and that in the event of any such termination
Hiway would continue to pay to the executive officer the salary and bonus
provided in the Hiway Employment Agreement throughout the remaining term of the
Hiway Employment Agreement, as well as other benefits.
Pursuant to the Merger Agreement, Hiway agreed to cause the termination of
each of the Hiway Employment Agreements. See "The Merger Agreement -- Certain
Covenants." In connection with terminating these Hiway Employment Agreements,
Hiway will be required to make payments to the Hiway Executive Officers in an
aggregate amount of approximately $2.1 million in consideration of their
agreements to terminate their respective Hiway Employment Agreements. All
amounts paid or payable or expenses otherwise incurred by Hiway in consideration
of such termination will be deemed to be expenses of Hiway in connection with
the Merger and will be included in the determination of Excess Expenses, and so
may result in a decrease in the Common Stock Exchange Ratio and the Option
Exchange Ratio. See "The Merger Agreement -- Merger Consideration."
Noncompetition and Nonsolicitation. It is a condition to Verio's obligation
to close the Merger that each Hiway Executive Officer enter into a
Noncompetition, Nonsolicitation and Proprietary Information and Inventions
Agreement (each, a "Noncompete Agreement") with Verio. See "The Merger
Agreement -- Conditions." Pursuant to the Noncompete Agreements each Hiway
Executive Officer will agree, among other things, not to engage or participate
in any business that is in competition with the business of Verio or Hiway at
the time the Noncompete Agreement is signed or such other related businesses or
industries as are specifically set forth in each Noncompete Agreement (subject
to certain limitations), during any period of employment by Hiway or for a
period of three years following the Effective Time, whichever is longer. Hiway
will be required to make certain payments to the Hiway Executive Officers in an
aggregate amount of approximately $2.3 million in consideration of their
execution of the Noncompete Agreements. Any amounts paid or payable by Hiway in
connection with the Noncompete Agreements will be deemed to be expenses of Hiway
in connection with the Merger and will be included in the determination of
Excess Expenses, and so may result in a decrease in the Common Stock Exchange
Ratio and the Option Exchange Ratio. See "The Merger Agreement -- Merger
Consideration."
Liability Insurance. Pursuant to the Merger Agreement, Verio will maintain
for a period of three years after the Effective Time, with respect to claims
arising from facts or events which occurred before the Effective Time, officers'
and directors' liability insurance covering the directors and officers of Hiway
who were covered (in their capacities as officers and directors of Hiway or any
of its subsidiaries) as of the date of the Merger Agreement by Hiway's existing
officers' and directors' liability insurance policies, on terms substantially no
less advantageous to such officers and directors than such existing insurance,
subject to certain limitations. See "The Merger Agreement -- Certain Covenants."
Verio Board. Verio has agreed to take all action necessary to cause Arthur
L. Cahoon, the Chairman and Chief Executive Officer of Hiway, to be appointed as
a member of the Verio Board as of the Effective Time. See "The Merger
Agreement -- Certain Covenants."
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the merger of Merger Sub into Hiway will
be treated as a sale of Hiway Common Stock by Hiway shareholders to Verio in
exchange for the Merger Consideration. Hiway shareholders will recognize gain or
loss equal to the difference between their tax basis in the Hiway Common
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Stock surrendered and the amount of cash and the fair market value (as of the
effective date of the Merger) of the Verio Common Stock received. Such gain or
loss will be a capital gain or loss provided the Hiway shareholder held the
Hiway shares as a capital asset on the effective date of the Merger, and will be
a long-term capital gain or loss if the Hiway shares were held for more than one
year on that date. Verio Common Stock received by a Hiway shareholder as part of
the Merger Consideration will have a tax basis equal to its fair market value on
the Effective Date, and the holding period for the Verio Common Stock in the
hands of the Hiway shareholder will commence as of the day following the
effective date of the Merger.
None of Verio, Merger Sub, or Hiway will recognize gain or loss as a result
of the Merger.
The foregoing discussion is intended only as a summary of the material
federal income tax consequences of the Merger and does not purport to be a
complete analysis or description of all potential tax effects of the Merger. In
addition, the discussion does not address all of the tax considerations that may
be relevant to particular Hiway shareholders in light of their particular
circumstances, such as shareholders who are dealers in securities; shareholders
who are subject to the alternative minimum tax provisions of the Internal
Revenue Code of 1986, as amended (the "Code"); shareholders who are foreign
persons; shareholders who acquired their shares in connection with stock option
or stock purchase plans or in other compensatory transactions; and shareholders
who otherwise hold convertible securities, warrants or options. Furthermore, no
foreign, state or local tax considerations are addressed in this discussion.
The foregoing discussion is based on the Code, applicable U.S. Treasury
Regulations, judicial authority, and administrative rulings and practice, all as
of the date of this Proxy Statement/Prospectus. The Internal Revenue Service
(the "IRS") is not precluded from adopting a contrary position. In addition,
there can be no assurance that future legislative, judicial, or administrative
changes or interpretations will not adversely affect the accuracy of the
statements and conclusions set forth in this discussion. Any such changes or
interpretations could be applied retroactively and could affect the tax
consequences of the Merger to Verio, Hiway and the Hiway shareholders. The
parties have not requested and will not request a ruling from the IRS as to the
tax consequences of the Merger.
\ Hiway shareholders are urged to consult their own tax advisors as to the
specific tax considerations of the Merger, including the applicable federal,
state, local and foreign tax consequences to them of the Merger.
ACCOUNTING TREATMENT
The Merger is expected to be accounted for under the purchase method of
accounting, in accordance with GAAP. Under the purchase method of accounting,
the purchase price of Hiway will be allocated to the net assets acquired based
upon their estimated relative fair values and in-process research and
development technology received at the Effective Time, with the excess of the
purchase price over the fair value of the net identifiable assets and in-process
research and development technology received allocated to goodwill, if any.
STOCK OWNERSHIP FOLLOWING THE MERGER
Based on the capitalization of Hiway as of November 13, 1998 and of Verio
as of October 31, 1998, and assuming there are no Excess Expenses, an aggregate
of approximately 3.14 million shares of Verio Common Stock will be issued to
Hiway shareholders in the Merger. Accordingly (and based on the foregoing
capitalization), the former holders of Hiway Common Stock will hold
approximately 8.71% of the shares of Verio Common Stock issued and outstanding
immediately after the Merger. In addition, an aggregate of approximately 1.78
million shares of Verio Common Stock will be issuable upon the exercise of Hiway
Stock Options or Hiway Warrants (each as defined below) assumed by Verio in the
Merger. See "The Merger -- General" and "The Merger Agreement -- Merger
Consideration."
REGULATORY APPROVALS
Under the HSR Act and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the Merger may not be consummated until notifications
have been given and certain information has been furnished to the FTC and the
Antitrust Division of the Department of Justice (the "Antitrust Division")
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and the specified waiting period requirements have been satisfied. Verio, Hiway
and certain shareholders of Hiway who may be deemed acquirers of Verio by virtue
of their ownership of Hiway Common Stock filed notification and report forms
under the HSR Act with the FTC and the Antitrust Division. The first of these
filings was made on September 8, 1998 and the second made on September 18, 1998.
Accordingly, the waiting period under the HSR Act with respect to such filings
expired at 11:59 p.m., New York City time, on October 8, 1998 and October 10,
1998, respectively.
The FTC and the Antitrust Division frequently scrutinize the legality under
the antitrust laws of transactions such as the Merger. At any time before or
after the consummation of the Merger, the Antitrust Division or the FTC could
take such action under the antitrust laws as it deems necessary or desirable in
the public interest, including seeking to enjoin the consummation of the Merger
or seeking divestiture of substantial assets of Verio and Hiway. At any time
before or after the consummation of the Merger, and notwithstanding that the HSR
Act waiting period may have expired, any state could take such action under the
antitrust laws as it deems necessary or desirable in the public interest. Such
action could include seeking to enjoin the consummation of the Merger or seeking
divestiture of Hiway or businesses of Verio. Private parties may also seek to
take legal action under the antitrust laws under certain circumstances.
Verio and Hiway believe that the Merger can be effected in compliance with
federal and state antitrust laws. However, there can be no assurance that a
challenge to the consummation of the Merger on antitrust grounds will not be
made or that, if such a challenge were made, Verio and Hiway would prevail or
would not be required to accept certain conditions, possibly including certain
divestitures, in order to consummate the Merger.
The obligations of Verio and Hiway to consummate the Merger are subject to
the conditions that there be no preliminary or permanent injunction or other
order by any federal, state or foreign court of competent jurisdiction that
prohibits consummation of the Merger, and that there be no statute, rule,
regulation, executive order, stay, decree or judgment enacted, entered, issued
or promulgated by any court or governmental authority that prohibits or
restricts the consummation of the Merger. See "The Merger
Agreement -- Conditions." Either Verio or Hiway may terminate the Merger
Agreement if any court of competent jurisdiction in the United States or other
United States governmental body shall have issued an order, decree or ruling or
taken any other action restraining, enjoining or otherwise prohibiting the
Merger and such order, decree, ruling or any other action shall have become
final and non-appealable, provided that the party seeking to terminate the
Merger Agreement for such reason shall have used all reasonable efforts to
remove such order, decree or ruling. See "The Merger Agreement -- Termination."
RESALE RESTRICTIONS
Subject to the restrictions imposed by the Lockup Agreements (as defined
below), all shares of Verio Common Stock received by Hiway shareholders in the
Merger will be freely transferable, except that shares of Verio Common Stock
received by persons who are deemed to be "affiliates" (as such term is defined
under the Securities Act) of Hiway may be resold by them only in transactions
permitted by the resale provisions of Rule 145 promulgated under the Securities
Act (or Rule 144 in the case of such persons who become affiliates of Verio) or
as otherwise permitted under the Securities Act. Persons who may be deemed to be
affiliates of Hiway or Verio generally include individuals or entities that
control, are controlled by, or are under common control with, such party and may
include certain officers and directors of such party as well as principal
stockholders of such party. Hiway has indicated to Verio that its affiliates for
purposes of the Securities Act are Messrs. Cahoon, Adams, Buzby, Zarley,
Nesbitt, Umberger and Barry (the "Hiway Affiliates").
Lockup Agreements. It is a condition to Verio's obligation to close the
Merger that Verio receive an executed lockup agreement (each, a "Lockup
Agreement") from each Hiway Executive Officer. See "The Merger
Agreement -- Conditions." Pursuant to the Lockup Agreements, each Hiway
Executive Officer has agreed that, for a period of six months from the Closing
Date, he shall not, without the prior written consent of Verio, directly or
indirectly, (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, or otherwise dispose of or transfer any shares of
Verio Common Stock (whether outstanding on the date thereof or thereafter
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acquired) or any securities convertible into or exchangeable or exercisable for
shares of Verio Common Stock, whether owned on the date thereof or thereafter
acquired or with respect to which the shareholder acquires the power of
disposition, or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly, the
economic consequences of ownership of shares of Verio Common Stock, whether any
such swap transaction is to be settled by delivery of shares of Verio Common
Stock or other securities, in cash or otherwise. The Hiway Executive Officers
collectively hold legal title to approximately % of the outstanding shares
of Hiway Common Stock as of the Hiway Record Date.
Affiliate Agreements and Registration Rights. The Merger Agreement requires
Hiway to use its best efforts to cause each of the Hiway Affiliates to execute a
written agreement (an "Affiliate Agreement") acknowledging such person's status
as an affiliate and agreeing not to dispose of any shares of Verio Common Stock
except as permitted by Rule 145 promulgated under the Securities Act. It is a
condition to Verio's obligation to consummate the Merger that each Hiway
Affiliate deliver such an agreement. See "The Merger Agreement -- Conditions."
It is a condition to Hiway's obligation to close the Merger that Verio
enter into a Registration Rights Agreement (the "Hiway Registration Rights
Agreement") with the Hiway Specified Shareholders (as defined below). See "The
Merger Agreement -- Conditions." Pursuant to the Hiway Registration Rights
Agreement, the Hiway Specified Shareholders will be entitled to certain
piggyback registration rights with respect to registration of certain
Registrable Securities (as defined in the Hiway Registration Rights Agreement)
under the Securities Act, subject to certain conditions and limitations,
including the Verio Board's right to defer such registration for a period of up
to 90 days. See "Description of Capital Stock -- Verio Registration Rights."
Verio is entitled to place appropriate legends, describing the restrictions
on transfer, on the certificates evidencing shares of Verio Common Stock subject
to the Lockup Agreements or any agreement with persons deemed to be "affiliates"
of Hiway, and to issue appropriate stop transfer instructions to Norwest Bank
Minnesota, National Association, the transfer agent and registrar for Verio
Common Stock.
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THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement, a copy of which is attached as Appendix A to this Proxy
Statement/Prospectus and is incorporated herein by reference. This summary is
qualified in its entirety by reference to the full text of the Merger Agreement.
THE MERGER
Pursuant to the Merger Agreement, and subject to the terms and conditions
thereof, at the Effective Time Merger Sub will be merged with and into Hiway,
with Hiway as the surviving company (the "Surviving Company"). The Merger will
have the effects specified in Section 1107 of the CGCL.
Hiway's Articles of Incorporation and Bylaws will be the Articles of
Incorporation and Bylaws of the Surviving Corporation, except that, effective as
of the Effective Time, Hiway's Articles of Incorporation and Bylaws will be
amended in their entirety to conform to the Articles of Incorporation and Bylaws
of Merger Sub (other than with respect to the name of the Surviving
Corporation), and shall continue thereafter as the Articles of Incorporation and
Bylaws of the Surviving Corporation until duly amended in accordance with the
terms thereof and the CGCL. Merger Sub's officers and directors will be the
initial officers and directors of the Surviving Company.
EFFECTIVE TIME OF THE MERGER
The Closing Date will be the later of (i) January 1, 1999, or as soon
thereafter as is reasonably practical, or (ii) the first business day following
the date on which the Hiway shareholders have given any requisite approvals in
connection with the Merger Agreement and the Merger, and on which all of the
other conditions to the Merger are satisfied or waived, or at such other date as
Verio and Hiway shall agree. See "-- Conditions."
As soon as practicable after the closing of the Merger, the Agreement of
Merger will be filed with the Secretary of State of the State of California in
accordance with Section 1108 of the CGCL. The Effective Time will be the time at
which the Agreement of Merger is so filed (or such later time as may be
specified in the Agreement of Merger).
MERGER CONSIDERATION
As a result of the Merger and without any action on the part of the holders
thereof, each share of Hiway Common Stock issued and outstanding immediately
prior to the Effective Time (other than Dissenting Shares) will be converted
into the right to receive (i) a fraction of a share of Verio Common Stock equal
to the Common Stock Exchange Ratio, and (ii) the Per Share Cash Amount
determined pursuant to the formula set forth in the Merger Agreement, as
described below.
A. The Total Consideration Value will be equal to the sum of (i)
$241.54 million plus (ii) the proceeds that would be receivable by Hiway
upon exercise of any options and warrants to purchase Hiway Common Stock
which were outstanding at July 28, 1998 (the date of the Initial Merger
Agreement) or were issued subsequent to such date and prior to the Closing
Date, and in any such case which remain outstanding on, or are exercised
prior to, the Closing Date, less (iii) any Excess Expenses.
Excess Expenses, for purposes of the above formula and all other
purposes under the Merger Agreement, will be equal to the amount in excess
of $9.338 million of all expenses that are incurred or paid by Hiway, or
which Hiway may be legally obligated to pay or reimburse, in connection
with or related to the Merger and the related transactions (including,
without limitation, the transactions contemplated by the Noncompete
Agreements, the Hiway Shareholder Voting Agreements, the Affiliate
Agreements, the Hiway Registration Rights Agreement, the Lockup Agreements
and any Proprietary Information and Inventions Agreement between Hiway and
its employees or consultants) or Hiway's proposed initial public offering,
in each case whether before or after the closing of the Merger (other than
amounts actually paid prior to June 30, 1998), including, without
limitation, (i) all legal, printing, investment banking and accounting
fees, (ii) all payments that may be made in respect of noncompeti-
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tion covenants or agreements (including without limitation the Noncompete
Agreements) (other than performance bonuses earned prior to the date of the
Merger Agreement), and (iii) all payments that may be made in respect of
the termination of the Hiway Employment Agreements or that would constitute
"parachute payments" within the meaning of Section 280G of the Code made to
the Hiway Executive Officers.
B. The Per Share Price will be equal to the quotient of (i) the Total
Consideration Value, divided by (ii) the number of shares of Hiway Common
Stock outstanding on the Closing Date, on a fully diluted basis.
C. The Per Share Cash Amount will be equal to (i) $176.0 million,
divided by (ii) the total number of shares of Hiway Common Stock
outstanding on the Closing Date.
D. The Common Stock Exchange Ratio will be equal to the quotient of
(i) the amount by which the Per Share Price exceeds the Per Share Cash
Amount, divided by (ii) $16.00.
The Total Consideration Value, Common Stock Exchange Ratio, the Per Share
Cash Amount and the Option Exchange Ratio cannot be determined until the
Effective Time, given the factors considered in their determination. Pursuant to
the formula for determining the Total Consideration Value, as described above,
the Total Consideration Value, as well as the Per Share Cash Amount, the Common
Stock Exchange Ratio and the Option Exchange Ratio, will be affected by several
factors that will not be known until the Closing Date or the Effective Time.
First, the Total Consideration Value will be decreased by the amount of any
Excess Expenses, which will result in a decrease in the Common Stock Exchange
Ratio and the Option Exchange Ratio. Second, the Total Consideration Value, and
the Per Share Cash Amount, the Common Stock Exchange Ratio and the Option
Exchange Ratio, will be affected by changes in the capitalization of Hiway prior
to the Closing Date. Pursuant to the Merger Agreement, Hiway generally has
agreed not to issue or sell any capital stock or other securities prior to the
Effective Time. However, Hiway may issue options to purchase shares of Hiway
Common Stock to its employees in the ordinary course of its business, provided,
that Hiway may not issue options to purchase in excess of 150,000 shares of
Hiway Common Stock in the aggregate. Additionally, Hiway may issue shares of
Hiway Common Stock pursuant to the exercise of option grants previously made to
its employees in the ordinary course of its business that were outstanding when
the Merger Agreement first was signed, as well as pursuant to the exercise of
warrants that were outstanding at that time. If, for example, Hiway issues
additional shares of Hiway Common Stock pursuant to the exercise of outstanding
options or warrants, or grants additional options to purchase shares of Hiway
Common Stock, then the Total Consideration Value will be increased to reflect
the increased proceeds receivable from the exercise of such options or warrants
(assuming such options or warrants remain outstanding at, or are exercised prior
to, the Closing Date), and the Common Stock Exchange Ratio and the Option
Exchange Ratio will be decreased to reflect the change in the Total
Consideration Value and the increase in the number of shares on a fully diluted
basis (provided that the average exercise price per share for such options and
warrants does not exceed a certain amount). If Hiway issues additional shares of
Hiway Common Stock (including upon the exercise of options or warrants to
purchase Hiway Common Stock), then the Total Consideration Value will be
decreased to reflect the decrease in proceeds receivable from the exercise of
options and warrants, if applicable, and the Per Share Cash Amount, the Common
Stock Exchange Ratio and the Option Exchange Ratio will be decreased.
The following are examples of the determination of the Common Stock
Exchange Ratio, the Per Share Cash Amount and the Option Exchange Ratio based on
certain specified assumptions:
- Based on the capitalization of Hiway as of November 13, 1998 (including
the amount of proceeds receivable by Hiway upon exercise of outstanding
options and warrants), and assuming that there are no Excess Expenses,
(i) the Per Share Cash Amount will be approximately $4.90, and the Common
Stock Exchange Ratio will be approximately 0.0875, and (ii) the Option
Exchange Ratio will be approximately 0.3940.
- Assuming that the capitalization of Hiway as of November 13, 1998 remains
unchanged at the Closing Date, but that there are $2.0 million in Excess
Expenses, (i) the Per Share Cash Amount would be
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unchanged (i.e., approximately $4.90), and the Common Stock Exchange
Ratio would be approximately 0.0844, and (ii) the Option Exchange Ratio
would be approximately 0.3909.
- Assuming that there are no Excess Expenses, but that Hiway issues an
additional 100,000 options with an average exercise price of $6.00 per
share prior to the Closing Date, but that the capitalization of Hiway as
of November 13, 1998 otherwise remains unchanged at the Closing Date, (i)
the Per Share Cash Amount would be unchanged (i.e., approximately $4.90),
and the Common Stock Exchange Ratio would be approximately 0.0875, and
(ii) the Option Exchange Ratio would be approximately 0.3940.
- Assuming that there are no Excess Expenses, but that options or warrants
to purchase 200,000 shares of Hiway Common Stock are exercised prior to
the Closing Date, at an average exercise price of $3.05 per share, but
that the capitalization of Hiway as of November 13, 1998 otherwise
remains unchanged as at the Closing Date, (i) the Per Share Cash Amount
would be approximately $4.88, and the Common Stock Exchange Ratio would
be approximately 0.0892, and (ii) the Option Exchange Ratio would be
approximately 0.3940.
The numbers in the examples in this Proxy Statement/Prospectus have been
rounded for purposes of clarity of description only. The actual Common Stock
Exchange Ratio, Per Share Cash Amount and Option Exchange Ratio will be
calculated in accordance with the terms of the Merger Agreement.
Each holder of a Hiway Stock Certificate, other than such a Certificate
representing Dissenting Shares, will, upon consummation of the Merger, cease to
have any rights with respect to such Hiway Common Stock, except the right to
receive, without interest, the Merger Consideration in respect of the shares of
Hiway Common Stock represented by such Certificate upon the surrender of such
Certificate (see "The Merger -- Conversion of Shares; Procedures for Exchange of
Stock Certificates"). If, prior to the Effective Time, Verio should split or
combine the shares of Verio Common Stock, or pay a stock dividend or other stock
distribution in, or in exchange of, shares of Verio Common Stock, or engage in
any similar transaction, then the Common Stock Exchange Ratio will be
appropriately adjusted to reflect such split, combination, dividend, exchange or
other distribution or similar transaction.
Hiway currently expects that there will be Excess Expenses of approximately
$250,000, although there can be no assurance that additional Excess Expenses
will not be incurred prior to the Effective Time.
Fluctuations in the value of Verio Common Stock will not affect the
determination of the Common Stock Exchange Ratio or the Option Exchange Ratio,
except to the extent that such fluctuations cause an increase in the aggregate
value of the consideration to be paid in the Merger, which in turn would
increase the aggregate fees payable by Hiway to its financial advisors and would
be included in the determination of Excess Expenses. In general, the value of
the fraction of a share of Verio Common Stock to be delivered as part of the
Merger Consideration for each share of Hiway Common Stock may change between the
date hereof and the Closing Date. There can be no assurance as to the market
price of Verio Common Stock at any time before or after the Effective Time. See
"Risk Factors -- Potential Fluctuation of Value of Consideration Received."
As of December , 1998, the closing sale price for Verio Common Stock as
reported on Nasdaq was $ per share.
STOCK OPTIONS AND WARRANTS
Each of the options and warrants to acquire Hiway Common Stock (each, a
"Hiway Stock Option" or "Hiway Warrant") outstanding and not expired as of the
Effective Time will be assumed by Verio and converted into an option or warrant
to purchase such number of shares of Verio Common Stock as the holder would have
received in the Merger had such option or warrant been exercised prior to the
Effective Time (and had the entire Per Share Price for the Hiway Common Stock
resulting from such exercise been paid in the form of Verio Common Stock based
upon a Verio Common Stock Price of $16.00), at an aggregate purchase price equal
to the aggregate purchase price applicable prior to such exercise; provided that
in the case of any Hiway Stock Option to which Section 421 of the Code applies
by reason of its qualification under Section 422
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of the Code, the conversion formula shall be adjusted, if necessary, to comply
with Section 424(a) of the Code. For examples of the determination of the Option
Exchange Ratio, see "-- Merger Consideration." Except as provided above, the
converted or substituted Hiway Stock Options or Warrants will be subject to
substantially the same terms and conditions (including expiration date and
vesting) as were applicable to Hiway Stock Options or Warrants immediately prior
to the Effective Time.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains certain representations and warranties by
Hiway relating to, among other things: (i) due organization and good standing of
Hiway; (ii) authorization, execution, delivery and enforceability of the Merger
Agreement and related agreements; (iii) Hiway's Articles of Incorporation and
Bylaws; (iv) capitalization of and ownership of stock by Hiway and the solvency
of Hiway; (v) the accuracy and completeness of financial statements delivered by
Hiway; (vi) absence of certain changes since the date of the Unaudited Balance
Sheet (as defined in the Merger Agreement); (vii) title to assets, real
property, leases and inventory; (viii) accounts receivable and accounts payable;
(ix) major customers and major suppliers; (x) the identity of Hiway's
proprietary assets; (xi) certain contracts and agreements; (xii) compliance with
applicable legal requirements; (xiii) necessary governmental authorizations;
(iv) tax matters; (xv) employment and labor matters; (xvi) employee benefit
plans; (xvii) compliance with environmental laws; (xviii) liability arising from
sales of products or performance of services; (xix) adequacy and enforceability
of insurance; (xx) pending or threatened proceedings or orders; (xxi)
non-contravention of the Merger Agreement and related agreements; (xxii)
required consents; (xxiii) brokers fees; (xxiv) full disclosure; (xxv) powers of
attorney; (xxvi) compliance with federal and state securities laws; (xxvii)
takeover statutes; (xxviii) outstanding voting arrangements relating to the
capital stock of Hiway; (xxix) financial projections by Hiway; and (xxx)
ownership of Verio Common Stock.
The Merger Agreement also contains certain representations and warranties
by Verio and Merger Sub relating to, among other things: (i) due organization
and good standing of Verio and Merger Sub; (ii) authorization, execution,
delivery and enforceability of the Merger Agreement and related agreements;
(iii) pending or threatened proceedings or orders; (iv) non-contravention of the
Merger Agreement and related agreements; (v) required consents; (vi) brokers
fees; (vii) financial capacity (subject to certain conditions); (viii) full
disclosure; and (ix) required Commission reports.
CERTAIN COVENANTS
General. Hiway agreed that, prior to the Effective Time, it will, among
other things: (i) provide Verio with access to Hiway's assets and premises at
reasonable times and upon reasonable notice, and confer regularly with Verio
concerning Hiway's operations and financial performance; (ii) conduct its
business only in the ordinary and usual course, consistent with past practices;
(iii) use its best efforts to preserve intact its business organization, to
retain its present officers and key employees, and to preserve the goodwill of
those having business relationships with it and its subsidiaries; (iv) not
declare, accrue, set aside or pay any dividend or other distribution, except as
provided in the Merger Agreement; (v) not issue or sell (or grant any warrants,
options or other rights to purchase) any stock or any other securities (except
issuance of Hiway Common Stock pursuant to option grants to employees made in
the ordinary course of business); (vi) except as provided in the Merger
Agreement, not form any subsidiary or acquire an equity interest in any other
entity; (vii) not adopt any employee benefit plan and not pay any bonus or
similar payment or increase any compensation payable to any of its directors,
officers or employees, except pursuant to existing agreements; (viii) not change
its methods of accounting or make any tax election; (ix) not enter into or amend
any agreements pursuant to which any other party is granted exclusive
distribution, marketing or other exclusive rights with respect to its services,
products or technology; (x) not pay, discharge or satisfy in an amount in excess
of $100,000 in any one case or $250,000 in the aggregate, any claim, liability
or obligation arising other than in the ordinary course of business, other than
those reserved against in its financial statements or to which Verio has
consented in writing; (xi) not hire any new director level or officer level
employee; (xii) give any notices or information required to be given to
employees of Hiway and any other government entity under the National Labor
Relations Act, the Code, the Consolidated Omnibus Reconciliation Act or other
applicable
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<PAGE> 68
law; (xiii) cause all indebtedness and other liabilities of any related party to
Hiway to be discharged and paid in full prior to closing of the Merger; (xiv)
enter into a Proprietary Information and Inventions Agreement, in one of the
forms attached to the Merger Agreement, with all of its employees and
consultants, other than those already party to such an agreement in a form
reasonably satisfactory to Verio; and (xv) use its best efforts to cause to be
delivered to Verio a letter from its independent auditors in connection with the
Registration Statement.
Verio and Hiway agreed that, among other things: (i) each will promptly
notify the other of the discovery of any event or circumstance that occurred or
existed prior to or arises after the date of the Merger Agreement that
constitutes (a) a breach by such party of any representation, warranty, covenant
or obligation in the Merger Agreement or (b) any condition that may make
satisfaction of any condition in the Merger Agreement impossible or unlikely;
and (ii) each will use its commercially reasonable best efforts to cause the
timely satisfaction of the conditions to closing the Merger as provided in the
Merger Agreement, so that the closing can take place on January 1, 1999 or as
soon thereafter as is reasonably practical.
Termination of Employment Agreements. Hiway agreed that, prior to the
Effective Time, it would cause the termination of each of the Hiway Employment
Agreements, in each case in such a manner that Hiway will not be required to
make any payments or bear any liability, prior to and after consummation of the
Merger, with respect to "excess parachute payments" within the meaning of
Section 280G of the Code. See "The Merger -- Interests of Certain Persons in the
Merger."
Securities Matters. Verio agreed to use reasonable efforts to take any
action required by state securities or blue sky laws in connection with the
issuance of the shares of Verio Common Stock pursuant to the Merger Agreement.
Hiway agreed to furnish Verio with all information concerning Hiway and the
holders of its capital stock and take such other action as Verio may reasonably
request in connection with the Registration Statement and such issuance of
shares of Verio Common Stock.
Hiway Shareholder Approval. Hiway agreed to recommend approval and adoption
of the Merger Agreement by its shareholders and to use its best efforts to
obtain such approval and that, if requested by Verio, it will seek the approval
and adoption of the Hiway Merger Proposal by written consent promptly following
the effectiveness of the Registration Statement.
Nasdaq. Verio has agreed to notify Nasdaq of the listing of the shares of
Verio Common Stock to be issued pursuant to the Merger.
No Solicitation. Until the termination of the Merger Agreement, Hiway may
not, and will ensure that its representatives do not, solicit, encourage or
engage or participate in negotiations concerning any acquisition, tender offer,
merger, consolidation, business combination or similar transaction, other than
the Merger (such proposals being referred to as "Acquisition Proposals"). Hiway
has agreed to notify Verio in writing of any such Acquisition Proposals. The
Hiway Specified Shareholders each agreed to similar restrictions in their Hiway
Shareholder Voting Agreements. See "Voting Agreements."
Director and Officer Indemnification. Verio agreed, for a period of three
years after the Effective Time, to maintain, with respect to claims arising from
facts or events which occurred before the Effective Time, officers' and
directors' liability insurance covering the officers and directors of Hiway who
were covered as of the date of the Merger Agreement by Hiway's then existing
officers' and directors' liability insurance policies, on terms substantially no
less advantageous to such officers and directors than such existing insurance.
See "The Merger -- Interests of Certain Persons in the Merger."
Verio Board. Verio agreed to take such action necessary to cause a designee
of Hiway to serve on the Verio Board. See "The Merger -- Interests of Certain
Persons in the Merger."
Integration Issues. Pursuant to the Merger Agreement, Verio and Hiway have
agreed to cooperate in good faith to identify and, to the extent practicable,
resolve matters regarding the orderly integration of their respective
operations, and the retention of other employees of Hiway who will remain after
the Closing Date.
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<PAGE> 69
CONDITIONS
The obligations of Verio and Hiway to effect the Merger are subject to the
satisfaction of certain conditions, including, among others: (i) the
Registration Statement shall have become effective in accordance with the
provisions of the Securities Act and shall be effective at the Effective Time;
(ii) all necessary approvals under federal and state securities laws and other
authorizations relating to the issuance or trading of Verio Common Stock to be
issued in the Merger shall have been obtained; (iii) the Verio Common Stock to
be issued in the Merger shall have been approved for listing on Nasdaq; (iv) the
Hiway Merger Proposal shall have been approved by Hiway's shareholders; (v) the
absence of any injunction prohibiting consummation of the Merger; and (vi) the
absence of any action by any federal or state governmental entity that imposes
any condition upon Verio or Hiway that would so impact the Merger as to render
the Merger inadvisable.
The obligation of each of Verio and Merger Sub to effect the Merger is
subject to the satisfaction of additional conditions, including, among other
things: (i) all of the representations and warranties made by Hiway and each
shareholder of Hiway in the Merger Agreement and related agreements are accurate
in all material respects as of the Effective Time; (ii) each Hiway Executive
Officer shall have executed a Lockup Agreement; (iii) each Hiway Executive
Officer shall have executed a Noncompete Agreement; (iv) Hiway and shareholders
of Hiway shall have satisfied all covenants and obligations that each is
required to comply with or perform in the Merger Agreement and any related
agreement; (v) Hiway shall have obtained all required consents; (vi) there not
having been any material adverse change in Hiway's business, condition, assets,
liabilities, operations or financial performance since the date of the Merger
Agreement; (vii) receipt of an opinion of Hiway's counsel; (viii) there shall
not have been commenced or threatened against Verio any proceeding challenging
or seeking damages in connection with the Merger, or which may interfere with
the Merger or have a material adverse effect on Hiway; (ix) no person shall have
made or threatened any claim relating to his or her right to acquire securities
or capital stock of Hiway or be entitled to any portion of the consideration to
be issued in the Merger; (x) the holders of no more than 10% of the outstanding
shares of Hiway Common Stock shall have demanded or shall be eligible to demand
dissenters' rights; (xi) each of Hiway's employees and consultants have entered
into a Proprietary Information and Inventions Agreement, in one of the forms
attached to the Merger Agreement or in another form approved by Verio; (xii)
each of the Hiway Employment Agreements shall have been terminated and Verio
shall be satisfied that there are no arrangements that would, in connection with
the Merger, constitute "excess parachute payments" within the meaning of Section
280G of the Code; and (xiii) receipt of various other consents from third
parties.
The obligation of Hiway to effect the Merger is subject to the satisfaction
of additional conditions, including, among other things: (i) all of the
representations and warranties made by Verio and Merger Sub in the Merger
Agreement are accurate in all material respects as of the Effective Time; (ii)
Verio and Merger Sub shall have satisfied all covenants and obligations that
each is required to comply with or perform in the Merger Agreement; (iii) Verio
shall have executed and delivered a Hiway Registration Rights Agreement to each
of the Hiway Specified Shareholders; (iv) there not having been any material
adverse change in Verio's business, condition, assets, liabilities, operations
or financial performance since the date of the Merger Agreement (provided that a
decrease in the trading price of Verio Common Stock shall not of itself be
considered a material adverse change); and (v) the person designated by Hiway as
a member of the Verio Board shall have been appointed to the Verio Board
effective at the Effective Time. The parties' obligations to close the Merger
are independent of any fluctuations (including any material decline) in the
amount of the Merger Consideration as a result of fluctuations in the value of
the portion of the Merger Consideration payable in Verio Common Stock, and no
re-solicitation of the approval of the holders of Hiway Common Stock would occur
if any such fluctuation occurred following the initial solicitation and receipt
of the requisite approval of the Merger.
TERMINATION
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time, whether before or after approval by the
shareholders of Hiway: (i) by mutual consent of Verio and Hiway; (ii) by Verio,
if there has been any material breach of a covenant or obligation of Hiway or a
shareholder of Hiway or if Verio reasonably determines that timely satisfaction
of a condition to closing the
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<PAGE> 70
Merger is impossible or impracticable (other than as a result of any failure on
the part of Verio to comply with or perform its covenants and obligations);
(iii) by Hiway, if there has been any material breach of a covenant or
obligation by Verio or Merger Sub or if Hiway reasonably determines that timely
satisfaction of a condition to closing the Merger is impossible or impracticable
(other than as a result of any failure on the part of Hiway or any shareholder
of Hiway to comply with or perform its covenants and obligations); (iv) by
Verio, if the Merger has not been consummated on or before February 28, 1999
(other than as a result of any failure on the part of Verio or Merger Sub to
comply with or perform its covenants or obligations under the Merger Agreement);
(v) by Hiway, if the Merger has not been consummated on or before February 28,
1999 (other than as a result of any failure on the part of Hiway or any
shareholder to comply with or perform its covenants or obligations under the
Merger Agreement or any related agreement); (vi) by either Verio or Hiway, if
any court of competent jurisdiction in the United States or other United States
governmental body has issued an order, decree or ruling or taken any other
action restraining, enjoining or otherwise prohibiting the Merger and such
order, decree, ruling or any other action has become final and non-appealable;
or (vii) by Verio, if approval of the shareholders of Hiway required for the
consummation of the Merger submitted for approval has not been obtained at a
duly held meeting of shareholders or at any adjournment thereof.
In the event the Merger Agreement is terminated, all further obligations of
Verio, Hiway and Merger Sub under the Merger Agreement shall terminate;
provided, however, that the parties shall remain subject to specified provisions
in the Merger Agreement relating to, among other things, the payment of fees and
expenses and the confidential treatment of certain information, and to the terms
of the Nondisclosure Agreement between Verio and Hiway dated as of July 15,
1998.
AMENDMENT; WAIVER
The Merger Agreement may not be amended, modified, altered or supplemented
other than by means of a written instrument duly executed and delivered on
behalf of Verio and Hiway.
No failure on the part of Verio, Hiway or Merger Sub to exercise any power,
right, privilege or remedy ("Rights") under the Merger Agreement (and no such
delay in any such exercise) shall operate as a waiver of such Right and no
single or partial waiver of any such Right shall preclude any further exercise
thereof or of any other Right. A waiver of any claim or Right must be in writing
duly executed and delivered on behalf of such person seeking such waiver.
EXPENSES
In general, all costs and expenses incurred by Hiway in connection with the
Merger Agreement and the transactions contemplated thereby will be paid by
Hiway, and all costs and expenses incurred by Verio or Merger Sub in connection
with the Merger Agreement and the transactions contemplated thereby will be paid
by Verio. However, in the event Hiway incurs any Excess Expenses, the Common
Stock Exchange Ratio and the Option Exchange Ratio will be reduced. See
" -- Merger Consideration" and "The Merger -- General."
VOTING AGREEMENTS
As a condition to the willingness of Verio to enter into the Merger
Agreement, the Hiway Executive Officers and Thomas C. Barry, a member of the
Hiway Board, and certain entities holding of record shares of Hiway Common Stock
owned beneficially by such Hiway Executive Officers and director (the "Hiway
Specified Shareholders"), representing approximately 63.0% of the capital stock
of Hiway outstanding as of November 13, 1998, each entered into a Voting
Agreement and Irrevocable Proxy (the "Hiway Shareholder Voting Agreements") with
Verio dated as of November 17, 1998.
Pursuant to the Hiway Shareholder Voting Agreements, each Hiway Specified
Shareholder has agreed to vote, and irrevocably granted to Verio and appointed
Verio such shareholder's proxy to vote, all shares of Hiway Common Stock then
owned or thereafter acquired by such shareholder in favor of the Merger,
approval of the Merger Agreement and any matters contemplated by the Merger
Agreement or incidental to the Merger, at any meeting of Hiway's shareholders
(or in any written consent in lieu thereof). In addition, each
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<PAGE> 71
Hiway Specified Shareholder has (i) waived all rights of first refusal and other
rights to acquire securities issued or sold by Hiway and all rights of co-sale
that may arise from the Merger Agreement; (ii) agreed not to sell or otherwise
dispose of any shares of Hiway Common Stock; and (iii) agreed not to initiate,
solicit, encourage or engage or participate in negotiations concerning any
Acquisition Proposals. The Hiway Shareholder Voting Agreements will terminate
upon the earlier of the Effective Time or the termination of the Merger
Agreement.
DISSENTERS' RIGHTS OF HIWAY SHAREHOLDERS
The rights of Hiway shareholders who dissent in connection with the Merger
are governed by specific legal provisions contained in Chapter 13 of the CGCL
("Chapter 13"). The following summary of the provisions of Chapter 13 is not
intended to be a complete statement of such provisions and is qualified in its
entirety by reference to the full text of Chapter 13, a copy of which is
attached to this Proxy Statement/ Prospectus as Appendix D and is incorporated
herein by reference. FAILURE TO FOLLOW THE STEPS REQUIRED BY CHAPTER 13 FOR
PERFECTING DISSENTERS' RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS.
Under Chapter 13, if the Merger is completed, any shares of Hiway Common
Stock as to which dissenters' rights are properly exercised ("Dissenting
Shares") will not be converted by virtue of the Merger into the right to receive
the Merger Consideration pursuant to the Merger Agreement, but instead will be
converted into the right to receive in cash the "fair market value" of such
shares, determined as of the day before the first announcement of the terms of
the Merger, and excluding any appreciation or depreciation in consequence of the
Merger. For shares of Hiway Common Stock to qualify as Dissenting Shares, (i)
the holders of such shares must not have voted in favor of approval of the Hiway
Merger Proposal and (ii) the holder of such shares must submit stock
certificates for endorsement (as described below).
If the Merger is approved at the Hiway Special Meeting, Hiway will, within
ten days after such approval, mail to any shareholder who may have a right to
require Hiway to purchase his, her or its shares for cash as a result of making
a demand (as described below), a notice that the required shareholder approval
of the Hiway Merger Proposal was obtained (the "Notice of Approval"),
accompanied by a copy of Chapter 13. The Notice of Approval will set forth the
price determined by Hiway to represent the "fair market value" of any Dissenting
Shares (which shall constitute an offer by Hiway to purchase such Dissenting
Shares at such stated price) and will set forth a brief description of the
procedures to be followed by such shareholders who wish to exercise their
dissenters' rights.
Within 30 days after the date on which the Notice of Approval was mailed,
(i) Hiway must receive the demand of the dissenting shareholder, which is
required by law to contain a statement concerning the number and class of shares
of Hiway Common Stock held of record by such dissenting shareholder and what the
shareholder claims to be the fair market value of the Dissenting Shares as of
the close of business on the day immediately prior to the announcement of the
Merger (the statement of fair market value in such demand by the dissenting
shareholder constitutes an offer by the dissenting shareholder to sell the
Dissenting Shares at such price); and (ii) the dissenting shareholder must
submit Hiway Stock Certificate(s) representing the Dissenting Shares to Hiway at
Hiway's principal office. The Hiway Stock Certificate(s) will be stamped or
endorsed with a statement that the shares are Dissenting Shares or will be
exchanged for Hiway Stock Certificates of appropriate denomination so stamped or
endorsed. If the price contained in the Notice of Approval is acceptable to the
dissenting shareholder, the dissenting shareholder may demand the same price.
This would constitute an acceptance of the offer by Hiway to purchase the
dissenting shareholder's stock at the price stated in the Notice of Approval.
If Hiway and a dissenting shareholder agree upon the price to be paid for
the Dissenting Shares, upon the dissenting shareholder's surrender of the Hiway
Stock Certificates representing the Dissenting Shares, such price (together with
interest thereon at the legal rate on judgments from the date of the agreement
between Hiway and the dissenting shareholder) is required by law to be paid to
the dissenting shareholder within 30 days after such agreement or within 30 days
after any statutory or contractual conditions to the Merger are satisfied,
whichever is later, subject to the surrender of the Hiway Stock Certificates
therefor.
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If Hiway and a dissenting shareholder disagree as to the price for such
Dissenting Shares or disagree as to whether such Dissenting Shares are entitled
to be classified as Dissenting Shares, such holder may, within six months after
the Notice of Approval is mailed, file a complaint in the Superior Court of the
proper county requesting the court to make such determinations or,
alternatively, may intervene in any pending action brought by another dissenting
shareholder. Costs of such an action (including compensation of appraisers) are
required to be assessed as the court considers equitable, but must be assessed
against Hiway if the appraised value determined by the court exceeds the price
offered by Hiway.
The court action to determine the fair market value of the shares will be
suspended if litigation is instituted to test the sufficiency or regularity of
the votes of the shareholders in authorizing the Merger. Furthermore, no
shareholder who is entitled to assert dissenters' rights under Chapter 13 shall
have any right to attack the validity of the Merger or to have the Merger set
aside or rescinded, except in an action to test whether the number of shares
required to authorize or approve the Merger has been legally voted in favor of
the Merger.
Dissenting Shares may lose their status as such and the right to demand
payment will terminate, among other reasons, if (i) the Merger is abandoned;
(ii) the shares are transferred before being submitted for endorsement or are
surrendered for conversion into shares of another class; (iii) the dissenting
shareholder and Hiway do not agree upon the status of the shares as Dissenting
Shares or upon the price of such shares and the dissenting shareholders fails to
file suit against Hiway or intervene in a pending action within six months
following the date on which the Notice of Approval was mailed to the
shareholder; or (iv) the dissenting shareholder withdraws his or her demand for
the purchase of the Dissenting Shares with the consent of Hiway.
It is a condition precedent to Verio's obligation to close the Merger that
less than 10% of the outstanding shares of Hiway Common Stock be, or be eligible
to be, Dissenting Shares. See "The Merger Agreement -- Conditions."
COMPARATIVE PER SHARE PRICES AND DIVIDEND POLICIES
Verio Common Stock is listed and traded on Nasdaq under the symbol "VRIO."
Verio Common Stock has traded under that symbol since May 12, 1998, the date of
the Verio IPO. Prior to that time, there was no public market for Verio Common
Stock.
The following table sets forth the high and low sale prices per share of
Verio Common Stock for the periods indicated, as reported by Nasdaq. There is no
public market for Hiway Common Stock.
<TABLE>
<CAPTION>
VERIO COMMON STOCK
---------------------
HIGH LOW
-------- -------
<S> <C> <C>
Calendar 1998:
Second Quarter...................................... $ 30.00 $ 16.50
Third Quarter....................................... 31.875 18.00
Fourth Quarter (through December )................ [ .] [ .]
</TABLE>
The following table sets forth the closing sale price of Verio Common Stock
on November 16, 1998, the last trading day prior to the public announcement of
the Merger Agreement, and , 1998, the latest practicable date
preceding the mailing of this Proxy Statement/Prospectus. The "equivalent per
share price" of Hiway Common Stock as of such dates equals the sum of (i) the
closing sale price of Verio Common Stock on such dates multiplied by the assumed
Common Stock Exchange Ratio of 0.0875 plus (ii) the assumed Per Share Cash
Amount of $4.90. See "The Merger Agreement -- Merger Consideration."
<TABLE>
<CAPTION>
VERIO HIWAY EQUIVALENT
COMMON STOCK PER SHARE VALUE
------------ ----------------
<S> <C> <C>
November 16, 1998............................... $ 16.00 $ 6.32
December , 1998............................... [ .] [ .]
</TABLE>
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Because the Common Stock Exchange Ratio is determined with respect to a
fixed number of shares of Verio Common Stock (subject to adjustment for certain
matters, as described herein, not related to the market price of Verio Common
Stock), and because the market price of Verio Common Stock is subject to
fluctuation, the market value of the shares of Verio Common Stock that holders
of Hiway Common Stock will receive in the Merger may increase or decrease prior
to and following the Merger. HOLDERS OF VERIO COMMON STOCK AND HOLDERS OF HIWAY
COMMON STOCK ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR VERIO COMMON
STOCK. NO ASSURANCE CAN BE GIVEN AS TO THE FUTURE PRICES OR MARKETS FOR VERIO
COMMON STOCK. See "Risk Factors -- Potential Fluctuation of Value of
Consideration Received." More recent market quotes may be obtained on the World
Wide Web at http://www.nasdaq.com.
Verio has never declared or paid any dividends on its Common Stock and does
not expect to pay dividends in the foreseeable future. Verio's current policy is
to retain all of its earnings to finance future growth and acquisitions.
Furthermore, the terms of the 1997 Indenture, the March 1998 Indenture, the
November 1998 Indenture and the Bank Facility place limitations on Verio's
ability to pay dividends. Future dividends, if any, will be at the discretion of
the Verio Board and will depend upon, among other things, Verio's operations,
capital requirements and surplus, general financial condition, contractual
restrictions and such other factors as the Verio Board may deem relevant. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Verio." Hiway Florida paid cash dividends on its shares in the
amount of $125,000 in 1996 and $3.0 million in 1997. However, Hiway does not
anticipate paying any cash dividends in the foreseeable future. Furthermore,
under Hiway's banking arrangements with Silicon Valley Bank, Hiway is not
permitted to declare or pay any dividends without the bank's prior written
consent.
DESCRIPTION OF CAPITAL STOCK
VERIO CAPITAL STOCK
The authorized capital stock of Verio consists of 137,500,000 shares,
consisting of 125,000,000 shares of Common Stock, par value $0.001 per share,
and 12,500,000 shares of Preferred Stock, par value $0.001 per share (the "Verio
Undesignated Preferred Stock"). As of October 31, 1998, there were 32,941,678
shares of Verio Common Stock outstanding and no shares of Verio Undesignated
Preferred Stock outstanding.
Holders of Verio Common Stock are entitled to one vote for each share held
of record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any then outstanding Verio Preferred
Stock, holders of Verio Common Stock are entitled to receive ratably such
dividends as may be declared by the Verio Board out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of Verio,
holders of Verio Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation of preferences of any
outstanding shares of Verio Preferred Stock, if any. Holders of Verio Common
Stock have no preemptive rights or rights to convert their Verio Common Stock
into any other securities. There are no redemption or sinking fund provisions
applicable to the Verio Common Stock. All outstanding shares of Verio Common
Stock are fully paid and nonassessable. The rights of holders of Verio Common
Stock are subject to, and may be adversely affected by, the rights of any series
of Preferred Stock which Verio may issue in the future.
The Verio Board has the authority to issue from time to time up to
12,500,000 shares of Undesignated Preferred Stock in one or more series and to
fix the powers, designations, preferences and relative, participating, optional
or other rights thereof, including dividend rights, conversion rights, voting
rights, redemption terms, liquidation preferences (any or all of which may be
greater than the rights of the Verio Common Stock) and the number of shares
constituting each such series, without any further vote or action by Verio's
stockholders.
Certain features of Verio's capital stock may have the effect of delaying
or preventing a change in control of Verio. See "Risk Factors -- Effect of
Anti-Takeover Provisions" and "Comparison of Rights of Verio Stockholders and
Hiway Shareholders -- Election and Number of Directors; Filling Vacancies;
Removal," "-- Stockholders Meetings and Written Consents," "-- Preferred Stock"
and "-- Business Combinations."
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VERIO WARRANTS
As of October 31, 1998, Verio had warrants outstanding to purchase an
aggregate of 1,547,032 shares of Verio Common Stock at an exercise price per
share of $0.01 (the "Verio Warrants"). The Verio Warrants were issued in
connection with the issuance of the 1997 Notes and are currently exercisable by
the holders of the Verio Warrants. Holders of the Verio Warrants also are
entitled to certain registration rights. See " -- Verio Registration Rights."
VERIO REGISTRATION RIGHTS
Pursuant to a Stockholders Agreement (the "Stockholders Agreement") between
Verio and certain of its initial investors (the "Investors"), the Investors are
entitled to certain demand and piggyback registration rights with respect to the
registration of certain Registrable Securities (as defined in the Stockholders
Agreement) under the Securities Act. Investors owning 25% or more of the
Registrable Securities may require Verio to effect registration under the
Securities Act of their Registrable Securities, subject to the right of the
Verio Board to defer such registration for a period of up to 180 days. In
addition, if Verio proposes to register securities under the Securities Act
(other than a registration statement on Form S-8 or S-4), whether or not for its
own account, then any of the Investors has a right (subject to quantity
limitations determined by underwriters if the offering involves an underwriting)
to request that Verio register such Investor's Registrable Securities. All
registration expenses incurred in connection with up to two long-form and all
short-form and piggyback registrations will be borne by Verio. Each Investor
will pay for its own Selling Expenses (as defined in the Stockholders Agreement)
on a pro rata basis. These registration rights are subject to certain conditions
and limitations, among them the right of the underwriters of an offering to
limit the number of shares included in such registration.
In connection with the Buyouts and the acquisitions of certain ISPs, Verio
entered into certain investment agreements (the "Investment Agreements") with
the recipients of shares of its Series D-1 Preferred Stock (which were
automatically converted into shares of Verio Common Stock upon the closing of
the Verio IPO) (the "Holders"). Pursuant to the Investment Agreements, some of
the Holders are entitled to certain piggyback registration rights with respect
to the registration of certain Registrable Securities (as defined in the
Investment Agreements) under the Securities Act. At any time after a Lock-Up
Termination Date (as defined in the Investment Agreements), if Verio proposes to
register any of its securities under the Securities Act (other than a
registration statement on Form S-8 or S-4), whether or not for its own account,
such Holders are entitled to notice of such registration and are entitled to
include such Holder's Registrable Securities therein. All such rights granted
under the Investment Agreements shall terminate with respect to the Registrable
Securities of a Holder upon the earliest to occur of (i) the second anniversary
of the Verio IPO, (ii) such time as all such Registrable Securities may be
immediately sold pursuant to Rule 144 within any 90-day period, or (iii) upon
any sale of such Registrable Securities pursuant to a registration statement or
Rule 144. Verio is required to bear all registration expenses (other than
underwriting discounts and commissions) incurred in connection with any such
registrations. Verio is not responsible for any expenses of any counsel retained
to act on behalf of any Holder participating in such registration. All of these
registration rights are subject to certain conditions and limitations,
including, in particular, that if the underwriters of an offering seek to limit
the number of shares included in such offering, all holders of demand and
piggyback registration rights (other than the piggyback registration rights held
by the Holders) shall include their shares in such offering in priority to the
Holders.
In connection with the issuance of the 1997 Notes, the holders of a number
of the Warrants, Warrant Shares and Registrable Securities (as defined in a
registration rights agreement (the "Common Stock Registration Rights Agreement")
entered into in connection with the issuance of the 1997 Notes) (the "Subject
Equity") equivalent to a majority of the Warrant Shares subject to the
originally issued Warrants, will be entitled to require Verio to effect one
registration under the Securities Act of the Subject Equity, subject to certain
limitations. Holders of such Registrable Securities also will have the right to
include such Registrable Securities in any registration statement under the
Securities Act filed by Verio (other than (i) a registration statement on Form
S-8 or S-4, (ii) a registration statement filed in connection with an offer of
securities solely to existing security holders or (iii) a Demand Registration
(as defined therein)), whether or
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not for its own account. These registration rights are subject to certain
conditions and limitations, among them the right of the underwriters of an
offering to limit the number of shares included in such registration.
Pursuant to the NTT Investment Agreement (as defined below), after the
first anniversary of the consummation of the Verio IPO, NTT and any transferee
of NTT's rights may require, on up to three occasions, that Verio effect a
registration statement under the Securities Act with respect to (a) at least 25%
of the NTT Shares (including any securities issued or issuable by way of a
distribution, stock split or the like, the "NTT Registrable Securities") or (b)
NTT Registrable Securities with an anticipated aggregate net offering price of
at least $25.0 million, unless Verio is eligible at such time to effect a
registration statement on Form S-3, in which case the aggregate net offering
price must be at least $15.0 million. Verio must effect any such registration as
promptly as practicable, subject, in certain circumstances, to Verio's right to
defer such demand for registration for specified periods. In addition, if Verio
proposes to register its securities under the Securities Act, or another holder
of Verio Common Stock exercises its demand registration rights, then NTT has a
right (subject to certain cutbacks determined by the underwriters in the event
of an underwritten offering) to include the NTT Registrable Securities in any
such offering. All registration expenses will be borne by Verio, subject to
certain exceptions, other than selling expenses which must be paid by NTT. In
the event that any NTT Shares are included in a registration statement, Verio
has agreed to indemnify NTT against certain losses for which NTT may become
liable under the Securities Act.
It is a condition to Hiway's obligation to close the Merger that Verio
enter the Hiway Registration Rights Agreement with certain holders of Hiway
capital stock (the "Hiway Specified Shareholders"). See "The Merger
Agreement -- Conditions." Pursuant to the Hiway Registration Rights Agreement,
the Hiway Specified Shareholders are entitled to certain piggyback registration
rights with respect to the registration of certain Registrable Securities (as
defined in the Hiway Registration Rights Agreement) under the Securities Act. If
at any time Verio proposes to register any Verio Common Stock under the
Securities Act (other than a registration statement on Form S-8 or S-4, or any
other form for a limited purpose, or any registration statement covering only
securities proposed to be issued in exchange for securities or assets of another
entity) in connection with an offering of Verio Common Stock, then each Hiway
Specified Shareholder has the right (subject to customary terms and limitations,
including the specific limitations addressed below) to request that Verio
register such Hiway Specified Shareholder's Registrable Securities. Subject to
certain limitations, Verio may delay the filing or effectiveness of, or suspend,
the applicable registration statement, and require that all Hiway Specified
Shareholders immediately cease sale of Verio Common Stock pursuant to the
registration statement, in any period during which Verio is engaged in any
activity or transaction required to be disclosed by Verio pursuant to the
Securities Act. All these piggyback registration rights terminate with respect
to any Registrable Securities upon the earlier to occur of (i) such time as all
such Registrable Securities may be immediately sold pursuant to Rule 144 and/or
Rule 145 under the Securities Act within any 90-day period, or (ii) upon any
sale of such Registrable Securities pursuant to a registration statement or Rule
144 and/or Rule 145 under the Securities Act. Verio will bear all registration
expenses (other than underwriting discounts and commissions) incurred in
connection with any such registrations, except for any expenses of any counsel
retained by any Hiway Specified Shareholder in connection with such
registration. These registration rights are subject to certain limitations and
conditions, including, in particular, that if the underwriters of an offering
seek to limit the number of shares included in such offering, then the
underwriters will apportion the shares sought to be registered as follows: (i)
first, Verio and any holders of demand registration rights shall be entitled to
register all securities that Verio or such holders propose to sell for their own
account; (ii) second, any holders of piggyback registration rights as and to the
extent that such registration rights have priority over the registration rights
granted to the Hiway Specified Shareholders; and (iii) lastly, any Hiway
Specified Shareholder, together with any holders of other piggyback registration
rights as and to the extent that such piggyback registration rights rank pari
passu with the piggyback registration rights granted to the Hiway Specified
Shareholders, shall be entitled to register, on a pro rata basis (subject to any
conflicting cut-back priority provided pursuant to the Common Stock Registration
Rights Agreement dated June 17, 1997 and based on the number of shares of Verio
Common Stock owned by each Hiway Specified Shareholder), up to that number of
Registrable Securities and other shares of Verio Common Stock that is equal to
the remaining shares of Verio Common Stock that the lead managing underwriter
will permit
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to be registered after giving effect to the apportionment set forth in clauses
(i) and (ii) above, in connection with such offering.
HIWAY CAPITAL STOCK
The authorized capital stock of Hiway consists of 60,000,000 shares of
Hiway Common Stock and 10,000,000 shares of Preferred Stock. As of November 13,
1998, there were outstanding 35,887,913 shares of Hiway Common Stock, warrants
to purchase 3,115,123 shares of Hiway Common Stock and options to purchase
1,399,205 shares of Hiway Common Stock. Of the 10,000,000 authorized shares of
Preferred Stock, 500,000 shares are designated Series A Preferred Stock,
4,000,000 shares are designated Series B Preferred Stock and the remaining
shares of Preferred Stock may be issued from time to time in one or more series,
as determined by the Hiway Board (all such Preferred Stock shall hereinafter be
designated, collectively, the "Hiway Preferred Stock"). Currently, no shares of
Hiway Preferred Stock are issued and outstanding and Hiway has no current plan
to issue any shares of Hiway Preferred Stock.
As of November 13, 1998, Hiway had outstanding options to purchase
1,399,205 shares of Hiway Common Stock at a weighted average per share exercise
price of $3.433, and outstanding warrants to purchase 3,115,123 shares of Hiway
Common Stock at a weighted average per share exercise price of $2.689. These
warrants expire in 2001 and 2002.
COMPARISON OF RIGHTS OF VERIO STOCKHOLDERS AND HIWAY SHAREHOLDERS
GENERAL
As a result of the Merger, holders of Hiway Common Stock will become
stockholders of Verio and the rights of all such former Hiway shareholders will
thereafter be governed by Verio's Restated Certificate of Incorporation (the
"Verio Certificate"), Verio's Bylaws (the "Verio Bylaws") and the DGCL. The
rights of the holders of Hiway Common Stock are currently governed by Hiway's
Amended and Restated Articles of Incorporation (the "Hiway Articles"), Hiway's
Bylaws (the "Hiway Bylaws") and the CGCL. The following summary, which does not
purport to be a complete statement of the general differences between the rights
of the stockholders of Verio and the shareholders of Hiway, sets forth certain
differences between the Verio Certificate, the Verio Bylaws and the DGCL, and
the Hiway Articles, the Hiway Bylaws and the CGCL. Accordingly, Hiway's
shareholders should carefully review the following summary, which Verio and
Hiway believe addresses all material differences in the rights of Hiway
shareholders upon consummation of the Merger, to understand how certain of their
rights as shareholders will be affected upon completion of the Merger. This
summary is qualified in its entirety by reference to the full text of each of
such documents, the DGCL and the CGCL.
In addition, upon completion of the Merger, the percentage ownership of
Verio by each former Hiway shareholder will be substantially lower than his, her
or its current percentage ownership of Hiway. See "The Merger -- Stock Ownership
Following the Merger." Accordingly, former Hiway shareholders will have a
significantly smaller voting influence over the affairs of Verio than they
currently have over the affairs of Hiway.
AMENDMENT OF CHARTER DOCUMENTS
The DGCL provides that approval of a majority of the outstanding shares
entitled to vote thereon is required to amend a certificate of incorporation.
The Verio Certificate provides that an amendment of certain provisions
(described below) must be approved by the affirmative vote, at a stockholders'
meeting, of at least 80% of the then-outstanding stock entitled to vote thereon.
Under the CGCL, a corporation's articles of incorporation may be amended by the
approval of a majority of the outstanding shares of each class. The Hiway
Articles make no provision to the contrary.
Under the DGCL, bylaws may be amended by stockholders; however, a
corporation may confer, in its certificate of incorporation, the power to amend
bylaws upon the directors. The fact that such power has been so conferred upon
the directors does not divest the stockholders of their power to amend the
bylaws. The Verio
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Certificate expressly provides that the Verio Board may make, alter or repeal
the Verio Bylaws, and the Verio Bylaws state that they may be amended by the
affirmative vote of a majority of the stock entitled to vote at any meeting of
the stockholders, unless a larger vote is required by the Verio Certificate or
Bylaws (described more fully below). Under the CGCL and the Hiway Bylaws,
amendments may be made only by approval of a majority of the outstanding shares
entitled to vote, except as described below.
ELECTION AND NUMBER OF DIRECTORS; FILLING VACANCIES; REMOVAL
Under the DGCL, cumulative voting in the election of directors is not
available unless specifically provided for in the certificate of incorporation.
The Verio Certificate and Bylaws do not provide for cumulative voting rights in
elections of directors. The Hiway Articles and Bylaws provide for cumulative
voting rights in elections for directors, subject to specified procedural
requirements.
The Verio Bylaws state that the number of directors is to be no less than
five and no more than 11, with the exact number being fixed within such limits
by an amendment to the Verio Bylaws duly adopted by the stockholders or the
Verio Board. Subject to revision within the foregoing limits, the Verio Board
set the number of directors at 11.
The Hiway Bylaws state that the number of directors is to be no less than
five and no more than nine, with the exact number being fixed within such limits
by an amendment to the Bylaws duly adopted by the shareholders or the Hiway
Board of Directors. An amendment reducing the fixed number of directors to less
than five cannot be adopted if the votes cast against such an amendment exceed
16 2/3% of the outstanding shares. Subject to revision within the foregoing
limits, the Hiway Bylaws, as currently in effect, set the number of directors at
seven.
Under the DGCL, a corporation may have a classified board of directors,
divided into as many as three classes. The Verio Certificate and Bylaws provide
for the division of Verio directors into three classes, serving staggered
three-year terms. Any amendment to the Verio Certificate or Bylaws which would
have the effect of circumventing or modifying such provisions relating to the
staggered board of directors requires the favorable vote of at least 80% of the
then-outstanding shares of stock of Verio entitled to vote.
The CGCL generally requires that directors be elected annually but does
permit a "classified" board of directors if the corporation is "listed." A
listed corporation is defined under the CGCL as one which (i) is listed on the
New York Stock Exchange or American Stock Exchange or (ii) with a class of
securities designated as a national market systems security on Nasdaq (or any
successor national market system) if the corporation has at least 800 holders of
its equity securities. If eligible for the classes, the CGCL permits
corporations to provide for a board of directors divided into as many as three
classes by adopting an amendment to their articles of incorporation or bylaws,
which amendment must be approved by the stockholders. The Hiway Bylaws do not
provide for a classified board.
The Verio Certificate and Bylaws provide that any vacancies (including
newly created directorships) may be filled by a majority of the remaining
directors, though less than a quorum. The Hiway Bylaws contain a comparable
provision, except that a vacancy created by the removal of a director by the
vote or written consent of the shareholders or by court order may be filled only
by the vote of the majority of the shares entitled to vote represented at a duly
held meeting at which a quorum is present, or by the written consent of holders
of a majority of the outstanding shares entitled to vote.
Under the DGCL, unless otherwise provided in a corporation's certificate of
incorporation, directors of a corporation with a classified board may be removed
only for cause. The Verio Certificate does not so otherwise provide.
Under the CGCL, the holders of at least 10% of the number of outstanding
shares of any class of stock may initiate a court action to remove any director
for cause. In addition, any or all of the directors of a California corporation
may be removed with or without cause by the affirmative vote of a majority of
the outstanding shares entitled to vote. However, no director may be removed
(unless the entire board is removed) when the votes cast against removal would
be sufficient to elect the director if voted cumulatively at
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an election at which the same total number of votes were cast and the entire
number of the directors authorized at the time of the director's most recent
election were then being elected.
STOCKHOLDERS MEETINGS AND WRITTEN CONSENTS
The Verio Bylaws provide that special meetings of Verio stockholders may be
called only by Verio's President or, at the direction of the Verio Board, the
Secretary of Verio; special meetings of stockholders may not be called by any
other person or persons. Any amendment, change or repeal of this provision
requires the favorable vote at a stockholders' meeting of the holders of at
least 80% of the then-outstanding shares of stock of Verio entitled to vote.
Under the CGCL and the Hiway Bylaws, special meetings of Hiway shareholders
may be called by the Chairman of the Hiway Board, the Hiway Board or the
President, or by one or more shareholders holding not less than 10% of the
shares entitled to vote at the meeting. The Hiway Bylaws provide certain
procedures regarding special meetings called by any person other than the Hiway
Board, including, among other things, the requirement that the meeting be held
not less than 35 nor more than 60 days after receipt of the request for the
special meeting.
The Verio Bylaws provide a procedure for nominating persons to be elected
to the Verio Board including, among other things, the requirement of not less
than 30 nor more than 60 days' notice prior to the scheduled meeting and the
provision of certain information about the nominee and the stockholder. The
Hiway Bylaws do not provide a procedure for nominating directors.
The Verio Certificate and Bylaws provide that any action required by the
provisions of the DGCL to be taken by the stockholders of Verio must be taken at
a stockholders' meeting and not by written consent or consents without a
meeting. Any amendment of this provision of the Verio Certificate and Bylaws
requires the favorable vote, at a stockholders' meeting, of the holders of at
least 80% of the then-outstanding shares of stock of Verio entitled to vote.
Under the CGCL (unless otherwise provided in a corporation's articles of
incorporation), any action which may be taken at an annual or special meeting of
shareholders may also be taken by the written consent of the holders of
outstanding shares having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. The Hiway Articles contain a
similar provision, except that, in the case of election of directors, such
consent shall be effective only if signed by the holders of all outstanding
shares entitled to vote for the election of directors, provided, however, that a
director may be elected at any time to fill a vacancy not filled by the
directors by the written consent of the holders of a majority of the outstanding
stock entitled to vote for the election of directors.
PREFERRED STOCK
Pursuant to the Verio Certificate, the Verio Board is authorized, subject
to the limitations prescribed by law and the Verio Certificate, to provide for
the issuance of shares of Verio Undesignated Preferred Stock in one or more
series. Similarly, the Hiway Articles provide that the Hiway Board is
authorized, subject to the limitations prescribed by the Hiway Articles and the
CGCL, to provide for the issuance of shares of Hiway Preferred Stock in one or
more series, including several pre-defined series.
Verio believes that the ability of the Verio Board to issue one or more
series of Undesignated Preferred Stock provides Verio with flexibility in
structuring possible future financings and acquisitions and in meeting other
corporate needs that might arise. The authorized shares of Verio Undesignated
Preferred Stock are available for issuance without further action by Verio
stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which Verio securities may
be listed or traded.
Although the Verio Board has no intention at the present time of doing so,
it could issue a series of Verio Undesignated Preferred Stock that could,
depending on the terms of such series, delay or prevent the completion of a
merger, tender offer or other takeover attempt. The Verio Board will make any
determination
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to issue such shares based on its judgment as to the best interests of Verio and
its stockholders. The Verio Board, in so acting, could issue Verio Undesignated
Preferred Stock having terms that discourage an acquisition attempt through
which an acquirer may be able to change the composition of the Verio Board,
including a tender offer or other transaction that some, or a majority, of
Verio's stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then current
market price of such stock.
BUSINESS COMBINATIONS
Section 203 of the DGCL provides that, subject to certain exceptions, a
corporation may not engage in any business combination with any "interested
stockholder" for a three year period following the date that such stockholder
becomes an interested stockholder, unless (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding shares held by directors who are also officers
and employee stock purchase plans in which employee participants do not have the
right to determine confidentially whether plan shares will be tendered in a
tender or exchange offer) or (iii) on or subsequent to such date, the business
combination is approved by the board of directors of the corporation and by the
affirmative vote at an annual or special meeting, and not by written consent, of
at least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder. Except as specified in Section 203 of the DGCL, an
interested stockholder is defined to include (a) any person that is the owner of
15% or more of the outstanding voting stock of the corporation or is an
affiliate or associate of the corporation and was the owner of 15% or more of
the outstanding voting stock of the corporation, at any time within three years
immediately prior to the relevant date, and (b) the affiliates and associates of
any such person.
Under certain circumstances, Section 203 of the DGCL may make it more
difficult for a person who would be an "interested stockholder" to effect
various business combinations with a corporation for a three year period. It is
anticipated that the provisions of Section 203 of the DGCL may encourage
companies interested in acquiring Verio to negotiate in advance with the Verio
Board, since the stockholder approval requirement would be avoided if a majority
of the directors then in office approve either the business combination or the
transaction which results in the stockholder becoming an interested stockholder.
There is no provision in the CGCL equivalent to Section 203 of the DGCL.
However, under the CGCL, if a party that makes a tender offer or proposes to
acquire a corporation by a reorganization or certain sales of assets is
controlled by such corporation or is or is controlled by an officer or director
of such corporation, or if a director or executive officer of such corporation
has a material financial interest in such party (each an "Interested Party
Proposal"), (i) an affirmative opinion in writing as to the fairness of the
consideration to the shareholders of such corporation must be delivered to
shareholders of such corporation, and (ii) such shareholders must be (x)
informed of certain later tender offers or written proposals for a
reorganization or sale of assets made by other persons, and (y) afforded a
reasonable opportunity to withdraw any vote, consent or proxy previously given
or shares previously tendered in connection with the Interested Party Proposal.
The CGCL also provides generally that if a corporation that is party to a
merger, or its parent, owns more than 50% but less than 90% of the voting power
of the other corporation that is party to such merger, the nonredeemable shares
of common stock of the controlled corporation may be converted only into
nonredeemable shares of the surviving corporation or a parent party unless all
of the shareholders of each class consents.
LIMITATION OF LIABILITY OF DIRECTORS
Both the DGCL and the CGCL permit a corporation to include a provision in
its charter or articles of incorporation eliminating or limiting the personal
liability of a director to the corporation or its stockholders or its
shareholders for damages for a breach of the director's fiduciary duty, subject
to certain limitations. Section 102(b)(7) of the DGCL provides that a
corporation may include in its certificate of incorporation a provision
eliminating or limiting the personal liability of a director to the corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the
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director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL, which concerns
unlawful payments of dividends, stock purchases or redemptions or (iv) for any
transaction from which the director derived an improper personal benefit. The
Verio Certificate includes such a provision, eliminating liability to the
maximum extent permitted by the DGCL.
The CGCL does not permit the elimination of monetary liability of a
director where such liability is based on: (i) intentional misconduct or knowing
and culpable violation of law; (ii) acts or omissions that a director believes
to be contrary to the best interests of the corporation or its shareholders, or
that involve the absence of good faith on the part of the director; (iii)
receipt of any improper personal benefit; (iv) acts or omissions that show
reckless disregard for the director's duty to the corporation or its
shareholders, where the director in the ordinary course of performing a
director's duties should have been aware of a risk of serious injury to the
corporation or its shareholders; (v) acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the corporation and its shareholders; (vi) interested transactions
between the corporation and a director, in which a director has a material
financial interest; or (vii) improper distributions, loans or guarantees. The
Hiway Articles provide for the elimination of directors' liability for monetary
damages to the fullest extent permissible under California law.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The DGCL permits a corporation to indemnify officers, directors, employees
and agents for actions taken in good faith and in a manner they reasonably
believe to be in, or not opposed to, the best interest of the corporation, and,
with respect to any criminal action, which they had no reasonable cause to
believe was unlawful, as determined by a majority vote of the disinterested
directors, by a committee of such directors designated by majority vote of the
disinterested directors, by independent legal counsel in a written opinion (if
there are no independent directors or such independent directors so direct) or
by the stockholders. The DGCL provides that a corporation may advance expenses
of defense (upon receipt of a written undertaking to reimburse the corporation
if indemnification is not appropriate) and must reimburse a successful defendant
for expenses, and permits a corporation to purchase and maintain liability
insurance for its directors and officers. The DGCL provides that indemnification
may not be made for any claim, issue or matter as to which a person has been
adjudged to be liable to the corporation, unless and only to the extent a court
determines that the person is entitled to indemnity for such expenses as the
court deems proper.
The CGCL permits indemnification of expenses in a derivative or third party
action, except that with respect to derivative actions (i) no indemnification
may be made when a person is adjudged liable to the corporation in the
performance of that person's duty to the corporation and its shareholders,
unless and only to the extent that a court determines that the person is fairly
and reasonably entitled to indemnity for expenses, and (ii) no indemnification
may be made in respect of amounts paid or expenses incurred in settling or
otherwise disposing of a threatened or pending action without court approval or
expenses incurred in an action settled or disposed of without court approval.
Indemnification is permitted by the CGCL only for acts taken in good faith and
reasonably believed to be in the best interests of the corporation and its
shareholders, as determined by a majority vote of a disinterested quorum of the
directors, independent legal counsel (if a quorum of independent directors is
not obtainable), a majority vote of a quorum of the shareholders (excluding
shares owned by the indemnified party), or the court handling the action and, in
the case of a criminal proceeding, indemnification is permitted if the
indemnified party had no reasonable cause to believe his or her conduct was
unlawful. The CGCL requires indemnification when the individual being
indemnified has successfully defended the action on the merits, and provides
that a corporation may advance expenses of defense upon receipt of a written
undertaking to reimburse the corporation if indemnification is not appropriate.
The Verio Certificate and Bylaws provide that Verio shall indemnify its
directors and officers, and may indemnify its employees and agents, to the
fullest extent permitted by the DGCL, as the same exists or may hereafter be
amended or interpreted, but, in the case of alleged occurrences of actions or
omissions preceding any such amendment or interpretation, only to the extent
that such amendment permits Verio to provide broader indemnification rights then
permitted prior to such amendment. The Verio Bylaws further provide
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that Verio shall advance, in the case of an officer or director, and may
advance, in the case of employees or other agents, expenses incurred in defense
of any proceedings, provided, however, that, in the case of a director or
officer, such expenses shall be advanced only upon delivery to Verio of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that the director or officer is not entitled
to be indemnified by Verio.
The indemnification and advancement rights conferred by the Verio Bylaws
are not exclusive of any other right to which persons seeking indemnification
may be entitled under any statute, provision of the Verio Certificate or Bylaws,
agreement, or vote of the stockholders or disinterested directors. In addition,
the Verio Bylaws state specifically that the indemnification right is a contract
right. Finally, the Verio Bylaws authorize Verio, upon approval of the Verio
Board, to purchase insurance on behalf of any person required or permitted to be
indemnified pursuant to such Bylaws.
The Hiway Articles and Bylaws provide that Hiway will indemnify any officer
or director to the fullest extent permitted by the provisions of the CGCL. The
Hiway Bylaws additionally provide that expenses incurred by any officer or
director in defending any proceeding may be advanced to the maximum extent
permitted by law. Finally, the Hiway Bylaws provide that the Hiway Board may in
its discretion provide by resolution for such indemnification of, or advance of
expenses to, other agents of Hiway under the provisions of the CGCL. The
indemnification and advancement rights conferred by the Hiway Articles and
Bylaws are not exclusive of any other right to which persons seeking
indemnification may be entitled under any bylaw, agreement, or vote of the
stockholders or disinterested directors.
DISSENTERS' RIGHTS
Under the DGCL, appraisal rights are generally available for the shares of
any class or series of stock of a corporation in a merger or consolidation,
provided, however, that no appraisal rights are available for the shares of any
class or series of stock which, at the record date for the meeting held to
approve such transaction, were either (i) listed on a national securities
exchange or Nasdaq, or (ii) held of record by more than 2,000 holders, and
further provided that no appraisal rights are available to stockholders of the
surviving corporation if the merger did not require their approval. Appraisal
rights are, however, available for such class or series if the holders thereof
receive in the merger or consolidation anything except: (i) shares of stock of
the corporation surviving or resulting from such merger or consolidation or
depository receipts in respect thereof; (ii) shares of stock of any other
corporation or depository receipts in respect thereof which at the effective
date of the merger or consolidation is either listed on a national securities
exchange or Nasdaq or held of record by more than 2,000 stockholders; (iii) cash
in lieu of fractional shares or fractional depository receipts; or (iv) any
combination of the foregoing.
Under the CGCL, in connection with the merger of a corporation for which
the approval of outstanding shares is required, dissenting shareholders of such
corporation who follow prescribed statutory procedures are entitled to receive
payment of the fair market value of their shares. No such rights are available,
however, if the shares are listed on a national securities exchange certified by
the California Commissioner of Corporations or appear on the Federal Reserve
Board list of over-the-counter margin stocks unless (i) such shares are subject
to certain restrictions on transfer, or (ii) the holders of at least five
percent of such shares elect dissenter's rights. In connection with the Merger,
holders of Hiway Common Stock may, by complying with required procedures, be
entitled to dissenters' rights under the CGCL. See "Dissenters' Rights of Hiway
Shareholders."
DIVIDENDS
Generally, under the CGCL a California corporation may pay dividends out of
retained earnings or if, after giving effect thereto, (i) the assets (excluding
goodwill and certain other assets) of the corporation are at least equal to 1.25
times its liabilities (excluding certain deferred credits), and (ii) the current
assets of such corporation are at least equal to (x) its current liabilities or
(y) if the average of the earnings of such corporation before taxes and interest
expense for the two preceding fiscal years was less than the average of the
interest expense of such corporation for such fiscal years, 1.25 times its
current liabilities. In addition, the
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ability of a California corporation to pay dividends is restricted by certain
limitations for the benefit of certain preference shares.
The Hiway Articles provide that dividends shall be paid only when, as and
if declared by the Hiway Board out of any assets legally available therefor,
provided, however, that holders of any Hiway Preferred Stock shall be given
certain preferences, as set forth in the Hiway Articles, over holders of Hiway
Common Stock in the payment of any dividends.
Under the DGCL, a corporation may pay dividends out of surplus or out of
its net profits for the fiscal year in which the dividend is declared or its net
profits for the preceding fiscal year, subject to certain limitations for the
benefit of certain preference shares. The Verio Bylaws provide that the Verio
Board may declare dividends pursuant to law.
STOCKHOLDER VOTING
With certain exceptions, the CGCL requires that a merger, sale of assets or
similar transaction be approved by a majority vote of each class of shares
outstanding. The DGCL does not require such class voting.
INSPECTION OF STOCKHOLDER LIST
The CGCL provides for an absolute right of inspection of the shareholder
list for persons holding five percent or more of a corporation's voting shares
or persons holding one percent or more of such shares who have filed a Schedule
14A with the Commission relating to the election of directors. Both the CGCL and
the DGCL allow any stockholder or shareholder to inspect the stockholder list
for a purpose reasonably related to such person's interest as a stockholder or
shareholder. However, the DGCL contains no provision comparable to the absolute
right of inspection provided by the CGCL to certain shareholders.
LOANS TO OFFICERS AND EMPLOYEES
Under the DGCL, a corporation may make loans to or guarantee the
obligations of its officers or other employees and those of its subsidiaries
when such action, in the judgment of the directors, may reasonably be expected
to benefit the corporation. Under the CGCL, such loans or guaranties, including
pursuant to employee benefit plans, may be made only with shareholder approval,
provided, however, that, if the company has 100 or more shareholders and a bylaw
permitting such loans or guarantees to be approved by the board of directors,
the board of directors alone may approve such loans to or guarantees on behalf
of an officer (whether or not such officer is a director) or adopt an employee
benefit plan authorizing such loans or guaranties by a vote sufficient, without
counting the vote of any interested director or directors, if the board of
directors determines that any such loans, guarantees or plans may reasonably be
expected to benefit the corporation.
INTERESTED DIRECTOR TRANSACTIONS
Under the laws of both California and Delaware, contracts or transactions
between a corporation and one or more of its directors, or between a corporation
and any other entity in which one or more of its directors are directors or have
a financial interest, are not void or voidable because of such interest or
because such director is present at a meeting of the board which authorizes or
approves the contract or transaction, provided that certain conditions, such as
obtaining the required approval and fulfilling the requirements of good faith
and full disclosure, are met. With certain exceptions, the conditions are
similar under the CGCL and the DGCL. Under the CGCL and the DGCL, either (i) the
stockholders or shareholders or the board of directors must approve any such
contract or transaction in good faith after full disclosure of the material
facts (and, in the case of board approval other than for a common directorship,
the CGCL requires that the contract or transaction must also be "just and
reasonable" to the corporation), or (ii) the contract or transaction must have
been "fair" (in Delaware) or, in the case of a common directorship (in
California), "just and reasonable" as to the corporation at the time it was
approved. The CGCL explicitly places the burden of proof of the just and
reasonable nature of the contract or transaction on the interested director.
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<PAGE> 83
Under the DGCL, if board approval is sought, the contract or transaction
must be approved by a majority of the disinterested directors (even though less
than a majority of a quorum). Under the CGCL, if shareholder approval is sought,
the interested director is not entitled to vote his or her shares at a
shareholder meeting with respect to any action regarding such contract or
transaction. If board approval is sought, the contract or transaction must be
approved by a majority vote of a quorum of the directors, without counting the
vote of any interested directors (except that interested directors may be
counted for purposes of establishing a quorum).
STOCKHOLDER DERIVATIVE SUIT
Under the DGCL, a person may only bring a derivative action on behalf of
the corporation if the person was a stockholder of the corporation at the time
of the transaction in question or his or her stock thereafter devolved upon him
or her by operation of law. The CGCL provides that a shareholder bringing a
derivative action on behalf of a corporation need not have been a shareholder at
the time of the transaction in question, provided that certain criteria are met.
The CGCL also provides that the corporation or the defendant in a derivative
suit may, under certain circumstances, make a motion to the court for an order
requiring the plaintiff shareholder to furnish a security bond. The DGCL does
not have a similar bonding requirement.
DISSOLUTION
Under the CGCL, shareholders holding 50% or more of the total voting power
may authorize a corporation's dissolution and this right may not be modified by
the articles of incorporation. Under the DGCL, if the dissolution is initiated
by the board of directors, it may be approved by the holders of a majority of
the corporation's stock. If the board of directors does not approve the proposal
to dissolve, it must be consented to in writing by all stockholders entitled to
vote thereon.
69
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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS OF VERIO
During the period from August 1, 1996 through September 30, 1998, Verio
completed numerous business combinations, whereby Verio acquired newly
authorized redeemable, convertible preferred stock, shares of common stock, or
certain net assets of entities operating in the Internet industry (ISPs), and
completed the Buyout of the remaining equity interests of certain ISPs in which
it initially acquired a less-than-100% equity position (collectively, the
"September 30, 1998 Completed Acquisitions"). Business combinations, which are
acquisitions of a 100% ownership interest in the target business or of a
majority ownership interest (upon conversion of the preferred shares to common
stock) on a fully diluted basis, are accounted for using the purchase method of
accounting. Acquisitions of minority interests represented by preferred stock
are accounted for using the equity method of accounting, as described in Note 1
to the Consolidated Financial Statements. The September 30, 1998 Completed
Acquisitions are described in Note A to the accompanying pro forma condensed
combined financial statements. Verio also has completed the acquisitions of
PacketWorks, Inc., TerraNet, Inc. and Smart.Connect (a division of
FiberServices, Inc.) which were not considered to be significant and,
accordingly, have not been included in the accompanying pro forma financial
statements.
In addition, subsequent to September 30, 1998, Verio completed the
acquisition of an approximate 80% interest in the outstanding common stock of
WWW, and entered into the Merger Agreement relating to the potential acquisition
of Hiway. These acquisitions have been, or will be, accounted for using the
purchase method of accounting. The WWW Acquisition and the Merger are also
described in Note A to the pro forma condensed combined financial statements.
While Verio now seeks to acquire 100% of new ISPs, Verio's early
acquisition strategy was to rapidly build mass and scale by acquiring less than
100% of its ISPs. In each case where Verio acquired less than 100% of an ISP
initially, it obtained the right to Buyout the remaining equity in the future at
a price based on either agreed upon revenue multiples or the fair market value
of the ISP. As part of its integration strategy, Verio has effected the Buyouts
of all but one ISP in which it did not initially acquire a 100% interest,
through the use of cash on hand and the issuance of equity. During the six
months ended June 30, 1998, Verio consummated the Buyout of the following
fifteen ISPs; On-Ramp Technologies, Inc.; NorthWestNet, Inc.; National Knowledge
Networks, Inc.; Access One, Inc.; Signet Partners, Inc.; Surf Network, Inc.;
Pacific Rim Network, Inc.; Internet Engineering Associates, Inc.; AimNet
Corporation; West Coast Online, Inc.; ServiceTech, Inc., Clark Internet
Services, Inc., Compute Intensive Inc., Structured Network Systems, Inc. and
Internet Online, Inc. With respect to the Buyout that has not yet been
completed, Verio has contractual rights to effect this Buyout and expects to
complete the Buyout during 1998. However, there can be no assurance that Verio
will be able to complete this Buyout at the time, or in accordance with the
terms and conditions, that it currently contemplates. This acquisition will also
be accounted for using the purchase method of accounting.
The unaudited pro forma condensed combined balance sheet assumes that the
WWW Acquisition and the Merger occurred on September 30, 1998 and includes the
September 30, 1998 historical consolidated balance sheets of Verio, WWW and
Hiway adjusted for the pro forma effects of these acquisitions. The assets and
liabilities of the September 30, 1998 Completed Acquisitions, adjusted for the
application of the purchase method of accounting, are included in the September
30, 1998 historical Verio consolidated balance sheet. The pro forma balance
sheet information also includes the effects of the November 1998 Notes. The
unaudited pro forma condensed combined statements of operations for the year
ended December 31, 1997 and the nine months ended September 30, 1998 assume that
the September 30, 1998 Completed Acquisitions, the WWW Acquisition and the
Merger had occurred on January 1, 1997 and include the historical consolidated
statements of operations of Verio and the acquired businesses for the year ended
December 31, 1997 and the nine months ended September 30, 1998, adjusted for the
pro forma effects of the WWW Acquisition and the Merger.
The unaudited pro forma condensed combined statements of operations are not
necessarily indicative of the results of operations that would actually have
occurred if the transactions had been consummated as of January 1, 1997 and are
not intended to indicate the expected results for any future period. These
statements
70
<PAGE> 85
should be read in conjunction with the historical consolidated financial
statements and related notes thereto of Verio, and certain acquired businesses,
included herein.
Verio is in the process of completing valuations of the assets acquired and
liabilities assumed in connection with certain of Verio's more significant
acquisitions. These valuations will be utilized in determining the final
purchase accounting adjustments for these acquisitions. Accordingly, the
purchase accounting adjustments reflected in the accompanying pro forma balance
sheet will be revised and such revisions may be significant. Specifically, Verio
expects to record charges to operations for in-process research and development
relating to its acquisition of TABNet, and these charges, which will be recorded
as an immediate charge to operations in the period of the acquisitions. The
projects under development at TABNet at the time of acquisition included credit
card processing software, web site development tools, the Star Page product, as
well as various application and database management tools which make the TABNet
domain name registration product faster to use, optimize search routines for
customers seeking a domain name, and enable TABNet to more effectively master
and capture the "on-hold" database of domain names, so that they can be sold to
new customers as soon as they are released. Management of Verio has identified
the foregoing technology projects as potential candidates for allocation of a
portion of the purchase price it paid in the TABNet acquisition to in-process
research and development. However, management is not yet able to determine or
estimate the remaining efforts that may be necessary to complete the development
of the acquired technology, nor determine whether the development of such
technology will be completed. These determinations and estimates depend, in
part, on assessments of certain technologies being developed or already
developed at Hiway, the acquisition of which has not yet closed. Nonetheless,
management of Verio does not anticipate that the amount of the purchase price of
TABNet which may be allocated to in-process research and development would be
significant.
Verio is aware that the Commission is reviewing the assumptions and
methodologies heretofore commonly used by companies in calculating such charges.
Verio intends to follow recent guidance published by the Commission in its
valuation of the assets acquired and liabilities assumed and, in particular, in
the valuation of in-process research and development.
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<PAGE> 86
VERIO INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1998 (UNAUDITED)
AMOUNTS IN THOUSANDS
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL PRO FORMA COMBINED -- PRO FORMA PRO FORMA
------------------ ADJUSTMENTS VERIO AND HISTORICAL ADJUSTMENTS COMBINED
VERIO WWW (NOTE C) WWW HIWAY (NOTE C) VERIO
--------- ------ ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.... $ 245,912 $ 884 $ (8,440)(1) $627,356 $ 3,569 $(180,000)(2) $ 450,925
389,000(9)
Restricted cash and
securities................. 14,159 -- -- 14,159 -- -- 14,159
Receivables, net............. 13,687 403 -- 14,090 3,669 -- 17,759
Prepaid expenses and other... 6,590 392 -- 6,982 1,239 -- 8,221
--------- ------ -------- -------- ------- --------- ----------
Total current assets... 280,348 1,679 380,560 662,587 8,477 (180,000) 491,064
Investments in affiliates...... 8,298 -- -- 8,298 464 -- 8,762
Restricted cash and
securities................... 7,238 -- -- 7,238 -- -- 7,238
Equipment and leasehold
improvements, net............ 43,213 4 -- 43,217 15,351 -- 58,568
Other assets:
Goodwill, net................ 210,047 -- 6,953(1) 217,000 -- 242,664(2) 459,664
Other, net................... 13,185 262 11,000(9) 24,447 2,385 -- 26,832
--------- ------ -------- -------- ------- --------- ----------
Total assets........... $ 562,329 $1,945 $398,513 $962,787 $26,677 $ 62,664 $1,052,128
========= ====== ======== ======== ======= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued
expenses................... $ 37,774 $ 263 $ -- $ 38,037 $ 3,980 $ -- $ 42,017
Lines of credit, notes
payable and current portion
of long-term debt and
capital lease
obligations................ 4,726 195 -- 4,921 382 -- 5,303
Deferred revenue............. 10,770 -- -- 10,770 4,205 -- 14,975
--------- ------ -------- -------- ------- --------- ----------
Total current
liabilities.......... 53,270 458 -- 53,728 8,567 -- 62,295
Long-term debt and capital
lease obligations, less
current portion.............. 274,452 -- 400,000(9) 674,452 6,054 -- 680,506
--------- ------ -------- -------- ------- --------- ----------
Total liabilities...... 327,722 458 400,000 728,180 14,621 -- 742,801
Stockholders' deficit:
Common stock and additional
paid-in capital............ 361,712 604 (604)(3) 361,712 8,206 (8,206)(3) 436,432
74,720(2)
Warrants..................... 12,675 -- -- 12,675 -- -- 12,675
Retained earnings
(deficit).................. (139,780) 883 (883)(3) (139,780) 3,850 (3,850)(3) (139,780)
--------- ------ -------- -------- ------- --------- ----------
234,607 1,487 (1,487) 234,607 12,056 62,664 309,327
--------- ------ -------- -------- ------- --------- ----------
Total liabilities and
stockholders' equity
(deficit)............ $ 562,329 $1,945 $398,513 $962,787 $26,677 $ 62,664 $1,052,128
========= ====== ======== ======== ======= ========= ==========
</TABLE>
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VERIO INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
PRO FORMA
COMBINED --
VERIO AND
SEPTEMBER 30, PRO FORMA
1998 PRO FORMA COMBINED -- PRO FORMA PRO FORMA
COMPLETED HISTORICAL ADJUSTMENTS VERIO AND HISTORICAL ADJUSTMENTS COMBINED
ACQUISITIONS WWW (NOTE C) WWW HIWAY (NOTE C) VERIO
------------- ---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity... $ 59,267 $ -- $ -- $ 59,267 $ 5,203 $ -- $ 64,470
Enhanced services and
other................. 37,235 4,625 -- 41,860 23,870 -- 65,730
----------- ------- -------- ----------- ------- ---------- -----------
Total revenue..... 96,502 4,625 -- 101,127 29,073 -- 130,200
----------- ------- -------- ----------- ------- ---------- -----------
Costs and expenses:
Internet services
operating costs....... 40,683 1,423 -- 42,106 7,088 -- 49,194
Selling, general and
administrative and
other................. 90,871 2,064 -- 92,935 18,365 -- 111,300
Stock option related
compensation and
severance costs....... 6,680 -- -- 6,680 -- -- 6,680
Depreciation and
amortization.......... 31,930 64 521(6) 32,515 1,023 18,204(6) 51,742
----------- ------- -------- ----------- ------- ---------- -----------
Total costs and
expenses........ 170,164 3,551 521 174,236 26,476 18,204 218,916
----------- ------- -------- ----------- ------- ---------- -----------
Earnings (loss) from
operations.......... (73,662) 1,074 (521) (73,109) 2,597 (18,204) (88,716)
Other income (expense):
Interest income......... 9,397 23 -- 9,420 -- -- 9,420
Interest expense........ (22,954) (2) (34,575)(9) (57,531) (25) -- (57,556)
Earnings (loss) before
minority interests,
income taxes, and
extraordinary
item................ (87,219) 1,095 (35,096) (121,220) 2,572 (18,204) (136,852)
Minority interests........ 184 -- -- 184 -- -- 184
Income taxes.............. -- (222) 222(8) -- (99) 99(8) --
----------- ------- -------- ----------- ------- ---------- -----------
Earnings (loss) before
extraordinary item...... $ (87,035) $ 873 $(34,874) $ (121,036) $ 2,473 $ (18,105) $ (136,668)
=========== ======= ======== =========== ======= ========== ===========
Weighted average shares
outstanding -- basic and
diluted................. 17,462,447 17,462,447 4,920,000(10) 22,382,447
=========== =========== ========== ===========
Loss per common share
before extraordinary
item -- basic and
diluted................. $ (4.98) $ (6.93) $ (6.11)
=========== =========== ===========
</TABLE>
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VERIO INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------------------- COMBINED --
SEPTEMBER 30, 1998 VERIO AND
COMPLETED PRO FORMA SEPTEMBER 30, 1998
ACQUISITIONS ADJUSTMENTS COMPLETED
VERIO (NOTE B) (NOTE C) ACQUISITIONS
----------- ------------------ ----------- ------------------
<S> <C> <C> <C> <C>
Revenue:
Internet connectivity.......... $ 53,196 $ 6,071 $ -- $ 59,267
Enhanced services and other.... 30,347 7,030 (142)(4) 37,235
----------- ------- ---------- -----------
Total revenue.......... 83,543 13,101 (142) 96,502
----------- ------- ---------- -----------
Costs and expenses:
Internet services operating
costs....................... 37,928 2,837 (82)(4) 40,683
Selling, general and
administrative and other.... 80,941 9,990 (60)(4) 90,871
Stock option related
compensation and severance
costs....................... 3,040 3,640 -- 6,680
Depreciation and
amortization................ 26,818 456 4,656(5) 31,930
----------- ------- ---------- -----------
Total costs and
expenses............. 148,727 16,923 4,514 170,164
----------- ------- ---------- -----------
Loss from operations........ (65,184) (3,822) (4,656) (73,662)
Other income (expense):
Interest income................ 9,381 16 -- 9,397
Interest expense............... (22,860) (94) -- (22,954)
----------- ------- ---------- -----------
Loss before minority
interests, income taxes,
and extraordinary item.... (78,663) (3,900) (4,656) (87,219)
Minority interests............... 545 -- (361)(7) 184
Income taxes..................... -- (100) 100(8) --
----------- ------- ---------- -----------
Loss before extraordinary
item........................ (78,118) (4,000) (4,917) (87,035)
Accretion of preferred stock to
liquidation value.............. (87) -- 87(3) --
----------- ------- ---------- -----------
Loss attributable to common
stockholders before
extraordinary item............. $ (78,205) $(4,000) $ (4,830) $ (87,035)
=========== ======= ========== ===========
Weighted average shares
outstanding -- basic and
diluted........................ 17,462,447 17,462,447
=========== ===========
Loss per common share before
extraordinary item -- basic and
diluted........................ $ (4.49) $ (4.98)
=========== ===========
</TABLE>
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VERIO INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 (UNAUDITED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
PRO FORMA
COMBINED --
VERIO AND PRO FORMA
SEPTEMBER 30, 1998 PRO FORMA COMBINED -- PRO FORMA PRO FORMA
COMPLETED HISTORICAL ADJUSTMENTS VERIO AND HISTORICAL ADJUSTMENTS COMBINED
ACQUISITIONS WWW (NOTE C) WWW HIWAY (NOTE C) VERIO
------------------ ---------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Internet
connectivity....... $ 64,938 $ -- $ -- $ 64,938 $ 7,231 $ -- $ 72,169
Enhanced services and
other.............. 30,448 3,712 -- 34,160 18,954 -- 53,114
---------- ------ -------- ---------- ------- ---------- ----------
Total Revenue.. 95,386 3,712 -- 99,098 26,185 -- 125,283
---------- ------ -------- ---------- ------- ---------- ----------
Costs and expenses:
Internet services
operating costs.... 39,946 1,234 -- 41,180 5,842 -- 47,022
Selling, general and
administrative and
other.............. 87,291 1,406 -- 88,697 14,101 -- 102,798
Depreciation and
amortization....... 30,997 -- 695(6) 31,692 1,371 24,271(6) 57,334
---------- ------ -------- ---------- ------- ---------- ----------
Total costs and
expenses..... 158,234 2,640 695 161,569 21,314 24,271 207,154
---------- ------ -------- ---------- ------- ---------- ----------
Earnings (loss)
from
operations....... (62,848) 1,072 (695) (62,471) 4,871 (24,271) (81,871)
Other income (expense):
Interest income...... 6,156 -- -- 6,156 67 -- 6,223
Interest expense..... (12,433) (10) 46,100(9) (58,543) (142) -- (58,685)
---------- ------ -------- ---------- ------- ---------- ----------
Earnings (loss)
before income
taxes.......... (69,125) 1,062 (46,795) (114,858) 4,796 (24,271) (134,333)
Income taxes........... -- (319) 319(8) -- (361) 361(8) --
---------- ------ -------- ---------- ------- ---------- ----------
Net earnings (loss).... $ (69,125) $ 743 $(46,476) $ (114,858) $ 4,435 $ (23,910) $ (134,333)
========== ====== ======== ========== ======= ========== ==========
Weighted average shares
outstanding -- basic
and diluted.......... 1,144,685 1,144,685 4,920,000(10) 6,064,685
========== ========== ========== ==========
Loss per common share
-- basic and
diluted.............. $ (60.37) $ (100.34) $ (22.15)
========== ========== ==========
</TABLE>
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VERIO INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 (UNAUDITED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
HISTORICAL
-------------------------- PRO FORMA
SEPTEMBER 30, COMBINED --
1998 VERIO AND
COMPLETED PRO FORMA SEPTEMBER 30, 1998
ACQUISITIONS ADJUSTMENTS COMPLETED
VERIO (NOTE B) (NOTE C) ACQUISITIONS
---------- ------------- ----------- ------------------
<S> <C> <C> <C> <C>
Revenue:
Internet connectivity................. $ 23,476 $41,560 $ (98)(4) $ 64,938
Enhanced services and other........... 12,216 18,232 -- 30,448
---------- ------- ---------- ----------
Total revenue................. 35,692 59,792 (98) 95,386
---------- ------- ---------- ----------
Costs and expenses:
Internet services operating costs..... 15,974 24,048 (76)(4) 39,946
Selling, general and administrative
and other.......................... 49,383 37,908 -- 87,291
Depreciation and amortization......... 10,624 3,436 16,937(5) 30,997
---------- ------- ---------- ----------
Total costs and expenses...... 75,981 65,392 16,861 158,234
---------- ------- ---------- ----------
Loss from operations............... (40,289) (5,600) (16,959) (62,848)
Other income (expense):
Interest income....................... 6,080 76 -- 6,156
Interest expense...................... (11,826) (607) -- (12,433)
Equity in losses of affiliates........ (1,958) -- 1,958(7) --
---------- ------- ---------- ----------
Loss before minority interests and
income taxes..................... (47,993) (6,131) (15,001) (69,125)
Minority interests...................... 1,924 -- (1,924)(7) --
Income taxes............................ -- (1,321) 1,321(8) --
---------- ------- ---------- ----------
Net loss...................... (46,069) (7,452) (15,604) (69,125)
Accretion of preferred stock to
liquidation value..................... (260) -- 260(3) --
---------- ------- ---------- ----------
Net loss attributable to common
stockholders.......................... $ (46,329) $(7,452) $ (15,344) $ (69,125)
========== ======= ========== ==========
Weighted average shares
outstanding -- basic and diluted...... 1,144,685 1,144,685
========== ==========
Loss per common share -- basic and
diluted............................... $ (40.47) $ (60.37)
========== ==========
</TABLE>
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VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(A) BASIS OF PRESENTATION
During the period from inception (March 1, 1996) to September 30, 1998,
Verio completed numerous business combinations, and completed the Buyout of the
remaining equity interests of certain ISPs in which it initially acquired a
less-than-100% equity position. In addition, subsequent to September 30, 1998,
Verio completed the acquisition of an 80% interest in WWW. On July 28, 1998,
Verio entered into a definitive agreement to acquire Hiway. All of the
acquisitions have been or will be accounted for using the purchase method of
accounting. Summary information regarding substantially all of the September 30,
1998 Completed Acquisitions, the WWW Acquisition and the Merger is as follows:
<TABLE>
<CAPTION>
CONSIDERATION (IN THOUSANDS)
-------------------------------
PREFERRED
SEPTEMBER 30, 1998 ACQUISITION OWNERSHIP CASH AND OR COMMON
COMPLETED ACQUISITIONS DATE(S) PERCENTAGE NOTES STOCK(B) TOTAL(C)
---------------------- ------------------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
On-Ramp Technologies, Inc....................... August 1, 1996 51%
October 4, 1996 4%
February 26, 1998 45% $13,639 $ 6,985 $ 20,624
National Knowledge Networks, Inc................ August 2, 1996 26%
November 7, 1997 15%
February 27, 1998 59% 2,991 -- 2,991
RAINet, Inc..................................... August 2, 1996 100% 2,000 -- 2,000
Access One, Inc................................. December 12, 1996 20%
February 27, 1998 80% 6,107 -- 6,107
CCnet, Inc...................................... December 19, 1996 100% 1,800 -- 1,800
Signet Partners, Inc............................ December 19, 1996 25%
November 20, 1997 16%
February 26, 1998 59% 1,459 1,283 2,742
Global Enterprise Services -- Network
Division...................................... January 17, 1997 100% 2,350 -- 2,350
Surf Network, Inc............................... January 31, 1997 25%
December 22, 1997 75% 603 -- 603
Pacific Rim Network, Inc........................ February 4, 1997 27%
February 16, 1998 73% 880 -- 880
Pioneer Global Telecommunications, Inc.......... February 6, 1997 100% 1,011 -- 1,011
Compute Intensive Inc........................... February 18, 1997 55%
April 24, 1998 45% 7,505 11,655 19,160
NorthWestNet, Inc............................... February 28, 1997 85%
March 6, 1998 15% 12,330 1,937 14,267
Internet Engineering Associates, Inc............ March 4, 1997 20%
February 25, 1998 80% 207 1,607 1,814
Internet Online, Inc............................ March 5, 1997 35%
June 30, 1998 65% 5,250 -- 5,250
Structured Network Systems, Inc................. March 6, 1997 20%
April 16, 1998 80% 1,400 -- 1,400
RustNet, Inc.................................... March 14, 1997 100% 1,703 -- 1,703
AimNet Corporation.............................. May 19, 1997 55%
September 22, 1997 45% 7,613 -- 7,613
West Coast Online, Inc.......................... July 26, 1996 20%
April 29, 1997 12%
September 30, 1997 68% 2,000 -- 2,000
ServiceTech, Inc. .............................. August 1, 1997 40%
December 31, 1997 60% 2,055 -- 2,055
Branch Information Services, Inc................ September 17, 1997 100% 1,687 -- 1,687
Communique, Inc................................. October 2, 1997 100% 3,000 -- 3,000
Clark Internet Services, Inc.................... October 17, 1997 51%
February 25, 1998 49% 3,952 3,431 7,383
ATMnet.......................................... November 5, 1997 100% 5,522 -- 5,522
Global Internet Network Services, Inc........... December 1, 1997 100% 6,000 -- 6,000
Sesquinet....................................... December 24, 1997 100%(a) 732 -- 732
PREPnet......................................... December 24, 1997 100% 1,405 -- 1,405
</TABLE>
77
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VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
CONSIDERATION (IN THOUSANDS)
-------------------------------
PREFERRED
SEPTEMBER 30, 1998 ACQUISITION OWNERSHIP CASH AND OR COMMON
COMPLETED ACQUISITIONS DATE(S) PERCENTAGE NOTES STOCK(B) TOTAL(C)
---------------------- ------------------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Monumental Network Systems, Inc................. December 31, 1997 100% $ 3,962 -- $ 3,962
Internet Servers, Inc........................... December 31, 1997 100% 9,800 $ 10,200 20,000
NSNet, Inc...................................... February 27, 1998 100% 1,896 1,765 3,661
LI Net, Inc..................................... April 9, 1998 100% 6,500 -- 6,500
STARnet, L.L.C.................................. April 14, 1998 100% 3,500 -- 3,500
Computing Engineers Inc......................... April 15, 1998 100% 9,000 -- 9,000
Florida Internet Corporation.................... April 15, 1998 100% 2,200 -- 2,200
Matrix Online Media, Inc........................ May 5, 1998 100% 4,000 -- 4,000
NTX, Inc........................................ July 7, 1998 100% 45,500 -- $ 45,500
Magic Net, Inc.................................. July 23, 1998 100% 3,300 -- 3,300
--------
Total................................... $223,722
========
WWW............................................. October 21, 1998 80% 8,440 -- $ 8,440
========
Hiway........................................... -- 100% 180,000 74,720 $254,720
========
</TABLE>
The total consideration, exclusive of acquisition costs of approximately
$9.4 million, for the above acquisitions has been allocated as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
COMPLETED
ACQUISITIONS WWW HIWAY
------------------ ------ --------
<S> <C> <C> <C>
Equipment................................................ $ 17,966 $ 4 $ 15,351
Goodwill................................................. 219,470 6,953 242,664
Net current assets (liabilities)......................... (13,714) 1,483 (3,295)
-------- ------ --------
Total.......................................... $223,722 $8,440 $254,720
======== ====== ========
</TABLE>
- ---------------
(a) Assets of this entity were purchased by On-Ramp Technologies, Inc.
(b) Represents shares of Series D-1 Preferred Stock valued at $15 per share
prior to February 28, 1998 or $22 per share after February 28, 1998. For
NorthWestNet, Inc., the amount represents options to purchase Preferred
Stock at $15 per share. Such per share values for preferred or common stock
or options, were determined by the Verio Board based on comparable
valuations of private and public companies, methodologies based on
multiples of revenue and discounted cash flows and arms-length negotiated
values.
(c) Total consideration does not include acquisition costs.
The accompanying unaudited pro forma condensed combined balance sheet as of
September 30, 1998 includes historical balances of Verio and the businesses
acquired including the acquisitions of the remaining interests in certain
consolidated subsidiaries and minority owned affiliates, adjusted for the pro
forma effects of the WWW Acquisition and the Merger. All acquisitions are
assumed to have been completed for cash, debt or the issuance of preferred or
common stock of Verio. The unaudited pro forma condensed combined statements of
operations for the year ended December 31, 1997 and the nine months ended
September 30, 1998 include the historical results of operations of Verio and the
businesses acquired, including the acquisitions of the remaining interests in
certain consolidated subsidiaries and minority owned affiliates, the WWW
Acquisition and the Merger, adjusted for the pro forma effects of the
acquisitions.
78
<PAGE> 93
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(B) HISTORICAL CONDENSED STATEMENTS OF OPERATIONS INFORMATION -- SEPTEMBER 30,
1998 COMPLETED ACQUISITIONS
Historical condensed statement of operations information for the September
30, 1998 Completed Acquisitions for the year ended December 31, 1997 including
the periods from January 1, 1997 to the dates of consolidation is as follows:
<TABLE>
<CAPTION>
WEST
PIONEER GLOBAL COAST
YEAR ENDED AIMNET RUSTNET, COMPUTE NORTHWEST TELECOMMUNI- ONLINE,
DECEMBER 31, 1997 CORPORATION INC. GES INTENSIVE NET CATIONS, INC. INC.
----------------- ----------- -------- ----- --------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity............ $1,068 $ 310 $ 112 $ 468 $ 709 $ 62 $1,192
Enhanced services and other...... 101 69 -- 326 351 7 457
------ ----- ----- ----- ------ ---- ------
Total revenue.............. 1,169 379 112 794 1,060 69 1,649
Operating costs and expenses:
Internet services operating
costs.......................... 444 147 94 301 113 33 735
Selling, general and
administrative and other....... 978 319 133 673 1,661 37 981
Depreciation and amortization.... 248 17 -- 16 136 4 77
------ ----- ----- ----- ------ ---- ------
Total costs and expenses... 1,670 483 227 990 1,910 74 1,793
------ ----- ----- ----- ------ ---- ------
Earnings (loss) from
operations..................... (501) (104) (115) (196) (850) (5) (144)
Interest income.................... 8 -- --
Interest expense................... -- (8) -- (8) -- (2) --
------ ----- ----- ----- ------ ---- ------
Earnings (loss) before income
taxes........................ (493) (112) (115) (204) (850) (7) (144)
Income taxes....................... -- -- -- -- 118 (5) --
------ ----- ----- ----- ------ ---- ------
Net earnings (loss)........ $ (493) $(112) $(115) $(204) $ (732) $(12) $ (144)
====== ===== ===== ===== ====== ==== ======
<CAPTION>
BRANCH
YEAR ENDED INFORMATION
DECEMBER 31, 1997 SERVICES, INC.
----------------- --------------
<S> <C>
Revenue:
Internet connectivity............ $ 588
Enhanced services and other...... 84
-----
Total revenue.............. 672
Operating costs and expenses:
Internet services operating
costs.......................... 84
Selling, general and
administrative and other....... 298
Depreciation and amortization.... 2
-----
Total costs and expenses... 384
-----
Earnings (loss) from
operations..................... 288
Interest income.................... --
Interest expense................... --
-----
Earnings (loss) before income
taxes........................ 288
Income taxes....................... (101)
-----
Net earnings (loss)........ $ 187
=====
</TABLE>
<TABLE>
<CAPTION>
GLOBAL
CLARK INTERNET
INTERNET SURF NETWORK
COMMUNIQUE, SERVICES, NETWORK, SERVICES,
INC. INC. INC. SESQUINET ATMNET INC. PREPNET
----------- --------- -------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Internet connectivity.......................... $1,454 $2,582 $ 585 $1,124 $ 2,754 $2,501 $2,026
Enhanced services and other.................... 764 562 190 -- 73 1,284 121
------ ------ ------ ------ ------- ------ ------
Total revenue............................ 2,218 3,144 775 1,124 2,827 3,785 2,147
Operating costs and expenses:
Internet services operating costs.............. 690 1,394 431 538 2,976 2,679 793
Selling, general and administrative and
other........................................ 1,159 1,784 981 367 1,786 1,019 773
Depreciation and amortization.................. 5 116 76 54 40 280 121
------ ------ ------ ------ ------- ------ ------
Total costs and expenses..................... 1,854 3,294 1,488 959 4,802 3,978 1,687
------ ------ ------ ------ ------- ------ ------
Earnings (loss) from operations.............. 364 (150) (713) 165 (1,975) (193) 460
Interest income.................................. -- 2 -- -- -- -- --
Interest expense................................. -- (25) (33) -- (171) (8) (11)
------ ------ ------ ------ ------- ------ ------
Earnings (loss) before income taxes.......... 364 (173) (746) 165 (2,146) (201) 449
Income taxes..................................... (127) -- -- (58) -- -- (171)
------ ------ ------ ------ ------- ------ ------
Net earnings (loss)...................... $ 237 $ (173) $ (746) $ 107 $(2,146) $ (201) $ 278
====== ====== ====== ====== ======= ====== ======
</TABLE>
79
<PAGE> 94
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
INTERNET
INTERNET SERVICE PACIFIC RIM SIGNET ENGINEERING STRUCTURED
MONUMENTAL, SERVERS, TECH, NETWORK, PARTNERS, NSNET, ASSOCIATES, NETWORK
INC. INC. INC. INC. INC. INC. INC. SYSTEMS, INC.
----------- -------- ------- ----------- --------- ------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity....... $2,425 $ 704 $ 1,536 $ 472 $1,133 $1,832 $ 831 $ 859
Enhanced services and
other..................... 47 3,688 627 337 518 15 303 27
------ ------ ------- ------ ------ ------ ------ -----
Total revenue......... 2,472 4,392 2,163 809 1,651 1,847 1,134 886
Operating costs and expenses:
Internet services operating
costs..................... 1,162 536 1,229 385 336 471 323 473
Selling, general and
administrative and
other..................... 1,757 2,006 1,814 674 1,977 939 678 511
Depreciation and
amortization.............. 172 260 197 69 10 126 63 --
------ ------ ------- ------ ------ ------ ------ -----
Total costs and
expenses............ 3,091 2,802 3,240 1,128 2,323 1,536 1,064 984
------ ------ ------- ------ ------ ------ ------ -----
Earnings (loss) from
operations.............. (619) 1,590 (1,077) (319) (672) 311 70 (98)
Interest income............... -- 26 -- -- -- -- 14 --
Interest expense.............. (16) -- (42) (15) (5) (6) -- (17)
------ ------ ------- ------ ------ ------ ------ -----
Earnings (loss) before
income taxes............ (635) 1,616 (1,119) (334) (677) 305 84 (115)
Income taxes.................. -- (602) 33 (15) -- (116) (29) --
------ ------ ------- ------ ------ ------ ------ -----
Net earnings (loss)..... $ (635) $1,014 $(1,086) $ (349) $ (677) $ 189 $ 55 $(115)
====== ====== ======= ====== ====== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
NATIONAL FLORIDA COMPU- MATRIX
KNOWLEDGE LI INTERNET TING ONLINE
ACCESSONE, NETWORKS, NET, CORPO- ENGINEERS STARNET, MEDIA, NTX, MAGICNET,
INC. INC. INC. RATION INC. L.L.C. INC. INC. INC.
---------- --------- ------ -------- --------- -------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity........ $2,484 $1,169 $1,907 $1,172 $3,322 $1,202 $1,094 $ -- $1,883
Enhanced services and
other...................... 1,035 234 120 264 758 399 233 4,944 294
------ ------ ------ ------ ------ ------ ------ ------ ------
Total revenue.......... 3,519 1,403 2,027 1,436 4,080 1,601 1,327 4,944 2,177
Operating costs and expenses:
Internet services operating
costs...................... 1,510 669 792 773 1,026 717 393 1,006 795
Selling, general and
administrative and other... 2,251 1,282 1,573 578 2,341 570 787 4,192 1,029
Depreciation and
amortization............... 245 55 135 121 329 156 127 86 93
------ ------ ------ ------ ------ ------ ------ ------ ------
Total costs and
expenses............. 4,006 2,006 2,500 1,472 3,696 1,443 1,307 5,284 1,917
------ ------ ------ ------ ------ ------ ------ ------ ------
Earnings (loss) from
operations............... (487) (603) (473) (36) 384 158 20 (340) 260
Interest income................ -- 6 -- -- -- 9 2 6 3
Interest expense............... (26) (26) (39) (12) (96) (6) (19) -- (16)
------ ------ ------ ------ ------ ------ ------ ------ ------
Earnings (loss) before
income taxes............. (513) (623) (512) (48) 288 161 3 (334) 247
Income taxes................... -- (3) -- -- (110) (61) -- -- (74)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net earnings (loss).... $ (513) $ (626) $ (512) $ (48) $ 178 $ 100 $ 3 $(334) $ 173
====== ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
TOTAL
-------
<S> <C>
Revenue:
Internet connectivity........ $41,560
Enhanced services and
other...................... 18,232
-------
Total revenue.......... 59,792
Operating costs and expenses:
Internet services operating
costs...................... 24,048
Selling, general and
administrative and other... 37,908
Depreciation and
amortization............... 3,436
-------
Total costs and
expenses............. 65,392
-------
Earnings (loss) from
operations............... (5,600)
Interest income................ 76
Interest expense............... (607)
-------
Earnings (loss) before
income taxes............. (6,131)
Income taxes................... (1,321)
-------
Net earnings (loss).... $(7,452)
=======
</TABLE>
80
<PAGE> 95
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Historical condensed statement of operations information for the September
30, 1998 Completed Acquisitions for the nine months ended September 30, 1998
including the periods from January 1, 1998 to the dates of consolidation is as
follows:
<TABLE>
<CAPTION>
INTERNET
PACIFIC RIM SIGNET ENGINEERING STRUCTURED
NETWORK, PARTNERS, NSNET, ASSOCIATES, NETWORK ACCESSONE,
NINE MONTHS ENDED SEPTEMBER 30, 1998 INC. INC. INC. INC. SYSTEMS, INC. INC.
- ------------------------------------ ----------- --------- ------ ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity.......................... $ 73 $122 $275 $152 $318 $ 643
Enhanced services and other.................... 31 50 75 41 25 108
---- ---- ---- ---- ---- -----
Total Revenue............................ 104 172 350 193 343 751
Operating costs and expenses:
Internet services operating costs.............. 43 45 126 61 178 268
Selling, general and administrative and
other........................................ 88 142 287 124 240 535
Depreciation and amortization.................. 10 4 27 13 7 53
---- ---- ---- ---- ---- -----
Total costs and expenses................. 141 191 440 198 425 856
---- ---- ---- ---- ---- -----
Earnings (loss) from operations.............. (37) (19) (90) (5) (82) (105)
Interest income.................................. -- -- -- 1 2 --
Interest expense................................. (2) (1) -- -- (2) (11)
---- ---- ---- ---- ---- -----
Earnings (loss) before income taxes.......... (39) (20) (90) (4) (82) (116)
Income taxes..................................... -- -- -- -- -- --
---- ---- ---- ---- ---- -----
Net earnings (loss)........................ $(39) $(20) $(90) $ (4) $(82) $(116)
==== ==== ==== ==== ==== =====
</TABLE>
<TABLE>
<CAPTION>
NATIONAL MATRIX
KNOWLEDGE FLORIDA COMPUTING ONLINE
NETWORKS, LI INTERNET ENGINEERS STARNET, MEDIA, NTX, MAGICNET,
INC. NET, INC. CORPORATION INC. L.L.C. INC. INC. INC TOTAL
--------- --------- ----------- --------- -------- ------ ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity...... $265 $554 $435 $ 914 $472 $546 $ -- $ 1,302 $ 6,071
Enhanced services and
other.................... 68 147 180 491 26 155 5,430 203 7,030
---- ---- ---- ------ ---- ---- ------- ------- -------
Total revenue........ 333 701 615 1,405 498 701 5,430 1,505 13,101
Operating costs and
expenses:
Internet services operating
costs.................... 147 299 158 373 89 187 289 574 2,837
Selling, general and
administrative and
other.................... 246 408 415 873 326 437 8,781 728 13,630
Depreciation and
amortization............. 9 39 27 54 15 44 99 55 456
---- ---- ---- ------ ---- ---- ------- ------- -------
Total costs and
expenses............ 402 746 600 1,300 430 668 9,169 1,357 16,923
---- ---- ---- ------ ---- ---- ------- ------- -------
Earnings (loss) from
operations............. (69) (45) 15 105 68 33 (3,739) 148 (3,822)
Interest income............. -- -- -- 9 -- 1 3 -- 16
Interest expense............ -- (34) (3) (20) -- (18) -- (3) (94)
---- ---- ---- ------ ---- ---- ------- ------- -------
Earnings (loss) before
income taxes........... (69) (79) 12 94 68 16 (3,736) 145 (3,900)
Income taxes................ -- -- (4) (28) (20) (5) -- (43) (100)
---- ---- ---- ------ ---- ---- ------- ------- -------
Net earnings
(loss).............. $(69) $(79) $ 8 $ 66 $ 48 $ 11 $(3,736) $ 102 $(4,000)
==== ==== ==== ====== ==== ==== ======= ======= =======
</TABLE>
(C) PRO FORMA ADJUSTMENTS
The following pro forma adjustments have been made to the condensed
combined balance sheet as of September 30, 1998 and the condensed combined
statements of operations for the year ended December 31, 1997 and the nine
months ended September 30, 1998. The purchase accounting adjustments relating to
the September 30, 1998 Completed Acquisitions are included in the historical
consolidated balance sheet of Verio as of September 30, 1998.
(1) To reflect cash of $8,440,000 used in connection with the
acquisition of an 80% interest in WWW, and the allocation of the excess
purchase price to goodwill in the amount of $6,953,000.
81
<PAGE> 96
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(2) To reflect cash of $180.0 million, including estimated acquisition
costs of $4.0 million, and the issuance of 4.92 million shares of common
stock (including 1.78 million shares to be issued for outstanding options
and warrants) valued at approximately $74.7 million in connection with the
Merger, and the allocation of the excess purchase price to goodwill in the
amount of approximately $242.7 million. The assumed value of the common
stock, options and warrants is based on the quoted price per share on
November 16, 1998, one day prior to the date of the Merger Agreement, less
the estimated exercise price of the options and warrants. It is anticipated
that Verio will record a charge to operations for in-process research and
development in connection with the Merger and such charge may be
significant. However, such amount is not presently determinable.
The consideration to be paid by Verio in the Merger is subject to
adjustment based on the amount of Excess Expenses and changes in Hiway's
capitalization prior to completion of the Merger as discussed in "The
Merger -- Merger Consideration." However, management does not believe such
adjustments will be significant with respect to the accompanying pro forma
financial statements.
(3) To eliminate the equity accounts of the acquisitions and the
accretion of preferred stock to liquidation value.
(4) To eliminate intercompany revenue, expenses, receivables and
payables.
(5) To adjust amortization expense due to increase in carrying value
of goodwill resulting from the September 30, 1998 Completed Acquisitions,
using a ten-year life, and additional amortization of goodwill on 1997
acquisitions for the period from January 1, 1997 through the date of
acquisition as if the acquisitions had occurred as of January 1, 1997 and
amortization of goodwill on 1998 acquisitions for the period from January
1, 1998 through the date of acquisition as if the acquisitions had occurred
as of January 1, 1997.
(6) To adjust amortization expense due to increase in carrying value
of goodwill resulting from the WWW Acquisition and the Merger, using a
ten-year life, as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ ----------------
<S> <C> <C>
WWW.............................................. $ 695 $ 521
======= =======
Hiway............................................ $24,271 $18,204
======= =======
</TABLE>
The above amounts do not include the effect of the potential
allocation of a portion of the Hiway purchase price to in-process research
and development (IPR&D), which will result in an immediate charge to
operations. Such amount is not presently determinable.
82
<PAGE> 97
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The impact on goodwill and net loss of the allocation of a portion of
the Hiway purchase price to IPR&D is as follows (in thousands):
<TABLE>
<CAPTION>
PERCENTAGE OF PURCHASE PRICE
ALLOCATED TO IPR&D
----------------------------
10% 20% 50%
------- ------- --------
<S> <C> <C> <C>
Decrease in goodwill as of September 30,
1998......................................... $25,472 $50,944 $127,360
======= ======= ========
Increase in net loss:
Nine months ended September 30, 1998:
IPR&D..................................... $25,472 $50,944 $127,306
Decrease in amortization expense.......... (1,910) (3,820) (9,550)
------- ------- --------
Net increase......................... $23,562 $47,124 $117,756
======= ======= ========
Year ended December 31, 1997:
IPR&D..................................... $25,472 $50,944 $127,360
Decrease in amortization expense.......... (2,547) (5,094) (12,736)
------- ------- --------
Net increase......................... $22,925 $45,850 $114,624
======= ======= ========
</TABLE>
(7) To eliminate minority interests share of equity and equity in
losses of affiliates upon acquisition of 100% ownership interests.
(8) To eliminate income tax expense or benefit of acquired businesses
due to consolidated net operating loss for the year ended December 31, 1997
and the nine months ended September 30, 1998.
(9) To adjust for the effects of the issuance of the November 1998
Notes, including net cash proceeds of $389.0 million, deferred financing
costs of $11.0 million and long-term debt of $400.0 million, and additional
interest expense (including amortization of debt issuance costs) of $46.1
million and $34.6 million for the year ended December 31, 1997 and nine
months ended September 30, 1998, respectively.
(10) To reflect the issuance of 4.92 million shares of common stock in
connection with the Merger.
83
<PAGE> 98
BUSINESS OF VERIO
OVERVIEW
Verio is a leading provider of comprehensive business Internet
services -- including broadband connectivity, Web hosting solutions, VPNs,
e-commerce and other enhanced Internet services -- with an emphasis on serving
the small and medium sized business market. Verio believes that small and medium
sized businesses represent an attractive target market for the provision of
Internet services due to this market's low current penetration levels and
customer churn rates, and the expanding Internet needs of these businesses.
Because of their limited internal technical resources and operating scale, small
and medium sized businesses are increasingly looking to outsource Internet and
IT functions at a reasonable cost. These businesses also typically require
hands-on local support to help analyze their needs, configure solutions and
provide ongoing technical support. Verio believes that these businesses
currently are underserved by both the local and other national ISPs. While the
national ISPs typically lack the local presence to provide customized hands-on
support, the local ISPs often lack the requisite scale and resources to provide
a full range of services at acceptable quality and pricing levels. Verio further
believes it has a unique competitive advantage in serving small and medium sized
business customers through the combination of the technical expertise and
hands-on support provided through its local sales and engineering personnel with
the quality and economic efficiency of Verio's national network, operational
infrastructure and financial strength.
Since its inception in March 1996, Verio has rapidly established critical
mass and a national presence through the acquisition, integration and growth of
over 45 ISPs that provide a comprehensive range of business Internet services.
Verio integrates the operations it acquires into regional operating units with
centralized regional management, connecting their regional networks to Verio's
high bandwidth, "tier one" national backbone, and providing them with Verio's
national support services, in order to capture economies of scale and
operational efficiencies while improving reliability, quality, and scalability.
Verio currently provides locally based sales and engineering support for its
connectivity, Web hosting and other enhanced services in 39 of the top 50 MSAs
in the U.S., and provides Web hosting services to customers in over 100
countries.
In addition to basic Internet connectivity, businesses are increasingly
capitalizing on the power of the Internet by establishing domain-based Web sites
(such as www.yourcompany.com) and adopting additional enhanced Internet services
to expand their markets, increase productivity and reduce costs. With its recent
acquisition of TABNet and the proposed Merger, Verio significantly accelerates
and expands its ability to provide Web hosting and other value-added services to
its target market. Together with its acquisition of iServer at the end of 1997,
these acquisitions establish Verio as the largest Web hosting company in the
world based on the number of domain names hosted, and significantly increase
Verio's customer base. As of October 31, 1998, including all acquisitions
completed as of that date, Verio served over 160,000 customer accounts,
including over 80,000 hosted Web sites, with combined pro forma revenues of
approximately $35.7 million for the three months ended September 30, 1998. The
completion of the Merger would bring Verio's total customer accounts to over
250,000, the number of Web sites hosted to over 180,000, and its pro forma
combined revenues for the three months ended September 30, 1998 to approximately
$46.2 million. The consummation of the Merger, together with the completed
acquisitions of iServer and TABNet, would accomplish Verio's goal of deriving at
least half of its total revenue from enhanced services. These acquisitions would
also create in Verio a powerful sales engine, driven by preferential marketing
agreements with leading Internet portal companies, private label relationships
with major telecommunications companies, an established telemarketing
operations, direct sales through over 200 sales professionals, and a worldwide
indirect distribution channel of over 4,000 resellers in the U.S. and over 100
other countries. In addition, Verio has acquired through the iServer and TABNet
acquisitions, and expects to acquire, through the announced Merger, key
proprietary technologies that significantly differentiate Verio's Web hosting
platform from other providers.
INDUSTRY BACKGROUND
Internet connectivity and enhanced Internet services (including Web
hosting) represent two of the fastest growing segments of the telecommunications
services market. Total ISP revenues in the United States are projected to grow
from $4.6 billion in 1997 to $18.3 billion in 2000, according to IDC, an
independent
84
<PAGE> 99
company that prepares market studies relating to the Internet. The availability
of Internet connectivity, advancements in technologies required to navigate the
Internet, and the proliferation of content and applications available over the
Internet have attracted a rapidly growing number of users. Businesses are
increasingly recognizing that the Internet can significantly enhance
communications among geographically distributed offices and employees as well as
with customers and suppliers. In addition, the Internet presents a compelling
profit opportunity for businesses as it enables them to reduce operating costs,
access valuable information and reach new markets. As a result, businesses
increasingly are utilizing the Internet for mission critical applications such
as sales, customer service and project coordination.
In order to capitalize on the power of the Internet, businesses must adopt
one or both of the fundamental Internet service platforms, Internet connectivity
and Internet Web site presence. Internet connectivity provides a company with
its basic gateway to the Internet, allowing it to transfer e-mail, access
information, and connect with employees, customers and suppliers, and provides
the foundation for VPNs. A Web site provides a company with a tangible identity
and interactive presence on the Internet, allowing it to post company
information and automate business processes such as sales, order entry and
customer service. Businesses are increasingly seeking a variety of enhanced
services and applications that can be enabled from the basic connectivity and
Web site platforms. For example, by connecting each of the company's office
locations and providing front-end security for data encryption, businesses can
implement a secured VPN over the Internet far more economically than the
traditional dedicated private wide area network approach. Similarly, by adding
security, shopping cart and transactions support to its Web site, a company can
offer electronic commerce, expanding its market reach and reducing its cost of
sales. According to IDC, enhanced services (including Web hosting) is the
fastest growing segment of the Internet services market, growing from
approximately $352 million in 1997 to over $7 billion by the year 2000. As
business users of the Internet adopt enhanced services, they also require
additional bandwidth and Web site functionality to support their expanded use of
the Internet. Verio expects this trend to continue as high-bandwidth, high
functionality enhanced services continue to be developed, improve and
proliferate and as Internet usage continues to expand.
Industry analysts have reported that small and medium sized businesses
represent a potential market of over seven million customers in the U.S., and
use of the Internet by this market segment is expected to grow substantially
from its current low level of market penetration. IDC predicts that dedicated
connections to the Internet for small and medium sized businesses will grow from
approximately 122,000 in 1997 to just under 800,000 in 2000, representing an 87%
compounded annual growth rate. In addition, these businesses are moving rapidly
to establish a presence on the Internet through Web sites, enabling them to more
effectively communicate company information, expand distribution, and improve
productivity through back-office automation. IDC estimates Web hosting revenues
from small and medium sized businesses will grow from approximately $217 million
in 1997 to over $3.4 billion, representing 95% of the total Web hosting market,
by the year 2000. Often these companies find an outsourced solution more
cost-effective, because they typically lack the technology expertise, IT
resources, capital, personnel, or ability to bear the time-to-market and
operational risks required to install, maintain and monitor their own Web
servers and Internet connectivity. Small and medium sized businesses generally
seek an ISP with locally based personnel who are readily available to respond
in-person to technical issues, who can assist in developing and implementing the
customer's effective use of the Internet, and with whom they can establish a
stable and long-term relationship.
The rapid development and growth of the Internet has resulted in a highly
fragmented industry of over 4,000 national and local ISPs in the United States,
with no dominant ISP serving the needs of small and medium sized businesses. The
other large national ISPs have primarily focused on the large business or
consumer markets and lack the local presence to provide the customized, hands-on
service required by small and medium sized businesses. Verio believes that
independent local and regional ISPs generally have been more adept at serving
small and medium sized businesses, and that these ISPs often have been the
source of innovative Internet products and services. As a result, independent
regional and local ISPs have successfully captured approximately one-half of
this market, despite the substantially greater resources of the national
providers. However, rising costs and increasing demands from business customers
are increasing the importance of scale and making it more difficult for the
small ISP to meet its customer's demands on a cost-
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effective basis. Facing these competitive pressures, Verio believes that
independent ISPs will continue to be attracted to and benefit from the
consolidation opportunity provided by Verio.
THE VERIO SOLUTION
Verio is a leading provider of Internet connectivity, Web hosting, VPNs,
e-commerce and other enhanced Internet services to small and medium sized
businesses. Verio's business strategy of combining national scale with local
presence was specifically developed to serve the needs of this market sector.
Verio has taken a leading role in consolidating the fragmented, independent ISP
industry, rapidly establishing its national presence through the acquisition,
integration, and growth of established, well-regarded national, regional and
local ISPs with a business customer focus. Verio believes it has a unique
competitive advantage in serving small and medium sized business customers.
Verio's combination of national scale with local presence provides distinct and
significant value to these customers, which Verio expects will result in
long-term customer loyalty and an expanding customer base. Verio's national
scale in both Internet connectivity and Web hosting allows it to provide robust,
scalable, high-quality service platforms for the full range of business Internet
solutions. Verio intends to further enhance the value of these platforms by
developing, both internally and through strategic vendor relationships, a
further array of enhanced, higher margin product and service offerings to
continue to address the evolving business needs of its customers. Verio plans to
leverage its local direct sales and technical support, as well as its increasing
number of distribution partners, to configure Internet connectivity, Web
hosting, VPNs, e-commerce and other enhanced service solutions for its
customers. Verio further believes that the small and medium sized business
market is more attractive than the consumer or large business market segments
for Internet services, in large part due to the stability of the customer
relationship resulting from the customer's reliance on its service provider's
hands-on technical support and ability to provide a turnkey Internet solution
tailored to the customer's particular business needs. Verio's market research
indicates that Verio's local presence, 24x7 hands-on technical support and
tailored Internet service solutions combined with its high speed, highly
reliable national backbone, will be significant factors in the purchase decision
for the small and medium sized business customer, as well as being a critical
factor driving customer loyalty.
THE VERIO STRATEGY
Verio's goal is to be the premier, full-service provider of Internet
connectivity, Web hosting, VPNs, e-commerce and other enhanced Internet services
to small and medium sized businesses. Key elements of Verio's strategy in
accomplishing this goal are to: (a) continue to build scale and expand market
presence and service offerings through acquisitions; (b) drive cost savings and
quality of service improvements by integrating the operations of its acquired
companies and leveraging its national network, infrastructure and support
services; (c) generate internal growth and customer loyalty by building national
Verio brand name recognition, expanding distribution and leveraging its local
sales and technical support capability; and (d) leverage its connectivity and
Web hosting core service platforms to develop and offer additional high-margin
enhanced services to increase revenues from existing and future customers.
Build Scale, Market Presence and Service Offerings through
Acquisitions. Verio has rapidly established a national presence and critical
customer mass by acquiring the stock or assets of, or making significant
investments in, established, well-regarded independent ISPs throughout the U.S.
Verio intends to continue its consolidation strategy, acquiring additional
business-focused ISPs to deepen and broaden its market presence, to expand its
strength in its Internet connectivity and Web hosting core service platforms,
and to add additional enhanced service capabilities. Given the increasing
competitive pressures facing independent ISPs, Verio believes that these ISPs
will continue to be attracted to and benefit from the consolidation opportunity
provided by Verio. As part of its integration strategy, Verio now seeks to
acquire 100% of new ISP affiliates and has effected the Buyouts of all but one
of the ISPs in which it did not initially acquire 100% ownership. See
"-- Subsidiary Ownership Structure." Given Verio's large customer base, broad
distribution channels and core service strengths in connectivity and Web
hosting, Verio believes it is also an attractive acquiror and strategic partner
for other related enhanced product and service companies.
Drive Cost Savings and Quality Improvements by Integrating Operations and
Leveraging National Infrastructure. Verio believes it can capture significant
economies of scale and operational efficiencies while
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improving service reliability, quality and scalability by integrating the
operations of the entities it acquires into core national service platforms for
Internet connectivity and Web hosting, focusing regional operations on sales,
distribution and customer support and leveraging a common set of leading edge
national systems and support services. Verio integrates the networks of the ISPs
it acquires into common regional networks connected to Verio's high-speed,
highly reliable national backbone with network management and monitoring
services provided by Verio's 7-day by 24-hour ("24X7") Network Operations Center
(NOC). Integration of the regional networks allows Verio to consolidate POPs,
aggregate traffic on higher capacity, lower per unit cost telco links,
consolidate engineering and network operations staffs, increase network
redundancy and ensure consistency of network operations. Similarly, Verio is in
the process of integrating its Web hosting operations into a single national Web
hosting operating unit with regional data centers connected to Verio's national
backbone and monitored 24X7 by Verio's NOC. Verio has developed national support
services backed by leading edge systems for network management, billing,
customer service and financial and accounting information. Verio is in the
process of integrating all of its operations onto these common national services
in order to capture further economies of scale, drive operations efficiency,
ensure operational control and improve quality, consistency and scalability of
its services. Finally, Verio has leveraged its scale to negotiate advantageous
national volume purchase agreements with key vendors such as Cisco, Qwest and
Raptor.
Drive Growth by Building Brand Recognition, Expanding Distribution Channels
and Leveraging Local Support. Verio believes that brand recognition will be an
increasingly important decision factor among small and medium sized businesses
in choosing an Internet solutions provider. In conjunction with the integration
of its acquired ISPs, Verio has branded its consolidated regional operations
under the Verio name. Verio is building national Verio brand recognition by
aggressively marketing its full range of services through a national advertising
campaign using traditional media, online campaigns and trade shows and by
leveraging a coordinated public relations program. Verio intends to leverage its
strong local sales, distribution and technical customer support capabilities to
provide superior hands-on support to customers, further enhancing its brand
image and driving customer loyalty and sales. Verio currently has over 200 local
direct sales executives, over 300 local engineers and customer support
technicians, and over 2,500 resellers and referral partners. Verio expects to
continue to expand this local sales and distribution force and to increase its
effectiveness through national training, sales support, advertising and
marketing programs. Verio also markets its services nationally through direct
mail, telemarketing and online marketing campaigns, as well as through national
reseller arrangements. In addition, Verio has expanded the marketing of its
services through OEM-like relationships with major telecommunications carriers,
such as NTT, who can offer Verio's services on a private-label or co-branded
basis to their customer base. NTT America has recently launched its branded
Arcstar Internet service in the U.S., and will resell the full range of Verio
services under this brand. Completion of the proposed Merger would add another
1,500 resellers and a number of additional "OEM" relationships to Verio's
existing distribution channels.
Develop and Offer Enhanced Products and Services to Increase
Revenues. While basic Internet connectivity and Web hosting constitute the
predominant services offered by Verio today, small and medium sized businesses
are increasingly looking for enhanced products and services that allow them to
further leverage the power of the Internet to expand markets, increase
productivity and reduce costs. Verio believes that its large existing customer
base and strong, balanced position in both the Internet connectivity and Web
hosting service platforms give it a competitive advantage in offering related
high-margin enhanced Internet services and bundled packages to meet the more
complex needs of its current and future customers. As a result, Verio believes
that it will be able to derive incremental revenue from these customers and
increase profitability by selling an expanding array of enhanced services, as
well as higher functionality Web sites and additional bandwidth to support these
services. Web-based enhanced services would include electronic commerce,
Web-based faxing and email, unified messaging, office and business process
automation capabilities, audio and video applications, automated Web site
authoring tools and templates and redundant "hot" sites across multiple national
and international data centers. Verio also plans to offer alternative
connectivity options such as DSL, as well as intranets and extranets
incorporating both connectivity and Web-hosting capabilities with enhanced
security measures. Verio also offers enhanced Internet security capabilities and
professional consulting services to support all of its Internet solutions. Verio
expects to provide these further
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enhanced services through a combination of internal development and packaging,
acquisitions and relationships with selected Internet hardware, software and
service companies.
THE VERIO ORGANIZATION
Verio conducts its operations with both a national and regional approach.
Initially, Verio pursued a regional acquisition strategy, acquiring independent,
locally based ISPs to establish critical mass and a pervasive market presence in
selected geographic regions. Having established its presence in each of its
initially targeted regions, Verio expanded its target markets to encompass all
of the top 50 MSAs and is continuing to add incrementally to its presence within
its existing regions. In order to provide enhanced services such as Web hosting
on a national basis, Verio more recently has sought to acquire national
operations that can add strength to Verio's core service capabilities. Both the
iServer and TABNet acquisitions brought Verio national Web hosting operations
which added significantly to Verio's technical, marketing and operational
strength, and Verio expects that the proposed Merger will considerably expand
those capabilities.
As of October 31, 1998, Verio had acquired the stock or assets of, or
invested in, over 45 ISPs, including the funding of a start-up operation which
is in the early stages of establishing a presence in the Rocky Mountain region.
Verio is in the process of consolidating the ownership and management of these
ISPs into five geographic operating regions, and integrating their network
operations, customer support, marketing efforts, financial and accounting
systems, and other back-office functions onto Verio's national systems, in order
to maximize operating synergies and efficiencies. Through these regional
operations, Verio provides locally based sales and engineering support in 39 of
the top 50 MSAs in the country. Verio is now focusing its acquisition efforts on
deepening and broadening its market presence, expanding its strength in its
Internet connectivity and Web hosting core service platforms, and adding
additional enhanced service capabilities. Verio has executed non-binding letters
of intent to acquire a number of additional ISPs and continues to evaluate, and
is in various stages of negotiations with, a number of additional potential
acquisition candidates.
PRODUCTS AND SERVICES
Verio currently offers, through its regional ISP operations, a
comprehensive range of Internet connectivity, Web hosting, VPNs, e-commerce and
other enhanced products and services. Verio plans to offer a core suite of
products and services nationally, with additional specific products offered in
each market based on the needs of the market and local telco tariffs. Verio
intends to continue to develop a broad range of enhanced products and services
independently, through acquisition, and through strategic relationships with key
vendors.
Connectivity Services. Verio offers a variety of connectivity solutions,
including Internet access, third-party software and hardware implementations and
configuration services, which are offered in bundled and unbundled packages.
Internet access currently includes dial-up, ISDN, xDSL, frame relay and leased
line connectivity at speeds ranging from 28.8 kbps to 155 Mbps. Verio is
participating in trials for the deployment of new access technologies, such as
wireless access, and expects to deploy additional connectivity-related enhanced
services, such as Internet fax, Internet telephony and Internet video
conferencing, as and when they become commercially viable. Verio also offers a
full range of customer premise equipment ("CPE") hardware required to connect to
the Internet, including routers, servers and other products as needed. Verio's
national purchasing and leasing relationships with a variety of partners provide
improved hardware pricing, lower cost leasing arrangements and bundled service
offerings. Verio also offers a selection of software products including
browsers, electronic mail, news and other solutions that permit customers to
navigate and utilize the Internet. Additionally, Verio provides turnkey
configuration solutions encompassing such services as domain name server ("DNS")
support, telco line provisioning, IP address space assignment, router set-up,
e-mail configuration, router security configuration and other set-up services.
Web Hosting Services.
- Shared Server Web Hosting. Verio offers a series of shared server Web
hosting plans that allow individuals and businesses to establish a
sophisticated presence on the Internet at a reasonable cost, leveraging
the expertise and equipment of Verio to deploy an effective Web site.
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The basic standardized Web hosting option offers 6,000 megabytes of data
transfer per month and 30 megabytes of disk storage. This service level
allows customers to store HTML, graphics, video and sound files on a Web
site and generally satisfies customers' bandwidth and disk storage
requirements. A majority of Verio's current shared server Web hosting
customers use the entry-level service. In order to allow customers to use
their Web site as an effective interface for communication, Verio provides
additional services bundled into its various shared server hosting plans.
For example, customers are provided various Web-based e-mail options,
support for Microsoft FrontPage(TM) extensions and a variety of unique Web
site development tools as part of the basic Web hosting account. The
higher tier shared server Web hosting offerings, including the proprietary
Virtual Server technology developed by iServer, provide customers enhanced
services, functionality and resources. Each successive tier allocates the
customer more disk storage and increases the monthly data transfer limit.
In addition, the more advanced plans offer Real Audio(TM), Real Video(TM)
and mSQL(TM) database support and support for electronic commerce-enabled
Web sites.
Verio also has implemented a variety of tools to allow its customers to
manage and enhance their sites more effectively and update their Web sites
remotely. Typically, the Web hosting plans feature detailed Web statistics
and access to raw log files, giving customers the ability to track the
performance and evaluate the effectiveness of their Web sites. Higher tier
plans offer customers their own configuration files, POP server and SMTP
gateway. In addition, Verio provides a number of popular CGI scripts that
allow customers to deploy hit counters, guest books, mail forms and other
useful graphics easily, and also supports custom CGI scripts that enable
customers to build additional functionality into their Web sites. Verio
offers numerous tools which increase the control a customer has over Web
site management, allowing them to change passwords, set e-mail forwarding
options, view Web site statistics and check account and billing
information. Additionally, all shared servers have regular back-up
procedures to protect customer files.
- Dedicated Server Web Hosting. Verio also offers dedicated server Web
hosting solutions for larger customers that prefer not to host their Web
sites on a shared server, providing the customer substantially more
server and network resources than available under shared server Web
hosting plans. The dedicated server Web hosting solutions provide the
customer with an NT or UNIX-based Verio-owned dedicated server that is
maintained by Verio in one of its data centers and monitored on a 24X7
basis. This solution gives customers the ability to run complex
applications without the additional IT administration costs and
considerations that customers would experience if they managed their own
servers and Web sites internally. Verio maintains spare equipment and
backs up data regularly. Verio offers the dedicated server service at
various prices depending upon the specific hardware configuration, level
of service and data transfer rates required by the customer.
- Co-location. Verio offers co-location services for customers that require
the resources of a dedicated server, prefer to retain physical access to
and ownership of their server, and have the expertise to maintain the Web
site and the server. Verio's co-location facilities offer customers a
secure location, environmental control, monitoring and a high-speed
connection to the Internet. The co-location facilities typically are
designed to provide an uninterruptible power source, a back-up diesel
generator, climate control and 24X7 monitoring.
- Domain Name Reservation. Each business or individual that desires a
personalized Web address must first reserve a domain name (such as
www.yourcompany.com). As more individuals and businesses establish a Web
presence, desirable domain names, like trade or service marks, become
more difficult to secure. With its acquisition of TABNet, Verio became
the world leader in providing this important service, registering more
domain names on a daily basis than any other company. For a one-time fee,
Verio will register and maintain a domain name for two years or until the
customer decides to use the domain name to host an active Web site.
Domain name registration typically generates a one-time fee for Verio,
but more importantly provides Verio a marketing advantage when these
domain name registration customers select a Web hosting provider. Verio
has built its leading position in this service through online marketing
campaigns which leverage preferred banner ad positions on the leading
search engines and Internet portals. Verio then actively telemarkets to
new customers registering a
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domain name and has a high conversion rate of these customers to
recurring revenue Web hosting services.
Virtual Private Networks ("VPNs"). Many companies today have private data
communication networks, which are often referred to as wide area networks
("WANs") and built on expensive leased lines, to transfer proprietary data
between office locations. The Internet offers companies a cost-effective
replacement alternative to WANs through VPNs, which are meant to provide secure
transmission of private Internet Protocol ("IP") traffic through the Internet.
Additionally, many companies require that their employees have remote access to
these private networks from home or while traveling. VPN products are available
in hardware, software, and firewall formats. VPN products, often in combination
with a Web site, are also the basis for offering intranet and extranet services.
Intranets are corporate/organizational networks that rely on Internet-based
technologies to provide secure links between corporate offices and secure access
to company data. Extranets expand the network to selected business partners
through secured links on the Internet. Increasingly, companies are finding that
intranets and extranets can enhance corporate productivity more easily and less
expensively than proprietary systems. Verio currently offers its customers a
number of VPN solutions, including Raptor's Firewall, IRE's SafeNet(TM), and
Watchguard's Firebox II(TM), and continues to evaluate additional products to
meet the needs of customers.
Electronic Commerce Solutions. Electronic commerce provides users the
ability to sell products and services on the Internet. Verio currently provides
e-commerce capability to its customers by providing one or more of the three
principle functions of electronic commerce: secure socket layer, shopping cart
support, and transaction processing capability. Secure socket layer ("SSL") is
provided through its Premier Business Partner relationship with Verisign for
digital certificates. Verio supports a large variety of shopping carts,
including Shop Site(TM) by Icentral, and provides support for third party
transaction processing through ICVerify(TM), Cybercash(TM) and AuthorizeNet(TM).
The e-commerce solutions are packaged according to the complexity of the
individual customer's needs. Verio also provides fully integrated, turnkey
e-commerce applications that simplify and facilitate online commerce for small
and medium sized businesses without the need for sophisticated IT support.
Other Enhanced Services. Verio believes that its small and medium sized
business customers will continue to increase their use of the Internet as a
business tool and, as a result, will require an expanding range of enhanced
services. Verio currently offers a variety of enhanced services. In addition,
Verio's national marketing group is focused on developing new enhanced services
through both internal development, acquisition and strategic relationships with
software, hardware and content providers. Verio's current and planned enhanced
services offerings include the following:
- Security. Security solutions are a vital component for most businesses
connected to the Internet. These solutions, which include firewalls,
packet filter and proxy servers, give the customer (i) an ability to
prevent intruders from accessing its corporate network, (ii)
authentication of users attempting to gain access to the customer's local
area network ("LAN") or Web site, and (iii) encryption services,
providing secured transmission of company data through the Internet.
Verio currently offers a comprehensive set of firewall products from
Raptor, including the sophisticated Eagle Firewall(TM) and the more
simplified product known as The Wall(TM). Additionally, Verio offers a
"managed" security solution that provides ongoing detection and
prevention of intrusions. Verio plans to expand its security product line
with new solutions that simplify, reduce cost, or offer greater
functionality as they become commercially available.
- National Roaming. Employees of small and medium businesses are
increasingly dependent on accessing their e-mail while on the road.
Currently, many users either cannot do so because of the limitations of
their local ISP, or they are required to pay expensive long distance
access charges. Verio is in the process of implementing a national
dial-up access roaming product to enable dial-up business customers to
access the Internet locally as they travel throughout the country and
abroad.
- Professional Services. Verio's target customers typically do not have the
internal resources or personnel to design and maintain Internet services.
As more businesses utilize the Internet for mission critical
applications, Verio expects its customers to rely on their ISP for
support of many of their IT
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applications. As a result, Verio believes it will be increasingly
important for ISPs to offer onsite, technical consulting to customers.
Verio currently offers a full complement of professional services to its
customers, including network and system design, Web content creation,
security system needs analysis and implementation, virtual private
network design and implementation, and other Internet-related consulting
projects. Verio plans to invest in additional professional services
capabilities as they are required to provide customers with turnkey
Internet solutions.
- Future Enhanced Connectivity Enabled Services. Customers are increasingly
seeking to utilize the Internet for an expanding array of
telecommunication services. Verio plans to serve these needs through the
packaging and configuration of third party applications, such as IP
telephony (which permits users to make voice calls on the Internet),
Internet faxing, Internet audio and video conferencing solutions, and
other applications that may be developed.
- Future Enhanced Web Enabled Services. Verio is exploring other Web-based
services through internal development and third-party licensing
arrangements to serve the evolving needs of small and medium size
businesses. Verio has focused its efforts on select areas, including
expanded electronic commerce capabilities, Web-based faxing and e-mail,
unified messaging and "virtual offices," audio and video appliances,
automated Web site authoring tools and templates, basic automated
marketing tools, and redundant "hot" sites across multiple national and
international data centers.
As businesses commit to using the Internet, Verio believes that the
advanced applications product category will continue to expand, offering
additional revenue opportunities. Verio strives to be market driven, assessing
potential opportunities to extend new offerings as they become available and
evaluating its ability to implement these solutions in a cost-effective way
while maintaining quality of service for its customers.
Verio has and intends to continue to enter into agreements with other
Internet companies to leverage their products, brand names, distribution
channels and other assets. Verio believes that its existing Internet product and
service partners have been attracted to Verio because of its broad geographic
coverage, ability to influence purchase decisions of its business customers, and
the ability of the Verio sales forces to sell complex Internet solutions. Verio
has established strategic relationships with software providers such as
Microsoft, Oracle and Raptor, and equipment providers such as Cisco and
Farallon, and intends to expand its strategic relationships with additional
providers of key products and services. These relationships provide Verio with
benefits including preferred pricing, access to the latest products,
co-marketing with the vendors, tailored product training and access to the
vendor's distribution channels to generate leads for new customers.
MARKETING
Verio's marketing organization is responsible for services management,
advertising, marketing communications and public relations, and focuses on
stimulating demand for Verio's services and extending Verio's brands. Verio
stimulates demand for its services and seeks to extend its brands through a
broad range of advertising, marketing communications and public relations
activities. Verio relies on a combination of traditional media and online
advertising, and recently has launched a national advertising campaign. Verio
focuses its traditional media efforts on advertisements in major business and
technical publications, radio spots and direct mail. Verio's online marketing
program consists of general rotation and keyword-specific Web banner
advertisements. With the recent TABNet acquisition, Verio now hosts more than
80,000 Web sites, and anticipates that total Web sites hosted will increase to
over 180,000 with the completion of the Merger. TABNet became one of the world's
largest Internet domain name registrars and Web hosting companies by pioneering
domain name registration services and establishing preferential Web-based
marketing relationships with leading Internet search engine and portal companies
including Netscape, Yahoo, Excite, Infoseek, and others. Verio intends to
leverage TABNet's marketing relationships and systems to build brand recognition
and expand these marketing opportunities to Verio's full suite of product
offerings. Other marketing vehicles include collateral materials, trade shows,
direct response programs and management of Verio's Web site. Public relations
focuses on cultivating industry analyst and media relationships with the goal of
securing broad media coverage and public recognition of Verio.
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Verio has consolidated the operations and marketing efforts of its acquired
operations under the Verio brand name. Verio has undertaken national public
relations efforts to raise the awareness and visibility of Verio in its target
market, and its recently launched national advertising campaign is designed to
further build Verio brand awareness. In certain instances, where an acquired
operation has established particularly strong brand identity (such as Hiway and
its RapidSite(TM) product offering), Verio may continue to market particular
products and services under that name.
SALES AND DISTRIBUTION
Verio utilizes multiple distribution channels in order to extend its reach
and leverage the service capabilities and brand names of its channel partners.
Verio uses a combination of direct sales, telemarketing, VARs and private label
resellers.
Direct Sales. Verio has a direct sales force of more than 200
professionals. These local sales representatives have a strong Internet
technical background and understand the local telecommunications tariffs as well
as the needs of their local business community. Additionally, these
representatives are familiar with local companies to assist in implementing
tailored solutions such as Web page content development. Because they are
locally based, these sales representatives are able to meet face-to-face with
prospective customers to discuss their Internet needs and technical requirements
and develop tailored solutions. Verio has developed programs at the national
level to attract and train high quality, motivated sales representatives that
have the necessary technical skills, consultative sales experience and knowledge
of their local markets. These programs include technical sales training,
consultative selling techniques, sales compensation plan development, and sales
representative recruiting profile identification. Through the effective use of
these initiatives, Verio plans to continue to expand its direct sales force. At
the local level, direct marketing techniques are being employed to target
customer segments that would achieve substantial benefit from the business
applications afforded by the Internet. Some direct marketing tactics include
direct mail, telemarketing, seminars and trade show participation. Verio works
with key vendors to assist in these direct marketing efforts. Verio co-markets
with these vendors through direct mail programs, joint seminar development and
joint trade show involvement. Through the TABNet acquisition, Verio has gained a
centralized outbound and inbound telemarketing sales capability targeted at
offering Web hosting services.
Resellers and Indirect Sales. Verio has three primary partner programs that
permit the regional operations to adapt a formal indirect distribution strategy
to their markets. Verio believes indirect sales channels are a significant
contributor to its growth, and already has over 2,500 formal and informal
channel partner relationships. Completion of the proposed Merger would increase
Verio's worldwide indirect distribution channel to over 4,000 resellers in the
U.S. and over 100 other countries. The Authorized Solutions Partner ("ASP")
program offers partners the ability to share in the ongoing revenue stream of
customers they bring to Verio. ASPs include computer resellers, VARs, systems
integrators and other organizations focused on providing IT hardware, software,
and services to the business community, who typically have an established
relationship with the prospective customer base, and a sales force capable of
selling Internet services as part of the partner's suite of services. Referral
partners, including organizations such as Web designers, advertising agencies,
and telco resellers, are another source of customer leads. Verio's Referral
Partner program targets organizations that are less capable of, or interested
in, selling Internet services, or where Internet services fall outside their
core business interests. The Private Label Partner program is a wholesale
program which allows qualifying organizations to resell Verio services under
their own brand. The benefits of these programs to Verio include greater market
reach without fixed overhead costs, and the ability to use partners to assist in
the delivery of complete solutions to meet customer needs. In addition to local
partnerships, Verio is working with several national companies to expand its
indirect sales capability. Verio also intends to pursue additional private label
OEM-like relationships with major telecommunications carriers such as NTT. NTT
America recently has launched its branded ArcStar Internet service in the U.S.,
and will resell the full range of Verio services under this brand. Hiway also is
party to this sort of agreement with three of the RBOCs and a large European
telecommunications company, and has a number of letters of intent with
additional potential OEM-type partners, all of which, upon completion of the
Merger, would be brought to Verio.
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TECHNOLOGY AND NETWORK OPERATIONS
Overview. Verio owns and operates a national network, providing a high
bandwidth, highly reliable data transmission path connecting Verio's customers
to the Internet, which Verio believes is adequate for the provision of current
and future planned access and enhanced services needs. Verio's national network
interconnects more than 22 national nodes and over 180 local POPs across the
United States. Verio believes that aggregating the bandwidth and capacity
requirements of its regional operations onto one national network provides
operational control and efficiency, reduces costs, provides redundancy, and
results in a higher quality service, thereby addressing some of the most
significant challenges that an ISP faces in supporting its customers. Verio's
national infrastructure also incorporates several other elements critical to
maintaining the highest quality Internet service, including a high capacity and
reliable national network, peering relationships with other regional, national
and international ISPs, sophisticated network management tools and engineering
support services. The reliability of the national network is the result of many
factors, including redundant routers and other critical hardware, carrier class
facilities at POP locations (such as back up power, fire suppression and climate
control), and redundant telecommunications lines.
National Network. As of October 31, 1998, the national network carried
traffic for 35 of the ISPs acquired to date. The remaining ISPs' traffic will be
added as growth drives the need for additional capacity, as private and public
peering is implemented and as their current transit contracts expire.
Following is a diagram of Verio's national network as of October 1, 1998:
[MAP]
Currently, the national network architecture includes a presence at
selected national exchange points and redundant network nodes to link Verio's
regional networks to the national network. As of October 1, 1998, Verio's
network included connectivity at MAE West, MAE East and the NY NAP, each of
which is a major public national exchange point for ISPs. Verio also has a
presence at the Palo Alto Internet Exchange
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(PAIX), NASA Ames and a number of other regional connecting points, including
Seattle, Washington; Portland, Oregon; Irvine, Sacramento and San Diego,
California; Denver, Colorado; Orem, Utah; New Orleans, Louisiana; Dallas and
Houston, Texas; Chicago, Illinois; Ann Arbor, Michigan; Harrisburg, Philadelphia
and Pittsburgh, Pennsylvania; Baltimore, Maryland; and Boston, Massachusetts.
Each of these Verio locations features leading router technology. The equipment
is located in facilities leased from a variety of telecommunications providers,
including MCI, Sprint, MFS and others. These access points are linked, using a
nationwide, high-speed ATM and DS-3 (45 Mbps), OC-3 (155 Mbps) and OC-12 (622
Mbps) clear line network infrastructure, utilizing capacity leased from a
variety of national telco providers, including Sprint, MCI, WorldCom and Qwest.
This combination of clear channel circuits, ATM and router architecture provides
reliability to the network through path diversity and redundancy. Verio's
regional operating units either co-locate at these access nodes or lease
connectivity from a local service provider such as an RBOC or other LEC to
connect to the Verio equipment.
Work has begun to add national access nodes to serve additional parts of
the Midwest, Southern California, Texas and the Northeast, all of which Verio
currently plans to put on-line during the remainder of 1998. Expansion into the
Southeast is currently targeted for the first quarter of 1999. Multiple national
access nodes facilitate connection to Verio's national network by its regional
operations. Verio continues to add additional private peering points and access
nodes as it acquires more ISPs and expands operations, and to further increase
network capacity as the need for additional bandwidth arises.
The national network is planned to allow for rapid expansion of bandwidth
through scaleable design supported by multiple local access and interexchange
carriers to provide the required bandwidth. Verio has begun the migration of
selected links from ATM to clear line. It is anticipated that Verio will have
implemented nationwide OC-3 capacity and selected OC-12 links in late 1998 to
handle its projected traffic requirements.
On March 31, 1998, Verio entered into a 15-year Capacity and Services
Agreement (the "Capacity Agreement") with Qwest Communications Corporation
("Qwest"), under which Verio will have access to long haul capacity and
ancillary services on Qwest's planned 16,285 mile MacroCapacity(sm) Fiber
Network. Over the first seven years of the term of the Capacity Agreement (the
"Commitment Term"), Verio must purchase, and Qwest must provide, not less than
$100.0 million, in the aggregate, of such capacity and services (the
"Commitment"), at agreed upon prices. The amount of capacity represented by the
Commitment would satisfy less than 50% of Verio's currently projected long haul
capacity requirements over the Commitment Term. However, Verio has the right to
order capacity and services in excess of the Commitment, and after the
expiration of the Commitment Term, at the same agreed upon prices. Verio also
currently is party to a number of other long haul capacity agreements with
additional telecommunication providers. These agreements are for various terms
(of up to 5 years), and have varied pricing. Verio anticipates that it will
satisfy a substantial portion of its capacity and ancillary services needs under
the Capacity Agreement, because it believes that the agreed upon pricing levels
will significantly reduce the per unit costs that it otherwise would pay under
its other existing long haul capacity agreements.
Verio believes that the currently installed Cisco and Juniper Networks
routers will be sufficient to support its traffic routing needs up to and
including OC-3 and OC-12 speeds. Verio is investigating and testing various
options to support higher than OC-12 speeds and bandwidth requirements. Verio's
options include switching, higher capacity and faster routers, or hybrid routing
and switching solutions.
Peering Relationships. By implementing its own national network and
establishing peering relationships with other national ISPs, Verio believes it
can lower the cost of its Internet transit and increase the performance and
reliability of its network operations. Peering is the Internet practice under
which ISPs exchange each other's traffic without the payment of settlement
charges. The basis on which the large national ISPs make peering available or
impose settlement charges is evolving as the provision of Internet access and
related services has expanded and the dominance of a small group of national
ISPs has driven industry peering practice. Recently, companies that have
previously offered peering have cut back or eliminated peering relationships and
are establishing new, more restrictive criteria for peering. Verio believes that
substantial traffic volume and national scale will continue to be the focal
criteria necessary to establish and maintain
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peering relationships. As a result, it has become increasingly important for
companies seeking to take advantage of peering to have significant traffic, a
national network and monitoring capability.
Verio has established public or private peering relationships with all of
the major national ISPs, as well as with many smaller domestic and international
networks, and continues to evaluate additional private peering proposals. With
over 100 peering partners, Verio's network is considered a "tier one" national
network. Some large network providers now prefer to peer at private exchange
points rather than at national exchange points. This preference represents the
desire to accomplish the exchange of high bandwidth traffic in a more efficient
manner rather than to risk congestion and equipment failure at public exchange
points. Verio currently anticipates that, as Verio's traffic grows, more peering
relationships can be obtained. However, no assurance can be given that peering
relationships will continue to be made available to Verio. Even if these
relationships are not maintained or established, Verio believes that it will be
more economical for Verio to maintain an exchange point transit agreement than
to pay other national ISPs for transit. See "Risk Factors -- Dependence upon
Implementation of Network Infrastructure; Establishment and Maintenance of
Peering Relationships."
Web Hosting Operations. Through the iServer and TABNet acquisitions, Verio
has developed high-performance, reliable, secure and scalable Web hosting
solutions, which Verio believes provide it with a significant competitive
advantage. These solutions are comprised of multiple proprietary Web hosting
platforms that incorporate automated functionality and a highly reliable network
infrastructure that includes multiple data centers monitored on a 24X7 basis.
Verio expects to substantially increase these capabilities through the pending
Merger. Verio's strategy in developing its Web hosting solutions focuses on
utilizing proprietary technological innovations that it integrates with
third-party software and hardware.
Web Hosting Platform. Also through its acquisitions, Verio has established
multiple proprietary Web hosting platforms that permit efficient hosting of up
to two thousand Web sites on a single server. Although industry-standard Web
servers can enable Web hosting, Verio believes that efficiently managing large
numbers of Web sites and users on a single shared server is technically
difficult and requires significant technological innovations. Accordingly, Verio
has focused its technology development efforts on creating various proprietary
operating system level tools to facilitate a high-density customer to server
ratio. Verio has also customized or developed Web server applications designed
to improve performance in a shared server environment and resource monitoring
tools designed to report and address scarcity of shared CPU and memory
resources. Verio's solution can scale easily, allowing server groups to be added
seamlessly and to be monitored centrally wherever they are located. To address
the diverse requirements of its customers, Verio offers Web hosting services on
a range of operating systems and computing platforms.
Verio also has developed proprietary software that allows Verio to provide
its services on an efficient and cost-effective basis by automating the
following back-end functions: (i) order-taking and processing; (ii) customer
billing via credit cards, check, bank transfer and accounts receivable; (iii)
account provisioning and activation; (iv) server management and monitoring; (v)
coordination of the e-mail subsystem to integrate e-mail forwarding, multiple
e-mail accounts on a single Web site and autoresponders; (vi) inherent
distributor-dealer-customer hierarchy of all data; and (vii) support for
third-party feature "plug-ins." In addition, Verio provides a front-end
interface that allows a customer to set up accounts, change account parameters,
check Web site statistics quickly and easily and verify billing information. "TQ
software" was engineered to maximize automation to achieve high levels of
scalability, and the modular design allows additional server groups to be
supported easily. Language and branding independence enables international VARs
and OEMs to localize for foreign languages and customize the interface quickly
and with minimal effort.
Data Centers. Verio currently has data centers located in Orem, Utah; San
Francisco, California; Seattle, Washington; and Dallas, Texas; and is finishing
the implementation of a new center in Washington, D.C. An upgraded data center
in the San Francisco Bay Area is planned for 1999. All of Verio's data centers
are fitted with environmental controls, back-up generators, Cisco routers and
switches, and continuous monitoring capabilities to ensure high-quality service
with minimal interruptions. Completion of the Merger would add additional telco
class data centers in Mountain View, California and Boca Raton, Florida.
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National Network Management. Verio considers world-class network management
an essential capability for network monitoring and expansion, maintaining high
customer satisfaction and improving network quality. Verio has established a
24X7 NOC to allow continuous monitoring of the network and to provide a single
point of contact for real-time network status information and customer technical
problem resolution. The NOC is designed to provide real-time alarming, event
correlation, traffic management and forecasting, and distributed notification of
the network events and network status. Verio utilizes many leading edge systems
to provide the NOC capabilities. As of October 31, 1998, Verio monitored the
national network and the local networks of approximately 27 of the ISPs it had
acquired as of such time. Verio plans to provide national and regional network
monitoring throughout its regional operations by the end of 1998.
Engineering Support Services. Verio has negotiated national level
telecommunications contracts with LECs, such as MFS/WorldCom, providing
favorable terms for local transport. Verio plans to expand national purchasing
and leasing benefits as well as technical planning and support to improve the
performance, reliability and economics of its regional networks. National level
purchasing benefits include both cost and vendor performance issues as well as
the provisioning of spare equipment and additional technical support from
suppliers. National level distribution agreements have been negotiated with a
number of additional national-scope suppliers. Co-location agreements have also
been established with companies such as Sprint, MCI, MFS/WorldCom and Digital
Equipment Corporation. Verio is pursuing additional vendor and telecommunication
relationships in an effort to reduce the cost of equipment and improve network
quality.
Technical Planning and Support. The national engineering team provides
engineering support for routing configurations, telecommunications management
and pricing, development of local networks and purchasing and contract
negotiation. The national engineering team also works with the regional
engineering teams to nationalize certain network elements, improve performance
and reduce network costs. Support includes Internet protocol addressing support,
training and technology. This effort of sharing ideas and best practices among
the national team and the regions is intended to enhance the engineering talent
available locally and to share best practices nationally.
NATIONAL SUPPORT SERVICES
In addition to its national network and network monitoring capability,
Verio has developed and implemented three critical national support services
designed to increase operational efficiencies and enhance the quality,
consistency and scalability of Verio's services. These support services include
24X7 customer technical support and service, financial information management
through a central, standardized accounting system and a sophisticated billing
and collections system. The strategy of creating a partnership between local
support teams and Verio's established national support services enables Verio to
capture economies of scale, improve quality and responsiveness, and increase
productivity, while allowing local personnel to focus on relationships with
customers.
Customer Technical Support. Verio's customer care combines the
responsiveness and on-site capabilities of local ISP presence with the scale
economies of a national customer support center in order to deliver customer
care to businesses. While local, independent ISPs bring the benefits of
understanding customer needs and providing hands-on support demanded by their
customers, they lack the ability to cost-effectively scale internal resources to
independently support their growing customer base. Verio's national customer
support center (located in Dallas, Texas) enables Verio to provide 24X7
responsiveness while maintaining the ability to provide on-site installation
assistance, hands-on troubleshooting and access to local experts who understand
the customer's business. As of October 31, 1998, Verio was providing customer
care services to 33 of the ISPs it had acquired as of such time and will offer
services to all of the Verio regional operations as the national customer
support center continues to expand throughout 1998. The support center team is
utilizing a leading customer support trouble ticketing and workflow management
system offered by Vantive Corporation. The system offers Verio the ability to
track, route, and report on customer issues and provides significant benefit in
ensuring quality and timely care to customers. Based on information received
through the trouble ticketing system, as well as through the centralized billing
and collections system, Verio is able to monitor network reliability and outage
experiences. To date, this information, as well as the low churn rates among
Verio's dedicated connectivity customers, reflects that the outages experienced
by Verio's customers, for the
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most part, are minor and attributable to expected, ordinary course of business
service interruptions, telco capacity demands, and the customer's hardware and
software functionality issues. While Verio does not provide general service
warranties and has not instituted a uniform policy relating to the provision or
extent of service credits, Verio provides credits for outages resulting from
network failures in certain circumstances. To date, these credits have been
immaterial. Verio will continue to monitor outage experiences, and would expect
to record appropriate reserves if the level of outage credits becomes material.
Financial Information Management. Verio is in the process of converting all
of its acquired ISP operations to the PeopleSoft(TM) financial reporting system
and the ADP payroll/human resources system, in order to provide a central,
standardized accounting system. As of October 31, 1998, 36 of the ISPs acquired
were utilizing the financial reporting system and 33 were utilizing the payroll
human resources system. These systems enable Verio to cost effectively increase
the productivity and quality of administrative support by standardizing
operational systems such as payroll, payables, purchasing and financial
reporting. These enhancements are part of Verio's initiative to implement
continuous improvement methodology and to create a learning organization.
Billing and Collections. Verio has implemented the Kenan Systems' EC Arbor
billing solution which offers high quality, flexibility, cost-effectiveness and
scalability. Kenan is a leading billing solutions provider to the
telecommunications industry, providing accurate, timely, and easy-to-understand
invoicing. As of October 31, 1998, this system served 26 of Verio's acquired
ISPs. Verio is aggressively rolling out this billing platform to all of its
regional operations and will continue on the path toward centralized management
of billing operations.
NTT STRATEGIC RELATIONSHIP
On April 7, 1998, Verio entered into agreements establishing a strategic
relationship with NTT. Under these agreements, upon the consummation of the IPO,
NTT acquired 4,493,877 shares of Common Stock for approximately $100.0 million
in aggregate consideration and is entitled to designate one member to serve on
Verio's Board of Directors. See "Certain Transactions of Verio -- Other
Transactions."
In addition, Verio and NTT's U.S. affiliate, NTT America, Inc. ("NTT
America"), entered into a three year Outside Service Provider Agreement (the
"OSP Agreement"), which took effect upon the closing of the NTT Investment.
Pursuant to the OSP Agreement, Verio was designated as the preferred provider of
Internet access and related services to customers of NTT America on a reseller
basis. Verio and NTT also will connect their backbones and establish a peering
and transit relationship. During the term of the OSP Agreement, NTT America will
pay Verio for the services provided by Verio at predetermined rates reflective
of the strategic relationship between the parties, under which NTT is entitled
to "most favored customer" status and pricing concessions. Under the OSP
Agreement, NTT and Verio agreed to continue to negotiate the specific terms of
these arrangements. Recently, NTT America and Verio have executed a further
Strategic Partner Services Agreement setting forth the details for
implementation of the specific technical and administrative aspects arising
under the OSP Agreement. NTT America has now launched its branded Arcstar
Internet service in the U.S., and will resell the full range of Verio services
under this brand. Verio will also provide NTT America with full back-office and
engineering support.
SUBSIDIARY OWNERSHIP STRUCTURE
While Verio now typically seeks to acquire 100% of new ISPs' operations,
Verio's early acquisition strategy was to rapidly build mass and scale by
acquiring less than 100% of its ISPs. In each case where Verio acquired less
than 100% of an ISP initially, it obtained the right to Buyout the remaining
equity in the future. As part of its integration strategy, Verio has effected
the Buyouts of all but one of the ISPs in which it did not initially acquire
100% ownership (other than VIANet, as discussed below). With the recent
completion of these Buyouts, Verio is now consolidating its ISP operations into
five integrated regional operating units and a national Web hosting division.
While Verio continues to own 100% of a number of operating subsidiaries, it is
continuing to consolidate the ownership of those subsidiaries in order to
minimize administrative costs.
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Verio currently holds an approximately 16% equity position in VIANet, which
was formed in 1997 to pursue a strategy similar to that of Verio's outside of
the U.S. and Canada. See "Certain Transactions -- Other Transactions." Verio has
no contractual right to acquire the remaining equity of VIANet, and has no
present plan to integrate the operations of VIANet with those of its own. Hiway
also owns minority and majority interests in certain entities that provide Web
hosting and other enhanced Internet services in various foreign countries. Upon
consummation of the Merger, Verio would acquire the remaining majority and
minority equity positions held by Hiway at that time, and may seek to acquire
the remaining equity in those entities in the future. Verio has recently
completed the acquisition of the remaining equity in one of these entities, a
German Web hosting company. If the Merger is not consummated, Hiway has an
option to purchase from Verio the 80% equity position in that entity that Verio
acquired, and Verio has a corresponding option to require Hiway to purchase that
80% interest from Verio.
COMPETITION
The market for Internet connectivity and related services is extremely
competitive. Verio anticipates that competition will continue to intensify as
the use of the Internet grows. The tremendous growth and potential market size
of the Internet access market has attracted many new start-ups as well as
existing businesses from different industries. Current and prospective
competitors include, in addition to other national, regional and local ISPs,
long distance and local exchange telecommunications companies, cable television
companies, direct broadcast satellite and wireless communications providers, and
on-line service providers. Verio believes that a reliable national network,
knowledgeable salespeople and the quality of technical support currently are the
primary competitive factors in Verio's target market, and that price is usually
secondary to these factors. See "Risk Factors -- Competition; Pricing
Fluctuation."
ISPs. According to Boardwatch magazine's directory of Internet Service
Providers, there are currently over 4,000 ISPs in the United States, consisting
of national, regional and local providers. Verio's current primary competitors
include other ISPs with a significant national presence which focus on business
customers, such as UUNet, GTE Internetworking (formerly BBN), PSINet, Concentric
Network and Intermedia/DIGEX. While Verio believes that its level of local
service and support and target market focus distinguish it from these
competitors, some of these competitors have significantly greater market
presence, brand recognition, and financial, technical and personnel resources
than Verio, and have extensive coast-to-coast Internet backbones. Verio also
competes with unaffiliated regional and local ISPs in its targeted geographic
regions.
Telecommunications Carriers. All of the major long distance companies (also
known as interexchange carriers or IXCs), including AT&T, MCI/WorldCom, Cable &
Wireless/InternetMCI, and Sprint, offer Internet access services and compete
with Verio. The recent sweeping reforms in the federal regulation of the
telecommunications industry have created greater opportunities for LECs,
including the RBOCs, to enter the Internet connectivity market. In order to
address the Internet connectivity requirements of the current business customers
of long distance and local carriers, Verio believes that there is a move toward
horizontal integration through acquisitions of, joint ventures with, and the
wholesale purchase of connectivity from, ISPs. The MCI/WorldCom/MFS/UUNet
consolidation, Cable & Wireless' acquisition of InternetMCI, the
Intermedia/DIGEX merger and GTE's acquisition of BBN are indicative of this
trend. Accordingly, Verio expects that it will experience increased competition
from the traditional telecommunications carriers. Many of these
telecommunications carriers, in addition to their substantially greater network
coverage, market presence, and financial, technical and personnel resources,
also have large existing commercial customer bases. Furthermore,
telecommunications providers may have the ability to bundle Internet access with
basic local and long distance telecommunications services. Such bundling of
services may have an adverse effect on Verio's ability to compete effectively
with the telecommunications providers and may result in pricing pressure on
Verio that would have an adverse effect on Verio's business, financial condition
and results of operations. Verio believes that its local presence and its strong
technical and data-oriented sales force is an important feature distinguishing
it from the centralized voice-oriented sales approach typified by the current
Internet connectivity services offered by the IXCs and LECs.
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Cable Companies, Direct Broadcast Satellite and Wireless Communications
Companies. Many of the major cable companies have announced that they are
exploring the possibility of offering Internet connectivity, relying on the
viability of cable modems and economical upgrades to their networks. MediaOne
Group and TCI have recently announced trials to provide Internet cable service
to their residential customers in select areas. However, the cable companies are
faced with large-scale upgrades of their existing plant equipment and
infrastructure in order to support connections to the Internet backbone via
high-speed cable access devices. Additionally, their current subscriber base and
market focus is residential which requires that they partner with
business-focused providers or undergo massive sales and marketing and network
development efforts in order to target the business sector. Several
announcements also have recently been made by other alternative service
companies approaching the Internet connectivity market with various wireless
terrestrial and satellite-based service technologies. These include Hughes
Network System's DirecPC product that provides high-speed data through direct
broadcast satellite technology, CAI Wireless System's announcement of an MMDS
wireless cable operator launching data services via 2.5 to 2.7 GHz and
high-speed wireless modem technology, Cellularvision's announcement that it is
offering Internet access via high-speed wireless LMDS technology, and Winstar,
which currently offers high-speed Internet access to business customers over the
38 GHz spectrum.
On-line Service Providers. The predominant on-line service providers,
including America Online, CompuServe, Microsoft Network, and Prodigy, have all
entered the Internet access business by engineering their current proprietary
networks to include Internet access capabilities. Verio competes to a lesser
extent with these on-line service providers.
Recently, there have been several announcements regarding the deployment
and planned deployment of broadband services for high speed Internet access by
cable and telephone companies through new technologies such as cable modems and
various DSL technologies. While these providers initially targeted the
residential consumer, recently a number of DSL providers have also announced
their intent to offer DSL services to Verio's target market of small and medium
sized businesses, which may significantly affect the pricing of Verio's service
offerings. Further, a number of DSL providers have recently launched their
services in conjunction with ISPs (including Verio), allowing ISPs to offer
Internet connectivity over DSL circuits. These DSL circuits, which provide
higher speed and lower latency Internet connections than a standard dial-up
phone connection, may compete with Verio's dedicated connectivity offerings.
PROPERTIES
Verio's corporate headquarters is located in Englewood, Colorado where
Verio leases approximately 43,400 square feet of office space. Verio's lease
agreement, which commenced February 1, 1998, is for a term of five years. Verio
also has executed a lease covering 20,700 square feet of space in the InfoMart
in Dallas, Texas, where Verio maintains its network operations center and
customer support center. That lease expires on June 30, 2002. Verio also leases
space, typically less than 200 square feet, in various geographic locations to
house network infrastructure and telecommunications equipment. Operational
functions are principally located in the offices of its regional operations,
where Verio typically is party to lease agreements for administrative office
space sufficient for locally based personnel, as well as smaller site leases to
house network equipment.
EMPLOYEES
As of October 31, 1998, Verio employed approximately 1,200 people,
including full-time and part-time employees at its corporate headquarters in
Colorado, its network operations and customer support center in Texas and at its
controlled ISPs. Verio considers its employee relations to be good. None of the
employees of Verio is covered by a collective bargaining agreement.
TRADEMARKS AND TRADE NAMES
Verio filed for federal trademark protection of "Verio" on November 29,
1996. This application is pending and Verio has no assurance that it will be
granted. Trademark protections for the Verio mark also
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have been applied for in the European Economic Community, as well as in Japan.
Additionally, corporate name reservations for the name "Verio Inc." have been
filed in all fifty states. In conjunction with the consolidation of its ISPs
into regional operating entities, the ISPs have migrated to the Verio brand
name, with a regional or local geographical identifier appended.
LEGAL PROCEEDINGS
Verio is not currently party to any material legal proceedings.
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CAPITALIZATION OF VERIO
(Amounts in Thousands)
The following table sets forth at September 30, 1998 (i) the actual
capitalization of Verio, (ii) the pro forma capitalization adjusted for the
September 30, 1998 Completed Acquisitions, the WWW Acquisition and the effects
of the November 1998 Notes, and (iii) the pro forma capitalization adjusted to
reflect the Merger. This table should be read in conjunction with the Selected
Consolidated Financial Data of Verio, the Unaudited Pro Forma Condensed Combined
Financial Statements of Verio and the Historical Consolidated Financial
Statements of Verio and notes thereto included elsewhere in this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
------------------------------------------
PRO FORMA
HISTORICAL PRO FORMA(1) AS ADJUSTED(2)
---------- ------------ --------------
<S> <C> <C> <C>
Cash and cash equivalents.............................. $ 245,912 $ 627,357 $ 450,925
Restricted cash and securities......................... 21,397 21,397 21,397
========= ========= =========
Long-term debt and capital lease obligations, net of
current portions..................................... 274,452 674,452 680,506
--------- --------- ---------
Stockholders equity:
Common stock, par value $0.001 per share; 125,000,000
shares authorized; 32,789,776 shares outstanding
historical and pro forma; 37,709,776 shares pro
forma as adjusted; and additional paid in
capital(3)........................................ 374,387 374,387 449,107
Accumulated deficit.................................. (139,780) (139,780) (139,780)
--------- --------- ---------
Total stockholders' equity................... 234,607 234,607 309,327
--------- --------- ---------
Total capitalization......................... $ 509,059 $ 909,059 $ 989,833
========= ========= =========
</TABLE>
- ---------------
(1) Pro forma for the September 30, 1998 Completed Acquisitions, the WWW
Acquisition and the effects of the November 1998 Notes, as if they had
occurred on September 30, 1998. See "Unaudited Pro Forma Condensed Combined
Financial Statements of Verio" and the notes thereto.
(2) As adjusted to give effect to the $176.0 million in cash payable to holders
of Hiway Common Stock outstanding as of the Effective Time and 4.92 million
shares of Verio Common Stock issuable to holders of Hiway Common Stock
outstanding as of the Effective Time or upon the exercise of Hiway Options
or Warrants outstanding as of the Effective Time. See "Unaudited Pro Forma
Condensed Combined Financial Statements of Verio" and the notes thereto.
(3) Does not include 4,633,084 shares of Verio Common Stock reserved for
issuance pursuant to outstanding stock options or 1,697,019 shares issuable
upon exercise of outstanding warrants, each as of September 30, 1998.
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SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA OF VERIO
The selected historical consolidated financial data of Verio as of December
31, 1997, and for the period from inception (March 1, 1996) to December 31,
1996, and the year ended December 31, 1997 have been derived from the audited
Consolidated Financial Statements of Verio included elsewhere in this Proxy
Statement/Prospectus. The selected historical consolidated financial data as of
September 30, 1998 and for the nine-month periods ended September 30, 1997 and
1998 have been derived from unaudited Consolidated Financial Statements of
Verio, also included herein.
The information set forth below should be read in conjunction with the
Unaudited Pro Forma Condensed Combined Financial Statements of Verio and the
historical Consolidated Financial Statements of Verio and the notes thereto
included elsewhere in this Proxy Statement/Prospectus. Results of operations for
the period from inception to December 31, 1996, year ended December 31, 1997 and
the nine-month periods ended September 30, 1997 and 1998 are not necessarily
indicative of results of operations for future periods. Verio's development and
expansion activities, including acquisitions, during the periods shown below
significantly affect the comparability of this data from one period to another.
All significant adjustments, consisting of only normal recurring adjustments,
which, in the opinion of Verio's management, are necessary for a fair
presentation of Verio's financial position and results of operations as of
September 30, 1998 and for the nine-month periods ended September 30, 1997 and
1998 have been included. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Verio."
SELECTED CONSOLIDATED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
NINE MONTHS ENDED SEPTEMBER 30,
YEAR ENDED --------------------------------------
(MARCH 1, 1996) DECEMBER 31, 1997 HISTORICAL PRO FORMA(1)
TO DECEMBER 31, ------------------------- ----------------------- ------------
1996 HISTORICAL PRO FORMA(1) 1997 1998 1998
--------------- ---------- ------------ --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Dedicated connectivity................. $ 1,100 $ 16,383 $ 47,714 $ 10,120 $ 36,924 $ 40,486
Dial-up connectivity................... 1,139 7,093 17,224 4,314 16,272 18,781
Enhanced services and other............ 126 12,216 34,160 7,853 30,347 41,860
------- --------- ---------- --------- ---------- ----------
Total revenue.................... 2,365 35,692 99,098 22,287 83,543 101,127
Costs and expenses:
Internet services operating costs...... 974 15,974 41,180 9,504 37,928 42,106
Selling, general and administrative and
other................................ 7,002 49,383 88,697 31,233 80,941 92,935
Stock option related compensation and
severance costs...................... -- -- -- -- 3,040 6,680
Depreciation and amortization.......... 669 10,624 31,692 6,737 26,818 32,515
------- --------- ---------- --------- ---------- ----------
Total costs and expenses......... 8,645 75,981 161,569 47,474 148,727 174,236
------- --------- ---------- --------- ---------- ----------
Loss from operations..................... (6,280) (40,289) (62,471) (25,187) (65,184) (73,109)
Other income (expense):
Interest income........................ 593 6,080 6,156 4,068 9,381 9,420
Interest expense....................... (115) (11,826) (58,543) (5,899) (22,860) (57,531)
Equity in losses of affiliates......... -- (1,958) -- (1,642) -- --
Minority interests..................... 680 1,924 -- 1,638 545 184
------- --------- ---------- --------- ---------- ----------
Loss before extraordinary item......... (5,122) (46,069) $ (114,858) (27,022) (78,118) $( 121,036)
========== ==========
Extraordinary item -- loss related to
debt repurchase...................... -- -- -- (10,101)
------- --------- --------- ----------
Net loss......................... (5,122) (46,069) (27,022) (88,219)
Accretion of preferred stock to
liquidation value...................... (23) (260) (179) (87)
------- --------- --------- ----------
Net loss attributable to common
stockholders........................... $(5,145) $ (46,329) $ (27,201) $ (88,306)
======= ========= ========= ==========
Loss per common share -- basic and
diluted(2):
Loss per common share before
extraordinary item................... $ (5.29) $ (40.47) $ (100.34) $ (24.11) $ (4.49) $ (6.93)
======= ========= ========== ========= ========== ==========
Loss per common share.................. $ (5.29) $ (40.47) $ (100.34) $ (24.11) $ (5.06)
======= ========= ========= ==========
Weighted average common shares
outstanding -- basic and diluted....... 971,748 1,144,685 1,144,685 1,128,004 17,462,447 17,462,447
======= ========= ========== ========= ========== ==========
OTHER DATA:
EBITDA(3)................................ $(5,611) $ (29,665) $ (30,779) $ (18,450) $ (38,366) $ (40,594)
Capital expenditures(4).................. 3,430 14,547 11,002 15,327
Cash flows information:
Net cash used by operating
activities........................... (2,326) (35,323) (20,462) (36,257)
Net cash used by investing
activities........................... (9,123) (120,330) (89,375) (119,312)
Net cash provided by financing
activities........................... 77,916 161,772 163,002 328,895
</TABLE>
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<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30, 1998
--------------------- -------------------------
1996 1997 HISTORICAL PRO FORMA(1)
------- -------- ---------- ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $66,467 $ 72,586 $245,912 $627,356
Restricted cash and securities.............................. -- 40,554 21,397 21,397
Goodwill, net............................................... 8,736 83,216 210,067 217,000
Total assets................................................ 82,628 246,471 562,329 962,787
Long-term debt and capital lease obligations, net of
discount.................................................. 106 142,321 274,452 674,452
Redeemable preferred stock.................................. 76,877 97,249 -- --
Stockholders' equity (deficit).............................. (4,055) (27,001) 234,607 234,607
</TABLE>
- ---------------
(1) Pro forma for the September 30, 1998 Completed Acquisitions and the WWW
Acquisition as if they had occurred on September 30, 1998 for balance sheet
purposes and on January 1, 1997 for statement of operations data purposes.
The pro forma information also includes the effects of the November 1998
Notes, but does not include the effects of the Merger. See "Unaudited Pro
Forma Condensed Combined Financial Statements of Verio" and the notes
thereto.
(2) Verio paid no cash dividends on Verio Common Stock during the period from
inception (March 1, 1996) to December 31, 1996, the year ended December 31,
1997, and the nine months ended September 30, 1998.
(3) EBITDA represents earnings (loss) from operations before interest, taxes,
depreciation, amortization and provision for loss on write-offs of
investments in ISPs and fixed assets and includes non-cash stock option
compensation and severance costs of $3.0 million and $6.7 million on a
historical and pro forma basis, respectively, for the nine months ended
September 30, 1998. The primary measure of operating performance is net
earnings (loss). Although EBITDA is a measure commonly used in Verio's
industry, it should not be construed as an alternative to net earnings
(loss), determined in accordance with GAAP, as an indicator of operating
performance or as an alternative to cash flows from operating activities,
determined in accordance with GAAP. In addition, the measure of EBITDA
presented herein by Verio may not be comparable to other similarly titled
measures of other companies.
(4) Excludes equipment and leasehold improvements acquired in business
acquisitions.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF VERIO
The following discussion and analysis is based on the historical and pro
forma results of Verio and includes a number of ISPs acquired at various times.
See "Unaudited Pro Forma Condensed Combined Financial Statements of Verio" for
the basis of presentation and those business acquisitions included therein.
Investments in ISP affiliates in which Verio acquires a minority interest are
accounted for at cost. Investments in ISP affiliates in which Verio acquires a
majority interest through the acquisition of net assets, common stock or
convertible preferred stock, and exercises significant control over the
operations, are accounted for using the purchase method of accounting and,
accordingly, the financial results of these ISPs have been consolidated with
those of Verio. Certain statements set forth below constitute "forward-looking
statements" within the meaning of the Reform Act. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of Verio, or industry
results, to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Given
these uncertainties, prospective investors are cautioned not to place undue
reliance on such forward-looking statements. See "Risk
Factors -- Forward-Looking Statements."
OVERVIEW
Verio is a leading provider of Internet connectivity, Web hosting, virtual
private networks ("VPNs"), e-commerce and other enhanced Internet services with
an emphasis on serving small and medium sized businesses. Since its inception in
March 1996, Verio has rapidly established a global presence through the
acquisition, integration, and growth of local Internet service providers
("ISPs") with a business customer focus. Verio believes that small and medium
sized businesses represent an attractive target market for the provision of
Internet services due to this market's low current penetration levels and
customer churn, and the expanding Internet needs of these businesses. Verio
believes it has a unique competitive advantage in serving small and medium sized
business customers through the combination of the technical competency and
hands-on support provided through its local sales and engineering personnel with
the quality and economic efficiency of Verio's national network, operational
infrastructure and financial strength. Verio has quickly built critical mass by
acquiring the stock or assets of, or making significant investments in, over 45
ISPs that provide a comprehensive range of Internet connectivity, Web hosting
and other enhanced products and services to over 160,000 customer accounts
providing locally based sales and engineering support in 39 of the top 50 MSAs
in the U.S. under the Verio brand name and providing Web hosting services to
customers in over 100 countries. Verio and its consolidated subsidiaries had
total revenue of approximately $33.8 million for the three-month period ended
September 30, 1998. Taking into account the combined revenue of all ISP
operations acquired as of October 31, 1998, the pro forma combined revenue for
the three-month period ended September 30, 1998 would have been approximately
$35.7 million. Combined revenue includes the revenue of all of the ISPs that
were owned 51% or more on or before October 31, 1998. The completion of the
Merger, which Verio currently expects to complete in the first week of 1999
(subject to the satisfaction of various closing conditions) would increase
Verio's pro forma combined revenue for the three months ended September 30, 1998
to approximately $46.2 million.
Initially, Verio's strategy was to acquire 51% to 100% of a large regional
ISP, and a minority interest in smaller ISPs within designated geographic
regions. Verio now generally seeks to acquire 100% of new ISPs and, during the
second quarter of 1998, Verio completed the buyout of the remaining equity
interests (each, a "Buyout") in all but one of the ISPs in which Verio initially
acquired less than a 100% interest. Since that time, Verio has undertaken to
consolidate the ownership and management of the acquired ISPs into five
geographic operating regions, and to integrate the network operations, customer
support, marketing efforts, financial and accounting systems, and other
back-office functions onto Verio's national systems, in order to capture scale
and operating efficiencies. Verio has incurred significant one-time costs in
these consolidation efforts, but expects to recognize substantial long-term cost
savings as a result of these expenditures. Verio has the contractual right to
effect the Buyout of the one remaining ISP in which it does not currently hold
100% ownership (not including V-I-A Internet, Inc. ("VIANet") in which Verio
holds an approximately 16%
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equity position). From January 1, 1998 through September 30, 1998, Verio
incurred costs of approximately $52.2 million, in the aggregate, in connection
with a total of 11 Buyouts, and approximately $84.8 million for acquisitions,
which amounts were paid with a combination of cash, shares of Verio stock and
options to acquire stock. As a result of its acquisitions, and the limited
amount of fixed assets required to operate an ISP, Verio has recorded
significant amounts of goodwill, and expects goodwill to increase significantly
during 1998.
During July 1998, Verio announced its two largest acquisitions to date: The
acquisition of NTX, Inc. d/b/a TABNet ("TABNet") was consummated on July 7, 1998
(the "TABNet Acquisition). In the TABNet Acquisition, Verio paid an initial
purchase price of $45.5 million in cash to TABNet's shareholders. While the
TABNet Acquisition Agreement provided for additional contingent payments to be
paid based on TABNet's performance through the end of 1998, Verio does not
currently anticipate that any material amount of additional consideration will
be required to be paid. In connection with the Merger, Verio has agreed to pay
total consideration of approximately $176.0 million in cash and 4.92 million
fully diluted shares of Verio's Verio Common Stock to Hiway's shareholders,
option holders and warrant holders.
To fund its acquisitions and operations, through September 30, 1998, Verio
had raised approximately $320.5 million of equity capital, including
approximately $115.7 million (after deduction of underwriting discounts,
commissions and expenses) in connection with its initial public offering of
Verio Common Stock ("the IPO") and approximately $100.0 million in connection
with its sale of Verio Common Stock to an affiliate of Nippon Telegraph and
Telephone Corporation ("NTT"), both of which occurred in May 1998. On June 15,
1998, pursuant to the partial exercise, at the request of the managing
underwriters, of the over-allotment option granted to the underwriters in the
IPO, Verio raised an additional $5.1 million after deduction of underwriting
discounts and commissions (the "Over-Allotment Offering"). Verio also issued
$150.0 million principal amount of 13 1/2% Senior Notes due 2004 ("the 1997
Notes") to a group of institutional investors and Brooks Fiber Properties, Inc.
("Brooks"), $100.0 million of which remain outstanding following the repurchase
of $50.0 million principal amount of the 1997 Notes previously held by Brooks
(the "Refinancing"). On March 25, 1998, Verio consummated the sale of $175.0
million principal amount of 10 3/8% Senior Notes due 2005 (the "March 1998
Notes"), a portion of the proceeds of which was used to effect the Refinancing.
Subsequent to September 30, 1998, on November 25, 1998, Verio issued the
November 1998 Notes with an aggregate principal amount of $400 million, and
resulting in net proceeds to the Company of approximately $389 million after
deducting the initial purchasers' discount and expenses. See "-- Liquidity and
Capital Resources."
Verio has incurred net losses since its inception, and management expects
to incur significant additional losses as Verio continues its acquisition
program, the development of its national network, the implementation of its
national services and systems, and the integration of the operations it
acquires. For the period from inception to December 31, 1996, the year ended
December 31, 1997, and the nine-month period ended September 30, 1998, Verio
reported net losses of $5.1 million, $46.3 million, and $88.3 million,
respectively. The extent to which Verio continues to experience negative cash
flow will depend upon a number of factors, including the number and size of its
further acquisitions, the expenses and time required to integrate acquired
operations and capture operating efficiencies, and the ability to generate
increasing revenue and cash flow. While Verio anticipates that it will recognize
various economies and efficiencies of scale as a result of the integration of
the operations of the ISPs it has acquired and continues to acquire, the process
of consolidating the businesses and implementing the strategic integration of
Verio and its acquired operations may take a significant period of time, will
place a significant strain on Verio's resources, and could subject Verio to
additional expenses during the integration process. The timing and amount of
expenditures related to Verio's cost-saving initiatives and integration efforts
may be difficult to predict. Verio may increase near-term expenditures in order
to accelerate the integration and consolidation of acquired operations with the
goal of achieving longer-term cost savings and improved profitability.
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<PAGE> 120
RESULTS OF OPERATIONS
REVENUE
Verio derives the majority of its revenue from business customers who
purchase dedicated Internet connections and enhanced services such as Web
hosting. Verio's subsidiaries offer a broad range of connectivity options to
their customers including dedicated, dial-up, Integrated Services Digital
Network ("ISDN"), frame relay and point-to-point connections. Dedicated
connection customers typically sign a contract for one to three years of service
that provides for fixed, recurring monthly service charges, and pay a one-time
setup fee. These charges vary depending on the type of service, the length of
the contract, and local market conditions. Dial-up customers also typically pay
a one-time setup fee and recurring monthly service charges. Fees and service
charges for enhanced services vary from product to product. For example, Web
hosting customers typically pay a one-time setup fee and fixed monthly service
charges that vary depending on the amount of disk space and bandwidth required.
In contrast, domain name registration customers pay a one-time fee. Additional
sources of enhanced services and other revenue include e-commerce, virtual
private networks, security services, co-location services, consulting and the
sales of equipment and customer circuits. Revenue related to Internet
connectivity and enhanced services is recognized as the services are provided.
Amounts billed relating to future periods are recorded as deferred revenue and
amortized monthly as services are rendered.
Currently, connectivity services provide a majority of total revenue.
However, revenue from enhanced services, especially Web hosting, is expected to
represent an increasing percentage of total revenue in future periods. With the
TABNet Acquisition and the proposed Merger, Verio expects that revenue from
enhanced services and other revenue, including Web hosting, will exceed 50% of
its total revenue. Revenue from business customers currently represents
approximately 90% of total revenue. In addition to the growth that Verio has
achieved through acquisitions, revenue is also expected to increase due to
internal growth. In the past, Verio has experienced some seasonality in its
internal revenue growth, with the period of higher growth being the fall and
winter.
Nine months ended September 30, 1997 compared to the nine months ended
September 30, 1998
Total consolidated revenue increased 275% from $22.3 million for the nine
months ended September 30, 1997, to $83.5 million for the nine months ended
September 30, 1998. Internet connectivity represented 65% and 64% of total
revenue for the nine months ended September 30, 1997 and the nine months ended
September 30, 1998, respectively, with the balance derived from enhanced
services and other. The increase in enhanced services and other revenue as a
percentage of total revenue is due to acquisitions and increased sales of
enhanced services. The increase in revenue from the nine months ended September
30, 1997 to the nine months ended September 30, 1998 was primarily due to the
acquisitions of ISPs subsequent to September 30, 1997. Revenue attributable to
acquisitions completed subsequent to September 30, 1997 accounted for $42.2
million or 50% of total revenue for the nine months ended September 30, 1998.
The larger acquisitions completed subsequent to September 30, 1997 contributed
the following revenue amounts for the nine months ended September 30, 1998: $7.9
million from Clark Internet Services, Inc. and Monumental Network System, Inc.
(whose operations have been consolidated); $4.7 million from Internet Servers,
Inc.; and $3.4 million from TABNet.
Period from Inception to December 31, 1996 compared to the Year Ended December
31, 1997
Total consolidated revenues increased from $2.4 million for the period from
inception (March 1, 1996) to December 31, 1996 (the "1996 Period"), to $35.7
million for the year ended December 31, 1997. Internet connectivity decreased
from 95% of total revenue for the 1996 Period to 66% for the year ended December
31, 1997, with the balance derived from enhanced services and other, which
include Web hosting, consulting, sales of equipment and customer circuits. The
increase in enhanced services and other revenues as a percentage of total
revenues is because of a change in the revenue mix resulting from acquisitions
and increased sales of enhanced services. The increase in dedicated and dial-up
revenues and enhanced services and other revenues for the 1996 Period compared
to the year ended December 31, 1997 was primarily due to
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the acquisitions of ISPs subsequent to December 31, 1996 and the longer period
covered. Revenues attributable to acquisitions completed in 1996 accounted for
$2.4 million or 100% of total revenues for the 1996 Period. Of these
acquisitions, revenues from material acquisitions were $1.8 million from On-Ramp
Technologies, Inc. and $.5 million from RAINet, Inc. Revenues attributable to
material acquisitions completed in 1997 accounted for $23.8 million or 67% of
total revenues for the year ended December 31, 1997. Of these acquisitions,
revenues from material acquisitions were $7.7 million from NorthWestNet, Inc.
($4.4 million in connectivity revenue and $3.3 million in enhanced services and
other revenue), and $3.6 million from Global Enterprise Services ($2.3 million
in connectivity revenue and $1.3 million in enhanced services and other
revenue). Revenues attributable to ISPs consolidated for the entire year were
31% of total revenues for the year ended December 31, 1997.
COSTS OF SERVICE AND OPERATING EXPENSES
Internet services operating costs consist primarily of local
telecommunication expense, Internet access expense and the cost of equipment and
customer circuits sold. Local telecommunications expense represents the cost of
transporting data between Verio's Points of Presence ("POPs") and a transit
provider, or circuits from the customer's location to one of the POPs. As of
September 30, 1998, 35 of the ISPs acquired prior thereto were utilizing the
Verio national network for their Internet access. In March 1998, Verio signed a
long-term long haul capacity agreement with Qwest Communications Corporation
("Qwest") (the "Capacity Agreement") in order to reduce the per unit costs of
such services. There will not be a significant effect on the results for 1998
from this agreement due to the time required to convert from existing circuits;
however, Verio expects that the pricing advantages provided by this agreement
will substantially reduce the cost of these services in future years.
Additionally, Verio has the right to prepay its minimum commitment, which would
allow the capitalization of costs (to the extent prepaid) under this contract.
Such capitalized costs would be amortized to operations over the term of the
agreement. The amount of the prepayment at September 30, 1998 would have been
approximately $60.0 million. Verio has incurred certain one-time expenses in
connection with the cancellation of Internet access contracts of acquired ISPs
and the consolidation of duplicate POPs that resulted from overlapping
acquisitions, closing a total of 31 POPs during the first nine months of 1998.
Selling, general and administrative and other expenses consist primarily of
salaries and related employment expenses, consulting, travel and entertainment,
rent, and utilities. During the three months ended September 30, 1998, Verio
incurred approximately $3.5 million in higher sales and marketing expenses
compared to the immediately prior three-month period, reflecting Verio's
increase in quota-carrying salespeople, a national advertising and marketing
campaign, and other sales-related efforts. In addition, Verio recorded a
one-time charge relating to integration activities of approximately $1.9 million
in connection with the elimination of approximately 250 positions, which are no
longer necessary due to the integration of these functions onto Verio's national
services.
Depreciation is provided over the estimated useful lives of the assets
ranging from 3 to 5 years using the straight-line method. The excess of cost
over the fair value of net assets acquired, or goodwill, is amortized using the
straight-line method over a ten-year period.
Nine months ended September 30, 1997 compared to the nine months ended
September 30, 1998
Internet services operating costs were 43% and 45% of total revenue for the
nine months ended September 30, 1997 and the nine months ended September 30,
1998, respectively. Total consolidated Internet services operating costs
increased $28.4 million from the nine months ended September 30, 1997 to the
nine months ended September 30, 1998 primarily due to the acquisitions of ISPs
subsequent to September 30, 1997. Internet services operating costs attributable
to corporate operations were 14% of total Internet services operating costs for
the nine months ended September 30, 1997, compared to 21% of total Internet
services operating costs for the nine months ended September 30, 1998. This
increase is primarily due to the conversion of acquired ISPs onto Verio's
national network. Verio expects Internet services operating costs to increase in
absolute dollars but to decrease as a percentage of total revenue over time as
additional acquired
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ISPs are integrated onto Verio's national network, as enhanced services become a
larger percentage of total revenue, and as the Capacity Agreement with Qwest is
implemented.
Selling, general and administrative and other expenses decreased from 140%
to 97% of total revenue from the nine months ended September 30, 1997 to the
nine months ended September 30, 1998. Total selling, general and administrative
and other expenses increased $49.7 million or 159% from the nine months ended
September 30, 1997 to the nine months ended September 30, 1998 primarily due to
acquisitions completed subsequent to September 30, 1997. In addition, Verio
incurred $3.4 million in one-time charges in connection with Verio's network and
operational consolidation and the associated integration of a number of its
previously acquired ISP operations. These expenses include approximately $1.9
million primarily related to severance costs in connection with the elimination
of approximately 250 positions which are no longer necessary due to the
integration of these functions on to Verio's national services. These
terminations have begun and will continue for approximately nine months. The
remaining liability for unpaid severance costs totaled approximately $1.7
million at September 30, 1998. The balance of the one-time integration expenses
were primarily related to personnel relocation costs and costs associated with
the cancellation of Internet access contracts and the closure of redundant POP
facilities of acquired ISPs. Corporate selling, general and administrative
expenses including the one-time expenses decreased from 59% of total revenue for
the nine months ended September 30, 1997 to 29% for the nine months ended
September 30, 1998. Consolidated sales and marketing expenses decreased from 32%
of total revenue for the nine months ended September 30, 1997 to 27% for the
nine months ended September 30, 1998, due in part to efficiencies gained from
the regionalization and nationalization of certain sales and marketing
functions.
Verio expects selling, general and administrative expenses to continue to
increase in absolute dollars but to decrease as a percentage of total revenue as
Verio acquires additional Internet businesses, allowing it to spread its
corporate overhead over a larger revenue base, as its scaleable systems reduce
the incremental costs of supporting additional revenue, as sales force
productivity increases with experience, and as indirect selling channels are
expanded. Verio anticipates that increases in absolute dollar terms will be
primarily due to increased personnel resulting from acquisitions and additional
expenditures in sales and marketing. Depreciation and goodwill amortization are
expected to continue to increase significantly as a result of Verio's
acquisition and investment strategies. Also, Verio expects that it will continue
to incur significant one-time integration expenses related to its strategy of
acquiring and regionalizing ISP operations, and integrating those operations
onto Verio's national systems.
Period from Inception to December 31, 1996 compared to the Year Ended December
31, 1997
Internet services operating costs increased from 41% to 45% of total
revenues from the 1996 Period to the year ended December 31, 1997. Internet
services operating costs attributable to acquisitions completed in 1996
accounted for $0.7 million, or 69%, of total Internet services operating costs
for the 1996 Period. Total consolidated Internet services operating costs
increased $15.0 million from the 1996 Period to the year ended December 31,
1997, primarily due to the acquisitions of ISPs subsequent to December 31, 1996.
Of these acquisitions, the costs from material acquisitions were $0.4 million
from On-Ramp Technologies, Inc. and $.2 million from RAINet, Inc. Internet
services operating costs attributable to acquisitions completed in 1997
accounted for $8.3 million, or 52%, of total Internet services operating costs
for the year ended December 31, 1997. Of these acquisitions, the costs from
material acquisitions were $2.5 million from Global Enterprise Services, $1.2
million from NorthWestNet, Inc. and $1.1 million from Compute Intensive Inc.
Internet services operating costs attributable to ISPs consolidated for the
entire year were 26% of total Internet services operating costs for the year
ended December 31, 1997. Internet services operating costs attributable to
corporate operations were 33% of total Internet services operating costs for the
1996 Period, compared to 22% of total Internet services operating costs for the
year ended December 31, 1997. This decrease is primarily the result of
acquisitions in late 1997 that had not yet converted to Verio's national
network.
Selling, general and administrative and other expenses declined from 296%
to 138% of total revenues from the 1996 Period to the year ended December 31,
1997. Total selling, general and administrative and other expenses increased
$42.4 million from the 1996 Period to the year ended December 31, 1997,
primarily due to the acquisitions of ISPs subsequent to December 31, 1996.
Selling, general and administrative and
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other expenses attributable to acquisitions completed in 1996 accounted for $3.1
million or 44% of total selling, general and administrative and other expenses
for the 1996 Period. Corporate, selling, general and administrative expenses
accounted for 167% of total revenue for the 1996 Period compared to 54% for the
year ended December 31, 1997. Selling, general and administrative and other
expenses attributable to acquisitions completed in 1997 accounted for $19.7
million or 40% of total selling, general and administrative and other expenses
for the year ended December 31, 1997. Of these acquisitions, the expenses from
material acquisitions were $4.9 million from NorthWestNet, Inc., $4.3 million
from Compute Intensive Inc., and $3.2 million from Global Enterprise Services.
Selling, general and administrative and other expenses attributable to ISPs
consolidated for the entire year, and to corporate expenses, were 22% and 38% of
total selling, general and administrative and other expenses for the year ended
December 31, 1997, respectively. For the 1996 Period, selling, general and
administrative and other expenses relating to operations, engineering and
customer care were 63% of total selling, general and administrative and other
expenses compared to 66% for the year ended December 31, 1997, as a result of
Verio's decision to emphasize the quality of its engineering and technical
support for its customers. Sales and marketing expenses decreased from 49% of
total revenue for the 1996 Period to 30% for the year ended December 31, 1997,
due in part to efficiencies gained from the regionalization and nationalization
of certain sales and marketing functions. Executive and finance expenses were
59% of total revenue for the 1996 Period compared to 17% for the year ended
December 31, 1997.
OTHER EXPENSES
Nine months ended September 30, 1997 compared to the nine months ended
September 30, 1998
Interest expense increased from $5.9 million for the nine months ended
September 30, 1997 to $22.9 million for the nine months ended September 30,
1998, primarily as a result of the issuance of the 1997 Notes in June 1997 and
the issuance of the March 1998 Notes in March 1998. Interest income increased
from $4.1 million for the nine months ended September 30, 1997 to $9.4 million
for the nine months ended September 30, 1998 due to the increased cash balance
related to the debt and equity offerings. See "-- Liquidity and Capital
Resources."
Verio incurred an extraordinary expense of $10.1 million related to the
Refinancing. See "-- Liquidity and Capital Resources."
Period from inception to December 31, 1996 compared to the Year Ended December
31, 1997
During the year ended December 31, 1997, Verio recognized equity in losses
of affiliates in the amount of $1,958,000, representing losses of those
affiliates in excess of the equity of the common shareholders of the affiliates.
See Note 1 to the Consolidated Financial Statements of Verio.
Interest expense increased from $115,000 in the 1996 Period to $11.8
million for the year ended December 31, 1997 primarily as a result of the
completion of the $150.0 million placement of the 1997 Notes on June 24, 1997.
Interest expense is expected to increase in 1998, reflecting a full year's
interest on the 1997 Notes that remain outstanding and interest on the March
1998 Notes.
INCOME TAXES
As of December 31, 1997, Verio had a net operating loss carryforward for
federal income tax purposes of approximately $49.9 million which is available to
offset future federal taxable income, if any, through 2012. The utilization of a
portion of the net operating loss carryforwards may be limited under Section 382
of the Internal Revenue Code. No tax benefit for such losses has been recorded
by Verio in fiscal 1997 or 1998 due to uncertainties regarding the utilization
of the loss carryforward.
STOCK-BASED COMPENSATION
Verio accounts for its stock-based compensation plans in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and Related Interpretations. Since inception, Verio has granted stock
options with exercise prices equal to the fair value of the underlying Verio
Common
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Stock, as determined by Verio's Board of Directors and based on Verio's other
equity transactions. Accordingly, Verio has not recorded compensation expense
related to the granting of stock options in 1996, 1997 and through February 28,
1998. Subsequent to February 28, 1998, and prior to the IPO, Verio granted
options to employees with exercise prices which were less than $22 per share
which was the low end of the IPO filing range immediately prior to the IPO.
Verio will record compensation expense totaling approximately $10.6 million,
representing the difference between the strike prices of the options granted and
$22 per share, pro rata over the forty-eight month vesting period of the
options. This compensation expense will total approximately $2.0 million for the
year ended December 31, 1998 and was $1.3 million for the nine months ended
September 30, 1998. Additionally, Verio incurred $1.4 million in compensation
expense during the quarter ended June 30, 1998 primarily related to the
accelerated vesting of options issued to Mark Johnson, Verio's former president
who passed away in March 1998, and approximately $0.4 million in compensation
expense during the quarter ended September 30, 1998, related to options issued
to Verio's new president.
QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1997 1997 1997 1997 1998 1998 1998
--------- -------- ------------- ------------ --------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Dedicated connectivity........ $ 1,954 $ 3,852 $ 4,314 $ 6,263 $ 9,900 $ 12,644 $ 14,380
Dial-up connectivity.......... 1,106 1,564 1,644 2,779 4,147 5,739 6,386
Enhanced services and other... 1,354 2,833 3,666 4,363 7,151 10,158 13,038
------- ------- -------- -------- -------- -------- --------
Total revenue............... 4,414 8,249 9,624 13,405 21,198 28,541 33,804
Costs and expenses:
Internet services operating
costs....................... 2,042 3,433 4,029 6,470 9,536 13,318 15,074
Selling, general and
administrative and other.... 6,718 11,122 13,393 18,150 19,999 25,851 35,091
Stock option related
compensation and severance
costs....................... -- -- -- -- -- 2,001 1,039
Depreciation and
amortization................ 1,246 2,548 2,943 3,887 6,381 8,698 11,740
------- ------- -------- -------- -------- -------- --------
Total costs and expenses.... 10,006 17,103 20,365 28,507 35,916 49,868 62,944
------- ------- -------- -------- -------- -------- --------
Loss from operations........ $(5,592) $(8,854) $(10,741) $(15,102) $(14,718) $(21,327) $(29,140)
======= ======= ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1997 1997 1997 1997 1998 1998 1998
--------- -------- ------------- ------------ --------- -------- -------------
(AS A PERCENTAGE OF TOTAL REVENUE)
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenue....................... 100% 100% 100% 100% 100% 100% 100%
Costs and expenses:
Internet services operating
costs........................... 46% 42% 42% 48% 45% 47% 45%
Selling, general and
administrative and other........ 152% 135% 139% 135% 94% 91% 104%
Stock option related compensation
and severance costs............. -- -- -- -- -- 7% 3%
Depreciation and amortization..... 28% 31% 31% 29% 30% 30% 35%
Total costs and expenses........ 227% 207% 212% 213% 169% 175% 186%
Loss from operations................ (127%) (107%) (112%) (113%) (69%) (75%) (86%)
</TABLE>
Verio's operating results have fluctuated in the past and may in the future
fluctuate significantly depending upon a variety of factors, including the
incurrence of capital costs, costs associated with the integration of acquired
operations, and the introduction of value-added enhanced services and new
services by Verio. Additional factors that may contribute to variability of
operating results include: the pricing and mix of services offered by Verio;
customer retention rate; changes in pricing policies and product offerings by
Verio's competitors; growth in demand for network and Internet access services;
one-time costs associated with regional consolidation; and general
telecommunications services' performance and availability. Verio also has
experienced seasonal variation in Internet use and, therefore, revenue streams
may fluctuate accordingly. As a result, variations in the timing and amounts of
revenues could have a material adverse effect on Verio's
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<PAGE> 125
quarterly operating results. Due to the foregoing factors, Verio believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and that such comparisons cannot be relied upon as indicators of
future performance.
LIQUIDITY AND CAPITAL RESOURCES
Verio's business and acquisition strategy has required and will continue to
require substantial capital for investments in Internet businesses, capital
expenditures for expansion of services, operating losses and working capital.
Net cash used by operating activities was $36.3 million during the nine months
ended September 30, 1998, which includes an increase in cash of $12.5 million
related to working capital items.
Net cash used by investing activities was $119.3 million during the nine
months ended September 30, 1998, primarily related to purchases of fixed assets
of $15.3 million and approximately $121.4 million for acquisitions, which was
partially offset by $19.7 million provided from the release of the restricted
cash related to the Refinancing, which includes $6.5 million of net interest
payments on the 1997 Notes. Net cash provided by financing activities was $328.9
million during the nine months ended September 30, 1998, primarily from the IPO,
the March 1998 Notes, and the NTT investment.
Until the completion of the IPO in May 1998, Verio financed its operations
primarily through the private sale of Preferred Stock, debt, and to a lesser
extent Verio Common Stock. In 1996, Verio raised approximately $78.1 million
from the sale of Series A and B Preferred Stock and approximately $1.1 million
from the sale of Verio Common Stock. In 1997, Verio sold Series C Preferred
Stock for gross proceeds of approximately $20.0 million. Upon the effectiveness
of Verio's IPO on May 12, 1998, all outstanding shares of Series A, B, C and D-1
Preferred Stock automatically converted to an equivalent number of shares of
Verio Common Stock.
On June 24, 1997, Verio completed the placement of $150.0 million principal
amount of the 1997 Notes and attached warrants (the "Warrants"). One hundred
fifty thousand units were issued, each consisting of $1,000 principal amount of
the 1997 Notes and eight Warrants, with each Warrant entitling the holder
thereof to purchase 1.76 shares of Verio's Common Stock at a price of $.01 per
share, for a total of 2,112,480 shares of Verio Common Stock. The Warrants and
the 1997 Notes were separated on December 15, 1997. The 1997 Notes mature on
June 15, 2004. Interest on the 1997 Notes, at the annual rate of 13 1/2%, is
payable semi-annually in arrears on June 15 and December 15 of each year.
Concurrent with the completion of the sale of the 1997 Notes, Verio was required
to deposit funds into an escrow account in an amount that together with interest
would be sufficient to fund the first five interest payments on the 1997 Notes.
Upon consummation of the sale of the March 1998 Notes and the Refinancing, that
portion of the escrowed amount attributable to the principal amount of the 1997
Notes refinanced was released to Verio. The 1997 Notes are redeemable at the
option of Verio commencing June 15, 2002. The 1997 Notes are senior unsecured
obligations of Verio ranking pari passu in right of payment with all existing
and future unsecured and senior indebtedness. The 1997 Notes impose significant
limitations on Verio's ability to incur additional indebtedness unless Verio's
Consolidated Pro Forma Interest Coverage Ratio (as defined) is greater than or
equal to 1.8 to 1.0 prior to June 30, 1999, or 2.5 to 1.0 on or after that date.
Verio is also limited in its ability to pay dividends or make Restricted
Payments (as defined in the Indenture, dated as of June 24, 1997, relating to
the 1997 Notes (the "1997 Indenture")), to engage in businesses other than the
Internet service business, and to place liens on its assets for the benefit of
persons other than the noteholders, among other restrictions. If a Change of
Control (as defined in the 1997 Indenture) occurs, Verio is required to make an
offer to purchase all of the 1997 Notes then outstanding at a price equal to
101% of the principal amount, plus accrued and unpaid interest.
On March 25, 1998, Verio completed the placement of $175.0 million
principal amount of the March 1998 Notes. The March 1998 Notes are senior
unsecured obligations of Verio ranking pari passu in right of payment with all
existing and future unsecured and senior indebtedness and mature on April 1,
2005. Interest on the March 1998 Notes, at the annual rate of 10 3/8%, is
payable semi-annually in arrears on April 1 and October 1 of each year,
commencing October 1, 1998. The March 1998 Notes are redeemable at the option of
Verio commencing April 1, 2002. The March 1998 Notes contain terms that are
substantially similar to the 1997 Notes. Verio used approximately $54.5 million
of the proceeds plus accrued interest to effect the repurchase of $50.0 million
principal amount of 1997 Notes from Brooks Fiber Properties, Inc. ("Brooks")
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<PAGE> 126
(the "Refinancing"). As a result of the Refinancing, Verio was refunded
approximately $13.3 million from the escrow account for the 1997 Notes, of which
approximately $1.9 million was used to pay accrued and unpaid interest on the
$50.0 million principal amount of 1997 Notes repurchased from Brooks.
On April 6, 1998, Verio entered into a credit facility ("the Bank
Facility") with a group of commercial lending institutions that committed to
provide a $57.5 million revolving credit facility secured by the stock of the
ISPs that Verio owns currently or may own in the future and the Capacity
Agreement with Qwest. During the three months ended September 30, 1998, the Bank
Facility was increased to $70.0 million. The Chase Manhattan Bank serves as
agent for the Bank Facility. The Bank Facility requires no payments of principal
until its maturity on December 31, 1999. The terms of the Bank Facility provide
for borrowings at LIBOR + 2%. There is a commitment fee of 1/2% per annum on
the undrawn amount of the Bank Facility and a one-time fee of 1/2% on any
amounts drawn. The last $3.0 million of the Bank Facility can only be drawn for
the payment of interest. As of October 31, 1998, Verio had made no borrowings
under the Bank Facility.
The Bank Facility sets forth covenants restricting, among other things,
Verio's ability to borrow, to guarantee the debt of others, and to make
borrowings at the subsidiary level. Verio is also limited in its ability to
enter into transactions with affiliates, create liens on its assets, and make
certain investments. In particular, Indebtedness (less cash), as defined in the
Bank Facility, may not exceed 2.35 times annualized pro forma revenue for the
most recent fiscal quarter. Verio's current indebtedness incurrence capacity is
approximately 2.35 times its annualized pro forma revenue. Dividends and certain
types of investments are prohibited, as are liens incurred for borrowed money.
Borrowings under the Bank Facility are required to be paid down with the
proceeds of new Indebtedness, certain asset sales, Excess Cash Flow (as defined
in the Bank Facility), or the net proceeds from insurance claims. As of October
31, 1998, Verio is in compliance with the provisions of each of the material
agreements under which it has incurred indebtedness.
On May 12, 1998, Verio effected its IPO, selling 5,500,000 shares of Verio
Common Stock for net proceeds of approximately $115.7 million after deducting
underwriting discounts, commissions and expenses. Concurrently with the IPO,
Verio completed the sale of 4,493,877 shares of Verio Common Stock to an
affiliate of NTT for net proceeds of approximately $100.0 million. On June 15,
1998, pursuant to the partial exercise, at the request of the managing
underwriters, of the over-allotment option granted to the underwriters in the
IPO, Verio sold an additional 235,000 shares in the Over-Allotment Offering. The
net proceeds from the Over-Allotment Offering were approximately $5.1 million
after deducting underwriting discounts and commissions.
As of September 30, 1998, Verio had approximately $245.9 million in cash
and cash equivalents (excluding restricted cash). Subsequent to September 30,
1998, on November 25, 1998, Verio issued the November 1998 Notes, for net
proceeds of approximately $389 million after deducting the initial purchasers'
discount and expenses. Verio's business plan currently anticipates investments
of approximately $325.0 million over the next 12 months for capital
expenditures, currently anticipated acquisitions, operating losses and working
capital, including approximately $176.0 million for the Merger. EBITDA losses
increased from $(18.5) million for the nine months ended September 30, 1997 to
$(38.4) million for the nine months ended September 30, 1998 despite an increase
in revenue from $22.3 million for the nine months ended September 30, 1997 to
$83.5 million for the nine months ended September 30, 1998. EBITDA as a
percentage of revenue improved from (83%) to (46%) for the nine months ended
September 30, 1997 and the nine months ended September 30, 1998, respectively.
Cash flows from operations declined from $(20.5) million for the nine months
ended September 30, 1997 to $(36.3) million for the nine months ended September
30, 1998. Cash flows from operations as a percentage of revenue improved from
(92%) to (43%) from the nine months ended September 30, 1997 and 1998,
respectively. Verio incurred $80.9 million in selling, general and
administrative expenses during the nine months ended September 30, 1998 as it
invested in scaleable systems, hiring and sales training, and network
improvements, that it expects will result in incremental revenue at reduced
incremental costs. Although Verio is seeking to reduce EBITDA losses as a
percentage of revenue over time, there can be no assurance that Verio will be
able to do so, or that the rate of any reduction in EBITDA losses will be as
rapid as is being sought by Verio.
Since the completion of substantially all of the Buyouts during the first
six months of 1998, Verio has focused considerable effort on, and incurred
significant expense in connection with, the consolidation of the
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<PAGE> 127
ownership and management and integration of the operations of the ISPs it has
acquired to date. During the three months ended September 30, 1998, Verio
recorded one-time expenses totaling approximately $3.4 million primarily in
connection with Verio's network and operational consolidation and integration
strategy, including approximately $1.9 million primarily related to the
elimination of approximately 250 positions which are no longer necessary due to
the integration of these functions into Verio's national services, and other
costs associated with personnel relocation and the cancellation of Internet
access contracts and the closure of redundant POP facilities of acquired ISPs.
Verio continues to incur costs for system upgrades and integration of TABNet's
operations onto Verio's network, customer care, billing and financial systems,
and expects to incur similar expenses associated with the integration of
additional ISP and Web hosting operations it acquires (including Hiway). While
Verio anticipates that these expenses could be significant, it also expects to
derive significant long-term savings as a result of synergies resulting from
telco and transit cost reductions, shared data centers, joint product
development, shared infrastructure and increased economies of scale made
possible by the consolidation and integration of its operations.
Verio's anticipated expenditures are inherently uncertain and will vary
widely based on many factors including operating performance and working capital
requirements, the cost of additional acquisitions and investments, the
requirements for capital equipment to operate Verio's business, and Verio's
ability to raise additional funds. Accordingly, Verio may need significant
amounts of cash in excess of its plan, and no assurance can be given as to the
actual amounts of Verio's expenditures and additional capital requirements.
Verio is constantly evaluating potential acquisition and other strategic
transaction opportunities, which could significantly affect Verio's business
plan and cash needs. Verio intends to use a significant portion of its cash for
acquisitions, and will have to increase revenue without a commensurate increase
in costs to generate sufficient cash to enable it to meet its debt service
obligations as described above. There can be no assurance that Verio will have
sufficient resources to fund its continued acquisition efforts, particularly if
operating losses continue to increase or additional acquisition or other
strategic opportunities become available, or that Verio will be able to
successfully raise additional capital.
Verio expects to meet its capital needs with cash on hand, proceeds from
the sale, or issuance of capital stock, credit facilities (including the Bank
Facility), lease financing, and additional debt. In the near term, Verio intends
to use its excess cash and the Bank Facility, which provides for up to $70.0
million in credit until it matures on December 31, 1999. Over the longer term,
Verio will be dependent on increased operating cash flows, and, to the extent
cash flow is not sufficient, the availability of additional financing, to meet
its debt service obligations. As an ongoing matter, Verio evaluates the
potential sources of capital that may be available to it, including public and
private sales of equity, the issuance of debt securities, bank financing, and
other sources, taking into account market conditions, available terms, the
current trading price of its stock, and other factors. There can be no assurance
that Verio will be able to service its indebtedness. Insufficient funding may
require Verio to delay or abandon some of its planned future expansion or
expenditures, which could have a material adverse effect on Verio's growth and
its ability to realize economies of scale. In addition, Verio's operating
flexibility with respect to certain business activities is limited by covenants
associated with its indebtedness. There can be no assurance that such covenants
will not adversely affect Verio's ability to finance its future operations or
capital needs or to engage in business activities that may be in the interest of
Verio.
NEW ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130), No. 131, Disclosures About Segments of an Enterprise and Related
Information (SFAS 131), and No. 132, Employers' Disclosures about Pensions and
Other Postretirement Benefits. During 1998, the American Institute of Certified
Public Accountants issued Statement of Position No. 98-5, Reporting on the Costs
of Start-up Activities (SOP 97-5) and Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities.
The adoption of these pronouncements did not and are not expected to have a
significant effect on Verio's financial position or results of operations.
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<PAGE> 128
FORWARD-LOOKING STATEMENTS
The statements included in the discussion and analysis above that are not
historical fact are "forward-looking statements" (as such term is defined in the
Reform Act). The safe harbor provisions provided in Section 27A of the
Securities Act and Section 21E of the Exchange Act apply to forward-looking
statements made by Verio. These statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy that involve risks and
uncertainties. Management cautions the reader that these forward-looking
statements addressing the timing, costs and scope of its acquisition of, or
investments in, existing ISPs, the revenue and profitability levels of the ISPs
in which it invests, the anticipated reduction in operating costs resulting from
the integration and optimization of those ISPs, and other statements regarding
matters that are not historical facts, are only predictions. No assurance can be
given that future results indicated, whether expressed or implied, will be
achieved. While sometimes presented with numerical specificity, these
projections and other forward-looking statements are based upon a variety of
assumptions relating to the business of Verio, which, although considered
reasonable by Verio, may not be realized. Because of the number and range of the
assumptions underlying Verio's projections and forward-looking statements, many
of which are subject to significant uncertainties and contingencies that are
beyond the reasonable control of Verio, some of the assumptions will not
materialize and unanticipated events and circumstances may occur subsequent to
the date of this report. These forward-looking statements are based on current
expectations, and Verio assumes no obligation to update this information.
Therefore, the actual experience of Verio and results achieved during the period
covered by any particular projections or forward-looking statements may differ
substantially from those projected. Consequently, the inclusion of projections
and other forward-looking statements should not be regarded as a representation
by Verio, or any other person, that these estimates and projections will be
realized and actual results may vary materially. There can be no assurance that
any of these expectations will be realized or that any of the forward-looking
statements contained herein will prove to be accurate.
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<PAGE> 129
CERTAIN TRANSACTIONS OF VERIO
TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
On June 16, 1997, Verio made a loan in the amount of $100,000 to Peter
Fritzinger, which Mr. Fritzinger repaid on July 21, 1997 with interest at the
then current market rate.
OTHER TRANSACTIONS
Brooks. On March 18, 1998, in response to an offer by Brooks, Verio and
Brooks reached an agreement pursuant to which Verio agreed to repurchase the
$50.0 million principal amount of Verio's 1997 Notes held by Brooks for an
aggregate net purchase price of approximately $54.5 million, plus accrued
interest. A portion of the proceeds from the sale of the 1998 Notes was used to
effect the Refinancing.
NTT. On May 15, 1998 (the date of the closing of the Verio IPO), pursuant
to a Stock Purchase and Master Strategic Relationship Agreement, dated as of
April 7, 1998, between Verio and NTT (the "NTT Stock Purchase Agreement"), NTT
purchased 4,493,877 shares of Verio Common Stock from Verio for proceeds of
approximately $100.0 million (the "NTT Investment"). Verio granted NTT certain
registration rights with respect to the Verio Common Stock it had acquired. See
"Description of Capital Stock -- Verio Registration Rights."
Verio and NTT also entered into an Investment Agreement, dated as of April
7, 1998 (the "NTT Investment Agreement"), providing for certain arrangements
effective from and after the consummation of the NTT Investment, some or all of
which could have the effect of delaying, deferring or preventing a change of
control of Verio. In particular, so long as NTT continues to hold at least 50%
of the aggregate number of shares of Verio Common Stock acquired by it in
connection with the NTT Investment, Verio has agreed to appoint an individual
designated by NTT to the Verio Board. The initial NTT designee, Yukimasa Ito,
will serve for an initial term ending as of the third annual stockholder meeting
following the closing of the Verio IPO. Thereafter, for so long as NTT continues
to meet the share ownership requirement, Verio has agreed, subject to certain
exceptions, to nominate as a member of the Verio Board at each subsequent
election of the applicable class of directors a person designated by NTT who
will be subject to election by the stockholders of Verio. In addition, NTT has
agreed on behalf of itself and its affiliates to certain "standstill"
restrictions pursuant to which NTT and its affiliates may only make open market
or privately negotiated purchases of additional voting securities (including
Verio Common Stock) so long as the total holdings of NTT and its affiliates do
not exceed 17.5% of Verio's fully diluted Common Stock after taking into account
such acquisition. The "standstill" obligations terminate five years after the
consummation of the NTT Investment. NTT has also agreed, among other things,
that it will not (i) solicit proxies or participate in a proxy solicitation or
otherwise seek to influence voting with respect to Verio, (ii) call a
stockholders meeting, or (iii) make any announcement or proposal for a tender
offer that would result in NTT owning more than 17.5% of Verio Common Stock on a
fully diluted basis. In addition, NTT has agreed that in connection with any
offer or agreement by a third party to acquire over 30% of the voting power of
Verio or over 50% of the assets or earning power of Verio (an "Acquisition
Proposal"), it will not transfer any securities of Verio in connection with an
Acquisition Proposal, unless such Acquisition Proposal has been recommended by
the Verio Board or the Verio Board has not publicly recommended against such
Acquisition Proposal within three months of the public announcement or
presentation to the Verio Board of such Acquisition Proposal.
The NTT Investment Agreement also imposes certain limitations on NTT's
ability to dispose of the shares of Verio Common Stock that it has acquired. NTT
has granted to Verio certain rights of first offer and rights of first refusal
which apply, under certain circumstances, in the event that NTT proposes to sell
some or all of the shares that it has acquired. The specific terms of these
rights vary depending upon the quantity of shares proposed to be sold and other
terms of the proposed sale. The NTT Investment Agreement also precludes NTT from
transferring Verio Common Stock to certain parties specified by Verio (which
list may include no more than 15 specified parties at any one time) that are or
are likely to become competitors of Verio or, subject to certain conditions, to
any person that as a result of such transfer would beneficially own more than
10% of Verio Common Stock.
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In connection with the NTT Investment Agreement, Verio and NTT also entered
into the OSP Agreement, under which Verio was designated as the preferred
provider of Internet access and related services to customers of NTT America on
a reseller basis, and Verio and NTT agreed to connect their backbones and
establish a peering and transit relationship, and that Verio would provide NTT
America with full back-office and engineering support. NTT America has agreed to
pay Verio for the services provided by Verio at predetermined rates reflective
of the strategic relationship between the parties, under which NTT is entitled
to "most favored customer" status and pricing concessions. Under the OSP
Agreement, NTT and Verio agreed to continue to negotiate the specific terms of
these arrangements. See "Business of Verio -- NTT Strategic Relationship."
Recently, NTT America and Verio have executed a further Strategic Partner
Services Agreement setting forth the details for implementation of the specific
technical and administrative aspects arising under the OSP Agreement. NTT
America recently has launched its branded Arcstar Internet service in the U.S.,
and will resell the full range of Verio services under this brand. Under the NTT
Investment Agreement, NTT has designated three individuals to be employed by
Verio in corporate development, technical and marketing positions to assist in
implementing and carrying out the commercial relationship between Verio and NTT.
VIANet. In May 1998, Verio consummated an additional equity investment in
VIANet in which it purchased shares of VIANet's Series B Preferred Stock for an
aggregate purchase price of $8.0 million, resulting in Verio's owning an
approximately 16% equity position in VIANet. Verio has no right to acquire the
remaining equity of VIANet. Although, with the iServer Acquisition and TABNet
Acquisition, Verio gained a substantial international Web hosting presence,
which would be considerably expanded with the consummation of the Merger, the
Verio Board has determined that its investment in VIANet currently will be the
primary component of its international expansion strategy in the Internet
connectivity market in the near term. However, Verio also may pursue direct
investments in certain international markets where appropriate opportunities
exist. Verio believes that its indirect strategy through VIANet currently is the
most effective means to leverage Verio's resources in pursuing Internet
connectivity business internationally.
A number of Verio's significant stockholders (including certain of The
Centennial Funds and Norwest) are investors in VIANet. Mr. Jaschke serves as the
Chairman of the Board of Directors of VIANet and Mr. Halstedt is a member of
VIANet's Board of Directors.
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<PAGE> 131
PRINCIPAL STOCKHOLDERS OF VERIO
The following table sets forth certain information as of October 31, 1998
with respect to the beneficial ownership of Verio Common Stock by (i) each
stockholder known by Verio to own beneficially more than five percent, in the
aggregate, of the outstanding shares of Verio Common Stock, (ii) each director
and Named Executive Officer of Verio (as defined below) and (iii) all executive
officers and directors as a group.
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF SHARES BENEFICIALLY
BENEFICIALLY OWNED(1) OWNED(1)
--------------------- -------------------
PRIOR TO ASSUMING PRIOR TO ASSUMING
HOLDERS MERGER MERGER MERGER MERGER
- ------- --------- --------- -------- --------
<S> <C> <C> <C> <C>
Brooks Fiber Properties, Inc.(2)............................ 5,369,131 5,369,131 15.96% 14.60%
425 Woods Mill Road South
Suite 300
Town & Country, Missouri 63017
Nippon Telegraph and Telephone Corporation(3)............... 4,493,877 4,493,877 13.64% 12.45%
Global Communications Headquarters
Tokyo Opera City Tower
20-2 Nishi-Shinjuku 3-chrome
Shinjuku-ku
Tokyo 163-14, Japan
Norwest Equity Partners V, L.P. ............................ 4,301,250 4,301,250 13.06% 11.92%
245 Lytton Avenue
Palo Alto, California 94301
Providence Equity Partners, L.P. ........................... 3,055,693 3,055,693 9.28% 8.47%
50 Kennedy Plaza
Providence, Rhode Island 02903
Centennial Fund V, L.P.(4).................................. 2,302,303 2,302,303 6.99% 6.38%
1428 Fifteenth Street
Denver, Colorado 80202
Centennial Fund IV, L.P.(4)................................. 2,159,105 2,159,105 6.55% 5.98%
1428 Fifteenth Street
Denver, Colorado 80202
Steven C. Halstedt(5)....................................... -- -- -- --
Herbert R. Hribar........................................... -- -- -- --
Justin L. Jaschke(6)........................................ 240,182 240,182 * *
Estate of Mark D. Johnson(7)................................ 130,000 130,000 * *
James C. Allen(8)........................................... 30,435 30,435 * *
Trygve E. Myhren(9)......................................... 20,000 20,000 * *
Paul J. Salem(10)........................................... 2,174 2,174 * *
Stephen W. Schovee(11)...................................... -- -- -- --
George J. Still, Jr.(12).................................... -- -- -- --
Arthur L. Cahoon(13)........................................ -- 186,813 -- *
Yukimasa Ito(14)............................................ -- -- -- --
Chris J. DeMarche(15)....................................... 102,819 102,819 * *
Carla Hamre Donelson(16).................................... 55,250 55,250 * *
Peter B. Fritzinger(17)..................................... 42,174 42,174 * *
All executive officers and directors as a group (13 persons
prior to Merger, 14 persons after Merger)(18)............. 559,121 745,934 1.69% 2.06%
</TABLE>
- ---------------
* Less than 1%
(1) Percentage of beneficial ownership is based on 32,941,678 total shares of
Verio Common Stock outstanding as of October 31, 1998. Percentage of
beneficial ownership after the Merger is based on 36,082,927 shares of
Verio Common Stock outstanding, which includes the shares outstanding prior
to the Merger identified above plus 3,141,249 shares of Verio Common Stock
to be issued pursuant to the Merger, but excludes 1,778,820 shares of Verio
Common Stock reserved for issuance relating to the assumption by Verio of
options or warrants to acquire Hiway Common Stock. In computing the number
of shares beneficially owned by a person and the percentage ownership of
that person, shares of Verio Common Stock subject to options or warrants
owned by such person that are currently exercisable or
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<PAGE> 132
exercisable within 60 days of October 31, 1998 are deemed outstanding;
provided, that such shares are not deemed outstanding for the purpose of
computing the percentage of ownership of any other person. Except as
indicated in the footnotes to this table and pursuant to applicable
community property laws, each of the persons named in this table has sole
voting and investment power with respect to the shares set forth opposite
such stockholder's name.
(2) Includes warrants to acquire 704,160 shares of Verio Common Stock
exercisable within 60 days. As a result of the acquisition of Brooks by
WorldCom, which resulted in Brooks becoming a wholly owned subsidiary of
WorldCom, WorldCom may be deemed to indirectly beneficially own the shares
owned by Brooks.
(3) Because the percentage of beneficial ownership following the Verio IPO
reflected in this table is based on outstanding (not fully diluted) shares
(see footnote 1), the ownership percentage shown for NTT is higher than the
maximum percentage of fully diluted shares that NTT was permitted to
purchase in the NTT Investment.
(4) Does not include 71,205 shares of Verio Common Stock held by Centennial
Entrepreneurs Fund V, L.P. ("Centennial Entrepreneurs"). Centennial
Holdings V, L.P. ("Holdings V") is the sole general partner of Centennial
Entrepreneurs and may be deemed to indirectly beneficially own such shares
by virtue of its authority to make decisions regarding the voting and
disposition of shares beneficially owned by Centennial Entrepreneurs.
Centennial Fund V, L.P. ("Centennial V") disclaims beneficial ownership of
the shares held by Centennial Entrepreneurs, and Centennial Entrepreneurs
disclaims beneficial ownership of the shares held by Centennial V. In
addition, Centennial V disclaims beneficial ownership of the shares held by
Centennial Fund IV, L.P. ("Centennial IV"), and Centennial IV disclaims
beneficial ownership of the shares held by Centennial V.
(5) The sole General Partner of Centennial IV is Centennial Holdings IV, L.P.
("Holdings IV") and the sole General Partner of Centennial V is Holdings V.
Holdings IV and Holdings V may be deemed to indirectly beneficially own the
shares owned by Centennial IV and Centennial V, respectively. Mr. Halstedt
is a general partner of Holdings IV and Holdings V and may be deemed to be
the indirect beneficial owner of the shares owned by Centennial IV and
Centennial V. Mr. Halstedt disclaims beneficial ownership of shares held by
Centennial IV and Centennial V. In addition, this amount does not include
141,265 shares of Verio Common Stock held by Centennial Holdings I, L.L.C.
("Holdings LLC"), of which Mr. Halstedt is a unit holder. Centennial
Holdings, Inc. ("Holdings Inc."), of which Mr. Halstedt is an officer and
director, is the sole Managing Member of Holdings LLC and may be deemed to
beneficially own shares directly beneficially owned by Holdings LLC.
However, Mr. Halstedt, acting alone, does not have voting or investment
power with respect to any of the shares directly held by either Holdings
Inc. or Holdings LLC, and, as a result, Mr. Halstedt disclaims beneficial
ownership of the shares held by Holdings LLC.
(6) Includes options for 70,000 shares of Verio Common Stock exercisable within
60 days.
(7) Includes options for 70,000 shares of Verio Common Stock exercisable within
60 days.
(8) On April 6, 1998, Mr. Allen transferred 25,000 of his shares of Verio
Common Stock to the James C. Allen Revocable Trust. In accordance with the
rules of the Exchange Act, Mr. Allen is deemed to be the beneficial owner
of such shares.
(9) Includes options for 10,000 shares of Verio Common Stock exercisable within
60 days.
(10) Mr. Salem holds 2,174 shares of Verio Common Stock personally. The sole
general partner of Providence Equity Partners L.P. ("Providence") is
Providence Equity Partners LLC ("PEPLLC"). Mr. Salem is a member of PEPLLC
and may be deemed to indirectly beneficially own the shares owned by
Providence. Mr. Salem disclaims beneficial ownership of these shares.
(11) Telecom Partners L.P. ("Telecom") holds 936,666 shares of Verio Common
Stock. Mr. Schovee is a general partner of Telecom and may be deemed to be
the indirect beneficial owner of the shares owned by Telecom. Mr. Schovee
disclaims beneficial ownership of shares held by Telecom.
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(12) The sole general partner of Norwest Equity Partners V, L.P. ("Norwest") is
Itasca Partners V ("Itasca"). Mr. Still is a general partner of Itasca and
may be deemed to indirectly beneficially own the shares owned by Norwest.
Mr. Still disclaims beneficial ownership of these shares.
(13) Includes the shares held of record by Pam Fitch as Trustee of the Arthur
Logan Cahoon Grantor Retained Annuity Trust dated May 29, 1998 (see
footnote (7) of "Principal Shareholders of Hiway") and assumes that Mr.
Cahoon exercises his warrants to acquire Hiway Common Stock prior to the
closing of the Merger. In the event that Mr. Cahoon exercises such warrants
(which are to be assumed by Verio at the Effective Time) after the closing
of the Merger, he will own 542,403 shares of Verio Common Stock (including
457,105 shares of Verio Common Stock issuable upon exercise of such
warrants at the Option Exchange Ratio of 0.3940) representing 1.48% of
Verio Common Stock.
(14) On September 11, 1998, options to purchase 30,000 shares of Verio Common
Stock were issued to Mr. Ito. Mr. Ito assigned these options to NTT Rocky,
Inc. on October 14, 1998. Mr. Ito disclaims beneficial ownership of these
options. NTT Rocky, Inc. is affiliated with NTT, and NTT may be deemed to
indirectly beneficially own these options.
(15) Includes options for 41,334 shares of Common Stock exercisable within 60
days.
(16) Includes options for 37,333 shares of Common Stock exercisable within 60
days.
(17) Includes options for 15,000 shares of Common Stock exercisable within 60
days.
(18) Includes options exercisable for 196,334 shares of Verio Common Stock (not
including options held by Mr. Johnson's estate) for the calculation prior
to the Merger. For the calculation after the Merger, also includes the
shares held of record by Pam Fitch as Trustee of the Arthur Logan Cahoon
Grantor Retained Annuity Trust dated May 29, 1998 (see footnote (13) above)
and assumes that Mr. Cahoon exercises his warrants to acquire Hiway Common
Stock prior to the closing of the Merger. In the event that Mr. Cahoon
exercises such warrants (which are to be assumed by Verio at the Effective
Time) after the closing of the Merger, all executive officers and directors
as a group will beneficially own 1,101,524 shares of Verio Common Stock
(including 457,105 shares of Verio Common Stock issuable upon exercise of
such warrants at the Option Exchange Ratio of 0.3940 to Mr. Cahoon, and
options exercisable for 196,334 shares of Verio Common Stock) representing
3.00% of Verio Common Stock.
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MANAGEMENT OF VERIO AFTER THE MERGER
DIRECTORS AND EXECUTIVE OFFICERS OF VERIO
The directors and certain officers (including all executive officers) of
Verio following consummation of the Merger are anticipated to be:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
Steven C. Halstedt(3)(4)........... 52 Chairman of the Board
Justin L. Jaschke(3)(4)............ 40 Chief Executive Officer, Director
Herbert R. Hribar(3)............... 46 President and Chief Operating Officer, Director
James C. Allen(2).................. 52 Director
Trygve E. Myhren(1)(2)(4).......... 61 Director
Paul J. Salem...................... 34 Director
Stephen W. Schovee(1)(2)........... 38 Director
George J. Still, Jr.(4)............ 40 Director
Yukimasa Ito....................... 43 Director
Arthur L. Cahoon................... 42 Director
Sean G. Brophy..................... 39 Vice President of Corporate Development
James E. Cunningham................ 41 Vice President of Sales and Marketing
Chris J. DeMarche.................. 41 Chief Technical Officer
Carla Hamre Donelson............... 42 Vice President, General Counsel and Secretary
Peter B. Fritzinger................ 40 Chief Financial Officer
Deb Mayfield Gahan................. 43 Vice President of Human Resources and
Organizational Development
James M. Kieffer................... 37 Vice President of Customer Operations
Eric S. Hood....................... 45 Vice President of Engineering and Operations
Edward R. Milstein................. 40 Vice President and Chief Information Officer
</TABLE>
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Executive Committee
(4) Member of Finance Committee
All of the officers identified above serve at the discretion of the Verio
Board. There are no family relationships between any persons identified above.
There are currently two vacancies on the Verio Board. One vacancy is being
reserved for the designee of Hiway pursuant to the Merger Agreement, which is
expected to be filled by Arthur L. Cahoon at the Effective Time. See "The Merger
Agreement -- Certain Covenants." The following are brief biographies of these
individuals.
Steven C. Halstedt has served as Chairman of the Board of Directors of
Verio since Verio's inception in March 1996. Mr. Halstedt is a co-founder of The
Centennial Funds. Mr. Halstedt has 17 years of direct venture capital experience
and serves as a general partner of each of the Centennial Holdings'
partnerships. Prior to co-founding The Centennial Funds in 1981, he was
Executive Vice President and Director of Daniels & Associates, Inc., a private
communications service company involved in cable television system operations.
Mr. Halstedt is a member of the Board of Directors of Formus Communications,
Inc., VIANet and WLL International, Inc. Mr. Halstedt was recently a director of
Pluto Technologies International, Inc., Centennial Communications Corp., Masada
Security Holdings, Inc. and Triax Communications Corp. He is also former
Chairman of the Board of OneComm Corporation ("OneComm"), PageAmerica Group,
Inc. and Orion Network Systems, Inc., all publicly traded telecommunications
companies. Mr. Halstedt received a Bachelor of Science with distinction in
management engineering from Worcester Polytechnic Institute, and earned a Master
of Business Administration from the Amos Tuck School of Business Administration
at Dartmouth
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College, where he was named an Edward Tuck Scholar. He attended the University
of Connecticut School of Law. He was a Platoon Leader and Battalion Operations
Officer in a U.S. Army Combat Engineer Battalion in Vietnam.
Justin L. Jaschke has served as Chief Executive Officer of Verio since
Verio's inception in March 1996. He is also a member of Verio's Board of
Directors. Prior to forming Verio, Mr. Jaschke served as Chief Operating Officer
for Nextel Communications ("Nextel") following its merger with OneComm in July
of 1995. Mr. Jaschke served as OneComm's President and a member of its Board of
Directors from the time that he joined that company in April 1993 until the
merger with Nextel. Mr. Jaschke currently serves as Chairman of the Board of
Directors of VIANet and also serves on the Board of Directors of Metricom, a
leading wireless data communications provider, and on the Board of Directors of
Dobson Communications, a rural cellular and local exchange provider. From May
1990 to April 1993, Mr. Jaschke served as President and CEO of Bay Area Cellular
Telephone Company. From November 1987 to May 1990, Mr. Jaschke was Vice
President of Corporate Development of PacTel Cellular, and from 1985 to 1987 was
Director of Mergers and Acquisitions for PacTel Corporation. Prior to that, Mr.
Jaschke was a management consultant with Marakon Associates. Mr. Jaschke
received a Bachelor of Science degree summa cum laude in mathematics from the
University of Puget Sound and a Master of Science degree in management from the
Sloan School of Management at MIT.
Herbert R. Hribar has served as President and Chief Operating Officer of
Verio since July 1998. Mr. Hribar joined Verio from Ameritech Corporation, where
he served as President of Ameritech Corporation's cellular services business
unit and was responsible for all aspects of the business, including strategy,
marketing, sales, network, customer service, IT and business development. He was
promoted to that position in 1997 after working for Ameritech for two years,
first as Vice President of International Operations beginning in early 1995, and
later as Managing Director of Ameritech Europe. He also served as Chairman and
Chief Executive Officer of ADSB Telecommunications, a consortium of
international telecommunications companies headed by Ameritech. Before joining
Ameritech, Mr. Hribar served in various capacities with Sprint Corporation from
1988 to 1995, including as Vice President and General Manager at Sprint
International, where he was responsible for the off-shore network planning,
design, operations and information systems planning for Sprint's international
voice, data, messaging and fax services as well as private data network systems.
Mr. Hribar previously worked in senior management positions at GTE Telenet and
served in the U.S. Navy. Mr. Hribar holds a Bachelor of Science degree in Ocean
Engineering from the U.S. Naval Academy, a Master of Science degree in Civil
Engineering from the University of Illinois, a Master of Business Administration
from George Washington University and a Master of Science degree in Computer
Science from Johns Hopkins University.
James C. Allen has served as a director of Verio since May 1996. Mr. Allen
served as CEO of Brooks Fiber Properties, Inc. until its recent acquisition by
WorldCom. Mr. Allen has 25 years of experience as an entrepreneur, operator,
financier, expert witness and advisor in cable television and broadband
telecommunications. Prior to joining Brooks, he served as Chief Financial
Officer and Chief Operating Officer of David Lipscomb University from which he
holds a Bachelor of Science degree. Mr. Allen was a founder and former
President, CFO and COO of Cencom Cable Associates, which was purchased by a
subsidiary of Hallmark Cards, and a former Vice President of Operations of
Telecom Engineering, Inc., a telecommunications engineering and consulting firm
with clients in both the telephone and cable television industries. Mr. Allen
previously held positions as Vice President of Operations of United Cable
Television, Divisional Manager of Continental Telephone Corporation, and Vice
President of Finance for National Communications Service Corporation. Mr. Allen
also is a director of MetroNet Communications Corp. ("MetroNet"), an LEC.
Trygve E. Myhren has served as a director of Verio since April 1997. Mr.
Myhren is President of Myhren Media, Inc., a private investment firm
concentrating in media, telecommunications, software and Internet related and
consumer products companies. From 1990 to 1996, Mr. Myhren was President and a
director of The Providence Journal Company. From 1975 until 1988, Mr. Myhren was
an officer of American Television and Communications Corporation (ATC), the
cable television subsidiary of Time, Inc. (now Time/Warner Cable), serving as
Chairman and CEO from 1980 to 1988. Mr. Myhren also serves on the boards of The
Providence Journal Company, Advanced Marketing Services, Peapod, Inc.,
CableLabs, J.D. Edwards, Inc., WNP, Inc., Founders Funds and The University of
Denver. Previously, Mr. Myhren served as chairman of the
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National Cable Television Association (NCTA), and also served on the boards of
Turner Broadcasting Systems, Continental Cablevision, Inc., Citizens Bank and
several internal Time, Inc. boards, including Home Box Office, Temple-Eastex and
Time Magazine Group. He also served on the FCC's Advisory Committee on High
Definition TV. Mr. Myhren has an undergraduate degree in political science and
philosophy from Dartmouth and a Master of Business Administration from the Amos
Tuck Graduate School at Dartmouth. He served three and one-half years as a naval
officer with the U.S. Pacific Fleet.
Paul J. Salem has served as a director of Verio since December 1996. Mr.
Salem is a Managing Director of Providence Equity Partners, Inc., and is a
partner of the general partner of Providence's private equity funds. Providence
manages over $500 million in equity and specializes in communications and media
investments. Mr. Salem has been responsible for many of Providence's investment
activities, including its investments in competitive local exchange companies,
enhanced specialized mobile radio, wireless data networks, radio representation,
telecommunications infrastructure and other areas. He is currently a director of
Interep National Radio Sales, Inc., MetroNet, Wired Ventures, Inc. and UniSite,
Inc. Prior to joining Providence, Mr. Salem worked for Morgan Stanley & Co. in
corporate finance and mergers and acquisitions. Previously, Mr. Salem spent four
years with Prudential Investment Corporation, an affiliate of Prudential
Insurance, where his responsibilities included private placement financings,
leveraged buyout transactions and establishing Prudential's European investment
office. Mr. Salem received a Bachelor of Arts in business from Brown University
and a Master of Business Administration from Harvard Business School.
Stephen W. Schovee has been a director of Verio since Verio's inception in
March 1996. Mr. Schovee serves as Managing Member of Telecom Partners, L.P. and
Telecom Partners II, L.P. Mr. Schovee was previously co-founder, Chief Executive
Officer and a director of OneComm from its inception until its merger with
Nextel. Prior to that, Mr. Schovee was a Vice President of Centennial Holdings,
the manager of The Centennial Funds, a Denver based venture capital fund with
over $400 million of subscribed capital. Mr. Schovee was a partner in two of The
Centennial Funds where he focused on telecommunications investments. Mr. Schovee
is a special limited partner of Centennial Fund IV, L.P. and Centennial Fund V,
L.P. He is a director of SMR Direct, WLL International, Inc., and Infobeat. Mr.
Schovee received a Bachelor of Science degree in mechanical engineering from
Bucknell University and a Master of Business Administration from The Wharton
School.
George J. Still, Jr. has been a director of Verio since Verio's inception
in March 1996. Mr. Still, based in Palo Alto, California, is a Managing Partner
of various Norwest Venture capital partnerships. From July 1984 until October
1989, he was a General Partner with The Centennial Funds based in Denver,
Colorado. Prior to Centennial, Mr. Still was with Ernst & Whinney (now Ernst &
Young) in San Francisco. Currently, he is a director of PeopleSoft, Inc. and
3Dfx Interactive, Inc., both public companies. In addition, he serves on the
board of several private companies, including Metapath Software Corporation,
Software Technologies Corp., ObjectStream, Inc., and Chordiant Software.
Further, Mr. Still serves as a director of the National Venture Capital
Association. He holds a Bachelor of Science degree in business administration
from Pennsylvania State University and a Master of Business Administration from
the Amos Tuck School at Dartmouth College.
Yukimasa Ito has been a director of Verio since September 11, 1998. Mr. Ito
is Vice President, Service Planning of NTT Worldwide Telecommunications Inc., a
corporation specializing in providing various international telecommunications
services to end-users. NTT Worldwide Telecommunications Inc. is a subsidiary of
NTT which, in turn, is an affiliate of Verio. Mr. Ito has held his current
position at NTT Worldwide Telecommunications Inc. since 1997, prior to which he
was Vice President, Service Planning of NTTPC Communications, Inc. from 1994 to
1997 and Director, Corporate Planning of NTT America, Inc. from 1991 until 1994.
Mr. Ito has worked for NTT or its subsidiaries since 1980. Mr. Ito holds a
Bachelor of Engineering degree from Waseda University and a Master of Business
Administration from the University of Washington. In 1990, Mr. Ito was a M.Sc.
Sloan Fellow at Stanford University.
Arthur L. Cahoon will be appointed to the Verio Board upon consummation of
the Merger. Mr. Cahoon served as Chairman of the Hiway Board, CEO and a director
of Hiway since May 1998. From October 1997 to May 1998, he was Chairman of Hiway
Florida. Since March 1993, he has served as general partner of Rock Creek
Partners, Ltd., an investment company, and executive vice president of James
Dahl & Co., an
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investment banking company. Since January 1995, Mr. Cahoon also has served as
Executive Vice President of Timberland Investment Services, LLP, an investment
management company, which he co-founded. In addition, from June 1995 to June
1996, he served as President of QuinStone Industries, inc., a manufacturing
company. Prior to March 1993, Mr. Cahoon served as Executive Vice President and
CFO of Cain & Bultman, Inc., a wholesale distributor. Mr. Cahoon holds a B.B.A.
in accounting and finance from Stetson University.
Sean G. Brophy has served as Vice President of Corporate Development since
November 1997, and prior to that served as Vice President of Marketing and
Business Development for Verio since joining Verio in May 1996. Mr. Brophy
served as Vice President of Marketing for OneComm and then Nextel from 1994 to
1996. He worked at Northern Telecom from 1990 through 1994 in a variety of
capacities, including strategic planning and product management, where he had
global responsibilities for new products for Personal Communications Services.
Prior to that he worked at Bell Northern Research, the research and development
arm of Northern Telecom, designing telephone equipment and services ranging from
the DMS-100 to key systems. While there he was awarded patent and design
excellence awards. Mr. Brophy holds a Bachelor of Science degree in computer
engineering from McMaster University, a Master of Science degree in electrical
engineering from Carleton University and a Master of Science degree in
management from the Sloan School of Management at MIT.
James E. Cunningham was appointed as Verio's Vice President of Sales and
Marketing in June 1998, after serving as the President of Verio's Northeast
regional operations since December 1997. He assumed that role after acting as
the President of Global Enterprise Services, Inc. (one of Verio's acquired ISPs)
beginning in May 1997. Mr. Cunningham has 17 years of sales, marketing and
general management experience with both established and early stage
telecommunications companies. Mr. Cunningham most recently served as Senior Vice
President of Sales and Marketing at U.S. One Communications, Inc. overseeing its
eastern United States sales and service organization. Prior to joining U.S. One
Communications in 1996, Mr. Cunningham spent 10 years with MCI. From 1995 to
1996, he served as Vice President, Sales & Marketing for network MCI Digital
Imaging where he directed its Campus MCI program which provided Internet access
and enhanced services for universities and local governments around the country.
Mr. Cunningham holds a Bachelor of Science degree in Business Administration
from Livingston University in Alabama.
Chris J. DeMarche has been Chief Technical Officer of Verio since joining
Verio in May 1996. From 1995 to 1996, Mr. DeMarche was CTO and Senior Vice
President of Nextel, where he was credited with addressing many critical
technology issues. From 1993 to 1995, he was Senior Vice President of
Engineering and Technology at OneComm, where he was responsible for building a
national engineering team and designing and implementing wireless communication
networks. Mr. DeMarche also worked in advanced technology areas at PacTel
Corporation and Hughes Aircraft Corporation and served in the U.S. Naval
Submarine Force. Mr. DeMarche received his Master of Business Administration
from UCLA in 1990, his Master of System Management from University of Southern
California in 1986, and his Bachelor of Science from the United States Naval
Academy in 1978.
Carla Hamre Donelson has served as Vice President, General Counsel and
Secretary of Verio since joining Verio in October 1996 from the law firm of
Morrison & Foerster LLP, where she had practiced law since March 1987. She
served as a partner in that firm's business department from 1990 and as head of
the Denver business practice from 1993. While in private practice, Ms. Donelson
was engaged in a general corporate and transactional practice, focused primarily
on the communications and related technology industries, representing domestic
and foreign entities in numerous financing, merger, acquisition, investment, and
licensing transactions. She served as regular outside corporate counsel to
OneComm and represented OneComm in connection with a variety of its SMR
acquisitions as well as its merger with Nextel. Ms. Donelson received her
Bachelor of Arts degree in molecular biology from the University of Colorado,
her Juris Doctor degree from the University of Denver College of Law, and is a
member of the Colorado Bar Association.
Peter B. Fritzinger has served as Chief Financial Officer of Verio since
June 1997. From September 1993 until June 1997, Mr. Fritzinger served as Chief
Financial Officer of Louis Dreyfus Natural Gas Corp., an
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independent, publicly held oil and gas company headquartered in Oklahoma City.
From 1991 to 1993, he was Vice President-Finance and Treasurer of Louis Dreyfus
Energy Corp., a diversified, global enterprise with investments in oil and gas
reserves and other petroleum-related industries. Mr. Fritzinger joined Louis
Dreyfus Energy Corp. from J.P. Morgan, where he was a Vice President in its
corporate finance group, having held various positions with Morgan Guaranty
Trust Company of New York since 1980. Mr. Fritzinger received his Bachelor of
Arts degree in math and psychology from Amherst College.
Deb Mayfield Gahan has served as Vice President of Human Resources and
Organizational Development for Verio since September 3, 1998. Prior to that, Ms.
Gahan served as Vice President of Finance and Administration since joining Verio
in May 1996. She brings with her ten years of extensive start-up and
telecommunications experience. From 1994 to 1996, Ms. Gahan served as Vice
President of Business Services and Controller for OneComm and then for Nextel
following its acquisition of OneComm. From 1987 to 1994, she was Director of
Business Operations and Controller for American Cellular Communications and then
BellSouth Cellular Corp., a leading provider of cellular service in 15 states.
In these positions, she was responsible for implementing cost-effective
financial control systems, asset protection, revenue assurance, financial
reporting, treasury and business process development. Ms. Gahan is a Certified
Public Accountant and holds a Master of Business Administration from Mississippi
College, as well as a Bachelor of Science in accounting from Mississippi State
University.
James M. Kieffer has served as Vice President of Customer Operations for
Verio since joining Verio in July 1996. Previously, Mr. Kieffer served as
Nextel's Vice President of Customer Operations responsible for customer care,
billing, accounts receivable, and inventory management from August 1996. Prior
to OneComm's merger with Nextel, Mr. Kieffer led the development of OneComm's
customer care as Director of Customer Operations from January 1994 to August
1995. Prior to that, Mr. Kieffer served as National Customer Service Manager for
Motorola's Land Mobile Products Sector. During his six years with Motorola, he
held several key roles while developing a consolidated national customer care
organization from March 1990 until January 1994. Prior to joining Motorola, Mr.
Kieffer managed customer relations and accounts receivable for IBM. He received
his Master of Business Administration from DePaul University and holds a
Bachelor of Science in management from Illinois State University.
Eric S. Hood has served as Vice President of Engineering and Operations
since September 3, 1998, having previously served as President and CEO of
NorthWestNet, Inc. Dr. Hood sits on the advisory board for several Internet
industry organizations, including Trustworthy Systems/Computer Emergency
Response Team (CERT), the top-level, international Internet security
organization; the U.S. Department of Justice Working Group on Internet Security;
and eCOMM Northwest, a regional consortium of businesses including Intel,
Sequent, BC Tel and Nike, promoting Internet commerce in the Northwest. From
1992 through 1994, Dr. Hood served as President of FARNET, the national
association of Internet service providers, telecommunications companies and
network equipment manufacturers, and from 1993 through 1995, he served on the
Steering Board for the U.S. Department of Energy's ESNet. Dr. Hood's research
and development programs in science, computing and network communications have
received funding support from the National Science Foundation, the U.S.
Department of Energy, the U.S. Department of Education, US West and Digital
Equipment Corporation, among others. Dr. Hood received his doctoral degree in
Theoretical Chemistry from the University of California at Santa Barbara in
1983. He also held the research positions of Bantrell Fellow at the California
Institute of Technology and Visiting Scientist at IBM's Thomas J. Watson
Research Center.
Edward R. Milstein has served as Vice President and Chief Information
Officer since September 3, 1998. Mr. Milstein previously served as President and
CEO of Compute Intensive d/b/a Network Intensive. Founded in 1991, Mr. Milstein
oversaw the growth of Network Intensive into a leading, full service, business
Internet access provider with customers throughout Southern California. Prior to
1991, Mr. Milstein served as area systems engineer for Sun Microsystems Computer
Corporation, a leading provider of high performance UNIX hardware and software.
From 1985 to 1987, Mr. Milstein was a software engineer for Hughes Aircraft,
where he developed a training business focused on the UNIX and Networking
industry. While earning his Bachelor of Science degree from the New Jersey
Institute of Technology in 1984, Mr. Milstein began his first business venture
as an independent consultant.
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COMMITTEES OF THE VERIO BOARD
The Verio Board has established an Executive Committee, a Finance
Committee, a Compensation Committee and an Audit Committee. The Executive
Committee is responsible for reviewing and, where appropriate, authorizing
corporate action with respect to the conduct of the business of Verio between
Board meetings. Actions taken by the Executive Committee must be submitted to
the Board for review and ratification at the next meeting, except in those cases
when the Verio Board has specifically delegated final decision-making authority
to the Executive Committee. The Executive Committee is composed of Messrs.
Halstedt, Jaschke and Hribar. The Finance Committee is responsible for reviewing
and, where appropriate, authorizing certain corporate actions with respect to
the finances of Verio and certain acquisitions of ISPs not involving the
issuance of stock. The Finance Committee is composed of Messrs. Halstedt,
Jaschke, Still and Myhren. The Compensation Committee is responsible for
reviewing and establishing the compensation structure for Verio's officers and
directors, including salary rates, participation in incentive compensation and
benefit plans, 401(k) plans, stock option and purchase plans and other forms of
compensation. The Compensation Committee is composed of Messrs. Allen, Myhren
and Schovee.
The Verio Board also has established an Audit Committee consisting of
Messrs. Myhren and Schovee. The Audit Committee will be comprised solely of
independent directors and will be responsible for recommending the firm to be
appointed as independent accountants to audit Verio's financial statements,
discussing the scope and results of the audit with the independent accountants,
reviewing the functions of Verio's management and independent accountants with
respect to Verio's financial statements and performing such other related duties
and functions as are deemed appropriate by the Audit Committee and the Verio
Board.
DIRECTORS AND EXECUTIVE OFFICERS OF MERGER SUB
The sole director of Merger Sub immediately prior to the Effective Time
will become the sole director of the Surviving Company at the Effective Time
until her successor has been duly elected and qualified or until her earlier
resignation or removal. As a result, the current directors of Hiway will not be
directors of the Surviving Company. The officers of Merger Sub immediately prior
to the Effective Time will be the officers of the Surviving Company at the
Effective Time until their respective successors have been duly appointed and
qualified or until their earlier resignation or removal.
COMPENSATION OF DIRECTORS AND CERTAIN
EXECUTIVE OFFICERS OF VERIO
COMPENSATION OF VERIO DIRECTORS
Each non-employee director of Verio receives an annual retainer fee of
$5,000 and a fee of $1,000 for each meeting of the Verio Board attended in
person or $500 for each meeting attended by telephone. The fee for Verio Board
committee meetings is $500 per meeting. A director may elect to receive these
payments in the form of Verio Common Stock. Upon consummation of the Verio IPO,
each non-employee director was automatically granted an option to acquire 30,000
shares of Verio Common Stock at an exercise price per share equal to the fair
market value of the Verio Common Stock at the date of grant. Such options will
vest and become exercisable in three equal installments on each yearly
anniversary of the grant date. Non-employee directors elected or appointed to
the Verio Board will be granted automatically at the time of election or
appointment an option to acquire 30,000 shares of Verio Common Stock with the
same terms and conditions at an exercise price equal to the then fair market
value of the Verio Common Stock. After the initial three year vesting period for
such options, non-employee directors will receive automatic annual grants of
options to acquire an additional 3,000 shares of Verio Common Stock at an
exercise price equal to the fair market value of the Verio Common Stock at the
date of grant. Such options will vest and become exercisable on the first
anniversary of the grant date. In April 1998, Verio adopted a separate stock
incentive plan under which options may be granted and shares of Verio Common
Stock may be issued to non-employee directors in
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accordance with these compensation arrangements. See "-- Stock Option and
Incentive Plans -- 1998 Non-Employee Director Stock Incentive Plan."
EXECUTIVE COMPENSATION OF VERIO
The following table sets forth certain summary information for the years
ended December 31, 1997 and 1996, respectively, concerning the compensation paid
and awarded to: (a) Verio's Chief Executive Officer and (b) Verio's four most
highly compensated executive officers whose salaries and bonuses exceeded
$100,000 who were serving as executive officers as of December 31, 1997
(collectively, with the Chief Executive Officer, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -----------------------
-------------------------------- RESTRICTED SECURITIES
FISCAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR(1) SALARY($) BONUS($) AWARDS($) OPTIONS(#) COMPENSATIONS($)
--------------------------- ------- --------- -------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Justin L. Jaschke.............. 1997 175,003 66,500 85,000 -- --
Chief Executive Officer 1996 124,631(2) 44,867 -- 240,000 --
Mark D. Johnson................ 1997 113,337 50,603 -- 200,000 --
President and Chief 1996 -- -- -- -- --
Operating Officer(3)
Chris J. DeMarche.............. 1997 160,004 60,800 25,000 20,000 --
Chief Technical Officer 1996 106,666(4) 38,215 -- 70,000 --
Carla Hamre Donelson........... 1997 160,004 57,760 -- 20,000 --
Vice President, General 1996 26,320(5) 13,680 50,000 60,000 42,678(7)
Counsel and Secretary
Peter B. Fritzinger............ 1997 89,443(6) 31,287 -- 75,000 70,267(8)
Chief Financial Officer 1996 -- -- -- -- --
</TABLE>
- ---------------
(1) Fiscal year 1996 covers the period from inception (March 1, 1996) to
December 31, 1996.
(2) Reflects compensation paid to Mr. Jaschke commencing with his appointment as
Chief Executive Officer in April 1996.
(3) Mr. Johnson, who served as Verio's President and Chief Operating Officer
beginning in March 1997, died on March 9, 1998.
(4) Reflects compensation paid to Mr. DeMarche commencing with his appointment
as Chief Technical Officer in May 1996.
(5) Reflects compensation paid to Ms. Donelson commencing with her appointment
as Vice President, General Counsel and Secretary in October 1996.
(6) Reflects compensation paid to Mr. Fritzinger commencing with his appointment
as Chief Financial Officer in June 1997.
(7) Represents the cost to Verio of tax reimbursements.
(8) Represents the cost to Verio of providing relocation benefits.
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STOCK OPTIONS GRANTED IN 1997
The following table contains information concerning the grant of stock
options by Verio under Verio's stock option plans to the Named Executive
Officers during the year ended December 31, 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM($)(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED(#) FISCAL YEAR ($/SHARE)(1) DATE 5% 10%
---- ---------- ------------- ------------- ------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Justin L. Jaschke......... -- -- -- -- -- --
Mark D. Johnson........... 200,000 13.28% 6.00 May 11, 2007 754,674 1,912,491
Chris J. DeMarche......... 20,000 1.38% 6.75 Nov. 24, 2007 84,901 215,155
Carla Hamre Donelson...... 20,000 1.38% 6.75 Nov. 24, 2007 84,901 215,155
Peter B. Fritzinger....... 75,000 5.18% 6.00 May 21, 2007 283,003 717,184
</TABLE>
- ---------------
(1) All options were granted at an exercise price per share equal to at least
the fair market value of the Verio Common Stock on the date of grant, as
determined by the Verio Board.
(2) The potential realizable value is calculated based on the fair market value
on the date of grant, which is equal to the exercise price of the options,
assuming that the stock appreciates in value from the date of grant
compounded annually until the end of the option term at the rate specified
(5% or 10%) and that the option is exercised and sold on the last day of the
option term for the appreciated stock price. Potential realizable value is
net of the option exercise price. The assumed rates of appreciation are
specified in the rules and regulations of the Commission and do not
represent Verio's estimate or projection of future stock price. Actual
gains, if any, resulting from stock option exercises and Verio Common Stock
holdings are dependent on the future performance of the Verio Common Stock
and overall stock market conditions. There can be no assurance that the
amounts reflected in this table will be achieved.
FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information with respect to the
Named Executive Officers regarding the stock options exercised during the last
fiscal year, the aggregate number of unexercised options to purchase Verio
Common Stock granted in all years and held by them as of December 31, 1997, and
the value of unexercised in-the-money options (i.e., options that had a positive
spread between the exercise price and the fair market value of the Verio Common
Stock) as of December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS AT IN-THE-MONEY OPTIONS
SHARES FISCAL YEAR-END(#) AT FISCAL YEAR-END($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Justin L. Jaschke........... 60,000 1,280,000 -- 180,000 380,000 3,600,000
Mark D. Johnson............. -- -- -- 200,000 -- 3,400,000
Chris J. DeMarche........... -- -- 14,000 76,000 280,000 1,445,000
Carla Hamre Donelson........ -- -- 12,000 68,000 240,000 1,285,000
Peter B. Fritzinger......... -- -- -- 75,000 -- 1,275,000
</TABLE>
- ---------------
(1) The value of options at year-end is based on an assumed fair market value of
$23.00 per share of Verio Common Stock.
EMPLOYMENT AGREEMENTS
As a general matter, Verio does not enter into employment agreements, and
has not entered into employment agreements with any of its officers. Rather, the
employment relationships with each officer are "at will." However, in connection
with the initial employment of each officer, Verio and the officer executed an
offer letter, in which the general compensation and benefits provided to the
officer are outlined, including base salary, targeted annual bonus, option
grants, employee benefits and severance. The amounts outlined in such offer
letters are subject to change from time to time.
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COMPENSATION PROTECTION AGREEMENTS
Verio has entered into compensation protection agreements (the
"Compensation Protection Agreements") with each of the Named Executive Officers
and certain additional officers (collectively, the "Protected Officers") of
Verio. Each of the Compensation Protection Agreements contain substantially
similar terms. The form of Compensation Protection Agreement has been filed as
an exhibit to Verio's Registration Statement of which this Proxy
Statement/Prospectus is a part. The Compensation Protection Agreements are for a
term of three years, subject to automatic yearly extensions. In no event will
the Compensation Protection Agreements terminate within 12 months of a Change in
Control of Verio. "Change in Control" includes the following:
(a) An acquisition (other than directly from Verio) of any voting
securities of Verio (the "Voting Securities") by any Person (as defined in
the Exchange Act) immediately after which such Person has Beneficial
Ownership (as defined in the Exchange Act) of 40% or more of the combined
voting power of Verio's then outstanding Voting Securities. In determining
whether a Change in Control has occurred, Voting Securities which are
acquired in a "Non-Control Acquisition," as defined in the Compensation
Protection Agreements, do not constitute an acquisition which would cause a
Change in Control;
(b) The individuals who, as of the date the Compensation Protection
Agreements were approved by the Verio Board, are members of the Verio Board
(the "Incumbent Verio Board"), cease for any reason to constitute at least
a majority of the Verio Board (subject to certain provisos);
(c) Approval by stockholders of Verio of a merger, consolidation or
reorganization involving Verio, unless such merger, consolidation or
reorganization (each, an "event") satisfies certain specified conditions;
(d) Any other event that at least two-thirds of the Incumbent Verio
Board determines constitutes a Change in Control; and
(e) If a Protected Officer's employment is terminated prior to a
Change in Control and the Verio Board determines that such termination was
at the request of a third party who has indicated an intention or taken
steps to effect a Change in Control and who subsequently effectuates a
Change in Control, or occurred in connection with, or in anticipation of, a
Change in Control which actually occurs, then a Change in Control is
considered to have occurred with respect to that Protected Officer.
Upon termination within 12 months following a Change in Control, each
Protected Officer will receive the following compensation and benefits:
(i) If a Protected Officer's employment with Verio is terminated
within 12 months following a Change in Control by Verio for Cause (as
defined in the Compensation Protection Agreements) or by reason of the
Protected Officer's Disability (as defined in the Compensation Protection
Agreements), death or retirement, or by the Protected Officer other than
for Good Reason (as defined in the Compensation Protection Agreements),
then Verio must pay to the Protected Officer the Accrued Compensation (as
defined below) due through the date of termination (the "Termination
Date"). "Accrued Compensation" includes base salary, reimbursement for
reasonable and necessary expenses incurred by the Protected Officer on
behalf of Verio during the period ending on the Termination Date, and
vacation pay.
(ii) If a Protected Officer's employment is terminated within 12
months of a Change in Control for any other reason than specified above,
the Protected Officer will receive:
(A) his or her Accrued Compensation;
(B) an amount equal to the product of a fraction, the numerator of
which is the number of days in Verio's fiscal year through the
Termination Date and the denominator of which is 365, and the bonus
amount, which will be the greater of 100% of the last annual incentive
payment paid or payable to the Protected Officer prior to the
Termination Date, and the Protected Officer's incentive target for the
fiscal year in which the Change in Control occurs (the "Bonus Amount");
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<PAGE> 143
(C) an amount equal to two times the sum of the Protected Officer's
annual base salary in effect immediately prior to the Change in Control,
plus the Bonus Amount. However, the amount paid to Mr. Jaschke will be
three times that sum;
(D) until the third anniversary of the Termination Date, the same
rights with respect to benefits provided by Verio, as were provided to
the Protected Officer as of the Effective Date, or, if greater, at any
time within 90 days preceding the date of the Change in Control; and
(E) the immediate vesting and removal of all restrictions on any
outstanding incentive awards granted to the Protected Officer under
Verio's stock option and other stock incentive plans or arrangement.
The Compensation Protection Agreements further provide that the Protected
Officers are not required to mitigate the amount of any payment by seeking
employment or otherwise. Protected Officers may be entitled to additional
compensation or benefits in accordance with Verio's employee benefit plans and
other applicable programs, policies and practices then in effect. The
Compensation Protection Agreements contain a "gross-up" provision pursuant to
which any Severance Payment, which would be subject to certain excise taxes
occurring as a result of Change in Control, would include an additional gross-up
payment resulting in the Protected Officer retaining an additional amount equal
to excise tax.
STOCK OPTION AND INCENTIVE PLANS
1996 Stock Option Plan
The 1996 Stock Option Plan was adopted and approved by the Verio Board in
May 1996 and by the stockholders of Verio in June 1996. In February 1998, the
1996 Stock Option Plan was amended, with the approval of the Verio Board, to
reserve a total of 2,205,300 shares of Verio Common Stock for issuance under
this plan. As of October 31, 1998, options to purchase 157,547 shares of Verio
Common Stock granted under the 1996 Stock Option Plan had been exercised,
options to purchase 1,743,158 shares of Verio Common Stock were outstanding and
no additional options to purchase shares of Verio Common Stock remained
available for grant. All options forfeited after the amendment to the 1996 Stock
Option Plan was implemented in February 1998 result in availability under the
1998 Stock Incentive Plan and are no longer available for grant under the 1996
Stock Option Plan. The outstanding options were exercisable at a weighted
average exercise price of $6.31 per share. Outstanding options to purchase an
aggregate of 1,051,334 shares were held by employees who are not officers or
directors of Verio. Of the 157,547 shares issued upon exercise of options, a
total of 48,250 were issued upon exercise prior to their respective exercise
vesting dates, as permitted by the terms of the 1996 Stock Option Plan. As a
result, these shares are subject to repurchase by Verio at their respective
exercise prices, until the date on which they would have become exercisable. The
1996 Stock Option Plan will terminate in 2006, unless sooner terminated by the
Verio Board.
The Verio Board has delegated administration of the 1996 Stock Option Plan
to its Compensation Committee. The Compensation Committee is constituted to
comply with the rules under Rule 16b-3 of the Exchange Act. Awards under the
1996 Stock Option Plan may consist of (i) options to purchase Verio Common Stock
that are designed to qualify, under Section 422 of the Code, as "incentive stock
options" ("Incentive Stock Options") or (ii) options to purchase Verio Common
Stock that are not described in Sections 422 or 423 of the Code ("Non-Qualified
Stock Options" and, collectively with Incentive Stock Options, "Options").
The Compensation Committee has discretion to grant Incentive Stock Options
to employees and officers (including directors who are employees) of Verio or
any Affiliate (as defined in the 1996 Stock Option Plan) of Verio and
Non-Qualified Stock Options to employees, officers, directors or consultants of
Verio and its Affiliates. The Compensation Committee may set the terms of such
grants, subject to applicable restrictions in the 1996 Stock Option Plan.
Incentive Stock Option grants are subject to the following limitations: (i) the
term of any Incentive Stock Option may not be longer than ten years, provided
that the term of any Incentive Stock Option granted to an individual possessing
more than 10% of the combined voting power of Verio or an Affiliate (a "10%
Holder") may not be longer than five years; (ii) the aggregate fair market value
of all shares
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<PAGE> 144
underlying Incentive Stock Options granted to an individual that first become
exercisable in any calendar year may not exceed $100,000; and (iii) the exercise
price of Incentive Stock Options may not be less than the fair market value of
the underlying shares on the grant date, provided that the exercise price of any
Incentive Stock Option granted to a 10% Holder may not be less than 110% of the
fair market value of the underlying shares on the grant date. With respect to
Non-Qualified Stock Options, the exercise price may not be less than 85% of the
fair market value of the underlying shares on the grant date. As of October 31,
1998, no such below-market grant has been made.
During an optionee's lifetime, an Incentive Stock Option is exercisable
only by the optionee and no Incentive Stock Option may be transferred by the
optionee other than by will or the laws of descent and distribution. During an
optionee's lifetime (or a transferee pursuant to a qualified domestic relation
order), a Non-Qualified Stock Option is exercisable only by the optionee and no
Non-Qualified Stock Option may be transferred by the optionee other than by will
or the laws of descent and distribution or pursuant to a qualified domestic
relation order satisfying the requirements of the prior version of Rule 16b-3
under the Exchange Act. An optionee whose continuous status as an employee,
director or consultant of Verio terminates for any reason (other than
termination because of death or disability) may exercise, in the three-month
period following such cessation (unless such Options terminate or expire sooner
by their terms), or such longer or shorter period as specified in the Option,
that portion of the optionee's Options that is exercisable at the time of such
cessation. In the event the optionee becomes disabled, the Options vested as of
the date of disability may be exercised prior to the earlier of such Option's
specified expiration date or 12 months from the date of the optionee's
disability, or such longer or shorter period as specified in the Option. In the
event the optionee dies, the Options vested as of the date of death may be
exercised prior to the earlier of such Option's specified expiration date or 18
months from the date of the optionee's death, or such longer or shorter period
as specified in the Option.
In the event of (i) a dissolution or liquidation of Verio, (ii) a merger or
consolidation in which Verio is not the surviving corporation, (iii) a reverse
merger in which Verio is the surviving corporation but the shares of Verio's
outstanding Verio Common Stock immediately prior to such merger are converted
into other property, whether in the form of securities, cash or otherwise, or
(iv) any other capital reorganization in which Verio's stockholders receive less
than 50% of the outstanding voting shares of the surviving corporation: (a) any
surviving corporation shall assume any Options outstanding under the 1996 Stock
Option Plan; (b) such Options shall continue in full force and effect; or (c)
the Options shall terminate if not exercised prior to such event.
1997 California Stock Option Plan
Verio's 1997 California Stock Option Plan (the "1997 California Plan") was
adopted by the Verio Board in February 1997, and approved by Verio's
stockholders in April 1997. In February 1998, the 1997 California Plan was
amended, with the approval of the Verio Board, to reserve a total of 795,400
shares of Verio Common Stock for issuance under this plan. This amendment has
been approved by Verio's stockholders. As of October 31, 1998, options to
purchase 320 shares of Verio Common Stock had been exercised under the 1997
California Plan, options to purchase 542,751 shares of Verio Common Stock were
outstanding and there were no options available for grant as the remaining
options were transferred to the 1998 Stock Incentive Plan (as defined below).
The outstanding options were exercisable at a weighted average exercise price of
$12.10 per share. Outstanding options to purchase an aggregate of 515,251 shares
were held by employees who are not officers or directors of Verio, and the
remaining outstanding options to purchase 70,000 shares are held by Mr.
Johnson's estate.
The 1997 California Plan may be administered by the Verio Board or the
Compensation Committee (either, the "1997 Plan Administrator"). The 1997
California Plan provides for the granting to employees of Verio and of its
subsidiaries or parent corporations of Incentive Stock Options, and for the
granting to employees and independent contractors of Non-Qualified Stock
Options. The 1997 Plan Administrator has the power to determine the terms of the
Options granted, including the exercise price, number of shares subject to the
Option and the exercisability thereof, and the form of consideration payable
upon exercise. Options granted under the 1997 California Plan are not
transferable by the optionee other than by will or by
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<PAGE> 145
the laws of descent or distribution, and each Option is exercisable during the
lifetime of the optionee only by such optionee. The exercise price of all
Incentive Stock Options granted under the 1997 California Plan must be at least
equal to the fair market value, as determined by the Verio Board, of the Verio
Common Stock on the grant date. The exercise price of all Non-Qualified Stock
Options granted under the 1997 California Plan must be at least 85% of the fair
market value, as determined by the 1997 Plan Administrator, of the Verio Common
Stock on the grant date. With respect to any participant who owns stock
possessing more than 10% of the voting power or value of all classes of Verio's
outstanding capital stock, the exercise price of any Incentive Stock Option or
Non-Qualified Stock Option granted must equal at least 110% of the fair market
value of the Verio Common Stock on the grant date and the term of the Option
must not exceed five years. The term of all other Options granted under the 1997
California Plan may not exceed ten years. The consideration for exercising any
Option may consist of cash, check, shares of Verio Common Stock, a promissory
note, the assignment of part of the proceeds from the sale of shares acquired
upon exercise of the Options or any combination thereof as specified in the
agreement evidencing the Option.
The 1997 California Plan provides that in the event of a merger of Verio
with or into another corporation or a consolidation, sale of substantially all
of Verio's assets or like transaction involving Verio in which Verio's
stockholders before the transaction do not retain a majority interest in Verio,
each Option may be assumed or an equivalent Option may be substituted by a
successor corporation. If the successor corporation chooses not to assume the
Options under the 1997 California Plan, the Options not otherwise exercisable
will terminate immediately prior to the consummation of the transaction.
Unless terminated sooner, the 1997 California Plan will terminate
automatically in 2007. The Verio Board has the authority to amend, suspend or
terminate the 1997 California Plan, subject to stockholder approval of certain
amendments, and provided no such action may affect any share of Verio Common
Stock previously issued and sold or any Option previously granted under the 1997
California Plan without the optionee's consent.
1998 Stock Incentive Plan
Verio's 1998 Stock Incentive Plan (the "1998 Stock Incentive Plan"), which
was adopted by the Verio Board in February 1998, was amended and restated as of
March 19, 1998 and has been approved by Verio's stockholders to reserve
6,199,300 shares of Verio Common Stock for issuance under the 1998 Stock
Incentive Plan, together with (a) any shares of Verio Common Stock available for
future awards under the 1997 California Plan as of the Verio IPO and (b) any
shares of Verio Common Stock represented by Awards under the 1996 Stock Option
Plan and the 1997 California Plan (the "Prior Plans"), that are forfeited,
expire or are cancelled following the Verio IPO. In connection with the adoption
of the 1998 Stock Incentive Plan, the Verio Board determined that Verio will
limit the issuance of 1998 Awards (as defined below) under the 1998 Stock
Incentive Plan such that the aggregate number of shares subject to 1998 Awards
granted under the 1998 Stock Incentive Plan and the Prior Plans will not at any
time exceed 15% of the Verio's outstanding fully-diluted equity. From and after
Verio's IPO, all further option grants, including the Hiway Options assumed by
Verio in the Merger, will be made solely under the 1998 Stock Incentive Plan.
As of October 31, 1998, options to purchase 34,968 shares of Verio Common
Stock had been exercised under the 1998 Stock Incentive Plan, options to
purchase 2,280,807 shares of Verio Common Stock were outstanding, and options to
purchase an additional 3,883,525 shares of Verio Common Stock remained available
for grant. The outstanding options were exercisable at a weighted average
exercise price of $16.75 per share. Outstanding options to purchase an aggregate
of 1,372,103 shares were held by employees who are not officers or directors of
Verio.
The purpose of the 1998 Stock Incentive Plan is to attract and retain the
best available personnel, to provide additional incentive to employees,
directors and consultants of Verio and its related entities and to promote the
success of Verio's business. The 1998 Stock Incentive Plan provides for the
granting to employees of Incentive Stock Options and the granting of
nonstatutory stock options, stock appreciation rights, dividend equivalent
rights, restricted stock, performance units, performance shares, and other
equity-based rights ("1998 Awards") to employees, directors and consultants of
Verio and its related entities.
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With respect to 1998 Awards granted to directors or officers, the 1998
Stock Incentive Plan is administered by the Verio Board or a committee
designated by the Verio Board constituted to permit such 1998 Awards to be
exempt from Section 16(b) of the Exchange Act in accordance with Rule 16b-3
thereunder. With respect to 1998 Awards granted to other participants, the 1998
Stock Incentive Plan is administered by the Verio Board or a committee
designated by the Verio Board. In each case, the respective plan administrator
shall determine the provisions, terms and conditions of each 1998 Award,
including, but not limited to, the 1998 Award vesting schedule, repurchase
provisions, rights of first refusal, forfeiture provisions, form of payment
(cash, shares of Verio Common Stock or other consideration) upon settlement of
the 1998 Award, payment contingencies and satisfaction of any performance
criteria.
Incentive Stock Options are not transferable by the optionee other than by
will or the laws of descent or distribution, and each Incentive Stock Option is
exercisable during the lifetime of the optionee only by such optionee. Other
1998 Awards shall be transferable to the extent provided in the agreement
evidencing the 1998 Award.
The exercise price of Incentive Stock Options must be at least equal to the
fair market value of the Verio Common Stock on the date of grant, and the term
of the option must not exceed ten years. The term of other 1998 Awards will be
determined by the respective plan administrator. With respect to an employee who
owns stock possessing more than 10% of the voting power of all classes of
Verio's outstanding capital stock, the exercise price of any Incentive Stock
Option must equal at least 110% of the fair market value of the Verio Common
Stock on the grant date and the term of the option must not exceed five years.
The exercise price or purchase price, if any, of other 1998 Awards will be such
price as determined by the respective plan administrator, but not less than 85%
of the fair market value of the stock. The consideration to be paid for the
shares of Verio Common Stock upon exercise or purchase of a 1998 Award will be
determined by the respective plan administrator and may include cash, check,
shares of Verio Common Stock or the assignment of part of the proceeds from the
sale of shares acquired upon exercise or purchase of the 1998 Award.
Where the 1998 Award agreement permits the exercise or purchase of a 1998
Award for a certain period of time following the recipient's termination of
service with Verio, disability or death, such 1998 Award will terminate to the
extent not exercised or purchased on the last day of the specified period or the
last day of the original term of such 1998 Award, whichever occurs first.
Unless terminated sooner, the 1998 Stock Incentive Plan will terminate
automatically in 2008. The Verio Board has the authority to amend, suspend or
terminate the 1998 Stock Incentive Plan, subject to stockholder approval of
certain amendments, and provided no such action may affect 1998 Awards
previously granted under the 1998 Stock Incentive Plan unless agreed to by the
affected grantees.
1998 Employee Stock Purchase Plan
Verio's 1998 Employee Stock Purchase Plan (the "Stock Purchase Plan") was
approved by the Verio Board in February 1998 and has been approved by Verio's
stockholders. The Stock Purchase Plan was subsequently amended and restated as
of April 13, 1998. The Stock Purchase Plan is intended to qualify as an
"employee stock purchase plan" under Section 423 of the Code in order to provide
employees of Verio with an opportunity to purchase Verio Common Stock through
payroll deductions. An aggregate of 3,000,000 shares of Verio Common Stock has
been reserved for issuance under the Stock Purchase Plan and available for
purchase thereunder, subject to adjustment in the event of a stock split, stock
dividend or other similar change in the Verio Common Stock or the capital
structure of Verio. All employees of Verio (and employees of "subsidiary
corporations" and "parent corporations" of Verio (as defined by the Code)
designated by the administrator of the Stock Purchase Plan) whose customary
employment is for more than five months in any calendar year and more than 20
hours per week are eligible to participate in the Stock Purchase Plan. Employees
of Verio are eligible to participate in the Stock Purchase Plan, subject to a
six-month waiting period after hiring. Non-employee directors, consultants and
employees subject to the rules or laws of a foreign jurisdiction that prohibit
or make impractical the participation of such employees in the Stock Purchase
Plan are not eligible to participate in the Stock Purchase Plan.
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The Stock Purchase Plan designates Purchase Periods, Accrual Periods and
Exercise Dates. Purchase Periods are generally overlapping periods of 12 months.
The initial Purchase Period begins on the effective date of the Stock Purchase
Plan, which is the effective date of Verio's Registration Statement relating to
the Verio IPO, and ends on May 14, 1999. Additional Purchase Periods will
commence each May 15 and November 15. Accrual Periods are generally six month
periods, with the initial Accrual Period commencing on the effective date of the
Stock Purchase Plan and ending on November 14, 1998. Thereafter, Accrual Periods
will commence each May 15 and November 15. Exercise Dates are the last day of
each Accrual Period. In the event of a merger of Verio with or into another
corporation, the sale of all or substantially all of the assets of Verio, or
certain other transactions in which the stockholders of Verio before the
transaction own less than 50% of the total combined voting power of Verio's
outstanding securities following the transaction, the administrator of the Stock
Purchase Plan may elect to shorten the Purchase Period then in progress.
On the first day of each Purchase Period, a participating employee is
granted a purchase right, which is a form of option to be automatically
exercised on the forthcoming Exercise Dates within the Purchase Period, during
which deductions are to be made from the pay of participants (in accordance with
their authorizations) and credited to their accounts under the Stock Purchase
Plan. When the purchase right is exercised, the participant's withheld salary is
used to purchase shares of Verio Common Stock. The price per share at which
shares of Verio Common Stock are to be purchased under the Stock Purchase Plan
during any Accrual Period is the lesser of (a) 85% of the fair market value of
the Verio Common Stock on the date of the grant of the option (the commencement
of the Purchase Period) or (b) 85% of the fair market value of the Verio Common
Stock on the Exercise Date (the last day of an Accrual Period). The
participant's purchase right is exercised in this manner on both Exercise Dates
arising in the Purchase Period unless, on the first day of any Accrual Period,
the fair market value of the Verio Common Stock is lower than the fair market
value of the Verio Common Stock on the first day of the Purchase Period. If so,
the participant's participation in the original Purchase Period is terminated,
and the participant is automatically enrolled in the new Purchase Period
effective the same date.
Payroll deductions may range from 1% to 10% (in whole percentage
increments) of a participant's regular base pay and bonuses, exclusive of
overtime, shift-premiums or commissions. Participants may not make direct cash
payments to their accounts. The maximum number of shares of Verio Common Stock
which any employee may purchase under the Stock Purchase Plan during an Accrual
Period is 1,250 shares. Certain additional limitations on the amount of Verio
Common Stock which may be purchased during any calendar year are imposed by the
Code.
The Stock Purchase Plan will be administered by the Verio Board or a
committee designated by the Verio Board, which will have the authority to
terminate or amend the Stock Purchase Plan (subject to specified restrictions)
and otherwise to administer the Stock Purchase Plan and to resolve all questions
relating to the administration of the Stock Purchase Plan.
1998 Non-Employee Director Stock Incentive Plan
In April 1998, the Verio Board adopted the 1998 Non-Employee Director Stock
Incentive Plan (the "1998 Non-Employee Director Plan"), under which the total
number of shares available for grant is equal to 550,000 shares of Verio Common
Stock, in order to provide for option grants and stock issuances to members of
the Verio Board who are not employees of Verio in accordance with the
compensation guidelines described in "-- Compensation of Verio Directors." The
1998 Non-Employee Director Plan has been approved by Verio's stockholders.
Options to purchase 210,000 shares of Verio Common Stock were granted to non-
employee directors. As of October 31, 1998, options to purchase an additional
340,000 shares of Verio Common Stock remained available for grant.
The purposes of the 1998 Non-Employee Director Plan are to attract and
retain the best available non-employee directors, to provide them additional
incentives, and to promote the success of Verio's business. The 1998
Non-Employee Director Plan establishes two programs for the grant of awards to
non-employee directors: the Automatic Option Grant Program and the Stock Fee
Program (the "Non-Employee Director Awards").
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<PAGE> 148
Under the Automatic Option Grant Program, each of the six non-employee
directors serving on the Verio Board automatically at the time of the Verio IPO
were granted an option to acquire 30,000 shares of Verio Common Stock at an
exercise price per share equal to the fair market value of the Verio Common
Stock at the date of grant. These options will vest and become exercisable in
three equal installments on each yearly anniversary of the grant date.
Non-employee directors appointed to the Verio Board also will be granted
automatically at the time of election or appointment an option to acquire 30,000
shares of Verio Common Stock with the same terms and conditions at an exercise
price equal to the then fair market value of the Verio Common Stock. After the
initial three year vesting period for such options, each non-employee director
will receive automatic annual grants of options to acquire an additional 3,000
shares of Verio Common Stock at an exercise price equal to the fair market value
of the Verio Common Stock at the date of grant. Such options will vest and
become fully exercisable on the first anniversary of the grant date.
Each automatic option grant will have a term of eight years and will be
transferable to the extent provided in the agreement evidencing the option. The
consideration for exercising an option may consist of cash, check, shares of
Verio Common Stock, the assignment of part of the proceeds from the sale of
shares acquired upon exercise of the option or any combination thereof. In the
event of a merger of Verio with or into another corporation, a sale of
substantially all of Verio's assets, a person becoming more than a 50% owner of
Verio or a like transaction involving Verio in which Verio's stockholders before
the transaction do not retain a majority interest in Verio, immediately prior to
the transaction, one-third of the shares subject to the options to purchase
30,000 shares of Verio Common Stock will vest and become exercisable and all of
the shares subject to the options to purchase 3,000 shares of Verio Common Stock
will vest and become exercisable. Upon consummation of such transaction all such
options will terminate, unless they are assumed by the successor company. In the
event of a hostile takeover of Verio or change in the majority of the Verio
Board through contested elections, the vesting of all such options will likewise
accelerate as described above, but the options will remain exercisable according
to their terms.
Under the Stock Fee Program, each non-employee director will be eligible to
apply all or any portion of the annual retainer and meeting fees otherwise
payable in cash to the non-employee director to the acquisition of shares of
Verio Common Stock. The non-employee director must make the stock purchase
election prior to the start of the calendar year for which the election is to be
in effect. The first year for which such elections may be made is 1999. On the
first trading day following the due date for payment of a portion of the annual
retainer fee or the date of any meeting in a calendar year for which the
election is effective, the portion of the annual retainer or meeting fee subject
to such election automatically will be applied to the acquisition of shares of
Verio Common Stock by dividing the selected dollar amount by the then fair
market value per share of the Verio Common Stock. The number of issuable shares
will be rounded down to the next whole share.
The 1998 Non-Employee Director Plan is administered by the Verio Board or a
committee designated by the Verio Board (either, the "1998 Plan Administrator")
constituted to permit Non-Employee Director Awards to be exempt from Section
16(b) of the Exchange Act in accordance with Rule 16b-3 thereunder. The 1998
Plan Administrator shall approve forms of the Non-Employee Director Award
agreement for use under the Plan, determine the terms and conditions of
Non-Employee Director Awards, and construe and interpret the terms of the 1998
Non-Employee Director Plan and Non-Employee Director Awards granted pursuant
thereto.
Unless terminated sooner, the 1998 Non-Employee Director Plan will
terminate automatically in 2008. The Verio Board has the authority to amend,
suspend or terminate the 1998 Non-Employee Director Plan, subject to stockholder
approval of certain amendments, and provided no such action may affect Non-
Employee Director Awards previously granted under the 1998 Non-Employee Director
Plan unless agreed to by the affected non-employee directors.
401(k) PLAN
In January 1997, Verio implemented an employee savings and retirement plan
(the "401(k) Plan") covering certain of Verio's employees who have at least one
month of service with Verio and have attained the age of 21. Pursuant to the
401(k) Plan, eligible employees may elect to reduce their current compensation
by
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<PAGE> 149
up to the lesser of 20% of such compensation or the statutorily prescribed
annual limit ($10,000 in 1998) and have the amount of such reduction contributed
to the 401(k) Plan. Verio may make contributions to the 401(k) Plan on behalf of
eligible employees. Employees become 20% vested in these Verio contributions
after one year of service, and increase their vested percentages by an
additional 20% for each year of service thereafter. The 401(k) Plan is intended
to qualify under Section 401 of the Code so that contributions by employees or
by Verio to the 401(k) Plan, and income earned on the 401(k) Plan contributions,
are not taxable to employees until withdrawn from the 401(k) Plan, and so that
contributions by Verio, if any, will be deductible by Verio when made. The
trustee under the 401(k) Plan, at the direction of each participant, invests the
401(k) Plan employee salary deferrals in selected investment options. Verio made
no contributions to the 401(k) Plan in 1996 or in 1997. Verio does not presently
expect to make any contributions to the 401(k) Plan during fiscal 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Chairman of the Compensation Committee is Mr. Schovee. No member of the
Compensation Committee was at any time during the fiscal year ended December 31,
1997, or at any other time, an officer or employee of Verio. No member of the
Compensation Committee serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of the Verio Board or the Compensation Committee.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Verio Certificate and Bylaws provide that Verio shall indemnify to the
fullest extent permitted by Section 145 of the DGCL, as it now exists or as
amended, all directors and officers pursuant thereto. The Verio Certificate and
Bylaws also authorize Verio to indemnify its employees and other agents, at its
option, to the fullest extent permitted by Section 145, as it now exists or as
amended. Verio entered into agreements to indemnify its directors and officers,
in addition to indemnification provided for in Verio's charter documents. These
agreements, among other things, provide for the indemnification of Verio's
directors and officers for certain expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding, including any action by or in the right of Verio, arising
out of such person's services as a director or officer of Verio, any subsidiary
of Verio or any other company or enterprise to which such person provides
services at the request of Verio to the fullest extent permitted by applicable
law. Verio believes that these provisions and agreements will assist Verio in
attracting and retaining qualified persons to serve as directors and officers.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL or
(iv) for any transaction from which the director derived an improper personal
benefit. The Verio Certificate provides for the elimination of personal
liability of a director for breach of fiduciary duty, as permitted by Section
102(b)(7) of the DGCL.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Verio
pursuant to the provisions contained in the Verio Certificate and Bylaws, the
DGCL or otherwise, Verio has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Verio of expenses incurred
or paid by a director, officer or controlling person of Verio in the successful
defense of any action, suit, or proceeding) is asserted by such director,
officer or controlling person in connection with the Verio Common Stock being
registered hereunder, Verio will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
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<PAGE> 150
Verio has purchased and maintains insurance on behalf of the officers and
directors insuring them against liabilities that they may incur in such
capacities or arising out of such status.
BUSINESS OF HIWAY
Hiway is a leading global provider of Web hosting and related enhanced
Internet services to small and medium sized businesses. With over 91,000 Web
hosting accounts worldwide, Hiway believes that it is currently the largest
provider of business Web hosting services, as measured by number of Web hosting
accounts. Hiway focuses on delivering high-quality, reliable and flexible
services that are backed by 24x7 customer support and can be scaled to host
millions of Web sites. Hiway's services enable its customers to deploy, expand
and update Web sites more rapidly and cost-effectively than internally developed
solutions. Hiway offers its solutions directly, through VARs and through OEMs.
Hiway's OEMs include three of the five RBOCs.
Hiway's services are designed to provide small to medium sized businesses
with the high performance, scalability, flexibility and expertise they need to
deploy a Web presence or expand its functionality cost effectively. Hiway's
services utilize a redundant, high-speed, secure, proprietary network
architecture and a fault tolerant hosting platform, monitored on a 24x7 basis
through two Hiway NOCs. This enables Hiway to offer its customers a 99.9% uptime
service level warranty. In addition, Hiway has developed various proprietary
operating system level tools to facilitate a high customer to server ratio,
allowing Hiway to host over 2,000 Web sites on a single server. Hiway also
utilizes various proprietary technologies to improve the back-end processing and
customer interface components of its solutions, allowing customers to order,
change and manage their Web hosting accounts easily and flexibly, regardless of
their level of technical expertise. To meet its customers' needs, Hiway offers
Web hosting services on a range of operating systems and computing platforms:
Silicon Graphics, Intel and Sun Microsystems. Hiway expects to offer Windows
NT-based Web hosting services commencing in the fourth quarter of 1998.
Hiway seeks to maximize market share by utilizing three distribution
channels -- direct sales, VARs and OEM partnerships. In addition to driving
direct sales through the use of traditional media and online marketing
campaigns, Hiway has developed a global VAR network consisting of over 1,800
value-added resellers that resell Hiway's services to customers located in more
than 100 countries. Hiway has also recently commenced the distribution of its
services through OEM partners, which include three of the five RBOCs. Hiway
believes that these relationships present a significant opportunity to penetrate
the large, established customer bases of these OEMs.
Hiway was formed in May 1998 through the merger of Best, which was
incorporated in September 1994, and Hiway Florida, which was incorporated in
April 1995. Prior to the Best/Hiway Merger, Hiway Florida was a leading provider
of shared server Web hosting domestically and, through its established network
of VARs, internationally. Hiway Florida had also begun to expand its
distribution channels by entering into relationships with RBOCs and other OEMs.
Best was a leading provider of shared server Web hosting bundled with dial-up
Internet access in the California market prior to such merger, and also offered
stand-alone high-speed Internet connectivity and co-location Web hosting
services. The Best/Hiway Merger was accounted for as a pooling of interests.
Primarily as a direct or indirect result of the Best/Hiway Merger, Hiway wrote
off approximately $395,000 of related merger costs in the second quarter of
1998, including approximately $204,000 of legal costs, $89,000 of accounting
costs and $102,000 of travel and miscellaneous costs. In 1997 and the first
quarter of 1998, Hiway Florida had revenues of $10.4 million and $4.3 million,
respectively, and Best had revenues of $15.8 million and $4.5 million,
respectively. At March 31, 1998, Hiway Florida had approximately 49,000 Web
hosting accounts and Best had approximately 29,000 Web hosting accounts.
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SELECTED CONSOLIDATED FINANCIAL DATA OF HIWAY
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements of Hiway and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Hiway" included elsewhere in this Proxy
Statement/Prospectus. The consolidated statement of operations data for each of
the years in the three-year period ended December 31, 1997, and the consolidated
balance sheet data as of December 31, 1996 and 1997, are derived from
consolidated financial statements of Hiway that, except as they relate to the
financial statements of Hiway Florida for the period from April 6, 1995 (date of
inception) to December 31, 1995 and for the year ended December 31, 1996, have
been audited by PricewaterhouseCoopers LLP, independent accountants, and,
insofar as they relate to the financial statements of Hiway Florida for the
period from April 6, 1995 (date of inception) to December 31, 1995 and for the
year ended December 31, 1996, have been audited by De Meo, Young, McGrath &
Company, P.A., independent accountants, and are included elsewhere in this Proxy
Statement/Prospectus. The consolidated statement of operations data for the
three months ended March 31, June 30, September 30 and December 31, 1997, and
March 31, June 30 and September 30, 1998, and the consolidated balance sheet
data as of December 31, 1995 and September 30, 1998, are derived from unaudited
consolidated financial statements that are not included herein. The unaudited
consolidated financial statements have been prepared on substantially the same
basis as the audited consolidated financial statements and, in the opinion of
Hiway's management, include all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly, in all material respects, the
financial condition and results of operations for such periods and as of such
dates. Historical results are not necessarily indicative of the results to be
expected in the future, and results of interim periods are not necessarily
indicative of results to be expected for the entire year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, -------------------
-------------------------- MAR. 31, JUNE 30,
1995 1996 1997 1997 1997
------ ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues...................................... $2,011 $12,217 $26,185 $5,371 $6,164
------ ------- ------- ------ ------
Operating costs and expenses:
Cost of revenues............................. 231 3,233 7,213 1,577 1,789
Sales and marketing.......................... 154 2,555 3,589 626 756
Product development and systems
engineering................................ 97 1,005 2,112 353 485
General and administrative................... 2,068 4,641 8,400 1,579 1,814
------ ------- ------- ------ ------
Total operating costs and expenses..... 2,550 11,434 21,314 4,135 4,844
------ ------- ------- ------ ------
Income (loss) from operations................. (539) 783 4,871 1,236 1,320
Interest and other income (expense), net...... (11) (190) (75) (18) 9
------ ------- ------- ------ ------
Income (loss) before provision (benefit) for
income taxes................................. (550) 593 4,796 1,218 1,329
Provision (benefit) for income taxes.......... 1 1 361 91 103
------ ------- ------- ------ ------
Net income (loss)...................... $ (551) $ 592 $ 4,435 $1,127 $1,226
====== ======= ======= ====== ======
Pro forma net income (loss)(1)......... $ (551) $ 560 $ 2,871 $ 737 $ 794
====== ======= ======= ====== ======
Historical net income (loss) per share(2)
-- Basic..................................... $(0.03) $ 0.02 $ 0.15 $ 0.04 $ 0.04
-- Diluted................................... $(0.03) $ 0.02 $ 0.13 $ 0.03 $ 0.04
Pro forma net income (loss) per share(2)
-- Basic..................................... $(0.03) $ 0.02 $ 0.10 $ 0.02 $ 0.03
-- Diluted................................... $(0.03) $ 0.02 $ 0.08 $ 0.02 $ 0.02
Shares used in computing basic net income
(loss) per share(2).......................... 16,871 25,878 30,020 29,599 29,966
Shares used in computing diluted net income
(loss) per share(2).......................... 16,871 28,509 34,877 33,529 34,816
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1997 1997 1998 1998 1998
--------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues...................................... $6,918 $7,732 $8,844 $9,666 $10,563
------ ------ ------ ------ -------
Operating costs and expenses:
Cost of revenues............................. 1,766 2,081 2,475 2,813 2,951
Sales and marketing.......................... 898 1,309 1,365 1,396 1,990
Product development and systems
engineering................................ 581 693 717 639 758
General and administrative................... 2,239 2,768 3,027 4,001 4,344
------ ------ ------ ------ -------
Total operating costs and expenses..... 5,484 6,851 7,584 8,849 10,043
------ ------ ------ ------ -------
Income (loss) from operations................. 1,434 881 1,260 817 520
Interest and other income (expense), net...... (6) (60) 62 (40) (47)
------ ------ ------ ------ -------
Income (loss) before provision (benefit) for
income taxes................................. 1,428 821 1,322 777 473
Provision (benefit) for income taxes.......... 107 60 176 (77) --
------ ------ ------ ------ -------
Net income (loss)...................... $1,321 $ 761 $1,146 $ 854 $ 473
====== ====== ====== ====== =======
Pro forma net income (loss)(1)......... $ 848 $ 492 $ 792 $ 464 $ 473
====== ====== ====== ====== =======
Historical net income (loss) per share(2)
-- Basic..................................... $ 0.04 $ 0.03 $ 0.04 $ 0.02 $ 0.01
-- Diluted................................... $ 0.04 $ 0.02 $ 0.03 $ 0.03 $ 0.01
Pro forma net income (loss) per share(2)
-- Basic..................................... $ 0.03 $ 0.02 $ 0.03 $ 0.01 $ 0.01
-- Diluted................................... $ 0.02 $ 0.02 $ 0.03 $ 0.01 $ 0.01
Shares used in computing basic net income
(loss) per share(2).......................... 29,968 30,549 31,156 33,447 35,809
Shares used in computing diluted net income
(loss) per share(2).......................... 35,155 35,675 36,063 36,537 37,776
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPT. 30,
1995 1996 1997 1998
------ ------ ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 55 $1,588 $ 5,672 $ 3,569
Working capital (deficiency)................................ (503) 389 4,169 (90)
Total assets......................................... 1,243 9,539 19,467 26,677
Long-term debt and capital lease obligations, less current
portion.................................................... 22 778 5,197 5,136
Total stockholders' equity........................... 487 4,969 8,957 12,056
</TABLE>
- ---------------
(1) See Note 18 of Notes to Consolidated Financial Statements of Hiway for an
explanation of the determination of pro forma net income (loss), which
reflects a provision for income taxes as if Hiway Florida was a corporation
subject to income taxes.
(2) See Note 19 of Notes to Consolidated Financial Statements of Hiway for an
explanation of the computation of per share data.
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<PAGE> 152
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF HIWAY
The following discussion and analysis is based on the historical and pro
forma results of Hiway. See "Consolidated Financial Statements of Hiway" for the
basis of presentation. Certain statements set forth below constitute
"forward-looking statements" within the meaning of the Reform Act. The safe
harbor provisions provided in Section 27A of the Securities Act and Section 21E
of the Exchange Act do not apply to forward-looking statements made by Hiway.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of Hiway, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Given these uncertainties, prospective investors are
cautioned not to place undue reliance on such forward-looking statements. See
"Risk Factors -- Forward-Looking Statements."
OVERVIEW
Hiway is a leading global provider of Web hosting and related enhanced
Internet services to small and medium sized businesses. With over 108,000 Web
hosting accounts worldwide, Hiway believes that it is currently the largest
provider of business Web hosting services, as measured by number of Web hosting
accounts. Hiway focuses on delivering high-quality, reliable and flexible
services that are backed by 24X7 customer support and can be scaled to host
millions of Web sites.
Hiway was formed in May 1998 through the merger of Best, which was
incorporated in September 1994, and Hiway Florida, which was incorporated in
April 1995. Prior to the Best/Hiway Merger, Hiway Florida was a leading provider
of shared server Web hosting domestically and, through its established network
of VARs, internationally. Hiway Florida had also begun to expand its
distribution channels by entering into relationships with RBOCs and other OEMs.
Best was a leading provider of shared server Web hosting bundled with dial-up
Internet access in the California market prior to such merger, and also offered
stand-alone high-speed Internet connectivity and co-location Web hosting
services. In 1997 and the first quarter of 1998, Hiway Florida had revenues of
$10.4 million and $4.3 million, respectively, and Best had revenues of $15.8
million and $4.5 million, respectively. At March 31, 1998, Hiway Florida had
approximately 49,000 Web hosting accounts and Best had approximately 29,000 Web
hosting accounts. Hiway currently expects to focus on shared server Web hosting,
both stand-alone and bundled with dial-up Internet access, and to de-emphasize
stand-alone high-speed Internet connectivity and co-location Web hosting
services. The Best/Hiway Merger was accounted for as a pooling of interests, and
accordingly all prior financial statements have been restated to combine the
results of Best and Hiway Florida. Primarily as a direct or indirect result of
the Best/Hiway Merger, Hiway wrote off approximately $395,000 of related merger
costs in the second quarter of 1998, including approximately $204,000 of legal
costs, $89,000 of accounting costs and $102,000 of travel and miscellaneous
costs. See Notes 1 and 4 of Notes to Consolidated Financial Statements of Hiway
included elsewhere in this Proxy Statement/Prospectus.
Hiway is in the process of completing leasehold improvements in a 70,000
square foot state-of-the-art data center and headquarters facility in Boca
Raton, Florida, which will replace its existing facility in Boca Raton.
Leasehold improvements, equipment and other capital expenditures for this
facility are expected to aggregate up to $5.5 million, of which approximately
$4.5 million had been spent by September 30, 1998. Following the completion of
this facility, Hiway will maintain two NOCs, one in Boca Raton and one in
Mountain View, California. Hiway believes that its two data centers will be
adequate to scale its domestic business for at least the next two years. Rather
than build international data centers, Hiway expects to lease data center space
in Europe, Japan and South America as Hiway's customer base grows in these
geographic regions. As a result, Hiway expects that future capital expenditures
will occur only incrementally as Hiway's business expands.
Hiway derived approximately 18.7% of its revenues internationally in the
first nine months of 1998 and expects that this percentage will increase over
the next several years. Although a portion of international customers purchase
services online directly from Hiway, Hiway markets and sells shared server Web
hosting
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<PAGE> 153
to international customers and services these customers primarily through its
indirect distribution channel comprised of Premier Partners and VARs. Premier
Partners are VARs that are responsible for building Hiway's brand in their local
markets through marketing programs and by establishing a network of additional
VARs. Hiway has ownership stakes in five of its 11 Premier Partners -- Germany
(20%), Japan (35%), France (25%), Spain (20%) and the United Kingdom
(60%) -- for which it has paid an aggregate of $370,000. Hiway grants its
Premier Partners and VARs substantial discounts from Hiway's retail prices on
the services they resell to their customers, and the Premier Partners and VARs
are responsible for localizing Hiway's services and providing technical support
and other services to their customers. Hiway denominates its sales to VARs and
Premier Partners in U.S. dollars. Thus, fluctuations in the value of the U.S.
dollar relative to the currency of a given country may make Hiway's services
more or less profitable and therefore more or less attractive to VARs selling in
that country.
Hiway derives its revenues primarily from ongoing monthly fees and one-time
setup fees for Web hosting and, to a lesser extent, from similar fees for
high-speed Internet connectivity and enhanced Internet services. Hiway
advertises in traditional and online media to attract potential customers. As a
result, to date, Hiway has derived a significant majority of its accounts from
inbound requests from potential customers. Hiway also markets its services
through over 1,800 international and domestic VARs and through OEMs, including
three RBOCs and SwissCom (a European telecommunications company), which offer
Hiway an opportunity to derive revenue from the large established customer bases
of these companies. In addition, Hiway is in discussions with a number of other
telecommunications companies regarding possible establishment of distribution
relationships. Although Hiway contemplates significant increases in advertising
in order to attempt to grow sales through its direct sales channel, Hiway
anticipates that an increasing percentage of its revenues will be derived from
sales through its VARs and OEMs. Because sales to VARs and OEMs are made at a
discount to Hiway's retail prices for similar services, they result in lower
gross margins to Hiway than direct sales; however, sales and marketing expenses
for these reseller channels are significantly less than such expenses for direct
sales. As a result, Hiway expects that, to the extent the portion of its new
customer base from these indirect reseller channels increases, this increase
will have a positive effect on its operating margin.
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<PAGE> 154
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain selected items in Hiway's
consolidated statements of operations as a percentage of revenues for the
periods indicated. This information has been derived from Hiway's unaudited
consolidated financial statements, which, in the opinion of Hiway's management,
have been prepared on substantially the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial information for
the quarters presented. This information should be read in conjunction with the
Consolidated Financial Statements of Hiway and Notes thereto included elsewhere
in this Statement/Prospectus. The operating results in any quarter are not
necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1997 1997 1997 1997 1998 1998 1998
-------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- ----- ----- -----
Operating costs and expenses:
Cost of revenues.............. 29.3 29.0 25.5 26.9 28.0 29.1 27.9
Sales and marketing........... 11.7 12.3 13.0 16.9 15.5 14.5 18.8
Product development and
systems engineering........ 6.6 7.9 8.4 9.0 8.1 6.6 7.2
General and administrative.... 29.4 29.4 32.4 35.8 34.2 41.4 41.2
----- ----- ----- ----- ----- ----- -----
Total operating costs
and expenses........ 77.0 78.6 79.3 88.6 85.8 91.6 95.1
----- ----- ----- ----- ----- ----- -----
Income from operations.......... 23.0 21.4 20.7 11.4 14.2 8.4 4.9
Interest and other income
(expense), net................ (0.3) 0.2 (0.1) (0.8) 0.7 (0.4) (0.4)
----- ----- ----- ----- ----- ----- -----
Income before provision
(benefit) for income taxes.... 22.7 21.6 20.6 10.6 14.9 8.0 4.5
Provision (benefit) for income
taxes......................... 1.7 1.7 1.5 0.8 2.0 (0.8) --
----- ----- ----- ----- ----- ----- -----
Net income...................... 21.0% 19.9% 19.1% 9.8% 12.9% 8.8% 4.5%
===== ===== ===== ===== ===== ===== =====
</TABLE>
Revenues. Revenues consist primarily of customer fees for Web hosting and,
to a lesser extent, customer fees for high-speed Internet connectivity and
enhanced Internet services. Customers typically pay recurring monthly fees and
one-time set-up fees for Web hosting and enhanced Internet services and for
high-speed Internet connectivity. Monthly fees are generally billed for, and
recognized ratably over, the one or three-month billing period selected by a
customer, and one-time set-up fees are typically recognized at the time the
set-up services are performed.
Hiway's revenues increased sequentially each quarter from $5.4 million to
$6.2 million to $6.9 million to $7.7 million to $8.8 million to $9.7 million and
to $10.6 million in the quarters ended March 31, June 30, September 30, and
December 31, 1997 and March 31, June 30, and September 30, 1998, respectively.
International revenues increased sequentially each quarter from $809,000 to
$952,000 to $1.2 million to $1.3 million to $1.6 million to $1.9 million and to
$2.0 million, a compound quarterly growth rate of 13.8%, while domestic revenues
increased sequentially from $4.6 million to $5.2 million to $5.7 million to $6.4
million to $7.2 million to $7.8 million and to $8.6 million, a compound
quarterly growth rate of 9.4%. As a result, the percentage of Hiway's revenues
derived internationally increased from 15.1% to 15.4% to 17.7% to 17.5% to 18.5%
to 21.0% then decreasing to 18.7% during the comparison periods.
Substantially all of this growth in revenues resulted from increases in the
number of Hiway's Web hosting accounts, which totaled approximately 44,000,
52,000, 59,000, 68,000, 78,000, 91,000 and 108,000 at March 31, June 30,
September 30, and December 31, 1997 and March 31, June 30, and September 30,
1998, respectively. Hiway did not materially alter the pricing of its various
Web hosting or high-speed Internet connectivity services during the comparison
periods; however, certain shifts in distribution and service mix served to
reduce Hiway's overall average selling price. During these periods, shared
server Web hosting
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revenues from direct sales, which are made at Hiway's retail prices, grew less
rapidly than shared server Web hosting sales to VARs and OEMs, which are made at
a significant discount from Hiway's retail prices. Sales to VARs and OEMs
represented 10.5%, 13.0%, 15.3%, 18.7%, 19.1%, 20.4% and 23.7% of Hiway's
revenues in the quarters ended March 31, June 30, September 30, and December 31,
1997 and March 31, June 30, and September 30, 1998, respectively, while revenues
from direct sales represented 89.5%, 87.0%, 84.7%, 81.3%, 80.9%, 79.6% and 76.8%
respectively. Sales to OEMs, although growing, represent only 3.3% of revenues
in the quarter ended September 30, 1998. Overall average selling price during
the comparison periods was also reduced by the fact that revenues from shared
server Web hosting (with or without dial-up access) grew more rapidly than
revenues from high-speed Internet connectivity, which have higher monthly fees.
Shared server Web hosting revenues increased from 73.3% of Hiway's revenues in
the first quarter of 1997 to 86.9% of its revenues in the third quarter of 1998,
while high-speed Internet connectivity revenues decreased from 17.8% of Hiway's
revenues in the first quarter of 1997 to 13.1% of its revenues in the third
quarter of 1998. Hiway does not plan to devote significant resources to
marketing stand-alone high-speed Internet connectivity services.
In the future, as competition for Web hosting services becomes more
intense, Hiway may find that competitive pressures will force it to reduce the
prices of its services, although Hiway may be able to mitigate such pressures by
incorporating more features into those services. Also, if OEMs and VARs, as
expected, continue to represent an increasing percentage of Hiway's revenues,
Hiway's average revenues per shared server Web hosting account will decline.
Cost of Revenues. Hiway's cost of revenues is comprised primarily of
Hiway's Internet connectivity costs, salaries and benefits for Hiway personnel
responsible for provisioning customer accounts and providing customer service
and technical support, depreciation of Hiway's servers and network equipment,
the cost of third-party equipment sold by Hiway and merchant fees on credit card
transactions. Hiway's cost of revenues increased from $1.6 million to $1.8
million to $1.8 million to $2.1 million to $2.5 million to $2.8 million and to
$3.0 million in the quarters ended March 31, June 30, September 30 and December
31, 1997 and March 31, June 30, and September 30, 1998, respectively, and
represented 29.3%, 29.0%, 25.5%, 26.9%, 28.0%, 29.1% and 27.9% of revenues,
respectively. The increases in cost of revenues in absolute dollars were
primarily the result of increased Internet connectivity costs, increased
salaries and benefits for customer support personnel and increased depreciation
of server and network equipment, all of which tend to grow as revenues grow.
Hiway's cost of revenues remained relatively constant as a percentage of
revenues during the comparison periods. The increase in percentage from the
third quarter of 1997 to the second quarter of 1998 was primarily the result of
increased headcount in the customer support organization in anticipation of
growth in the number of Web hosting accounts and increased Internet connectivity
costs related to Hiway's expansion into the Los Angeles Basin. Hiway expects
that its cost of revenues may continue to increase as a percentage of revenues
to the extent competitive pressures cause it to reduce prices or increase
features and as Hiway derives a greater percentage of its revenues from OEMs and
VARs, which purchase at discounts from Hiway's retail prices. The decreases in
gross margin that would result may be offset in part by the fact that the
depreciation on Hiway's leasehold improvements and equipment at its new data
center and headquarters in Boca Raton, Florida will decrease as a percentage of
revenues as revenues grow and that, if Hiway develops significantly more
Internet traffic, it may be able to negotiate lower costs for certain types of
Internet connectivity.
Sales and Marketing. Hiway's sales and marketing expenses are comprised
primarily of salaries and benefits for Hiway's sales and marketing personnel,
print and online advertising costs associated with Hiway's marketing efforts and
costs for trade shows. After increasing gradually in absolute dollar terms in
the quarters ended March 31, June 30 and September 30, 1997, Hiway's sales and
marketing expenses jumped significantly in the quarter ended December 31, 1997
both in absolute dollars and as a percentage of total revenues as a result of
increased advertising designed to accelerate the rate of customer growth.
Hiway's sales and marketing expenses continued to increase minimally in absolute
dollars in the first two quarters of 1998 and increased in absolute dollars and
as a percentage of sales in the third quarter of 1998 as Hiway began a more
aggressive advertising program. Hiway's cost of acquiring new direct sales
customers increased each quarter in 1997 as it sought to attract not only
technologically sophisticated "early adopters" but also more mainstream small
and medium sized businesses, but decreased in each of the first two quarters of
1998 as a result of more efficient
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marketing campaigns. Hiway's cost of acquiring customers then increased again in
the third quarter of 1998 as the result of a more broad based advertising
campaign designed to build brand identity and accelerate growth. Hiway expects
sales and marketing expenses to continue to increase significantly in absolute
dollar terms and, at least through the end of 1998, as a percentage of revenues,
as Hiway continues to focus on customer growth and to advertise more heavily and
in more expensive broad based publications and online. To the extent revenue
growth does not justify continued increases in advertising and promotion
expenses, Hiway may elect to reduce the rate of growth of such expenses.
Product Development and Systems Engineering. Hiway's product development
and systems engineering expenses are comprised almost entirely of salaries and
benefits for Hiway's product development and systems engineering organizations,
which focus on enhancing and administering the functionality and breadth of
Hiway's Web hosting platforms and enhanced Internet service offerings. Product
development and systems engineering expenses increased each quarter through the
first quarter of 1998 in absolute dollars, primarily as a result of hiring
additional personnel, and also increased as a percentage of revenues from the
first quarter of 1997 through the fourth quarter of 1997. Product development
and systems engineering expenses decreased as a percentage of revenues in the
first and second quarters of 1998 and in absolute dollars in the second quarter
of 1998, although Hiway also capitalized approximately $108,000 of costs in the
second quarter of 1998 in connection with the development of a Windows NT Web
hosting platform. Product development costs increased again in the third quarter
of 1998 in absolute dollars and as a percentage of sales as a result of
increased headcount. Hiway expects that product development and systems
engineering expenses will increase in absolute dollars as Hiway continues to
develop new service offerings and enhance its network infrastructure and
operations but will not increase significantly as a percentage of revenues if
revenues increase at the rate expected.
General and Administrative. Hiway's general and administrative expenses are
comprised primarily of salaries and benefits for Hiway's executive,
administrative, human resources, financial and accounting personnel, Hiway's
occupancy costs and other overhead, depreciation on Hiway's leasehold
improvements, furniture and fixtures, fees for Hiway's outside professional
advisers and the allowance for bad debts. The increases in general and
administrative expenses in absolute dollars and as a percentage of revenues
during 1997 were primarily the result of increased salaries and benefits for
personnel as well as increases in fees for outside professional advisers and
depreciation. In the first quarter of 1998, Hiway experienced a significant
increase in rent as a result of its new Blue Lake facility, but general and
administrative expenses still declined as a percentage of revenues. In the
second quarter of 1998, general and administrative expenses again increased in
absolute dollars and as a percentage of revenues due to the first full quarter
of occupancy costs at Hiway's new Florida facilities, an increase in salaries
and benefits for personnel, fees for outside professional advisers, and charges
relating to the merger with Hiway Florida. General and administrative expenses
increased in the third quarter of 1998 due to a slight increase in headcount and
charges relating to the sale of the company to Verio. Hiway expects that general
and administrative expenses will increase in absolute dollars but will begin to
decline as a percentage of revenues if revenues increase at the rate expected.
Provision for Income Taxes. Best's effective income tax rate during 1997
approximated 7.5%. The effective income tax rate differed from the statutory
federal rate of 34% as Hiway Florida did not pay taxes at the corporate level
during the comparison periods because it operated as a Subchapter S corporation.
Best had an effective tax rate of 18.0% throughout 1997, which differed from the
statutory rate primarily as a result of a change in the deferred tax valuation
allowance. In the first quarter of 1998, Best's effective tax rate was 13.3%,
which differed from the federal statutory rate primarily as a result of the use
of net operating loss carryforwards. In the second quarter of 1998, Best's
effective tax rate was a credit of 10%, which differed from the federal
statutory rate primarily as a result of a tax benefit that resulted from Hiway
Florida's conversion from a Subchapter S corporation to a Subchapter C
corporation. Hiway did not record a provision for income taxes in the third
quarter of 1998 as Hiway anticipates accruing one-time initial public offering
("Hiway IPO") expenses and expenses related to the Merger of approximately $7.0
million in the fourth quarter of 1998, thereby reducing fiscal 1998 tax
liability.
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YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND NINE MONTHS ENDED SEPTEMBER 30,
1997 AND 1998
Revenues. Hiway's revenues increased 508% from $2.0 million in 1995 to
$12.2 million in 1996 and increased an additional 114% to $26.2 million in 1997.
The rapid revenue increases from 1995 to 1997 resulted primarily from Hiway's
success in increasing its number of Web hosting accounts, which totaled
approximately 35,000 and 68,000 at the end of 1996 and 1997, respectively. Hiway
also acquired the assets and ongoing operations of two Internet service
providers in July 1996, which resulted in incremental revenues of approximately
$900,000 in 1996. Price and service mix changes did not have significant effects
on revenues between the comparison periods. Hiway's revenues increased 57.3%
from $18.5 million in the first nine months of 1997 to $29.1 million in the
first nine months of 1998 primarily as a result of Hiway's success in increasing
its number of Web hosting accounts, which totaled approximately 59,000 and
108,000 at September 30, 1997 and 1998, respectively.
Cost of Revenues. Cost of revenues increased from $231,000 in 1995 to $3.2
million in 1996 and to $7.2 million in 1997. The rapid increase in costs of
revenues from 1995 to 1996 resulted primarily from (a) increased connectivity
costs of approximately $1.3 million necessary to support a rapidly growing
customer base and implement redundancy in Hiway's network connectivity, (b)
increased depreciation of servers and network equipment and (c) increased
technical support personnel. In 1997, Hiway continued to increase its
connectivity and support costs in absolute dollars (to approximately $3.1
million) but began to experience a slight decrease in such costs as a percentage
of revenues as Hiway achieved some operating leverage in its support personnel.
Cost of revenues increased 58.8% from $5.1 million in the first nine months of
1997 to $8.1 million in the first six months of 1998 primarily due to increases
in Internet connectivity costs, technical support salaries and benefits and
depreciation of servers and network equipment.
Sales and Marketing. Hiway's sales and marketing expenses increased from
$154,000 in 1995 to $2.6 million in 1996 and $3.6 million in 1997. These
increases were primarily the result of hiring additional sales and marketing
personnel, which contributed approximately $41,000, $1.6 million and $2.0
million to sales and marketing expenses in 1995, 1996 and 1997, respectively,
and expanding marketing and advertising programs in connection with Hiway's
efforts to create national, international and regional brands, which contributed
approximately $113,000, $1.0 million and $1.6 million to sales and marketing
expenses in 1995, 1996 and 1997, respectively. The decline in sales and
marketing expenses as a percentage of revenues from 20.9% in 1996 to 13.7% in
1997 was primarily a result of a slowing in the growth rate of Hiway's
advertising and promotion expenses. Hiway's sales and marketing expenses
increased 113.0% from $2.3 million in the first nine months of 1997 to $4.9
million in the first nine months of 1998 primarily as a result of increases in
expenditures for sales and marketing personnel and marketing and advertising
expenditures.
Product Development and Systems Engineering. Product development and
systems engineering expenses increased from $97,000 in 1995 to $1.0 million in
1996 and $2.1 million in 1997. These increases were primarily the result of
payroll increases. Product development and systems engineering expenses
increased as a percentage of revenues from 4.8% in 1995 to 8.2% in 1996 and then
remained relatively constant at 8.1% in 1997. Product development and systems
engineering expenses increased from $1.4 million in the first nine months of
1997 to $2.1 million in the first nine months of 1998 as a result of increased
expenditures for product development and systems engineering personnel.
General and Administrative. General and administrative expenses increased
from $2.1 million in 1995 to $4.6 million in 1996 to $8.4 million in 1997. These
increases were primarily the result of increases in headcount, occupancy costs
and the provision for bad debts, which generally increases as a percentage of
revenues. Occupancy costs contributed approximately $155,000, $346,000 and
$856,000 to general and administrative expenses in 1995, 1996 and 1997,
respectively, and the provision for bad debts contributed approximately $8,000,
$423,000 and $1.5 million to general and administrative expenses in 1995, 1996
and 1997, respectively. The significant increase in Hiway's provision for bad
debts corresponds with the increase in revenues from $2 million in 1995 to $26.2
million in 1997. Hiway's provision reflects the proportion of accounts which are
expected to be bad debts based on past experience and is calculated using a
percentage of revenues that is consistent with historical results and is updated
monthly. General and administrative expenses decreased as a percentage of
revenues from 102.8% in 1995 to 38.0% in 1996 and 32.1% in 1997. General and
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administrative expenses increased from $5.6 million in the first nine months of
1997 to $11.4 million in the first nine months of 1998, primarily as a result of
increased expenditures on salaries and benefits for an increased number of
administrative personnel, occupancy costs, provision for bad debts, and charges
relating to the merger with Hiway Florida and the sale of the company to Verio.
Provision for Income Taxes. Hiway recorded a $1,000 tax provision for both
1995 and 1996 for minimum state income taxes. No other income taxes were payable
since Best incurred losses during these periods and Hiway Florida operated as a
Subchapter S corporation. During 1997, Hiway Florida continued to operate as a
Subchapter S corporation and therefore paid no tax at the corporate level. In
1997, Best had a provision for income taxes of $361,000, which represented an
effective tax rate of 18.0% for Best and 7.5% for Hiway as a combined company.
The effective tax rate differed from the federal statutory rate of 34.0%
primarily as a result of a change in Hiway's deferred tax valuation allowance.
During the first nine months of 1998, Hiway had a provision for income taxes of
$99,000, which represented an effective tax rate of 3.4%. The effective tax rate
differed from the federal statutory rate of 34.0% primarily as a result of the
use of net operating loss carryforwards and the tax benefit that resulted from
Hiway Florida's conversion from a Subchapter S corporation to a Subchapter C
corporation and from Hiway anticipating the accrual of $7.0 million of one-time
Hiway IPO costs and costs related to the Merger in the fourth quarter of 1998,
thereby reducing fiscal 1998 tax liability.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Hiway has financed its operations primarily through
private sales of equity securities and debt issuances, cash generated from
operating activities and various types of equipment loans and lease lines.
Hiway generated $92,000, $1.9 million, $6.5 million and $6.1 million in
cash from operations in the years ended December 31, 1995, 1996 and 1997 and the
nine months ended September 30, 1998, respectively. Net cash provided by
operations in 1995 resulted primarily from increases in accounts payable and
other liabilities mostly offset by Hiway's net loss for the year. For each of
the other periods, net cash provided by operations resulted primarily from
Hiway's net income plus non-cash depreciation, amortization and doubtful
accounts expenses, coupled with increases in deferred revenue, partially offset
by increases in accounts receivable.
Net cash used in investing activities in 1995, 1996, 1997 and the nine
months ended September 30, 1998 was $1.0 million, $4.8 million, $5.5 million and
$8.3 million, respectively. Net cash used for investing activities in these
periods resulted almost entirely from expenditures for network and computer
equipment and leasehold improvements and investments in Hiway's network
infrastructure and, in 1996, cash used to acquire two Internet service providers
and in 1998 from expenditures to build out Hiway's Blue Lake facility.
Cash provided by financing activities in 1995, 1996 and 1997 was $1.0
million, $4.4 million and $3.1 million, respectively, and was almost entirely
the result of private sales of equity securities and, in 1996 and 1997, $0.8
million and $5.9 million, respectively, of net debt issuances, offset in 1996
and 1997 by distributions to shareholders of Hiway Florida, a Subchapter S
corporation, of $125,000 and $3.0 million, respectively. Hiway did not have any
material financing activities in the nine months ended September 30, 1998.
At September 30, 1998, the principal source of liquidity for Hiway was $3.6
million of cash and cash equivalents. As of that date, Hiway also had aggregate
principal amount of $5 million in 5% Senior Unsecured Notes (the "Notes")
outstanding. The Notes bear interest at 5% until January 1, 2000 and then bear
interest at 9% through maturity at December 31, 2002. Interest payments on the
Notes are due quarterly, and the outstanding principal balance is due at
maturity. The Notes may be prepaid at the option of Hiway after December 1999,
subject to certain conditions, at a premium of ten percent. At September 30,
1998, Hiway had no material commitments for capital expenditures but expects
such expenditures to be approximately $1.0 million in the remainder of 1998.
Hiway also has minimum lease obligations of between $800,000 and $1.2 million
annually for the next five years. Hiway believes that its existing cash and cash
equivalents, and any cash generated from operations will be sufficient to fund
its operating activities, capital expenditures and other obligations through at
least the next 18 months. Hiway may not be successful in generating sufficient
cash flow from operations or in raising additional capital when required in
sufficient amounts on terms acceptable to Hiway. The failure of Hiway to raise
capital when needed could have a material adverse effect
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on Hiway's business, results of operations and financial condition. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of its then-current shareholders would be reduced.
Furthermore, such equity securities might have rights, preferences or privileges
senior to those of the Hiway Common Stock.
FACTORS AFFECTING RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Hiway has experienced significant fluctuations in its results of operations
on a quarterly and an annual basis. Hiway expects to continue to experience
significant fluctuations in its quarterly and annual results of operations due
to a variety of factors, many of which are outside Hiway's control. These
factors include: (a) demand for and market acceptance of Hiway's services; (b)
introductions of products or services by Hiway and its competitors; (c) reliable
continuity of service and network availability; (d) the ability to increase
bandwidth as necessary; (e) the mix of services sold by Hiway; (f) provisions
for customer discounts and credits; (g) customer retention; (h) the timing and
success of marketing efforts and service introductions by Hiway and its VARs and
OEMs; (i) the timing and magnitude of capital expenditures, including
construction costs relating to the expansion of operations; (j) the introduction
by third parties of new Internet and networking technologies; (k) increased
competition in Hiway's markets; (l) changes in the pricing policies of Hiway and
its competitors; (m) fluctuations in bandwidth used by customers; (n) the timing
and magnitude of expenditures on advertising and promotion; (o) economic
conditions specific to the Internet industry; and (p) other general economic
factors. In addition, a relatively large portion of Hiway's expenses are fixed
in the short-term, and therefore Hiway's results of operations are particularly
sensitive to fluctuations in revenues. Also, if Hiway were unable to continue
using third-party products in Hiway's services offerings, Hiway's service
development costs could increase significantly. Although Hiway has not
encountered significant difficulties in collecting accounts receivable in the
past, many of Hiway's customers are individuals and small businesses, and Hiway
may not be able to collect accounts receivable on a timely basis. For these and
other reasons, in some future quarters, Hiway's results of operations may not
meet or exceed the expectations of securities analysts or investors, which could
have a material adverse effect on the market price of Hiway Common Stock.
The market for Web hosting and related enhanced Internet services has only
recently begun to develop and is evolving rapidly. There is significant
uncertainty regarding whether this market ultimately will prove to be viable or,
if it becomes viable, whether it will grow. Hiway's future growth, if any, will
depend upon the willingness of businesses and consumers to outsource Web hosting
services and Hiway's ability to market its services in a cost-effective manner
to a sufficiently large number of customers. The market for Hiway's services may
not develop further, Hiway's services may not be more widely adopted, and
significant numbers of businesses, organizations or consumers may not use the
Internet for commerce and communication. If this market fails to develop further
or develops more slowly than expected, or if Hiway's services do not achieve
broader market acceptance, Hiway's business, results of operations and financial
condition would be materially and adversely affected. In addition, to be
successful in this emerging market, Hiway must be able to differentiate itself
from its competition through its service offerings and brand recognition. Hiway
may not be successful in differentiating itself or achieving market acceptance
of its services, and Hiway may experience difficulties that could delay or
prevent the successful development, introduction or marketing of these services.
If Hiway incurs increased costs or is unable, for technical or other reasons, to
develop and introduce new services or products or enhancements to existing
services in a timely manner, or if new services do not achieve market acceptance
in a timely manner or at all, Hiway's business, results of operations and
financial condition could be materially adversely affected.
An important element of Hiway's strategy for growth is to continue to
develop its reseller channel through RapidSite, which manages Hiway's network of
over 1,800 domestic and international VARs, and through Hiway's OEM
relationships. Hiway's VARs typically are Web development or Web consulting
companies that also sell Hiway's Web hosting services but that do not generally
have established customer bases to which they can market Hiway's services.
Therefore, in those markets, primarily international, where Hiway does not focus
its direct marketing efforts, Hiway is dependent on third parties to stimulate
demand for Hiway's services. Although Hiway attempts to incentivize its VARs by
providing them with price discounts on Hiway's services
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that the VARs seek to resell at a profit, the failure of Hiway's services to be
commercially accepted in certain markets, whether as a result of a VAR's
performance or otherwise, could cause Hiway's current channel partners to
discontinue their relationships with Hiway, and Hiway may not be successful in
establishing additional channel partner relationships as required. Hiway has
also developed strategic relationships with certain of its international VARs
through its "Premier Partner" program. Each of Hiway's Premier Partners is
responsible for building and supporting a VAR channel, which allows Hiway to
leverage the Premier Partner's local marketing and distribution expertise, and
for helping Hiway build the RapidSite brand internationally. In addition, Hiway
recently has established OEM relationships with several large companies and is
pursuing OEM relationships with additional companies. Hiway's OEM relationships
have not generated a material amount of revenue to date, and, in order for Hiway
to be successful, revenues generated by OEMs must increase significantly. OEMs
and VARs have no obligation to market or resell Hiway's Web hosting services,
and OEMs can terminate their relationships with Hiway with limited or no penalty
with as little as 30 days' notice. The loss of Premier Partners, other VARs or
OEMs, the failure of such parties to perform under agreements with Hiway or the
Premier Partner or the inability of Hiway to attract and retain new Premier
Partners, VARs or OEMs with the industry experience required to market Hiway's
Web hosting services successfully in the future could have a material adverse
effect on Hiway's business, results of operations and financial condition.
Hiway's direct sales efforts may conflict with the efforts of its indirect
channel partners, which may adversely affect Hiway's relationships with such
partners. In addition, to the extent that Hiway succeeds in increasing its sales
through indirect channels such as Premier Partners, VARs or OEMs, those sales
will be at discounted rates, and revenue and gross margin to Hiway for each such
sale will be less than if Hiway had sold the same services to the customer
directly.
In 1996, 1997 and the first nine months of 1998, revenues derived from
customers outside the United States, primarily in Europe and Asia, represented
approximately 9.5%, 14.0% and 18.7%, respectively, of Hiway's revenues. Hiway's
success is dependent in part on expanding its international presence, primarily
through Hiway's VARs and RapidSite's Premier Partners and their VARs. As a
result, Hiway will depend upon its VAR network to market and sell its services
and manage the accounts of customers internationally. Hiway's VARs may not be
able to continue to market and sell Hiway's Web hosting services successfully.
Hiway denominates its sales to VARs and Premier Partners in U.S. dollars. Thus,
fluctuations in the value of the U.S. dollar relative to the currency of a given
country may make Hiway's services more or less profitable and therefore more or
less attractive to VARs selling in that country. In addition, there are certain
risks inherent in conducting business internationally, such as changes in
regulatory requirements, export restrictions, tariffs and other trade barriers,
differing technology standards, longer payment cycles, political and economic
instability, fluctuations in currency exchange rates, imposition of currency
exchange controls, seasonal reductions in business activity, increased
difficulty in enforcing contracts and potentially adverse tax consequences, any
of which could adversely affect Hiway's international operations. Furthermore,
certain foreign governments, such as Germany, have enforced laws and regulations
related to content distributed over the Internet that are more strict than those
currently in place in the United States. One or more of these factors could have
a material adverse effect on Hiway's current or future international operations
and, consequently, on Hiway's business, results of operations and financial
condition. To the extent that Hiway does business in foreign markets directly,
Hiway will also be subject to risks such as challenges in staffing and managing
foreign operations, employment laws and practices in foreign countries and
problems in collecting accounts receivable. In addition, Hiway or its channel
partners may not be able to compete effectively in international markets.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards ("SFAS No. 131"), Disclosure about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for the
way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports. SFAS
No. 131 is effective for financial statements for fiscal years beginning after
December 15, 1997. Hiway has determined that it does not have any separately
reportable business segments.
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In March 1998, the AICPA issued Statement of Position ("SOP") 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use. Hiway is reviewing the impact of SOP 98-1, which will be effective for the
year ending December 31, 1999.
YEAR 2000 ISSUES
Hiway recognizes the need to ensure its operations will not be adversely
impacted by Year 2000 software failures. Software failures due to processing
errors potentially arising from calculations using the dates on or after Year
2000 are a known risk. Hiway has established procedures for evaluating and
managing the risks and costs associated with this problem and believes that its
systems are Year 2000 compliant. Hiway currently anticipates hiring an
independent consultant to review Hiway's systems and certify that they are Year
2000 compliant in order to satisfy inquiries from customers. The cost of this
review could exceed $100,000, and, were it to uncover Year 2000 problems, Hiway
could incur significant operating expenses or be required to invest in improved
computer systems to be Year 2000 compliant. Such expenditures could have a
material adverse effect on Hiway's business, results of operations and financial
condition. In addition, Hiway maintains most of its customers' Web pages on
UNIX-based servers, which may be impacted by Year 2000 complications. The
failure of such servers could have a material adverse effect on Hiway's
customers, which in turn could have a material adverse effect on Hiway's
business, results of operations and financial condition.
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PRINCIPAL SHAREHOLDERS OF HIWAY
Except as otherwise noted, the following table sets forth certain
information known to Hiway with respect to beneficial ownership of the Hiway
Common Stock as of November 13, 1998 by (a) each shareholder known by Hiway to
be the beneficial owner of more that five percent, in the aggregate, of the
outstanding shares of Hiway Common Stock, (b) each director of Hiway, (c)
Hiway's current Chief Executive Officer and four most highly compensated
executive officers whose salaries and bonuses exceeded $100,000, and (d) all
current executive officers and directors as a group. The information in the
table was obtained from the books and records of Hiway or, where applicable,
supplied to Hiway by the beneficial owners below.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)(2)
---------------------------------------
NUMBER OF SHARES PERCENT
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED
- ------------------------ ------------------ ------------------
<S> <C> <C>
William G. Nesbitt(3)................................ 7,861,070 21.9%
Scott H. Adams(3)(4)................................. 7,237,174 20.2
Steven J. Umberger(3)(5)............................. 3,930,535 11.0
Robert D. Leppo(6)................................... 2,943,047 8.2
Arthur L. Cahoon(3)(7)............................... 2,135,003 5.8
James R. Zarley(8)................................... 1,250,150 3.5
David S. Buzby(9).................................... 841,871 2.3
Thomas C. Barry/BI Partners, LLC(10)................. 630,716 1.8
Robert E. Tomasi, Jr.(11)............................ 422,917 1.2
All current executive officers and directors as a
group (7 persons)(12).............................. 23,886,519 64.3
</TABLE>
- ---------------
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
(2) Percentage ownership is based on 35,887,913 shares outstanding as of
November 13, 1998. Shares of Hiway Common Stock subject to options or
warrants granted as of November 13, 1998 that are currently exercisable or
exercisable within 60 days of November 13, 1998 are deemed to be
outstanding and to be beneficially owned by the person holding such options
or warrants for the purpose of computing the percentage ownership of such
person but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(3) The address of Messrs. Nesbitt, Adams, Umberger and Cahoon is c/o Hiway
Technologies, Inc., 5050 Blue Lake Drive, Suite 100, Boca Raton, Florida,
33431.
(4) Represents 6,237,174 shares held of record by Mr. Adams and 1,000,000
shares held of record by Franklin H. Adams as Trustee of the Scott H. Adams
Grantor Retained Annuity Trust dated May 29, 1998.
(5) Represents 3,180,535 shares held of record by Mr. Umberger, 500,000 shares
held of record by Margaret Norine Davis as Trustee of the Steven J.
Umberger Grantor Retained Annuity Trust III dated May 29, 1998, 175,000
shares held of record by Timothy D. Umberger as Trustee of the Steven J.
Umberger Grantor Retained Annuity Trust I dated May 29, 1998 and 75,000
shares held of record by Carolyn Davis Oates as Trustee of the Steven J.
Umberger Grantor Retained Annuity Trust II dated May 29, 1998.
(6) The address of Mr. Leppo is 5655 College Ave., #250, Oakland, California
94618.
(7) Represents 724,838 shares held of record by Arthur L. Cahoon, 250,000
shares held of record by Pam Fitch as Trustee of the Arthur Logan Cahoon
Grantor Retained Annuity Trust dated May 29, 1998 and 1,160,165 shares
subject to immediately exercisable warrants held of record by Mr. Cahoon.
(8) Represents 1,040,000 shares held of record by The Zarley Family Trust dated
May 1, 1994, 148,150 shares held of record by Mr. Zarley and 62,000 shares
held of record by Quantech Investment Co., which was founded by Mr. Zarley.
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<PAGE> 163
(9) Represents 841,871 shares held of record by David S. Buzby and Susheela D.
Vasan, Trustees of the Buzby-Vasan 1997 Trust.
(10) Represents 520,000 shares and 100,000 shares subject to a warrant held of
record by BI Partners, LLC, of which Mr. Barry is the founder, general
partner and manager. In addition, on July 7, 1998, options to acquire
20,000 shares of Hiway Common Stock, of which 10,716 of such options have
vested or will vest and be exercisable within 60 days of November 13, 1998,
have been granted to Mr. Barry.
(11) Represents 412,917 shares held of record by Mr. Tomasi and 10,000 shares
held of record by Mr. Tomasi's children.
(12) Includes the shares subject to warrants and options that are identified in
footnotes (7) and (10).
OTHER MATTERS
It is not expected that any matters other than those described in this
Proxy Statement/Prospectus will be brought before the Hiway Special Meeting. If
any other matters are presented, however, it is the intention of the persons
named in the proxy to vote such proxies in accordance with their respective
discretion.
It is expected that representatives of PricewaterhouseCoopers LLP, Hiway's
independent public accountants, will be present at the Hiway Special Meeting,
where they will have an opportunity to respond to appropriate questions of
shareholders of Hiway and to make statements if they so desire.
LEGAL MATTERS
Certain legal matters with respect to the validity of the securities
offered hereby will be passed upon for Verio by Morrison & Foerster LLP, San
Francisco, California.
EXPERTS
The consolidated financial statements of Verio Inc. and subsidiaries as of
December 31, 1996 and 1997 and for the period from inception (March 1, 1996) to
December 31, 1996, and the year ended December 31, 1997 and the financial
statements of On-Ramp Technologies, Inc. as of and for the nine months ended
July 31, 1996; Global Enterprise Services -- Network Division (a Division of
Global Enterprise Services, Inc.) as of December 31, 1995 and 1996, and for each
of the years in the three-year period ended December 31, 1996 and the period
ended January 17, 1997; Compute Intensive Inc. as of December 31, 1995 and 1996,
and for each of the years in the two-year period ended December 31, 1996, and
the period ended February 18, 1997; NorthWestNet, Inc. as of and for the six
months ended June 30, 1996 and the eight months ended February 28, 1997,
Northwest Academic Computing Consortium, Inc. as of and for the year ended June
30, 1995 and the six months ended December 31, 1995; Aimnet Corporation as of
and for the year ended March 31, 1997 and for the period ended May 19, 1997;
West Coast Online, Inc. as of and for the nine months ended September 30, 1997;
Clark Internet Services, Inc. as of and for the year ended September 30, 1997
and for the period ended October 17, 1997; ATMnet as of and for the years ended
October 31, 1996 and 1997; Global Internet Network Services, Inc. as of December
31, 1996 and November 26, 1997 and for the year and period then ended;
Pennsylvania Research Partnership Network as of and for the years ended November
30, 1996 and 1997 and for the period ended December 24, 1997; Monumental Network
Systems, Inc. as of and for the years ended December 31, 1996 and 1997; Internet
Servers, Inc. as of December 31, 1996 and 1997 and for the period from inception
(August 23, 1995) to December 31, 1995 and the years ended December 31, 1996 and
1997; NSNet, Inc. as of and for the years ended December 31, 1996 and 1997;
Access One, Inc. as of and for the year ended December 31, 1997; STARnet, L.L.C.
as of and for the year ended December 31, 1997; Computing Engineers Inc. as of
and for the years ended December 31, 1996 and 1997; LI Net, Inc. as of April 30,
1997 and January 31, 1998 and for the years ended April 30, 1996 and 1997 and
the nine months ended January 31, 1998; and NTX, Inc. as of and for the nine
months ended June 30, 1998, have been included herein in reliance upon the
reports of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
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<PAGE> 164
The consolidated financial statements of Hiway Technologies, Inc. and
subsidiaries included in this Proxy Statement/Prospectus as of December 31, 1996
and 1997 and for each of the years in the three-year period ended December 31,
1997, except as they relate to the financial statements of Hiway Florida as of
December 31, 1996, for the period from April 6, 1995 (date of incorporation) to
December 31, 1995 and for the year ended December 31, 1996, have been audited by
PricewaterhouseCoopers LLP, independent certified public accountants, and,
insofar as they relate to the financial statements of Hiway Florida as of and
for the periods indicated, by DeMeo, Young, McGrath & Company, P.A., independent
accountants, whose reports thereon appear herein. Such financial statements have
been included in reliance on the reports of such independent accountants given
on the authority of said firms as experts in accounting and auditing.
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<PAGE> 165
GLOSSARY OF TERMS
ATM........................ Asynchronous Transfer Mode. An information transfer
standard for routing traffic which uses packets
(cells) of a fixed length.
Backbone................... A centralized high-speed network that interconnects
smaller, independent networks.
Bandwidth.................. The number of bits of information which can move
through a communications medium in a given amount
of time; the capacity of a telecommunications
circuit/network to carry voice, data and video
information. Typically measured in kbps and Mbps.
Caching.................... Temporary storage or replication of a Web server
content at one or more locations throughout the
Internet to provide a quicker response to a browser
request.
CGI........................ Custom Gateway Interface.
CPE........................ Customer Premise Equipment.
DNS........................ Domain Name Server.
DS-3 or T-3................ A data communications circuit capable of
transmitting data at 45 Mbps. Equivalent to 28
T-1's of data capacity. Currently used only by
businesses/institutions and carriers for high end
applications.
Firewall................... A system placed between networks that filters data
passing through it and prevents unauthorized
traffic, thereby enhancing the security of the
network.
Frame Relay................ An information transfer standard for relaying
traffic based on an address contained in the
six-byte header of a variable length packet that is
up to 2,106 bytes long.
Hertz...................... The dimensional unit for measuring the frequency
with which an electromagnetic signal cycles through
the zero-value state between lowest and highest
states. One Hertz (abbreviated Hz) equals one cycle
per second. KHz (KiloHertz) stands for thousands of
Hertz; MHz (MegaHertz) stands for millions of
Hertz; GHz (GigaHertz) stands for billions of
Hertz.
Internet................... A global collection of interconnected computer
networks which use a specific communications
protocol.
IP......................... Internet Protocol. Network protocols that allow
computers with different architectures and
operating system software to communicate with other
computers on the Internet.
ISDN....................... Integrated Services Digital Network. An information
transfer standard for transmitting digital voice
and data over telephone lines at speeds up to 128
Kbps.
ISPs....................... Internet Service Providers. Companies formed to
provide access to the Internet to consumers and
business customers via local networks.
IXC........................ Interexchange Carrier. A telecommunications company
that provides telecommunications services between
local exchanges on an interstate or intrastate
basis.
151
<PAGE> 166
Kbps....................... Kilobits per second. A transmission rate. One
kilobit equals 1,024 bits of information.
LAN........................ Local Area Network. A data communications network
designed to interconnect personal computers,
workstations, minicomputers, file servers and other
communications and computing devices within a
localized environment.
Leased Line................ Telecommunications line dedicated to a particular
customer along predetermined routes.
LEC........................ Local Exchange Carrier. A telecommunications
company that provides telecommunications services
in a geographic area in which calls generally are
transmitted without toll charges. LECs include both
RBOCs and competitive local exchange carriers.
LMDS....................... Local Multipoint Distribution Service. Two blocks
of spectrum with total bandwidth of 1150 MHz and
150 MHz to be auctioned and used for various
wireless services.
Mbps....................... Megabits per second. A transmission rate. One
megabit equals 1,024 kilobits.
MMDS....................... Microwave Multipoint Distribution Service.
Modem...................... A device for transmitting digital information over
an analog telephone line.
MSAs....................... Metropolitan Statistical Areas. A designation by
the U.S. Census Bureau for metropolitan areas with
a central city or an urbanized area having a
minimum population of 50,000 with a total
metropolitan population of at least 100,000 and
including all counties that have strong economic
and social ties to the central city.
NAP........................ Network Access Point. A location at which ISPs
exchange each other's traffic.
National Node.............. National network access point where IP traffic is
exchanged between network links and where regional
networks access the national network.
NOC........................ Network Operations Center. Facility where the
Company monitors and manages the Company's network.
OC-3....................... A data communications circuit consisting of three
DS-3s capable of transmitting data at 155 Mbps.
OC-12...................... A data communications circuit capable of
transmitting data at 622 Mbps (4 X OC-3).
Peering.................... The commercial practice under which ISPs exchange
each other's traffic without the payment of
settlement charges. Peering occurs at both public
and private exchange points.
POP........................ Point of Presence. Telecommunications facility
where the Company locates network equipment used to
connect customers to its network backbone.
Proxy Server............... A server that acts on behalf of one or more other
servers, usually for screening, firewall, caching,
or a combination of these purposes. Typically, a
proxy server is used within a company to gather all
Internet requests, forward them out to Internet
servers, and then receive the
152
<PAGE> 167
responses and in turn forward them to the original
requestor within the company.
Router..................... Equipment placed between networks that relays data
to those networks based upon a destination address
contained in the data packets being routed.
SMTP....................... Simple Mail Transfer Protocol.
TCP/IP..................... Transmission Control Protocol/Internet Protocol. A
suite of network protocols that allow computers
with different architectures and operating system
software to communicate with other computers on the
Internet.
VPN........................ Virtual Private Network. A network capable of
providing the tailored services of a private
network (i.e. low latency, high throughput,
security and customization) while maintaining the
benefits of a public network (i.e. ubiquity and
economies of scale).
WAN........................ Wide Area Network. A data communications network
designed to interconnect personal computers,
workstations, mini computers, file servers and
other communications and computing devices across a
broad geographic region.
Web Site................... A server connected to the Internet from which
Internet users can obtain information.
World Wide Web or Web...... A collection of computer systems supporting a
communications protocol that permits multi-media
presentation of information over the Internet.
xDSL....................... A term referring to a variety of new Digital
Subscriber Line technologies. Some of these
varieties are asymmetric with different data rates
in the downstream and upstream directions. Others
are symmetric. Downstream speeds range from 384
kbps (or "SDSL") to 1.5-8 Mbps (or "ASDL").
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Best Internet Communications, Inc. and Subsidiaries --
Financial Statements:
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................ F-5
Report of De Meo, Young, McGrath & Company, P.A.,
Independent Accountants................................ F-6
Consolidated Balance Sheets as of December 31, 1996 and
1997 and September 30, 1998 (unaudited)................ F-7
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997 and the Nine Months
Ended September 30, 1997 and 1998 (unaudited).......... F-8
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31 1995, 1996 and 1997 and Nine
Months Ended September 30, 1998 (unaudited)............ F-9
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997 and the Nine Months
Ended September 30, 1997 and 1998 (unaudited).......... F-10
Notes to Consolidated Financial Statements................ F-11
Verio Inc. and Subsidiaries -- Consolidated Financial
Statements:
Independent Auditors' Report.............................. F-24
Consolidated Balance Sheets as of December 31, 1996 and
1997 and September 30, 1998 (unaudited)................ F-25
Consolidated Statements of Operations for the Period from
Inception (March 1, 1996) to December 31, 1996, the
Year Ended December 31, 1997 and the Nine Months Ended
September 30, 1998 and 1997 (unaudited)................ F-26
Consolidated Statements of Stockholders' Deficit for the
Period from Inception (March 1, 1996) to December 31,
1996, the Year Ended December 31, 1997 and the Nine
Months Ended September 30, 1998 (unaudited)............ F-27
Consolidated Statements of Cash Flows for the Period from
Inception (March 1, 1996) to December 31, 1996, the
Year Ended December 31, 1997 and the Nine Months Ended
September 30, 1998 and 1997 (unaudited)................ F-28
Notes to Consolidated Financial Statements................ F-29
On-Ramp Technologies, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-43
Balance Sheet as of July 31, 1996......................... F-44
Statement of Operations for the Nine Months Ended July 31,
1996................................................... F-45
Statement of Stockholders' Deficit for the Nine Months
Ended July 31, 1996.................................... F-46
Statement of Cash Flows for the Nine Months Ended July 31,
1996................................................... F-47
Notes to Financial Statements............................. F-48
Global Enterprises Services -- Network Division -- Financial
Statements:
Independent Auditors' Report.............................. F-51
Balance Sheets as of December 31, 1995 and 1996........... F-52
Statements of Operations and Owner's Deficit for the Years
Ended December 31, 1994, 1995, 1996 and Period Ended
January 17, 1997....................................... F-53
Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996 and Period Ended January 17,
1997................................................... F-54
Notes to Financial Statements............................. F-55
</TABLE>
F-1
<PAGE> 169
<TABLE>
<S> <C>
Compute Intensive, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-58
Balance Sheets as of December 31, 1995 and 1996........... F-59
Statements of Operations for the Years Ended December 31,
1995 and 1996 and Period Ended February 18, 1997....... F-60
Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1995 and 1996 and Period Ended
February 18, 1997...................................... F-61
Statements of Cash Flows for the Years Ended December 31,
1995 and 1996 and Period Ended February 18, 1997....... F-62
Notes to Financial Statements............................. F-63
NorthWestNet, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-68
Balance Sheets as of June 30, 1995 and 1996............... F-69
Statements of Operations for the Year Ended June 30, 1995
and the Six Months Ended December 31, 1995 and Six
Months Ended June 30, 1996 and the Eight Months Ended
February 28, 1997...................................... F-70
Statements of Stockholders' Equity and Fund Balance for
the Year Ended June 30, 1995 and the Six Months Ended
December 31, 1995 and Six Months Ended June 30, 1996
and the Eight Months Ended February 28, 1997........... F-71
Statements of Cash Flows for the Year Ended June 30, 1995
and the Six Months Ended December 31, 1995, and the Six
Months Ended June 30, 1996 and the Eight Months Ended
February 28, 1997...................................... F-72
Notes to Financial Statements............................. F-73
Aimnet Corporation -- Financial Statements:
Independent Auditors' Report.............................. F-80
Balance Sheet as of March 31, 1997........................ F-81
Statement of Operations for the Year Ended March 31, 1997
and Period Ended May 19, 1997.......................... F-82
Statements of Stockholders' Equity for the Year Ended
March 31, 1997 and Period Ended May 19, 1997........... F-83
Statements of Cash Flows for the Year Ended March 31, 1997
and Period Ended May 19, 1997.......................... F-84
Notes to Financial Statements............................. F-85
West Coast Online, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-88
Balance Sheet as of September 30, 1997.................... F-89
Statement of Operations and Accumulated Deficit for the
Nine Months Ended September 30, 1997................... F-90
Statement of Cash Flows for the Nine Months Ended
September 30, 1997..................................... F-91
Notes to Financial Statements............................. F-92
Clark Internet Services, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-95
Balance Sheet as of September 30, 1997.................... F-96
Statements of Operations and Retained Earnings for the
Year Ended September 30, 1997 and Period Ended October
17, 1997............................................... F-97
Statements of Cash Flows for the Year Ended September 30,
1997 and Period Ended October 17, 1997................. F-98
Notes to Financial Statements............................. F-99
</TABLE>
F-2
<PAGE> 170
<TABLE>
<S> <C>
ATMnet -- Financial Statements:
Independent Auditors' Report.............................. F-101
Balance Sheets as of October 31, 1996 and 1997............ F-102
Statements of Operations for the Years Ended October 31,
1996 and 1997.......................................... F-103
Statements of Stockholders' Deficit for the Years Ended
October 31, 1996 and 1997.............................. F-104
Statements of Cash Flows for the Years Ended October 31,
1996 and 1997.......................................... F-105
Notes to Financial Statements............................. F-106
Global Internet Network Services, Inc. -- Financial
Statements:
Independent Auditors' Report.............................. F-110
Balance Sheets as of December 31, 1996 and November 26,
1997................................................... F-111
Statements of Operations for the Year Ended December 31,
1996 and the Period Ended November 26, 1997............ F-112
Statements of Stockholders' Equity (Deficit) for the Year
Ended December 31, 1996 and the Period Ended November
26, 1997............................................... F-113
Statements of Cash Flows for the Year Ended December 31,
1996 and the Period Ended November 26, 1997............ F-114
Notes to Financial Statements............................. F-115
Pennsylvania Research Partnership Network
(PREPnet) -- Financial Statements:
Independent Auditors' Report.............................. F-118
Balance Sheets as of November 30, 1996 and 1997........... F-119
Statements of Operations and Owner's Deficit for the Years
Ended November 30, 1996 and 1997 and the Period Ended
December 24, 1997...................................... F-120
Statements of Cash Flows for the Years Ended November 30,
1996 and 1997 and the Period Ended December 24, 1997... F-121
Notes to Financial Statements............................. F-122
Monumental Network Systems, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-125
Balance Sheets as of December 31, 1996 and 1997........... F-126
Statements of Operations for the Years Ended December 31,
1996 and 1997.......................................... F-127
Statements of Stockholders' Deficit for the Years Ended
December 31, 1996 and 1997............................. F-128
Statements of Cash Flows for the Years Ended December 31,
1996 and 1997.......................................... F-129
Notes to Financial Statements............................. F-130
Internet Servers, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-134
Balance Sheets as of December 31, 1996 and 1997........... F-135
Statements of Operations for the Period from Inception
(August 23, 1995) to December 31, 1995 and Years Ended
December 31, 1996 and 1997............................. F-136
Statements of Stockholders' Equity for the Period from
Inception (August 23, 1995) to December 31, 1995 and
Years ended December 31, 1996 and 1997................. F-137
Statements of Cash Flows for the Period from Inception
(August 23, 1995) to December 31, 1995 and Years Ended
December 31, 1996 and 1997............................. F-138
Notes to Financial Statements............................. F-139
NSNet, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-142
Balance Sheets as of December 31, 1996 and 1997........... F-143
Statements of Operations for the Years Ended December 31,
1996 and 1997.......................................... F-144
Statements of Owner's and Stockholder's Equity for the
Years Ended December 31, 1996 and 1997................. F-145
Statements of Cash Flows for the Years Ended December 31,
1996 and 1997.......................................... F-146
Notes to Financial Statements............................. F-147
</TABLE>
F-3
<PAGE> 171
<TABLE>
<S> <C>
Access One, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-150
Balance Sheet as of December 31, 1997..................... F-151
Statement of Operations and Accumulated Deficit for the
Year Ended December 31, 1997........................... F-152
Statement of Cash Flows for the Year Ended December 31,
1997................................................... F-153
Notes to Financial Statements............................. F-154
STARnet, L.L.C. -- Financial Statements:
Independent Auditors' Report.............................. F-158
Balance Sheet as of December 31, 1997..................... F-159
Statement of Operations for the Year Ended December 31,
1997................................................... F-160
Statement of Members' Equity for the Year Ended December
31, 1997............................................... F-161
Statement of Cash Flows for the Year Ended December 31,
1997................................................... F-162
Notes to Financial Statements............................. F-163
Computing Engineers Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-165
Balance Sheets as of December 31, 1996 and 1997........... F-166
Statements of Operations for the Years Ended December 31,
1996 and 1997.......................................... F-167
Statements of Stockholders' Equity for the Years Ended
December 31, 1996 and 1997............................. F-168
Statements of Cash Flows for the Years Ended December 31,
1996 and 1997.......................................... F-169
Notes to Financial Statements............................. F-170
LI Net, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-172
Balance Sheets as of April 30, 1997 and January 31,
1998................................................... F-173
Statements of Operations for the Years Ended April 30,
1996 and 1997 and the Nine Months Ended January 31,
1998................................................... F-174
Statements of Stockholders' Equity (Deficit) for the Years
Ended April 30, 1996 and 1997 and the Nine Months Ended
January 31, 1998....................................... F-175
Statements of Cash Flows for the Years Ended April 30,
1996 and 1997 and the Nine Months Ended January 31,
1998................................................... F-176
Notes to Financial Statements............................. F-177
NTX, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-181
Balance Sheet as of June 30, 1998......................... F-182
Statement of Operations for the Nine Months Ended June 30,
1998................................................... F-183
Statement of Stockholders' Deficit for the Nine Months
Ended June 30, 1998.................................... F-184
Statement of Cash Flows for the Nine Months Ended June 30,
1998................................................... F-185
Notes to Financial Statements............................. F-186
Independent Auditors Report............................... F-189
Balance Sheet as of June 30, 1998......................... F-190
Statement of Operations for the Nine Months Ended June 30,
1998................................................... F-191
Statement of Stockholders' Deficit for the Nine Months
Ended June 30, 1998.................................... F-192
Statement of Cash Flows for the Nine Months Ended June 30,
1998................................................... F-193
Notes to Financial Statements............................. F-194
</TABLE>
F-4
<PAGE> 172
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Best Internet Communications, Inc.
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, stockholders' equity, and cash flows present fairly, in all
material respects, the financial position of Best Internet Communications, Inc.
and its subsidiaries at December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of 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 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 and the report of other auditors provide a reasonable
basis for the opinion expressed above. We did not audit the financial statements
of Hiway Technologies, Inc. (Hiway Florida) for 1995 and 1996, which statements
reflect total assets of $2,150,000 at December 31, 1996 and revenues of
$2,700,000 and $10,400,000, respectively, for the years ended 1995 and 1996.
Those statements were audited by other auditors whose unqualified reports have
been furnished to us and our opinion, insofar as it relates to amounts included
for Hiway Florida for such periods, is based solely on the report of the other
auditors.
PricewaterhouseCoopers LLP
San Jose, California
May 27, 1998
F-5
<PAGE> 173
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of Hiway Technologies, Inc. Boca Raton, Florida
We have audited the accompanying balance sheet of Hiway Technologies, Inc.
as of December 31, 1996 and the related statements of income, retained earnings
and cash flows for the period from April 6, 1995 (date of inception) to December
31, 1995 and the year ended December 31, 1996. These financial statements are
the responsibility of Hiway Technologies, Inc.'s management. Our responsibility
is to express an opinion on the financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hiway Technologies, Inc. as
of December 31, 1996, and the results of its operations and its cash flows for
the period from April 6, 1995 (date of inception) to December 31, 1995 and for
the year ended December 31, 1996, in conformity with generally accepted
accounting principles.
De Meo, Young, McGrath & Company,
P.A.
September 17, 1997
Fort Lauderdale, Florida
F-6
<PAGE> 174
BEST INTERNET COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1996 1997 1998
------ ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................... $1,588 $ 5,672 $ 3,569
Accounts receivable, net of allowance for doubtful accounts
of $373, $1,072 and $1,063, respectively.................. 1,380 2,550 3,669
Note receivable............................................. -- 160 --
Inventory -- equipment held for resale...................... 71 35 14
Prepaid expenses and other current assets................... 237 297 565
Deferred taxes.............................................. -- 342 660
------ ------- -------
Total current assets.............................. 3,276 9,056 8,477
Property and equipment, net................................. 4,813 8,706 15,351
Deposits and other.......................................... 68 196 1,354
Investments................................................. -- 344 464
Intangible assets, net of accumulated amortization of $101,
$318 and $458, respectively............................... 1,382 1,165 1,031
------ ------- -------
Total assets...................................... $9,539 $19,467 $26,677
====== ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $1,165 $ 1,234 $ 2,353
Accrued payroll and related liabilities..................... 265 458 1,137
Other accrued liabilities................................... 201 141 490
Deferred revenue............................................ 981 2,578 4,205
Current portion of notes payable............................ 140 225 91
Current portion of capital lease obligations................ 135 251 291
------ ------- -------
Total current liabilities......................... 2,887 4,887 8,567
Deferred rent............................................... 105 119 564
Deferred taxes.............................................. -- 307 354
Notes payable, less current portion......................... 541 4,944 4,904
Capital lease obligations, less current portion............. 237 253 232
Convertible note payable.................................... 800 -- --
------ ------- -------
Total liabilities................................. 4,570 10,510 14,621
------ ------- -------
Commitments (Note 8)
SHAREHOLDERS' EQUITY:
Preferred stock, convertible and redeemable, $0.001 par
value per share: Authorized: 10,000,000 shares;
Series B: Authorized: 4,000,000 shares; Issued and
outstanding: 2,822,000, 3,462,000 and no shares,
respectively.............................................. 3,441 4,229 --
Liquidation preference: $3,528, $4,328 and $0, respectively
Common stock, $0.001 par value per share: Authorized:
60,000,000 shares; Issued and outstanding: 27,776,620,
31,120,237 and 35,886,113 shares, respectively............ 14 16 36
Additional paid-in capital.................................. 1,598 4,224 9,528
Notes receivable from shareholders.......................... -- (889) (1,358)
Retained earnings (accumulated deficit)..................... (84) 1,377 3,850
------ ------- -------
Total shareholders' equity........................ 4,969 8,957 12,056
------ ------- -------
Total liabilities and shareholders' equity........ $9,539 $19,467 $26,677
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 175
BEST INTERNET COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------------------
1995 1996 1997 1997 1998
------ ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.................................. $2,011 $12,217 $26,185 $18,453 $29,073
------ ------- ------- ------- -------
Operating costs and expenses:
Cost of revenues........................ 231 3,233 7,213 5,132 8,112
Sales and marketing..................... 154 2,555 3,589 2,280 4,878
Product development and systems
engineering.......................... 97 1,005 2,112 1,419 2,114
General and administrative.............. 2,068 4,641 8,400 5,632 11,372
------ ------- ------- ------- -------
Total operating costs and
expenses...................... 2,550 11,434 21,314 14,463 26,476
------ ------- ------- ------- -------
Income (loss) from operations............. (539) 783 4,871 3,990 2,597
Other income (expense).................... (7) -- 67 54 269
Interest expense, net..................... (4) (190) (142) (69) (294)
------ ------- ------- ------- -------
Income (loss) before provision for income
taxes................................... (550) 593 4,796 3,975 2,572
Provision for income taxes................ 1 1 361 301 99
------ ------- ------- ------- -------
Net income (loss)......................... $ (551) $ 592 $ 4,435 $ 3,674 $ 2,473
====== ======= ======= ======= =======
Basic net income (loss) per share......... $(0.03) $ 0.02 $ 0.15 $ 0.12 $ 0.07
====== ======= ======= ======= =======
Diluted net income (loss) per share....... $(0.03) $ 0.02 $ 0.13 $ 0.11 $ 0.07
====== ======= ======= ======= =======
Pro forma net income data (unaudited)
(Note 18):
Income (loss) before provision for
income taxes......................... $ (550) $ 593 $ 4,796 $ 3,975 $ 2,572
Pro forma provision for income taxes.... 1 33 1,925 1,596 843
------ ------- ------- ------- -------
Pro forma net income (loss)............... $ (551) $ 560 $ 2,871 $ 2,379 $ 1,729
====== ======= ======= ======= =======
Pro forma basic net income (loss) per
share................................... $(0.03) $ 0.02 $ 0.10 $ 0.08 $ 0.05
====== ======= ======= ======= =======
Pro forma diluted net income (loss) per
share................................... $(0.03) $ 0.02 $ 0.08 $ 0.07 $ 0.05
====== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 176
BEST INTERNET COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 AND NINE MONTHS ENDED SEPTEMBER 30,
1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES B NOTES RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE EARNINGS TOTAL
-------------------- ------------------- PAID-IN FROM (ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL SHAREHOLDERS DEFICIT) EQUITY
---------- ------- ---------- ------ ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1,
1995.................... -- $ -- -- $-- $ -- $ -- $ -- $ --
Issuance of common stock
for cash, net of
issuance costs of $7.... -- -- 22,622,141 22 990 -- -- 1,012
Issuance of common stock
for services rendered... -- -- 510,000 1 25 -- -- 26
Net loss.................. -- -- -- -- -- -- (551) (551)
---------- ------- ---------- --- ------ ------- ------- -------
BALANCES, DECEMBER 31,
1995.................... -- -- 23,132,141 23 1,015 -- (551) 487
Issuance of common stock
and exercise of stock
options for cash, net of
issuance costs of $3.... -- -- 4,509,479 5 430 -- -- 435
Issuance of common stock
for acquisitions........ -- -- 135,000 -- 67 -- -- 67
Issuance of warrants...... -- -- -- -- 72 -- -- 72
Issuance of preferred
stock for cash, net of
issuance costs
of $86.................. 2,822,000 3,441 -- -- -- -- -- 3,441
Net income................ -- -- -- -- -- -- 592 592
Distributions by Hiway
Florida (a Subchapter S
corporation)............ -- -- -- -- -- -- (125) (125)
---------- ------- ---------- --- ------ ------- ------- -------
BALANCES, DECEMBER 31,
1996.................... 2,822,000 3,441 27,776,620 28 1,584 -- (84) 4,969
Issuance of common stock
and exercise of stock
options for
cash.................... -- -- 2,279,503 2 544 -- -- 546
Issuance of common stock
and exercise of stock
options for
notes................... -- -- 1,084,114 1 608 (609) -- --
Repurchase of common
stock................... -- -- (20,000) -- (40) -- -- (40)
Issuance of warrants for
note.................... -- -- -- -- 280 (280) -- --
Issuance of warrant....... -- -- -- -- 1,233 -- -- 1,233
Issuance of preferred
stock for cash, net of
issuance costs
of $12.................. 640,000 788 -- -- -- -- -- 788
Net income................ -- -- -- -- -- -- 4,435 4,435
Distributions by Hiway
Florida (a Subchapter S
corporation)............ -- -- -- -- -- -- (2,974) (2,974)
---------- ------- ---------- --- ------ ------- ------- -------
BALANCES, DECEMBER 31,
1997.................... 3,462,000 4,229 31,120,237 31 4,209 (889) 1,377 8,957
Exercise of stock options
for cash................ -- -- 683,161 1 445 -- -- 446
Exercise of stock options
for
notes................... -- -- 620,715 1 468 (469) -- --
Conversion of preferred
stock................... (3,462,000) (4,229) 3,462,000 3 4,226 -- -- --
Contribution from
shareholders............ -- -- -- -- 180 -- -- 180
Net income................ -- -- -- -- -- -- 2,473 2,473
---------- ------- ---------- --- ------ ------- ------- -------
BALANCES, SEPTEMBER 30,
1998
(unaudited)............. -- $ -- 35,886,113 $36 $9,528 $(1,358) $ 3,850 $12,056
========== ======= ========== === ====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE> 177
BEST INTERNET COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -------------------------
1995 1996 1997 1997 1998
------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $ (551) $ 592 $ 4,435 $ 3,674 $ 2,473
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................. 87 608 1,371 916 1,962
Amortization of intangibles.................... -- 101 217 146 134
Services rendered in exchange for common
stock........................................ 26 -- -- -- --
Provision for doubtful accounts................ 8 365 699 423 (9)
Loss (gain) on sale and trade-in of property
and equipment................................ -- 39 2 (2) (134)
Equity in earnings of foreign resellers........ -- -- -- -- (13)
Amortization of discount on convertible debt... -- 72 -- -- 224
Deferred taxes................................. -- -- (35) -- (443)
Changes in operating assets and liabilities:
Accounts receivable.......................... (92) (1,660) (1,869) (1,215) (1,110)
Inventory.................................... (30) (41) 36 32 21
Prepaid expenses and other current assets.... (4) (233) (60) 81 (268)
Deposits..................................... (34) (15) (128) (96) (1,158)
Accounts payable............................. 360 804 69 (2) 1,119
Accrued liabilities.......................... 150 316 133 225 1,199
Deferred revenue............................. 115 866 1,597 1,193 1,627
Deferred rent................................ 57 48 14 10 445
------- ------- ------- ------- -------
Net cash provided by operating
activities............................ 92 1,862 6,481 5,385 6,069
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment..... -- 47 7 -- 2
Purchases of property and equipment.............. (1,047) (3,491) (4,955) (3,417) (8,277)
Repayment (issuance) of note receivable.......... -- -- (160) (160) 160
Purchase of investments.......................... -- -- (344) (120) (158)
Acquisitions..................................... -- (1,312) -- -- --
------- ------- ------- ------- -------
Net cash used in investing activities... (1,047) (4,756) (5,452) (3,697) (8,273)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock........... 1,012 422 500 500 --
Proceeds from exercise of stock options.......... -- 13 46 22 446
Proceeds from issuance of preferred stock........ -- 3,441 788 788 --
Repurchase of common stock....................... -- -- (40) -- --
Proceeds from (repayment of) convertible notes... -- 800 (800) (590) --
Proceeds from notes payable...................... -- 43 5,912 -- --
Principal payments on notes payable.............. -- (79) (190) (127) (346)
Proceeds from shareholder loans.................. 9 -- 105 105 --
Repayment of shareholder loans................... (8) (21) (105) -- --
Loans to shareholder............................. -- -- -- (250) --
Principal payment on capital lease obligations... (3) (67) (187) (126) (179)
Distributions to shareholders.................... -- (125) (2,974) (1,219) --
Contribution from shareholders................... -- -- -- -- 180
------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities............................ 1,010 4,427 3,055 (897) 101
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents.................................... 55 1,533 4,084 791 (2,103)
Cash and cash equivalents, beginning of period... -- 55 1,588 1,588 5,672
------- ------- ------- ------- -------
Cash and cash equivalents, end of period......... $ 55 $ 1,588 $ 5,672 $ 2,379 $ 3,569
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE> 178
BEST INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30,
1997 AND 1998 IS UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
1. COMPANY BACKGROUND
Best Internet Communications, Inc. (the Company), was incorporated in
California on September 21, 1994. Activity from September 21, 1994 (date of
inception) to December 31, 1994 resulted in revenues of $20 and a net loss of
$46, which have been included in the results for the year ended December 31,
1995. On May 27, 1998, the Company merged with Hiway Technologies, Inc. (Hiway
Florida), a company based in Florida. Hiway Florida was formed on April 6, 1995
and operated as a Subchapter S corporation.
The Company is a leading global provider of Web hosting and related
enhanced Internet services to small and medium sized businesses. The Company
focuses on delivering high-quality, reliable and flexible services that are
backed by 24 X 7 customer support.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
The Company has minority investments in certain of its foreign resellers.
The activities of these entities are not significant.
Management Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents:
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. These instruments are
stated at cost, which approximates fair value.
Fair Value of Financial Instruments:
Carrying amounts of certain financial instruments held by the Company
including cash and cash equivalents, accounts receivable, accounts payable and
other accrued liabilities approximate fair value due to their short maturities.
Based on borrowing rates currently available to the Company for loans with
similar terms, the carrying value of the notes payable and capital lease
obligations approximates fair value.
Inventory:
Inventory is stated at the lower of cost (determined on a first-in,
first-out basis) or market, and consists primarily of third party equipment for
resale.
Property and Equipment:
Property and equipment is stated at cost and is depreciated on a straight
line basis over their estimated useful lives of five to seven years. Leasehold
improvements are amortized over the length of the lease or
F-11
<PAGE> 179
BEST INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimated useful life, whichever is less. Major additions and betterments are
capitalized, while replacements, maintenance, and repairs that do not improve or
extend the life of the assets are charged to expense. In the period assets are
retired or otherwise disposed of, the costs and related accumulated depreciation
and amortization are removed from the accounts, and any gain or loss on disposal
is included in results of operations.
Intangible Assets:
Intangible assets consist of goodwill which arose from the acquisition of
two Internet service providers in 1996 (see Note 4) and is being amortized on a
straight-line basis over seven years. The Company reviews the carrying value of
goodwill for impairment whenever events or changes in circumstance indicate that
the carrying amount may not be recoverable.
Revenue Recognition:
Revenues consist primarily of Web hosting and Internet service fees, set-up
fees and equipment sales. The Company generally sells its Web hosting services
for contractual periods ranging from one to three months. Revenues from these
services are recognized ratably over the contractual period. The fee charged for
domain name reservations is recognized over the two year name reservation period
and any unrecognized portion of the revenue is booked upon any termination of
the reservation. Internet service fees consist of fixed monthly amounts that are
recognized as the service is provided. Payments received in advance of providing
services are deferred until the period such services are provided. Set-up fees
and equipment sales are recognized when the set-up services are performed. The
Company offers a 30-day money-back guarantee for Web hosting services. Refunds
made by the Company have been insignificant.
Advertising:
The Company charges advertising costs to expense as they are incurred.
Advertising expense for the years ended December 31, 1995, 1996 and 1997 was
$113, $988 and $1,353, respectively.
Product Development:
Product development expenses are charged to operations as incurred.
Income Taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes." Under SFAS 109, deferred tax assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to affect taxable income. Valuation
allowances are established when, in management's estimate, there is uncertainty
over the recovery of deferred tax assets. The provision for income tax is
comprised of taxes payable for the current period, plus the net change in
deferred tax amounts during the period.
Income taxes are recognized in these consolidated financial statements for
the operations of the Company which was a C Corporation during all periods
presented. Because Hiway Florida was a Subchapter S corporation during all
periods presented, the income taxes for Hiway Florida's operations were the
responsibility of that company's stockholders. Pro forma income tax expenses, as
though both the Company and Hiway Florida reported on a combined basis as a C
corporation is disclosed in Note 18.
F-12
<PAGE> 180
BEST INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unaudited Interim Financial Information:
The accompanying interim balance sheet as of September 30, 1998 and the
statements of operations and cash flows for the nine months ended September 30,
1997 and 1998 together with the related notes are unaudited but include all
adjustments, consisting of only normal recurring adjustments, which the Company
considers necessary to present fairly, in all material respects, the financial
position, as of September 30, 1998 and the results of operations and cash flows
for the nine months ended September 30, 1997 and 1998. Results for the nine
months ended September 30, 1997 and 1998 are not necessarily indicative of
results for an entire year.
Recent Accounting Pronouncements:
In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information," which is
effective for the year ending December 31, 1998.
In March 1998, the AICPA issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The Company is reviewing the impact of SOP 98-1, which will be
effective for the year ending December 31, 1999.
3. BUSINESS RISKS AND CREDIT CONCENTRATION
The Company operates in the intensely competitive Internet industry which
is characterized by rapid technological change, short product life cycles, and
heightened competition. Significant technological changes in the industry could
affect operating results adversely.
Financial instruments that potentially subject the Company to
concentrations of credit risk comprise principally cash and cash equivalents,
trade accounts receivable, and other receivables and deposits. As of December
31, 1997, the Company's cash and cash equivalents are deposited with numerous
domestic financial institutions. With respect to accounts receivable, the
Company's customer base is dispersed across many different geographic areas. The
Company monitors customers' payment history and establishes reserves for bad
debt as warranted. In addition to individual customers, the Company also
provides Web hosting services to resellers who in turn provide services to their
own customers.
4. MERGERS AND ACQUISITIONS
Merger with Hiway Florida:
On May 27, 1998, the Company merged with Hiway Florida, a provider of Web
hosting services. Under the terms of the merger agreement, each share of Hiway
Florida common stock was exchanged for 4.1374 shares of the Company's common
stock. The Company issued approximately 21.8 million shares of common stock in
exchange for all the outstanding shares of Hiway Florida. The Company also
assumed and exchanged all options and warrants to purchase Hiway Florida stock
for options and warrants to purchase approximately 3 million shares of the
Company's common stock. The transaction was accounted for as a pooling of
interest and accordingly the Company's financial statements have been restated
to include the results of Hiway Florida for all periods presented.
F-13
<PAGE> 181
BEST INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Separate and combined results of operations for the periods prior to the
merger are as follows:
<TABLE>
<CAPTION>
NINE
MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------- SEPTEMBER 30,
1995 1996 1997 1998
------ ------- ------- -------------
<S> <C> <C> <C> <C>
Revenues:
Best...................................... $1,965 $ 9,517 $15,785 $14,312
Hiway Florida............................. 46 2,700 10,400 14,761
------ ------- ------- -------
Combined.................................. $2,011 $12,217 $26,185 $29,073
====== ======= ======= =======
Net income (loss) -- historical:
Best...................................... $ (566) $ (474) $ 1,662 $ 320
Hiway Florida............................. 15 1,138 2,773 2,153
------ ------- ------- -------
Combined.................................. $ (551) $ 664 $ 4,435 $ 2,473
====== ======= ======= =======
</TABLE>
Other Acquisitions:
In July 1996, the Company acquired certain assets and the ongoing
operations of two Internet service providers for a total of $2,076. The
aggregate purchase price comprised $1,312 in cash, $697 in notes payable to
sellers, and 135,000 shares of common stock valued at $67. The purchase price
was allocated to the net tangible assets acquired ($593) and to goodwill
($1,483). The value of the common stock was determined by the Board of
Directors.
5. NOTE RECEIVABLE
The note receivable is due from one of the Company's partners in a foreign
reseller. The note is uncollateralized, bears interest at the rate of 12% and is
due on demand.
6. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1996 1997 1998
------ ------ -------------
<S> <C> <C> <C>
Network, computer equipment and software............... $4,661 $8,841 $12,860
Furniture and fixtures................................. 124 471 841
Leasehold improvements................................. 566 1,199 5,317
Other.................................................. 148 252 127
------ ------ -------
5,499 10,763 19,145
Less accumulated depreciation and amortization......... 686 2,057 3,794
------ ------ -------
$4,813 $8,706 $15,351
====== ====== =======
</TABLE>
Included in network and computer equipment are $490, $776 and $799 of
equipment acquired under capital leases at December 31, 1996 and 1997 and
September 30, 1998, respectively. Accumulated amortization related to such
capital leases was $40, $158 and $325 at December 31, 1996 and 1997 and
September 30, 1998, respectively. Network and computer equipment also includes
$1,064 and $328 of equipment not yet placed in service at December 31, 1997 and
September 30, 1998, respectively.
F-14
<PAGE> 182
BEST INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. CAPITAL LEASE OBLIGATIONS
The Company leases network equipment under several capital leases. The
agreements require the Company to maintain liability and property insurance.
Capital leases at December 31, 1997 expire at various dates through September
2000 and bear interest ranging from 5.8% to 18.5%. Future minimum lease payments
as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $284
1999........................................................ 209
2000........................................................ 58
----
551
Less amount representing interest........................... 47
----
Present value of minimum lease payments..................... 504
Less current portion........................................ 251
----
$253
====
</TABLE>
8. COMMITMENTS
The Company rents office facilities and equipment under several operating
leases which expire at various times through May 2005. Rent expense charged to
operations was $155, $345 and $670 for the years ended December 31, 1995, 1996,
and 1997, respectively.
Future minimum lease payments under noncancelable operating leases as of
December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 786
1999........................................................ 861
2000........................................................ 1,148
2001........................................................ 1,140
2002........................................................ 977
Thereafter.................................................. 1,818
------
Total commitments................................. $6,730
======
</TABLE>
9. NOTES PAYABLE
Notes payable comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
---- ------
<S> <C> <C>
Seller notes................................................ $649 $ 475
Bank notes.................................................. 32 927
Senior unsecured notes...................................... -- 3,767
---- ------
681 5,169
Less current portion........................................ 140 225
---- ------
$541 $4,944
==== ======
</TABLE>
The seller notes bear interest at 8% per annum and are repayable in monthly
equal installments through July 2001. These notes resulted from the acquisitions
made in 1996 (see Note 4).
F-15
<PAGE> 183
BEST INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The bank notes bear interest at 9.75% to 10% per annum and are repayable in
equal monthly installments through October 2001. The bank notes are
collateralized by the Company's assets and require the Company to comply with
certain covenants including a minimum quick ratio, a minimum tangible net worth,
a maximum ratio of total liabilities to tangible net worth, a minimum monthly
subscriber additions to disconnections ratio, and minimum cash requirements. The
Company also has an unused line of credit with this bank in the amount of $500.
The line of credit bears interest at 1% above the bank's prime rate, and
advances are limited to 75% of eligible accounts receivable.
On December 19, 1997, the Company issued $5,000 of 5% Senior Unsecured
Notes (the Notes) with detachable warrants to purchase 1,654,962 shares of
common stock. The warrants can be exercised for $3.02 per share, at any time
after December 19, 1997. The Notes are uncollateralized and bear interest at 5%
from December 19, 1997 until January 1, 2000 and then bear interest at 9%
through maturity on December 31, 2002. Quarterly payments of interest only are
due beginning March 31, 1998 with the outstanding principal balance due on
December 31, 2002. The notes may be prepaid at the option of the Company,
subject to certain conditions, at a premium of ten percent.
In connection with the issuance of the Notes and warrants, the Company
attributed a portion of the proceeds to the warrants, which has been recorded as
additional paid in capital and as a reduction to the face amount of the Notes,
thereby increasing effective interest to 13.895% and increasing interest expense
for the year ended December 31, 1997 to $42. The value of the warrants was
determined by discounting the debt using an assumed interest rate of 12%.
Future payments of the notes payable as of December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998........................................................ $ 225
1999........................................................ 437
2000........................................................ 448
2001........................................................ 292
2002........................................................ 3,767
------
$5,169
======
</TABLE>
10. CONVERTIBLE NOTE
In January 1996, the Company issued two convertible notes in the amounts of
$200,000 and $800,000. In connection with the $200,000 note, the Company issued
a warrant to purchase 100,000 shares of common stock at $0.50 per share to the
noteholder. In connection with the $800,000 note, the Company issued warrants to
purchase 266,667 and 133,333 shares of common stock at $0.50 per share to the
noteholder and the guarantor of the note, respectively.
In July 1996, the Company repaid the $200,000 convertible note. The
$800,000 convertible note was repaid in March 1997 and the warrant issued to the
noteholder to purchase 266,667 shares of common stock was replaced by a warrant
to purchase 200,000 shares of common stock at $0.50 per share. In addition, the
warrant held by the guarantor of the note was canceled.
The Company recorded the fair value of the warrants as a discount against
the related convertible notes with a corresponding amount credited to additional
paid-in capital. Amortization of the debt discount totalled $72 in 1996 and was
insignificant in 1997.
11. NOTES RECEIVABLE FROM SHAREHOLDERS
Notes receivable from shareholders comprise loans made to shareholders in
connection with the exercise of options for the Company's common stock or to
purchase the Company's common stock. The loans are with full recourse and bear
interest at rates from 2% above prime to 8.5%. The loans are due between 1998 to
2000.
F-16
<PAGE> 184
BEST INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also issued a warrant to purchase 1,160,166 shares of common
stock at $2.78 per share to a shareholder, as an incentive to the shareholder to
become Chairman of the Board of Directors, in return for a promissory note in
the amount of $280. The note bears interest at prime and is due in 2000. There
was no compensation element relating to the warrant since the exercise price was
in excess of the fair market value of the Company's common stock at the date of
issuance, as determined by other equity transactions and an independent
valuation.
12. SHAREHOLDERS' EQUITY
Preferred Stock
In connection with the issuance of convertible promissory notes in 1996,
the Board of Directors designated 500,000 shares of the Serial preferred stock
as Series A preferred stock. As at December 31, 1997, the convertible promissory
notes had been repaid by the Company and there were no conversions into the
Series A preferred stock.
In 1996, the Board of Directors designated 4,000,000 shares of the Serial
preferred stock as Series B preferred stock. These shares were issued and sold
by the Company in July 1996 and March 1997 to independent third party investors.
Effective May 27, 1998, all of the outstanding shares of Series B preferred
stock were converted into 3,462,000 shares of common stock.
Warrants
In 1996 and 1997, the Company issued warrants to purchase common stock to
investors and lenders. At December 31, 1997 such warrants were as follows:
<TABLE>
<CAPTION>
SHARES OF EXERCISE EXPIRATION
COMMON STOCK PRICE DATE PURPOSE OF WARRANT
- ------------ -------- ---------- ------------------
<C> <C> <C> <S>
100,000 $0.50 January 2001 Issued in connection with $200 convertible note
200,000 $0.50 January 2001 Issued in connection with $800 convertible note
1,160,166 $2.78 December 2000 Issued to stockholder in return for $280 promissory note
1,654,952 $3.02 December 2002 Issued in connection with $5,000 senior unsecured notes
</TABLE>
13. STOCK OPTION PLANS
Under the Company's 1996 Stock Option Plan, as amended, (the Plan) the
Company could issue incentive options to employees at prices not lower than fair
market value at the date of grant, as determined by the Board of Directors.
Supplemental stock options (options that do not qualify as incentive stock
option) could be granted to employees, directors and consultants, at prices not
lower than 85% of fair market value at the date of grant, as determined by the
Board of Directors. The Board also had the authority to set the term of the
options (no longer than ten years from date of grant). Options granted generally
vest over three to four years. Unexercised options expire at least 30 days after
termination of employment with the Company.
In April 1998, the Board of Directors and the shareholders approved the
adoption of a 1998 Equity Incentive Plan (the 1998 Plan) which serves as the
successor of the 1996 Stock Option Plan. As amended through July 1998, the
Company has reserved, subject to shareholder approval, a total of 4,000,000
shares of common stock. In June 1998, the Board also adopted the 1998 Directors
Stock Option Plan and reserved a total of 600,000 shares of common stock for
issuance thereunder. The amended and restated 1998 Plan and the 1998 Directors
Stock Option Plan are subject to the shareholders' approval.
F-17
<PAGE> 185
BEST INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity under the Plans is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
--------------------------------------------------------------------
SHARES NUMBER WEIGHTED
AVAILABLE OF EXERCISE AGGREGATE AVERAGE
FOR GRANT SHARES PRICE PRICE EXERCISE PRICE
---------- ---------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
Options reserved at Plan
inception.................... 4,000,000 --
Options granted................ (1,156,500) 1,156,500 $ 0.05-$0.50 $ 149,564 $ 0.13
---------- ---------- ------------ ---------- ------
Balances, December 31, 1995.... 2,843,500 1,156,500 149,564 $ 0.13
Options granted................ (2,721,500) 2,721,500 $ 0.50-$0.75 1,549,955 $ 0.57
Options exercised.............. -- (178,944) $ 0.05-$0.50 (20,012) $ 0.11
Options canceled............... 592,832 (592,832) $ 0.10-$0.50 (214,015) $ 0.36
---------- ---------- ------------ ---------- ------
Balances, December 31, 1996.... 714,832 3,106,224 1,465,492 $ 0.47
Options granted................ (1,508,156) 1,508,156 $ 0.36-$3.00 1,459,085 $ 0.97
Options exercised.............. -- (1,079,986) $ 0.05-$1.25 (444,347) $ 0.41
Options canceled............... 1,419,330 (1,419,350) $ 0.50-$1.25 (727,566) $ 0.51
---------- ---------- ------------ ---------- ------
Balances, December 31, 1997.... 626,006 2,115,044 1,752,664 $ 0.83
Options reserved under new
Plan......................... 4,000,000 --
Cancellation of shares
available for grant under old
Plan......................... (578,506) --
Options granted................ (851,150) 851,150 $ 3.00-$6.00 4,936,663 $ 5.80
Options exercised.............. -- (1,303,862) $ 0.25-$3.00 (908,636) $ 0.70
Options canceled............... -- (230,321) $ 0.50-$6.00 (811,887) $ 3.53
---------- ---------- ------------ ---------- ------
Balances, June 30, 1998........ 3,196,350 1,432,011 $4,968,804 $ 3.47
========== ========== ========== ======
</TABLE>
The following table summarizes information with respect to stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS CURRENTLY
-------------------------------------------------- EXERCISABLE
WEIGHTED ----------------------------
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------- ----------- ---------------- ----------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.10........................ 140,000 7.07 $0.10 140,000 $0.10
$0.25........................ 46,000 7.50 $0.25 46,000 $0.25
$0.36........................ 206,865 9.45 $0.36 68,958 $0.36
$0.50........................ 240,116 8.62 $0.50 81,200 $0.50
$0.75........................ 1,054,318 9.04 $0.75 212,034 $0.75
$1.25........................ 108,750 9.47 $1.25 10,680 $1.25
$1.75........................ 172,495 9.84 $1.75 1,980 $1.75
$2.00........................ 128,000 9.84 $2.00 -- --
$3.00........................ 18,500 9.92 $3.00 -- --
--------- ------- -----
2,115,044 560,852 $0.48
========= ======= =====
</TABLE>
F-18
<PAGE> 186
BEST INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following information concerning the Company's stock option plan is
provided in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company accounts for the plan in accordance with APB No. 25
and related Interpretations.
The fair value of each option grant has been estimated on the date of grant
using the minimum value method with the following assumptions:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Risk-free interest rates.................................... 6.55% 6.25%
Expected volatility......................................... 0% 0%
Expected life............................................... 5 years 5 years
Dividends................................................... None None
</TABLE>
The weighted average fair value of the options granted in 1996 and 1997 was
$0.42 and $0.77, respectively.
The following pro forma net income (loss) information has been prepared as
if the Company had followed the provisions of SFAS No. 123:
<TABLE>
<CAPTION>
1996 1997
---- ------
<S> <C> <C>
Net income:
As reported (pro forma)................................... $560 $2,871
Pro forma................................................. $494 $2,600
</TABLE>
These pro forma amounts may not be representative of the effects on
reported net income (loss) for future years as options vest over several years
and additional awards are generally made each year.
14. MERGER COSTS
General and administrative expense for the nine months ended September 30,
1998 includes approximately $1.2 million in costs related to the merger with
Hiway Florida and the sale of the Company to Verio. The Company expenses such
costs as they are incurred.
15. INCOME TAXES
The Company's provision for income taxes for the year ended December 31,
1997 is as follows:
<TABLE>
<S> <C>
Current provision:
Federal................................................... $(314)
State..................................................... (81)
-----
(395)
-----
Deferred benefit:
Federal................................................... 33
State..................................................... 1
-----
34
-----
Provision for income taxes.................................. $(361)
=====
</TABLE>
The Company recorded a $1 tax provision for both years ended December 31,
1995 and 1996 for minimum state income tax. No other income taxes were payable
since the Company incurred losses during these periods and Hiway Florida
operated as a Subchapter S corporation (see Note 17 for pro forma provision for
income tax).
F-19
<PAGE> 187
BEST INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. Since the Company underwent a change in ownership during
1996 as defined in the Internal Revenue Code, the net operating loss
carryforwards of $995 and $940 at December 31, 1996 for Federal and California
purposes, respectively, could not be fully utilized in 1997. At December 31,
1997 the Company had net operating loss carryforwards of approximately $49 and
$47 for Federal and California purposes, respectively. These carryforwards
expire in 2003 through 2012 if not utilized beforehand.
The Company's deferred income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
----- -----
<S> <C> <C>
Deferred tax assets (current):
Net operating losses...................................... $ 426 $ 21
Allowance for doubtful accounts........................... 144 208
Deferred rent............................................. 45 51
Accrued liabilities....................................... 33 35
Other..................................................... 1 28
Deferred tax assets (non-current):
Amortization.............................................. 30 72
----- -----
Deferred tax assets....................................... 679 415
Deferred tax liabilities (non-current):
Depreciation.............................................. (239) (380)
Other..................................................... (30) --
----- -----
Deferred tax liabilities.................................... (269) (380)
Valuation allowance......................................... (410) --
----- -----
Net deferred tax asset............................ $ -- $ 35
===== =====
</TABLE>
The deferred tax valuation allowance decreased by $410 in 1997 as
management determined that the net deferred tax asset as of December 31, 1997
was more likely to be realized than not.
The following schedule reconciles the differences between the federal
income tax rate and the effective income tax rate for the year ended December
31, 1997:
<TABLE>
<S> <C>
Statutory rate.............................................. 34.0%
State taxes, net............................................ 1.1
Change in valuation allowance............................... (8.5)
Effect of income not subject to income taxes due to Hiway
Florida's Subchapter S status............................. (19.7)
Other....................................................... 0.6
-----
Effective tax rate.......................................... 7.5%
=====
</TABLE>
16. EMPLOYEE BENEFIT PLAN
In September 1995, the Company adopted a 401(k) Plan which qualifies under
Section 401(k) of the Internal Revenue Code of 1986. The Plan provides
retirement benefits through tax deferred salary deductions for all eligible
employees meeting certain age and service requirements. The Company may make
discretionary matching contributions on behalf of employees. All employee
contributions are 100% vested. The Company did not make any contribution to the
Plan during the years ended December 31, 1995, 1996 or 1997.
F-20
<PAGE> 188
BEST INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
----- ----- -------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Taxes paid................................................ $ 1 $ 56 $ 283
Interest paid............................................. 4 103 122
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITY:
Note payable issued for rent deposit...................... 18 406 --
Equipment purchased under capital lease................... 36 490 286
Common stock issued in acquisitions....................... -- 67 --
Note issued in acquisitions............................... -- 697 --
Shareholders contributions of equipment in exchange for
shareholder loans payable.............................. 21 -- --
Allowances on trade in of equipment....................... -- 34 --
Exercise of stock options for notes....................... -- -- 409
Issuance of common stock for note......................... -- -- 200
Issuance of warrant for note.............................. -- -- 280
Issuance of warrant....................................... -- 72 1,233
</TABLE>
18. UNAUDITED PRO FORMA DATA
The statement of operations includes a pro forma provision for income taxes
to reflect income tax expense as if both entities in the merged company, the
Company and Hiway Florida (which operated as a Subchapter S corporation), had
been a C corporation on a combined basis for all periods presented. The
components of the pro forma provision for income taxes consisted of:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -------------
1995 1996 1997 1997 1998
----- ----- ------- ------ ----
<S> <C> <C> <C> <C> <C>
Current provision:
Federal...................................... $-- $ 79 $1,636 $1,380 $641
State........................................ 1 22 428 321 204
--- ---- ------ ------ ----
1 101 2,064 1,701 845
--- ---- ------ ------ ----
Deferred provision (benefit):
Federal...................................... -- (58) (138) (104) 15
State........................................ -- (10) (1) (1) (17)
--- ---- ------ ------ ----
-- (68) (139) (105) (2)
--- ---- ------ ------ ----
Pro forma provision for income taxes........... $ 1 $ 33 $1,925 $1,596 $843
=== ==== ====== ====== ====
</TABLE>
F-21
<PAGE> 189
BEST INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. EARNINGS PER SHARE (EPS) DISCLOSURES
In accordance with the requirements of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," a reconciliation of the numerator and
denominator of basic and diluted EPS is provided as follows.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- --------------------------
1995 1996 1997 1997 1998
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Numerator-Basic EPS
Historical net income
(loss)..................... $ (551) $ 592 $ 4,435 $ 3,674 $ 2,473
========== =========== =========== =========== ===========
Pro forma net income (loss)
(unaudited)................ $ (551) $ 560 $ 2,871 $ 2,379 $ 1,729
========== =========== =========== =========== ===========
Denominator-Basic EPS
Weighted average common
stock outstanding....... 16,871,100 25,877,800 30,020,460 29,844,420 33,470,450
========== =========== =========== =========== ===========
Basic earnings (loss) per
share -- Historical........ $ (0.03) $ 0.02 $ 0.15 $ 0.12 $ 0.07
========== =========== =========== =========== ===========
-- Pro forma......... $ (0.03) $ 0.02 $ 0.10 $ 0.08 $ 0.05
========== =========== =========== =========== ===========
Numerator -- Diluted EPS
Historical net income
(loss)..................... $ (551) $ 592 $ 4,435 $ 3,674 $ 2,473
Interest on convertible
debt (net of related tax
effect)................. -- 28 6 -- --
---------- ----------- ----------- ----------- -----------
Historical net income
(loss)..................... $ (551) $ 620 $ 4,441 $ 3,674 $ 2,473
========== =========== =========== =========== ===========
Pro forma net income (loss)
(unaudited)............. $ (551) $ 560 $ 2,871 $ 2,379 $ 1,729
Interest on convertible
debt (net of related tax
effect)................. -- 28 6 -- --
---------- ----------- ----------- ----------- -----------
Pro forma net income (loss)
(unaudited)................ $ (551) $ 588 $ 2,877 $ 2,379 $ 1,729
========== =========== =========== =========== ===========
Denominator-Diluted EPS
Denominator -- Basic EPS..... 16,871,100 25,877,800 30,020,460 29,844,420 33,470,450
Effect of Dilutive
Securities:
Common stock options....... -- 885,680 1,419,380 1,378,340 755,700
Warrants................... -- 68,460 142,100 137,620 834,770
Convertible preferred
stock................... -- 1,293,420 3,212,000 3,139,780 1,731,000
Convertible debt........... -- 383,340 83,340 -- --
---------- ----------- ----------- ----------- -----------
16,871,100 28,508,700 34,877,280 34,500,160 36,791,920
========== =========== =========== =========== ===========
Diluted earnings (loss) per
share -- Historical........ $ (0.03) $ 0.02 $ 0.13 $ 0.11 $ 0.07
========== =========== =========== =========== ===========
-- Pro forma......... $ (0.03) $ 0.02 $ 0.08 $ 0.07 $ 0.05
========== =========== =========== =========== ===========
</TABLE>
For the years ended December 31, 1995, stock options, preferred stock,
convertible debt and warrants and in 1996 and 1997, convertible debt and certain
warrants were excluded from the determination of the diluted EPS since their
effect would have been antidilutive.
F-22
<PAGE> 190
BEST INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. SEGMENT REPORTING
The Company operates in one industry segment.
The distribution of revenues by geographic area was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
North America............................................ $2,011 $11,052 $22,507
Europe................................................... -- 593 2,194
Rest of the world........................................ -- 572 1,484
------ ------- -------
$2,011 $12,217 $26,185
====== ======= =======
</TABLE>
21. SUBSEQUENT EVENTS (UNAUDITED)
In June 1998, the Board of Directors authorized management of the Company
to file a Registration Statement with the Securities and Exchange Commission
relating to a public offering of the Company's common stock.
In July 1998, the Board of Directors approved the sale of the Company to
Verio, a leading provider of Internet services. As a result of this transaction,
the Company suspended its public offering of common stock and the Company
anticipates formally withdrawing the offering in December 1998. Accordingly, the
Company will expense approximately $1 million of deferred costs relating to the
public offering in the fiscal quarter ending December 31, 1998.
F-23
<PAGE> 191
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying consolidated balance sheets of Verio Inc.
and subsidiaries as of December 31, 1996 and 1997, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the period
from inception (March 1, 1996) to December 31, 1996 and the year ended December
31, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 financial position of Verio Inc.
and subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for the period from inception (March 1, 1996) to
December 31, 1996 and the year ended December 31, 1997 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
February 25, 1998
F-24
<PAGE> 192
VERIO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1997 1998
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $66,467 $ 72,586 $ 245,912
Restricted cash and securities (notes 3 and 4)............ -- 21,015 14,159
Receivables:
Trade, net of allowance for doubtful accounts of $117,
$1,233, and $3,698.................................... 611 7,565 13,687
Affiliates.............................................. 119 735 --
Prepaid expenses and other................................ 410 3,921 6,590
------- -------- ---------
Total current assets............................... 67,607 105,822 280,348
Restricted cash and securities (notes 3 and 4).............. -- 19,539 7,238
Investments in affiliates, at cost (note 2)................. 1,536 2,378 8,298
Equipment and leasehold improvements:
Internet access and computer equipment.................... 4,485 30,535 54,858
Furniture, fixtures and computer software................. 220 3,301 4,930
Leasehold improvements.................................... 141 1,596 3,780
------- -------- ---------
4,846 35,432 63,568
Less accumulated depreciation and amortization............ (359) (7,219) (20,355)
------- -------- ---------
Net equipment and leasehold improvements.............. 4,487 28,213 43,213
Other assets:
Goodwill, net of accumulated amortization of $303, $3,595,
and $15,670 (note 2).................................... 8,736 83,216 210,047
Debt issuance costs, net of accumulated amortization of
$330, and $1,169........................................ -- 4,858 8,796
Organization costs and other, net......................... 262 2,445 4,389
------- -------- ---------
Total assets....................................... $82,628 $246,471 $ 562,329
======= ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 2,132 $ 7,389 $ 9,263
Accrued expenses.......................................... 931 11,401 15,402
Accrued interest payable.................................. -- 844 13,109
Accrued preferred stock issuance costs.................... 1,110 -- --
Lines of credit, notes payable and current portion of
long-term debt (note 3)................................. 2,573 2,751 774
Current portion of capital lease obligations (note 4)..... 64 1,575 3,952
Deferred revenue.......................................... 659 7,177 10,770
------- -------- ---------
Total current liabilities.......................... 7,469 31,137 53,270
Long-term debt, less current portion, net of discount (note
3)........................................................ 20 139,376 268,440
Capital lease obligations, less current portion (note 4).... 86 2,945 6,012
------- -------- ---------
Total liabilities.................................. 7,575 173,458 327,722
------- -------- ---------
Minority interests in subsidiaries (note 2)................. 2,231 2,765 --
Redeemable preferred stock (converted to common stock in
1998)(note 5):
Series A, convertible, $.001 par value; 6,100,000 shares
authorized; 6,033,333 shares issued and outstanding at
December 31, 1996 and 1997.............................. 18,078 18,080 --
Series B, convertible, $.001 par value; 10,117,000 shares
authorized; 10,000,000 and 10,028,334 shares issued and
outstanding at December 31, 1996 and 1997............... 58,799 59,193 --
Series C, convertible, $.001 par value; 2,500,000 shares
authorized; issued and outstanding at December 31,
1997.................................................... -- 19,976 --
------- -------- ---------
76,877 97,249 --
------- -------- ---------
Stockholders' equity (deficit) (note 6):
Preferred stock, Series D-1, convertible, $.001 par value;
3,000,000 shares authorized; 680,000 shares issued and
outstanding at December 31, 1997 (converted to common
stock in 1998)(note 5).................................. -- 10,200 --
Common stock, $.001 par value; 125,000,000 shares
authorized; 1,090,000, 1,254,533 and, 32,789,776 shares
issued and outstanding at December 31, 1996 and 1997 and
September 30, 1998...................................... 1 1 33
Additional paid-in capital................................ 1,089 14,272 374,354
Accumulated deficit....................................... (5,145) (51,474) (139,780)
------- -------- ---------
Total stockholders' equity (deficit)............... (4,055) (27,001) 234,607
------- -------- ---------
Commitments (notes 2, 4 and 5)
Total liabilities and stockholders' equity
(deficit)........................................ $82,628 $246,471 $ 562,329
======= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
<PAGE> 193
VERIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEAR NINE MONTHS ENDED
(MARCH 1, 1996) ENDED SEPTEMBER 30,
TO DECEMBER 31, DECEMBER 31, -------------------
1996 1997 1997 1998
--------------- ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Internet connectivity:
Dedicated............................... $ 1,100 $ 16,383 $ 10,120 $ 36,924
Dial-up................................. 1,139 7,093 4,314 16,272
Enhanced services and other................ 126 12,216 7,853 30,347
------- -------- -------- --------
Total revenue...................... 2,365 35,692 22,287 83,543
Costs and expenses:
Internet services operating costs.......... 974 15,974 9,504 37,928
Selling, general and administrative and
other................................... 7,002 49,383 31,233 80,941
Stock option related compensation and
severance costs (note 6)................ -- -- -- 3,040
Depreciation and amortization.............. 669 10,624 6,737 26,818
------- -------- -------- --------
Total costs and expenses........... 8,645 75,981 47,474 148,727
------- -------- -------- --------
Loss from operations............... (6,280) (40,289) (25,187) (65,184)
Other income (expense):
Interest income............................ 593 6,080 4,068 9,381
Interest expense........................... (115) (11,826) (5,899) (22,860)
Equity in losses of affiliates............. -- (1,958) (1,642) --
------- -------- -------- --------
Loss before minority interests and
extraordinary item............... (5,802) (47,993) (28,660) (78,663)
Minority interests........................... 680 1,924 1,638 545
------- -------- -------- --------
Loss before extraordinary item..... (5,122) (46,069) (27,022) (78,118)
Extraordinary item -- loss related to debt
repurchase (note 3)........................ -- -- -- (10,101)
------- -------- -------- --------
Net loss........................... (5,122) (46,069) (27,022) (88,219)
Accretion of preferred stock to liquidation
value...................................... (23) (260) (179) (87)
------- -------- -------- --------
Net loss attributable to common
stockholders..................... $(5,145) $(46,329) $(27,201) $(88,306)
======= ======== ======== ========
Weighted average number of common shares
outstanding -- basic and diluted........... 972 1,145 1,128 17,462
======= ======== ======== ========
Loss per common share -- basic and diluted:
Loss per common share before extraordinary
item.................................... (5.29) (40.47) (24.11) (4.49)
Extraordinary item......................... -- -- -- (0.57)
------- -------- -------- --------
Loss per common share.............. $ (5.29) $ (40.47) $ (24.11) $ (5.06)
======= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE> 194
VERIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
PREFERRED ------------------- PAID-IN ACCUMULATED
STOCK SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ---------- ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT INCEPTION.............. $ -- -- $-- $ -- $ -- $ --
Issuance of common stock for
cash............................. -- 1,090,000 1 1,089 -- 1,090
Accretion of redeemable preferred
stock to liquidation value....... -- -- -- -- (23) (23)
Net loss........................... -- -- -- -- (5,122) (5,122)
-------- ---------- --- -------- --------- --------
BALANCES AT DECEMBER 31, 1996...... -- 1,090,000 1 1,089 (5,145) (4,055)
Issuance of common stock for
exercise of options.............. -- 76,200 148 -- 148
Issuance of common stock for
cash............................. -- 88,333 360 -- 360
Warrants issued in connection with
debt offering (note 3)........... -- -- -- 12,675 -- 12,675
Issuance of preferred stock in
business combination (note 5).... 10,200 -- -- -- -- 10,200
Accretion of redeemable preferred
stock to liquidation value....... -- -- -- (260) (260)
Net loss........................... -- -- -- (46,069) (46,069)
-------- ---------- --- -------- --------- --------
BALANCES AT DECEMBER 31, 1997...... 10,200 1,254,533 1 14,272 (51,474) (27,001)
Issuance of common stock for
exercise of options.............. -- 114,725 -- 485 -- 485
Issuance of common stock for
exercise of warrants............. -- 415,461 1 -- -- 1
Issuance of common stock in initial
public offering, net of expenses
(note 6)......................... -- 5,735,000 6 120,814 -- 120,820
Issuance of common stock to private
investor (note 6)................ -- 4,493,877 4 99,995 -- 99,999
Issuance of Series D-1 preferred
stock in business combinations
(notes 2 and 5).................. 26,726 -- -- -- -- 26,726
Accretion of redeemable preferred
stock to liquidation value....... -- -- -- -- (87) (87)
Issuance of common stock pursuant
to conversion of Series D-1
preferred stock (note 5)......... (36,926) 2,214,513 2 36,924 -- --
Issuance of common stock pursuant
to conversion of Series A, B and
C redeemable preferred stock
(note 5)......................... -- 18,561,667 19 97,287 -- 97,306
Issuance of common stock options in
business combinations............ -- -- -- 1,937 -- 1,937
Stock option related compensation
and severance costs (note 6)..... -- -- -- 2,640 -- 2,640
Net loss........................... (88,219) (88,219)
-------- ---------- --- -------- --------- --------
BALANCE AT SEPTEMBER 30, 1998
(UNAUDITED)...................... $ -- 32,789,776 $33 $374,354 $(139,780) $234,607
======== ========== === ======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE> 195
VERIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION NINE MONTHS ENDED
(MARCH 1, 1996) YEAR ENDED SEPTEMBER 30,
TO DECEMBER 31, DECEMBER 31, --------------------
1996 1997 1997 1998
--------------- ------------ -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(5,122) $ (46,069) $(27,022) $ (88,219)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization..................... 669 10,624 6,737 26,818
Minority interests' share of losses............... (680) (1,924) (1,638) (545)
Stock option related compensation and severance
costs........................................... -- -- -- 3,040
Equity in losses of affiliates.................... -- 1,958 1,642 --
Extraordinary item -- loss related to the
repurchase of debt.............................. -- -- -- 10,101
Changes in operating assets and liabilities,
excluding effects of business combinations:
Receivables..................................... (265) (1,561) (2,110) (1,979)
Prepaid expenses and other current assets....... (284) (2,305) (2,593) (899)
Accounts payable................................ 1,439 (1,656) (359) (889)
Accrued expenses................................ 1,910 3,082 (1,531) 3,720
Accrued interest payable........................ -- 844 5,400 13,040
Deferred revenue................................ 7 1,684 1,012 (445)
------- --------- -------- ---------
Net cash used by operating activities........ (2,326) (35,323) (20,462) (36,257)
------- --------- -------- ---------
Cash flows from investing activities:
Acquisition of equipment and leasehold
improvements...................................... (3,430) (14,547) (11,002) (15,327)
Acquisition of net assets in business combinations
and investments in affiliates, net of cash
acquired.......................................... (5,627) (64,023) (28,796) (121,432)
Change in restricted cash and securities............ (40,554) (48,532) 19,689
Other............................................... (66) (1,206) (1,045) (2,242)
------- --------- -------- ---------
Net cash used by investing activities........ (9,123) (120,330) (89,375) (119,312)
------- --------- -------- ---------
Cash flows from financing activities:
Proceeds from lines of credit, notes payable and
long-term debt.................................... -- 145,512 145,478 168,827
Repayments of lines of credit and notes payable..... (20) (3,468) (2,566) (58,784)
Repayments of capital lease obligations............. (8) (950) (440) (2,452)
Proceeds from issuance of common and preferred
stock, net of issuance costs...................... 77,944 20,678 20,530 221,304
------- --------- -------- ---------
Net cash provided by financing activities.... 77,916 161,772 163,002 328,895
------- --------- -------- ---------
Net increase in cash and cash equivalents.... 66,467 6,119 53,165 173,326
Cash and cash equivalents:
Beginning of period................................. -- 66,467 66,467 72,586
------- --------- -------- ---------
End of period....................................... $66,467 $ 72,586 $119,632 $ 245,912
======= ========= ======== =========
Supplemental disclosures of cash flow information:
Cash paid for interest.............................. $ -- $ 10,982 $ -- $ 10,393
======= ========= ======== =========
Supplemental disclosures of non-cash investing and
financing activities:
Equipment acquired through capital lease
obligations....................................... $ 58 $ 3,301 $ 1,923 $ 7,209
======= ========= ======== =========
Acquisition of net assets in business combination
through issuance of notes payable................. $ 6,675 $ 4,718 $ -- $ --
======= ========= ======== =========
Acquisition of net assets in business combination
through issuance of preferred stock and preferred
stock options..................................... $ -- $ 10,200 $ -- $ 28,663
======= ========= ======== =========
Warrants issued in connection with debt offering.... $ -- $ 12,675 $ 12,675 $ --
======= ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE> 196
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE SIX-MONTH PERIODS ENDED
SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Basis of Presentation
Verio Inc. (Verio or the Company) was incorporated on March 1, 1996 to
capitalize on the growing demand for Internet access and enhanced services by
business users through the acquisition, integration, and growth of existing
independent Internet service providers with a business customer focus in
targeted geographic regions. The goal of the Company is to be the dominant,
full-service national provider of Internet connectivity and enhanced Internet
services to small and medium sized businesses. The Company commenced operations
in April 1996 and had no activity other than the sale of common stock to
founders prior to April 1, 1996.
The accompanying unaudited financial information as of September 30, 1998
and for the nine-month periods ended September 30, 1997 and 1998 has been
prepared in accordance with generally accepted accounting principles for interim
financial information. All significant adjustments, consisting of only normal
and recurring adjustments, which, in the opinion of management, are necessary
for a fair presentation of the results for the nine months ended September 30,
1997 and 1998 have been included. Operating results for the nine-month period
ending September 30, 1998 are not necessarily indicative of the results that may
be expected for the full year.
The accompanying consolidated financial statements include the accounts of
Verio and its majority owned subsidiaries, as described in Note 2. All
significant intercompany balances and transactions have been eliminated in
consolidation. The preparation of financial statements 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 amount of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
(b) Cash and Cash Equivalents and Restricted Cash
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. Included in cash
equivalents as of December 31, 1996, December 31, 1997 and September 30, 1998
are U.S. government, municipal and corporate debt securities, money market
accounts and commercial paper, totaling $61,769,000, $75,442,000 (exclusive of
cash overdraft in the amount of $11,228,000) and $233,975,000, respectively,
with maturities ranging from thirty to ninety days.
Restricted cash and securities include U.S. government securities which are
classified as securities held to maturity and recorded at cost. At December 31,
1997 and September 30, 1998, cost approximated market value.
(c) Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost. Depreciation is
provided over the estimated useful lives of the assets ranging from 3 to 5 years
using the straight-line method. Leasehold improvements are amortized over the
shorter of the lease term or the estimated useful life of the asset.
(d) Investments in Affiliates and Consolidation of Subsidiaries
Investments in affiliates represent newly issued preferred shares of
various affiliates. The preferred shares are convertible at the option of the
Company into common shares on a one-for-one basis and represent future common
stock ownership interests, upon conversion, of less than 50%. As the Company did
not acquire a
F-29
<PAGE> 197
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock ownership interest, these investments are recorded at cost until
such time as the preferred shares are converted to common. In addition, if these
entities incur losses resulting in the equity of the common shareholders being
reduced to zero, the Company will utilize the equity method of accounting for
these investments and will generally recognize 100% of all losses of the
affiliates from that date, up to the amount of the Company's investment, based
on the inability of the majority common shareholders to fund additional losses.
During the year ended December 31, 1997, the Company recognized equity in losses
of affiliates of $1,958,000 under this method of accounting. Such losses were
not significant for the nine months ended September 30, 1998.
The Company has also acquired preferred shares in certain entities which
are convertible into future common stock ownership interests of greater than
50%. In these situations, the Company has majority representation on the Board
of Directors and majority voting rights, exercises significant control over the
entities' operations, and intends to acquire a 100% common ownership interest in
the future. Accordingly, the accounts of these investees have been consolidated
with those of the Company in the accompanying consolidated financial statements
from the dates of acquisition (see note 2).
As of September 30, 1998, the Company had acquired a 100% ownership
interest in all but one affiliate. Accordingly, the accounts of these investees
are consolidated with those of the Company as of September 30, 1998.
(e) Other Assets
The excess of cost over the fair value of net assets acquired, or goodwill,
is amortized using the straight-line method over a 10-year period. Other
intangibles are amortized using the straight-line method over periods ranging
from three to seven years.
(f) Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lives Assets to be Disposed
Of (SFAS 121). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations, including goodwill, when indications of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. In addition, the
recoverability of goodwill is further evaluated under the provisions of APB
Opinion No. 17, Intangible Assets, based upon undiscounted cash flows. If such
assets are impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the estimated fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
value or fair value, less costs to sell.
(g) Revenue Recognition
Revenue related to Internet and enhanced services is recognized as the
services are provided, and deferred and amortized to operations for amounts
billed relating to future periods. Installation and customer set-up fees are
recognized upon completion of the services. Revenue from consulting services is
recognized as the services are provided. Revenue from hardware and software
sales is recognized upon shipment of the respective products.
(h) Peering Relationships
The Company does not pay any fees in connection with its peering
relationships with other companies and does not record revenue or expense in
connection with those arrangements. The nature of these relationships is that
the parties share the responsibility for communications that occur between their
respective local networks. These peering relationships are essentially exchanges
of similar productive assets rather than the culmination of an earnings process.
Accordingly, these arrangements are appropriately not reflected in the
operations of the Company.
F-30
<PAGE> 198
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(i) Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109).
SFAS 109 requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the difference is expected to reverse.
(j) Stock-Based Compensation
The Company accounts for its stock-based employee compensation plans using
the intrinsic value based method prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations (APB 25). The Company has provided pro forma disclosures of net
loss and loss per share as if the fair value based method of accounting for the
plans, as prescribed by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123), had been applied. Pro forma
disclosures include the effects of employee stock options granted during the
period and year ended December 31, 1996 and 1997.
(k) Loss Per Share
Loss per share is presented in accordance with the provisions of Statement
of Financial Accounting Standards No. 128, Earnings Per Share, (SFAS 128). SFAS
128 replaced the presentation of primary and fully diluted earnings (loss) per
share (EPS), with a presentation of basic EPS and diluted EPS. Under SFAS 128,
basic EPS excludes dilution for common stock equivalents and is computed by
dividing income or loss available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock and resulted in the
issuance of common stock. Basic and diluted EPS are the same in 1996, 1997 and
1998, as all potential common stock instruments are antidilutive.
F-31
<PAGE> 199
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) BUSINESS COMBINATIONS AND INVESTMENTS IN AFFILIATES
During the period from inception (March 1, 1996) to December 31, 1996, the
Company completed seven business combinations and investments for cash and notes
payable. All of the acquisitions were accounted for using the purchase method of
accounting, and represent the acquisition of stock or net assets. Outstanding
stock options of acquired businesses were included in the determination of the
purchase prices based on fair values. For those businesses acquired and
consolidated, the results of operations for the acquired businesses are included
in the Company's consolidated statement of operations from the dates of
acquisition. Summary information regarding the business combinations is as
follows:
Consolidated acquisitions in 1996:
<TABLE>
<CAPTION>
TOTAL
OWNERSHIP
OWNERSHIP INTEREST AT APPROXIMATE
INTEREST DECEMBER 31, PURCHASE
BUSINESS NAME ACQUISITION DATE PURCHASED(a) 1996(a) PRICE
------------- ----------------- ------------ --------------- -----------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C> <C> <C>
On-Ramp Technologies, Inc...... August 1, 1996 51%
October 4, 1996 4% 55%(b) $ 8,775
RAINet, Inc.................... August 2, 1996 100% 100%(c) 2,000
CCnet Inc...................... December 19, 1996 100% 100%(c) 1,800
-------
$12,575
Acquisition costs.............. 284
-------
$12,859
=======
</TABLE>
The aggregate purchase price, including acquisition costs was allocated
based upon fair value as follows:
<TABLE>
<S> <C>
Equipment.................................................. $ 1,359
Goodwill................................................... 9,039
Net current assets......................................... 2,461
-------
Total purchase price............................. $12,859
=======
</TABLE>
Unconsolidated investments in 1996:
<TABLE>
<CAPTION>
TOTAL
OWNERSHIP
OWNERSHIP INTEREST AT APPROXIMATE
INTEREST DECEMBER 31, PURCHASE
BUSINESS NAME ACQUISITION DATE PURCHASED(a) 1996(a) PRICE
------------- ----------------- ------------ --------------- -----------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C> <C> <C>
West Coast Online, July 26, 1996 20% 20%(b) $ 225
Inc....................
National Knowledge August 2, 1996 26% 26%(b) 300
Networks, Inc..........
Access One, Inc.......... December 12, 1996 20% 20%(b) 506
Signet Partners, Inc..... December 19, 1996 25% 25%(b) 403
-------
$ 1,434
Acquisition costs........ 102
-------
$ 1,536
=======
</TABLE>
F-32
<PAGE> 200
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the year ended December 31, 1997, the Company completed 23 business
combinations and investments for cash, notes payable and preferred stock. All of
the acquisitions were accounted for using the purchase method of accounting. For
those businesses acquired and consolidated, the results of operations for the
acquired businesses are included in the Company's consolidated statement of
operations from the dates of acquisition. Seventeen subsidiaries were acquired
and newly consolidated during 1997. In addition, the Company formed two new
start-up subsidiaries. Summary information regarding these acquisitions is as
follows:
Consolidated acquisitions in 1997:
<TABLE>
<CAPTION>
TOTAL
OWNERSHIP
OWNERSHIP INTEREST AT APPROXIMATE
INTEREST DECEMBER 31, PURCHASE
BUSINESS NAME ACQUISITION DATE PURCHASED(a) 1997(a) PRICE(e)
------------- ------------------ ------------ --------------- -----------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C> <C> <C>
Global Enterprise Services --
Network Division............ January 17, 1997 100% 100%(d) $ 2,350
Pioneer Global
Telecommunications, Inc..... February 6, 1997 100% 100%(c) 1,011
Compute Intensive Inc......... February 18, 1997 55% 55%(b) 4,900
NorthWestNet, Inc............. February 28, 1997 85% 85%(c) 9,464
RUSTnet, Inc.................. March 14, 1997 100% 100%(c) 1,703
Aimnet Corporation............ May 19, 1997 55%
September 22, 1997 45% 100%(c) 7,613
Branch Information Services,
Inc......................... September 17, 1997 100% 100%(c) 1,687
West Coast Online, Inc........ April 29, 1997 12%
September 30, 1997 68% 100%(b) 1,775
Communique, Inc............... October 2, 1997 100% 100%(c) 3,000
Clark Internet Services,
Inc......................... October 17, 1997 51% 51%(b) 3,520
ATMnet........................ November 5, 1997 100% 100%(d) 5,522
Global Internet Network
Services, Inc............... December 1, 1997 100% 100%(c) 6,000
Surf Network, Inc............. January 31, 1997 25%
December 22, 1997 75% 100%(b) 603
PREPnet....................... December 24, 1997 100% 100%(d) 1,405
Sesquinet..................... December 24, 1997 100% 100%(d) 732
Service Tech, Inc............. August 1, 1997 40%
December 31, 1997 60% 100%(b) 2,055
Monumental Network Systems,
Inc......................... December 31, 1997 100% 100%(c) 3,962
Internet Servers, Inc......... December 31, 1997 100% 100%(c) 20,000
-------
$77,302
Acquisition costs............. 3,396
-------
$80,698
=======
</TABLE>
F-33
<PAGE> 201
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate purchase price, including acquisition costs was allocated
based upon fair values as follows:
<TABLE>
<S> <C>
Equipment.................................................. $12,378
Goodwill................................................... 77,772
Net current liabilities.................................... (9,452)
-------
Total purchase price............................. $80,698
=======
</TABLE>
Unconsolidated investments in 1997:
<TABLE>
<CAPTION>
TOTAL OWNERSHIP
OWNERSHIP INTEREST AT APPROXIMATE
INTEREST DECEMBER 31, PURCHASE
BUSINESS NAME ACQUISITION DATE PURCHASED(a) 1997(a) PRICE(e)
------------- ----------------- ------------ --------------- -----------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C> <C> <C>
Pacific Rim Network, Inc..... February 4, 1997 27% 27%(b) $ 150
Internet Engineering
Associates, Inc............ March 4, 1997 20% 20%(b) 206
Internet Online, Inc......... March 5, 1997 35% 35%(b) 1,050
Structured Network Systems,
Inc........................ March 6, 1997 20% 20%(b) 150
National Knowledge Networks,
Inc........................ November 7, 1997 15% 41%(b) 599
Signet Partners, Inc......... November 20, 1997 16% 41%(b) 414
------
$2,569
Acquisition costs............ 253
------
$2,822
======
</TABLE>
During the nine months ended September 30, 1998, the Company purchased
additional investments in eleven of the Company's affiliates and acquired 10 new
internet service providers for a combination of cash and Series D-1 Preferred
Stock. All acquisitions were accounted for using the purchase method of
accounting. For those businesses acquired and consolidated, the results of
operations for the acquired businesses are included in the Company's
consolidated statement of operations from the dates of acquisition. Summary
information regarding the business combinations is as follows:
Consolidated acquisitions in 1998:
<TABLE>
<CAPTION>
TOTAL OWNERSHIP
OWNERSHIP INTEREST AT APPROXIMATE
INTEREST JUNE 30, PURCHASE
BUSINESS NAME ACQUISITION DATE PURCHASED(a) 1998(a) PRICE(e)
------------- ----------------- ------------ --------------- -----------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C> <C> <C>
Signet Partners, Inc........... January 30, 1998 14% -- --
February 26, 1998 45% 100% $ 1,925
Pacific Rim Network, Inc....... February 16, 1998 73% 100% 730
Clark Internet Services,
Inc.......................... February 25, 1998 49% 100% 3,863
Internet Engineering
Associates, Inc.............. February 25, 1998 80% 100% 1,608
On-Ramp Technologies, Inc...... February 26, 1998 45% 100% 11,849
National Knowledge Networks,
Inc.......................... February 27, 1998 59% 100% 2,092
</TABLE>
F-34
<PAGE> 202
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
TOTAL OWNERSHIP
OWNERSHIP INTEREST AT APPROXIMATE
INTEREST JUNE 30, PURCHASE
BUSINESS NAME ACQUISITION DATE PURCHASED(a) 1998(a) PRICE(e)
------------- ----------------- ------------ --------------- -----------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C> <C> <C>
Access One, Inc................ February 27, 1998 80% 100% 5,601
NSNet, Inc..................... February 27, 1998 100% 100% 3,661
NorthWestNet, Inc.............. March 6, 1998 15% 100% 4,803
LI Net, Inc.................... April 9, 1998 100% 100% 6,500
STARnet, L.L.C................. April 14, 1998 100% 100% 3,500
Computing Engineers Inc........ April 15, 1998 100% 100% 9,000
Florida Internet Corporation... April 15, 1998 100% 100% 2,200
Structured Network Systems,
Inc.......................... April 16, 1998 80% 100% 1,250
Compute Intensive Inc.......... April 24, 1998 45% 100% 14,260
Matrix Online Media, Inc....... May 5, 1998 100% 100% 4,000
PacketWorks, Inc............... June 19, 1998 100% 100% 852
Internet Online, Inc........... June 30, 1998 65% 100% 4,200
NTX, Inc. (TABNet)............. July 7, 1998 100% 100% 45,500
MagicNet, Inc. ................ July 23, 1998 100% 100% 3,300
TerraNet....................... August 7, 1998 100% 100% 4,271
--------
134,965
Acquisition costs.............. 5,314
--------
$140,279
========
</TABLE>
The aggregate purchase price, including acquisition costs was allocated
based upon fair values as follows:
<TABLE>
<S> <C>
Equipment................................................ $ 5,506
Goodwill................................................. 137,863
Net current liabilities.................................. (3,090)
--------
Total purchase price........................... $140,279
========
</TABLE>
- ---------------
(a) Represents existing ownership interest or, in the case of investments in
preferred stock, ownership upon conversion of preferred shares to common,
on a fully diluted basis.
(b) Represents ownership of preferred stock of affiliate or subsidiary.
(c) Represents ownership of common stock of affiliate or subsidiary.
(d) Represents acquisition of net assets.
(e) Purchase prices are comprised of cash, notes payable, the issuance of
shares of Series D-1 preferred stock, and the granting of an option to
purchase shares of Series D-1 preferred stock. The value of such shares,
which were converted to common stock of the Company in May 1998, as
described in note 5, was generally determined by the Company's Board of
Directors based on comparable valuations of private and public companies,
methodologies based on multiples of revenue and discounted cash flows, and
arms-length negotiated values.
F-35
<PAGE> 203
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited condensed pro forma information presents the
unaudited results of operations of the Company as if substantially all of the
above consolidated acquisitions had occurred on January 1, 1996:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -------------------
1996 1997 1997 1998
---------- ---------- -------- --------
(AMOUNTS IN THOUSANDS,
EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue.................................... $ 57,712 $ 95,386 $ 68,286 $ 96,502
Loss before extraordinary item and
accretion of preferred stock............. (42,469) (69,125) (43,297) (87,035)
Net loss attributable to common
stockholders............................. (42,492) (69,125) (43,476) (97,223)
Loss per common share -- basic and
diluted.................................. $ (43.73) $ (60.37) $ (38.54) $ (5.57)
</TABLE>
The pro forma results do not necessarily represent results that would have
occurred if the consolidated acquisitions had taken place as of January 1, 1996
nor are they necessarily indicative of the results of future operations.
Subsequent to September 30, 1998, the Company completed one acquisition for
total consideration of approximately $8.4 million in cash. In addition, in
August 1998, the Company entered into a definitive agreement to purchase Hiway
for total consideration of $254.7 million, consisting of cash of $176.0 million
and approximately 4.92 million fully diluted shares of Verio Inc. Common Stock.
(3) DEBT
Lines of credit, notes payable and long-term debt consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1997 1998
------- -------- -------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
10 3/8% Senior Notes due 2005(b)................... $ -- $ -- $175,000
13 1/2% Senior Notes due in 2004, net of
unamortized discount of $12,130,136 and 7,900,515
as of December 31, 1997 and September 30, 1998,
respectively(a).................................. -- 137,870 92,494
Revolving lines of credit, bearing interest at .5%
to 2.00% above prime, (9.0% to 10.5% at December
31, 1997) due primarily on demand, secured by
restricted cash of $765,000...................... -- 788 --
Unsecured notes payable bearing interest primarily
at 7%, due in 1998 and 1999...................... 2,500 2,809 1,418
Other.............................................. 93 660 302
------- -------- --------
2,593 142,127 269,214
Less current portion............................... (2,573) (2,751) (774)
======= ======== ========
Long-term debt, less current portion............... $ 20 $139,376 $268,440
======= ======== ========
</TABLE>
- ---------------
(a) In June 1997, the Company completed a debt offering of $150.0 million,
13 1/2% Senior Notes due 2004 (the "1997 Notes") and warrants to purchase
2,112,480 shares of common stock at $.01 per share, which were valued at
approximately $12,675,000 based on the Company's most recent equity
offering. Interest on the 1997 Notes is payable semi-annually on June 15
and December 15 of each year. The value attributed to the warrants has been
recorded as debt discount and is being amortized to interest expense using
the interest method over the term of the 1997 Notes. Upon closing, the
Company deposited U.S.
F-36
<PAGE> 204
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Treasury securities in an escrow account in an amount that, together with
interest on the securities, will be sufficient to fund the first five
interest payments (through December 1999) on the 1997 Notes. This
restricted cash and securities balance totaled $38,195,404 at December 31,
1997. The 1997 Notes are redeemable on or after June 15, 2002 at 103% of
the face value.
The indenture covering the 1997 Notes includes various covenants
restricting the payment of dividends, additional indebtedness, disposition of
assets, and transactions with affiliates.
(b) On March 25, 1998, the Company completed the private placement of $175.0
million principal amount of senior notes (the "March 1998 Notes"). The
March 1998 Notes are redeemable at the option of the Company commencing
April 1, 2002. The March 1998 Notes mature on April 1, 2005. Interest on
the March 1998 Notes, at the annual rate of 10 3/8%, is payable
semi-annually in arrears on April 1 and October 1 of each year, commencing
October 1, 1998. The March 1998 Notes are senior unsecured obligations of
the Company ranking pari passu in right of payment with all existing and
future unsecured and senior indebtedness. The March 1998 Notes contain
terms that are substantially similar to the 1997 Notes. The Company used
approximately $54.5 million of the proceeds plus accrued interest to
repurchase $50.0 million principal amount of the $150,000,000 13 1/2%
Senior Notes due 2004. As a result, the Company was refunded approximately
$13.3 million from the escrow account for the 1997 Notes, of which
approximately $1.9 million was used to pay accrued and unpaid interest on
the $50.0 million principal amount of 1997 Notes repurchased from Brooks
Fiber Properties, Inc. This transaction resulted in an extraordinary loss
of $10.1 million.
Maturities of lines of credit, notes payable and long-term debt are as
follows (in thousands):
<TABLE>
<S> <C>
1998..................................................... $ 2,751
1999..................................................... 1,032
2000..................................................... 474
2001..................................................... --
2002..................................................... --
Thereafter............................................... 137,870
--------
$142,127
========
</TABLE>
The Company has received commitments from a group of commercial lending
institutions to provide an aggregate of up to $70.0 million pursuant to a
two-year revolving credit financing facility. No borrowings are outstanding
under this facility as of September 30, 1998.
F-37
<PAGE> 205
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) LEASES AND COMMITMENTS
The Company leases office space, certain facilities storing internet points
of presence and certain computer and office equipment under capital and
operating leases expiring at various dates through 2003. Future minimum annual
lease payments under these leases as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
1998........................................................ $ 2,279 $ 5,786
1999........................................................ 1,840 5,178
2000........................................................ 1,128 3,485
2001........................................................ 42 1,393
2002........................................................ 9 487
Thereafter.................................................. -- 172
------- -------
Total minimum payments............................ $ 5,298 $16,501
=======
Less amount representing interest........................... (778)
-------
Present value of net minimum lease payments....... 4,520
Less current portion........................................ (1,575)
-------
$ 2,945
=======
</TABLE>
Rent expense for the period from inception (March 31, 1996) to December 31,
1996 and the year ended December 31, 1997 and the nine months ended September
30, 1998 was $128,000, $1,856,000, and $3,036,000, respectively.
In addition, the Company has entered into agreements with two
telecommunications companies to provide the Company with products and services
to be used in its operations. Under one agreement, the minimum payments as of
September 30, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $1,200
1999........................................................ 1,900
2000........................................................ 2,400
2001........................................................ 800
------
Total minimum payments............................ $6,300
======
</TABLE>
Under the second agreement, the Company is obligated to spend a total of
$39 million between June 16, 1997 and June 16, 2002 of which approximately
$3,300,000 had been paid as of September 30, 1998. Annual payments will be based
on actual usage by the Company.
On March 31, 1998, the Company entered into a 15-year Capacity and Services
Agreement (the "Capacity Agreement") with Qwest Communications Corporation
("Qwest"), under which the Company will have access to long haul capacity and
ancillary services on Qwest's planned 16,285 mile MacroCapacity(sm) Fiber
Network. Over the first seven years of the term of the Capacity Agreement (the
"Commitment Term"), the Company must purchase, and Qwest must provide, not less
than $100.0 million, in the aggregate, of such capacity and services (the
"Commitment"), at agreed upon prices. The amount of capacity represented by the
Commitment would satisfy less than 50% of the Company's currently projected long
haul capacity requirements over the Commitment Term. However, the Company has
the right to order capacity and services in excess of the Commitment, and after
the expiration of the Commitment Term, at the same agreed upon prices.
The Company had an outstanding irrevocable letter of credit in the amount
of $1.4 million as of September 30, 1998. This letter of credit, which is
automatically renewed after one year at the discretion of the bank, not to be
extended beyond January 31, 2003, is to collateralize the Company's lease
obligation to a
F-38
<PAGE> 206
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
third party. The fair value of this letter of credit approximates contract value
which is fixed over the life of the commitment. Restricted cash in the amount of
$1,500,000 secures the letter of credit.
(5) PREFERRED STOCK
Series A, B and C preferred shares were issued in 1996 and 1997 at $3, $6
and $8 per share, respectively, for total proceeds of $18,100,001, $60,170,004
and $20,000,000, respectively. The Series A, B, and C preferred shares were
subject to mandatory redemption and were convertible into common stock initially
on a one-for-one basis. In December 1997, the Company also issued 680,000 shares
of Series D-1 preferred stock at $15 per share in connection with an
acquisition. The Series D-1 preferred shares were not redeemable. From January
1, 1998 through April 30, 1998, the Company issued 1,534,513 additional shares
of Series D-1 preferred stock ranging from $15 to $22 per share in connection
with business combinations. The preferred shares were entitled to receive
dividends equal, on an as-converted basis, to any amount paid to common
stockholders. In the event of any liquidation or dissolution of the Company,
including certain mergers, consolidations and asset sales, holders of the
preferred shares were entitled to receive an amount equal to the original
issuance price, plus any declared and unpaid dividends. In connection with the
Company's initial public offering of common stock discussed in note 6, all
outstanding preferred shares were converted to common stock in May 1998.
(6) STOCKHOLDERS' EQUITY
Common Stock Offerings
On May 15, 1998, the Company completed its initial public offering of
common stock. The Company issued 5,500,000 shares for net proceeds, after
offering costs, of approximately $115.7 million.
Concurrently with the above offering, the Company also sold an additional
4,493,877 shares to a strategic investor for total proceeds of approximately
$100 million.
Subsequent to the above offering, the Company sold an additional 235,000
shares, in connection with the underwriters exercise of their over-allotment
option, for net proceeds of approximately $5.1 million.
Stock-Based Compensation Plans
The Company has established Incentive Stock Option Plans (the Plans)
whereby, at the discretion of the Board of Directors (the Board), the Company
may grant stock options to employees of the Company and its controlled
subsidiaries. As of September 30, 1998, the Company had reserved 4,633,084
shares for issuance under the Plans. The option price is determined by the Board
at the time the option is granted, but generally such price is not less than the
fair market value of the Company's common stock at the date of grant, as
determined by the Board. As of December 31, 1996 and December 31, 1997, options
had been granted entitling the holders to purchase 707,200 and 2,237,050 shares
of the Company's common stock, respectively, at exercise prices of $1, $3, $6,
$6.75 and $8.50 per share. Options granted on or before December 19, 1997, vest
over a five year period, and expire ten years from the date of grant. Options
granted December 20, 1997, or later, vest over a four year period, and expire
eight years from the date of grant. In certain circumstances, options vest
earlier or later based upon the fair value of the Company's common shares or
upon reaching certain performance targets, as defined, and in the case that such
performance targets are not met, such performance-based options vest seven years
from the date of grant. Performance based options granted on or before December
19, 1997, expire ten years from the date of grant, and performance based options
granted December 20, 1997, or later, expire eight years from the date of grant.
As of December 31, 1997, 54,700 options, in total, were vested and exercisable.
Options may be exercised prior to their scheduled vesting date, but are subject
to a repurchase by the Company at the exercise price until the scheduled vesting
date. The weighted average contractual term of outstanding options was
approximately 5 years at December 31, 1997.
F-39
<PAGE> 207
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes option activity for the period from
inception (March 1, 1996) through September 30, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- --------
<S> <C> <C>
Options granted at the following exercise prices:
$1 per share.............................................. 60,000
$3 per share.............................................. 647,700
---------
Options outstanding at December 31, 1996.................... 707,700 $ 2.83
Options granted at the following exercise prices:
$3 per share.............................................. 6,000
$6 per share.............................................. 924,550
$6.75 per share........................................... 635,450
$8.50 per share........................................... 191,250
Options forfeited......................................... (151,700) $ 5.95
Options exercised......................................... (76,200) $ 1.95
--------- ------
Options outstanding at December 31, 1997.................... 2,237,050 $ 5.55
Options granted at the following exercise prices:
$12.75 per share.......................................... 467,150
$13.50 per share.......................................... 1,042,284
$17.00 per share.......................................... 18,500
$17.38 per share.......................................... 180,750
$17.75 per share.......................................... 250,000
$19.00 per share.......................................... 555,187
$20.50 per share.......................................... 30,000
$20.81 per share.......................................... 70,000
$21.13 per share.......................................... 177,700
$22.75 per share.......................................... 7,750
$23.00 per share.......................................... 180,000
$27.25 per share.......................................... 104,350
$29.13 per share.......................................... 104,900
$30.03 per share.......................................... 39,500
Options forfeited......................................... (751,650) $10.72
Options exercised......................................... (80,387) $ 4.65
--------- ------
Options outstanding at September 30, 1998 (unaudited)....... 4,633,084 $12.90
========= ======
</TABLE>
Options outstanding does not include approximately 165,000 options assumed
in connection with the Buyout of NorthWestNet.
During the period and year ended December 31, 1996 and 1997, the per share
weighted-average fair value of stock options granted was $.46 and $1.08,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions: no dividends or volatility,
risk-free interest rate of 6%, and expected life of three years. If the Company
had recorded compensation expense for the period and year ended December 31,
1996 and 1997, based on the fair value of the options at the grant date under
SFAS No. 123, net loss available to common stockholders would increase to
$5,210,000 and $46,737,000, respectively, and basic and diluted net loss per
common share would increase to $4.78 and $40.83, respectively.
F-40
<PAGE> 208
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Since inception, the Company has generally granted stock options with
exercise prices equal to the fair value of the underlying common stock, as
determined by the Company's Board of Directors and based on the Company's other
equity transactions. Accordingly, the Company has not recorded compensation
expense related to the granting of stock options in 1996, 1997 and through
February 28, 1998. Subsequent to February 28, 1998, the Company granted options
to employees with exercise prices less than the fair value per share based upon
the Company's estimated price per share in the initial public offering.
Accordingly the Company will record compensation expense totaling approximately
$10.6 million. Such compensation expense will be recognized pro rata over the
forty-eight month vesting period of the options. This compensation expense
totaled approximately $1,269,000 for the nine months ended September 30, 1998.
It is the intention of the Company to generally grant future stock options with
exercise prices equal to the fair value of the underlying Common Stock at the
date of grant. In addition, the Company incurred $1.4 million in compensation
expense during the nine-months ended September 30, 1998 related to accelerated
vesting of options and approximately $0.4 million in compensation expense
related to options issued to the Company's new president.
(7) INCOME TAXES
Income tax benefit for the period and year ended December 31, 1996 and
1997, differs from the amounts that would result from applying the federal
statutory rate of 34% as follows in thousands:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1996 1997
------- --------
<S> <C> <C>
Expected tax benefit........................................ $(1,749) $(15,752)
State income taxes, net of federal benefit.................. (180) (1,622)
Nondeductible goodwill amortization......................... 26 820
Change in valuation allowance for deferred tax assets,
exclusive of effect of acquired net operating losses...... 1,877 16,472
Other....................................................... 26 82
------- --------
Actual income tax benefit................................. $ -- $ --
======= ========
</TABLE>
No tax benefit was recorded for the nine months ended September 30, 1997
and 1998 due to the increase in the valuation allowance for deferred tax assets,
relating primarily to net operating loss carryforwards.
Temporary differences that give rise to the components of deferred tax
assets as of December 31, 1996 and 1997 and June 30, 1998 are as follows in
thousands:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1997 1998
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Net operating loss carryforwards, including
acquisitions...................................... $ 2,238 $ 18,586 $ 52,500
Other, net.......................................... 39 163 250
------- -------- --------
Gross deferred tax asset.................. 2,277 18,749 52,750
Valuation allowance................................. (2,277) (18,749) (52,750)
------- -------- --------
Net deferred tax asset.................... $ -- $ -- $ --
======= ======== ========
</TABLE>
At December 31, 1997, the Company has a net operating loss carryforward for
federal income tax purposes of approximately $49.9 million, of which $5.9
million and $44.0 million is available to offset future federal taxable income,
if any, through 2011 and 2012, respectively. As a result of various preferred
stock transactions during 1996 and 1997, management believes the Company has
undergone an "ownership change"
F-41
<PAGE> 209
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as defined by section 382 of the Internal Revenue Code. Accordingly, the
utilization of a portion of the net operating loss carryforward may be limited.
Due to this limitation, and the uncertainty regarding the ultimate utilization
of the net operating loss carryforward, no tax benefit for losses has been
recorded by the Company in 1996, 1997 and 1998, and a valuation allowance has
been recorded for the entire amount of the deferred tax asset.
(8) CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable. As of December 31, 1996 and 1997 and September 30, 1998,
the Company had no concentrations of credit risk. Concentrations of credit risk
with respect to trade receivables are limited due to the large number of
customers comprising the Company's customer base and the relatively minor
balances of each individual account. At December 31, 1996 and 1997 and September
30, 1998, the fair value of the Company's financial instruments approximate
their carrying value, based on their terms and interest rates.
(9) EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Plan (the Plan) for all full time employees of the
Company. The Company may make discretionary contributions to the Plan on behalf
of employees that meet certain contribution eligibility requirements defined
under the terms of the Plan. The Company did not make any contributions to the
Plan during 1996, 1997 or 1998.
(10) QUARTERLY FINANCIAL DATA (UNAUDITED)
Summary quarterly financial information for the Company is as follows. The
second quarter of 1996 represents the period from inception (March 1, 1996) to
June 30, 1996 (Amounts in Thousands Except Per Share Data).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------
1996 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
- ---- -------- ------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
Revenue......................... $ -- $ -- $ 678 $ 1,687 $ 2,365
Loss from operations............ -- (329) (1,395) (4,556) (6,280)
Net loss........................ -- (329) (1,442) (3,374) (5,145)
Loss per common share -- basic
and diluted................... -- (0.34) (1.48) (3.47) (5.29)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------
1997 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
- ---- -------- ------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
Revenue......................... $ 4,414 $ 8,249 $ 9,624 $ 13,405 $ 35,692
Loss from operations............ (5,592) (8,854) (10,741) (15,102) (40,289)
Net loss........................ (4,677) (9,274) (13,250) (19,128) (46,329)
Loss per common share -- basic
and diluted................... (4.29) (8.32) (11.26) (16.63) (40.47)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------
1998 MARCH 31 JUNE 30 SEPTEMBER 30 TOTAL
- ---- -------- -------- ------------ --------
<S> <C> <C> <C> <C>
Revenue............................... $ 21,198 $ 28,541 $ 33,804 $ 83,543
Loss from operations.................. (14,717) (21,327) (29,140) (65,184)
Net loss.............................. (28,384) (26,316) (33,606) (88,306)
Loss per common share -- basic and
diluted............................. (22.44) (1.44) (1.03) (5.06)
</TABLE>
F-42
<PAGE> 210
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheet of On-Ramp Technologies,
Inc. as of July 31, 1996, and the related statements of operations,
stockholders' deficit, and cash flows for the nine months 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 audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of On-Ramp Technologies, Inc.
as of July 31, 1996, and the results of its operations and its cash flows for
the nine months then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Denver, Colorado
April 11, 1997
F-43
<PAGE> 211
ON-RAMP TECHNOLOGIES, INC.
BALANCE SHEET
JULY 31, 1996
ASSETS
<TABLE>
<S> <C>
Current assets:
Trade receivables, net of allowance for doubtful accounts
of $80,812............................................. $ 433,075
Prepaid expenses and other................................ 25,079
-----------
Total current assets.............................. 458,154
Equipment, net (note 2)..................................... 867,388
-----------
Total assets...................................... $ 1,325,542
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Cash overdraft............................................ $ 91,342
Accounts payable.......................................... 448,460
Accrued liabilities....................................... 61,750
Current portion of note payable (note 3).................. 55,003
Deferred revenue.......................................... 652,965
-----------
Total current liabilities......................... 1,309,520
Note payable, less current portion (note 3)................. 58,692
-----------
Total liabilities................................. 1,368,212
-----------
Stockholders' equity (deficit) (note 5):
Common stock, $0.001 par value, 40,000,000 shares
authorized, 1,079,000 shares issued.................... 1,079
Additional paid-in capital................................ 1,804,871
Accumulated deficit....................................... (1,822,620)
Treasury stock -- 689,971 shares at cost.................. (26,000)
-----------
Total stockholders' deficit....................... (42,670)
-----------
Commitments and contingencies (note 4):
Total liabilities and stockholders' deficit....... $ 1,325,542
===========
</TABLE>
See accompanying notes to financial statements.
F-44
<PAGE> 212
ON-RAMP TECHNOLOGIES, INC.
STATEMENT OF OPERATIONS
NINE MONTHS ENDED JULY 31, 1996
<TABLE>
<S> <C>
Revenue:
Internet services......................................... $2,959,650
Computer hardware and software sales...................... 312,487
Consulting services....................................... 92,881
----------
Total revenue..................................... 3,365,018
----------
Cost and expenses:
Internet services operating costs......................... 606,249
Cost of hardware and software sales....................... 249,990
Selling, general and administrative....................... 2,210,706
Provision for bad debts................................... 497,742
Depreciation.............................................. 260,194
----------
Total operating expenses.......................... 3,824,881
----------
Loss from operations.............................. (459,863)
Other income (expense):
Interest income........................................... 8,035
Interest expense.......................................... (7,991)
----------
Net loss.......................................... $ (459,819)
==========
</TABLE>
See accompanying notes to financial statements.
F-45
<PAGE> 213
ON-RAMP TECHNOLOGIES, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
NINE MONTHS ENDED JULY 31, 1996
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL STOCKHOLDERS'
COMMON PAID-IN ACCUMULATED TREASURY EQUITY
STOCK CAPITAL DEFICIT STOCK (DEFICIT)
------- ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES AT NOVEMBER 1, 1995............ 1,079 1,799,699 (1,362,801) (26,000) 411,977
Capital contribution.................... -- 5,172 -- -- 5,172
Net loss................................ -- -- (459,819) -- (459,819)
------ --------- ---------- ------- --------
BALANCES AT JULY 31, 1996............... $1,079 1,804,871 (1,822,620) (26,000) (42,670)
====== ========= ========== ======= ========
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE> 214
ON-RAMP TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 1996
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(459,819)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation........................................... 260,194
Provision for bad debts................................ 497,742
Changes in operating assets and liabilities:
Trade receivables.................................... (375,867)
Prepaid expenses..................................... 6,103
Accounts payable..................................... (170,123)
Accrued liabilities.................................. 4,891
Deferred revenue..................................... 227,140
---------
Net cash used by operating activities............. (9,739)
---------
Cash flows from investing activities --
purchases of equipment.................................... (222,564)
---------
Cash flows from financing activities:
Increase in cash overdraft................................ 91,342
Principal payments on note payable........................ (26,919)
Capital contribution...................................... 5,172
---------
Net cash used by financing activities............. 69,595
---------
Decrease in cash.................................. (162,708)
Cash at beginning of period................................. 162,708
---------
Cash at end of period....................................... $ --
=========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 7,991
=========
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE> 215
ON-RAMP TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Basis of Presentation
On-Ramp Technologies, Inc. (the Company) was incorporated in the State of
Texas on December 27, 1993. The Company's business consists of providing
regional internet access services, and hardware and software sales and
consulting, to customers in Texas and Georgia.
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 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
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance.
Revenue from consulting services is recognized as the services are
provided. Revenue from hardware and software sales is recognized upon shipment
of the respective products.
Equipment
Equipment is stated at cost, less accumulated depreciation. Depreciation is
recorded using the straight-line method over the estimated useful life of the
related assets of three years. Costs for normal repairs and maintenance are
expensed as incurred.
Income Taxes
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, (SFAS 109).
Under SFAS 109, deferred income taxes are recognized for the future tax
consequences of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121). This
statement was effective for financial statements for fiscal years beginning
after December 15, 1995. Statement No. 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. The adoption of SFAS 121 as of November
1, 1995 did not have a significant effect on the Company's financial position or
results of operations.
Stock Based Compensation
In October 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, (SFAS No. 123), which establishes a fair
F-48
<PAGE> 216
ON-RAMP TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
value-based method of accounting for stock-based compensation plans. Companies
are encouraged to adopt all provisions of SFAS No. 123 and are required to
comply with the disclosure requirements of SFAS No. 123, which was effective for
fiscal years beginning after December 15, 1995. The Company will continue to
account for stock based compensation under the provisions of APB Opinion No. 25
and will provide the pro forma disclosures required by SFAS 123.
(2) EQUIPMENT
Equipment consisted of the following at July 31, 1996:
<TABLE>
<S> <C>
Internet and computer equipment............................. $1,155,370
Furniture and office equipment.............................. 119,973
Leasehold improvements...................................... 6,668
----------
1,282,011
Less accumulated depreciation............................... (414,623)
----------
$ 867,388
==========
</TABLE>
(3) DEBT
Debt as of July 31, 1996 consists of the following:
<TABLE>
<S> <C>
Note payable bearing interest at 18%, monthly principal and
interest payments of $7,020 through April 1, 1998......... $113,695
Less current portion...................................... (55,003)
--------
$ 58,692
========
</TABLE>
(4) COMMITMENTS AND CONTINGENCIES
Future minimum annual lease payments under operating leases for each of the
years ending July 31, are as follows:
<TABLE>
<S> <C>
1997........................................................ $129,377
1998........................................................ 326,781
1999........................................................ 324,755
2000........................................................ 211,920
--------
$992,833
========
</TABLE>
Rent expense for the nine months ended July 31, 1996 totaled $90,999.
Concentration of Credit Risk and Financial Instruments
The Company provides unsecured credit to customers in the normal course of
business. Failure of the customers to pay could result in losses up to the
recorded receivable balances. The Company does not have any customers that
represent greater than 5% of total revenue at July 31, 1996.
The Company conducts business in Texas and Georgia. Customers who operate
in Texas represent approximately 97% of the Company's customer base and accounts
receivable.
At July 31, 1996, the fair values of the Company's financial instruments
approximate their carrying values based on their terms and interest rates.
F-49
<PAGE> 217
ON-RAMP TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) STOCKHOLDERS' EQUITY
Effective August 1, 1996, the Company issued 1,250,000 shares of newly
authorized redeemable, convertible preferred stock to Verio Inc. (Verio) for
cash consideration of $2,336,816, cancellation of indebtedness in the amount of
$1,663,184, and a note receivable of $4,175,000. The preferred shares are
convertible into common shares on a one for one basis and represent a 50.82%
interest in the Company upon conversion. The preferred shares are redeemable at
the option of the holder at any time, vote on an as-converted basis, and have a
liquidation preference equal to the issuance price. On October 4, 1996, Verio
purchased 100,000 shares of common stock from two Company shareholders for cash
consideration of $600,000, representing an additional 4.07% interest in the
Company. In addition, Verio acquired an option to acquire a 100% common stock
ownership in the Company in the future upon the occurrence of certain events,
including an initial public offering of Verio common stock.
The Company established a stock option plan (the Plan) which provides that
salaried officers or key employees, non-employee directors, and consultants who
provide services to the Company may, at the discretion of the Board of
Directors, be granted options to purchase shares of common stock. 130,560 shares
of the Company's Common Stock have been authorized for issuance under the Plan,
of which 59,878 shares were granted during the nine months ended July 31, 1996,
with an exercise price of $6.34 per share. There were no options exercised or
canceled during the nine months ended July 31, 1996. As of July 31, 1996, 11,976
options were exercisable.
Generally, options vest 20% or 25% on the date of grant of the option and
the balance vests thereafter over a 4 or 3 year period.
During the nine months ended July 31, 1996, the per share weighted-average
fair values of stock options granted was $.71 on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions; expected dividend yield 0%, risk-free interest rate of 6%, and
expected life of four years. If the Company determined compensation expense for
the nine months ended July 31, 1996 based on the fair value of the options at
the grant date under SFAS No. 123, net loss would have been approximately
$468,000.
(6) INCOME TAXES
At December 31, 1995, the Company has a net operating loss carryforward for
federal income tax purposes of $534,000 which is available to offset future
federal taxable income, if any, through 2010. Management believes the Company
has undergone an ownership change under section 382 of the Internal Revenue Code
and, accordingly, the utilization of the net operating loss carryforward
incurred prior to this ownership change is limited. Due to this limitation and
the uncertainty regarding the ultimate utilization of the net operating loss
carryforward a valuation allowance has been recorded for the full amount of the
deferred tax asset related to the net operating loss carryforward, which
represents the only significant temporary difference as of December 31, 1996.
F-50
<PAGE> 218
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheets of Global Enterprise
Services -- Network Division (a Division of Global Enterprise Services, Inc.) as
of December 31, 1995 and 1996, and the related statements of operations and
owners' deficit, and cash flows for each of the years in the three-year period
ended December 31, 1996 and the period ended January 17, 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 Global Enterprise
Services -- Network Division (a Division of Global Enterprises Services, Inc.)
as of December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1996 and
for the period ended January 17, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
February 25, 1998
F-51
<PAGE> 219
GLOBAL ENTERPRISE SERVICES -- NETWORK DIVISION
(A DIVISION OF GLOBAL ENTERPRISE SERVICES, INC.)
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
ASSETS
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash...................................................... $ 31,072 33,018
Accounts receivable, net of allowance for doubtful
accounts of $67,247 in 1995 and $84,510 in 1996........ 843,980 822,823
Prepaid expenses and other assets......................... 26,286 10,424
----------- -----------
Total current assets.............................. 901,338 866,265
Equipment, net (note 2)..................................... 1,672,045 2,388,509
Other assets................................................ 43,487 118,888
----------- -----------
Total assets...................................... $ 2,616,870 3,373,662
=========== ===========
LIABILITIES AND OWNER'S DEFICIT
Current liabilities:
Accounts payable.......................................... $ 1,223,510 2,450,316
Accrued expenses.......................................... 378,400 449,270
Deferred revenue.......................................... 1,293,360 1,545,884
Current portion of capital lease obligations (note 6)..... 213,041 548,608
Due to related party (note 3)............................. 866,840 2,183,256
----------- -----------
Total current liabilities......................... 3,975,151 7,177,334
Capital lease obligations, less current portion (note 6).... 454,122 824,034
----------- -----------
Total liabilities................................. 4,429,273 8,001,368
Owner's deficit............................................. (1,812,403) (4,627,706)
----------- -----------
Total liabilities and owner's deficit............. $ 2,616,870 3,373,662
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-52
<PAGE> 220
GLOBAL ENTERPRISE SERVICES -- NETWORK DIVISION
(A DIVISION OF GLOBAL ENTERPRISE SERVICES, INC.)
STATEMENTS OF OPERATIONS AND OWNER'S DEFICIT
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND PERIOD ENDED JANUARY 17, 1997
<TABLE>
<CAPTION>
PERIOD ENDED
1994 1995 1996 JANUARY 17, 1997
---------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
Internet services revenue, net........... $3,386,621 3,642,063 3,958,049 155,170
Costs and expenses:
Internet services operating costs...... 1,965,110 2,484,276 3,227,766 163,076
Selling, general and administrative.... 1,716,853 1,953,712 2,847,300 107,179
Depreciation and amortization.......... 191,983 291,541 556,112 33,126
---------- ----------- ----------- -----------
Total operating costs and
expenses..................... 3,873,946 4,729,529 6,631,178 303,381
---------- ----------- ----------- -----------
Loss from operations........... (487,325) (1,087,466) (2,673,129) (148,211)
Interest expense, net.................... (6,479) (39,960) (142,174) (6,622)
---------- ----------- ----------- -----------
Net loss....................... (493,804) (1,127,426) (2,815,303) (154,833)
Owner's deficit at beginning of period... (191,173) (684,977) (1,812,403) (4,627,706)
---------- ----------- ----------- -----------
Owner's deficit at end of period......... $ (684,977) (1,812,403) (4,627,706) (4,782,539)
========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-53
<PAGE> 221
GLOBAL ENTERPRISE SERVICES -- NETWORK DIVISION
(A DIVISION OF GLOBAL ENTERPRISE SERVICES, INC.)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND PERIOD ENDED JANUARY 17, 1997
<TABLE>
<CAPTION>
PERIOD ENDED
JANUARY 17,
1994 1995 1996 1997
-------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................. (493,804) (1,127,426) (2,815,303) $(154,833)
Adjustments to reconcile net loss to
net cash provided (used) by
operating activities:
Depreciation and amortization...... 191,983 291,541 556,112 33,126
Provision for doubtful accounts.... 30,644 31,714 25,993 --
Changes in operating assets and
liabilities:
Accounts receivable.............. 170,528 (291,457) (4,836) 148,984
Prepaid expenses and other
current assets................ (26,819) 11,404 15,862 (9,636)
Other assets..................... (27,258) 3,771 (75,401) 60,000
Accounts payable................. 286,981 766,581 1,226,806 (52,610)
Accrued expenses................. 63,273 (3,735) 70,870 116,785
Deferred revenue................. 297,900 (387,288) 252,524 (155,171)
-------- ---------- ----------- ---------
Net cash provided (used) by
operating activities........ 493,428 (704,895) (747,373) (13,355)
-------- ---------- ----------- ---------
Cash flows from investing
activities -- purchases of
equipment............................. (321,399) (497,168) (345,436) --
-------- ---------- ----------- ---------
Cash flows from financing activities:
Net change in due to related party.... (142,215) 1,318,772 1,316,416 (153,663)
Proceeds from debt.................... -- -- -- 134,000
Principal repayments on capital lease
obligations........................ (22,739) (93,738) (221,661) --
-------- ---------- ----------- ---------
Net cash provided (used) by
financing activities........ (164,954) 1,225,034 1,094,755 (19,663)
-------- ---------- ----------- ---------
Net increase (decrease) in cash......... 7,075 22,971 1,946 (33,018)
Cash at beginning of period............. 1,026 8,101 31,072 33,018
-------- ---------- ----------- ---------
Cash at end of period................... 8,101 31,072 33,018 $ --
======== ========== =========== =========
Supplemental disclosure of cash flow
information:
Cash paid during the year for
interest........................... 6,073 35,249 70,535 $ 6,622
======== ========== =========== =========
Supplemental disclosure of non-cash
investing activities -- equipment
acquired through capital leases....... 10,908 735,088 927,140 $ --
======== ========== =========== =========
</TABLE>
See accompanying notes to financial statements.
F-54
<PAGE> 222
GLOBAL ENTERPRISE SERVICES -- NETWORK DIVISION
(A DIVISION OF GLOBAL ENTERPRISE SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Business and Basis of Presentation
Global Enterprise Services, Inc. (GES) was formed in August 1992 to provide
internet services to subscribers on a national and international basis through a
high performance telecommunications network. The accompanying financial
statements include the accounts of the domestic operations (Network Division),
assuming that the Network Division had been operated separately as of January 1,
1994 and thereafter.
In preparing the accompanying financial statements, management has
allocated certain assets, liabilities, revenue and expenses based upon the
characteristics of the accounts and the business divisions to which they relate.
Expenses which are not directly related to a particular division are allocated
based upon revenue or payroll expense of the division which, in the opinion of
management, represents a reasonable and appropriate method of allocation.
Effective January 17, 1997, the net assets of the Network Division were
acquired by Verio Inc.
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 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
Internet services are recognized as the services are provided. The Network
Division records deferred revenue for amounts billed and/or collected in
advance.
Equipment
Equipment, including any assets under capital leases, is stated at cost,
less accumulated depreciation and amortization. Depreciation and amortization is
recorded using the straight-line method over the estimated useful lives of the
related assets or the lease term, which range from five to seven years. Costs
for normal repairs and maintenance are expensed as incurred.
Income Taxes
The operations of the Network Division are included in the income tax
returns of GES, which was treated as a subchapter S Corporation in 1994 and
through August 14, 1995, and a C Corporation beginning on August 15, 1995.
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, (SFAS 109).
Under SFAS 109, deferred income taxes are recognized for the future tax
consequences of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
No tax benefit has been allocated to the Network Division in 1994, 1995 and
1996 or for the period ended January 17, 1997, due to losses at the GES level
for which no tax benefit has been provided for financial statement purposes.
F-55
<PAGE> 223
GLOBAL ENTERPRISE SERVICES -- NETWORK DIVISION
(A DIVISION OF GLOBAL ENTERPRISE SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk and Financial Instruments
The Network Division provides unsecured credit to customers in the normal
course of business. Failure of the customers to pay could result in losses up to
the recorded receivable balances. The Network Division does not have any
customers that represent greater than 5% of total revenue for the years ended
December 31, 1994, 1995 and 1996 or for the period ended January 17, 1997.
At December 31, 1996, the fair values of the Network Division's financial
instruments approximate their carrying values based on their terms and interest
rates.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121). This
statement was effective for financial statements for fiscal years beginning
after December 15, 1995. Statement No. 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. The adoption of SFAS 121 effective
January 1, 1996 did not have a significant effect on the Network Division's
financial position or results of operations.
(2) EQUIPMENT
Equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Internet and computer equipment............................. $2,277,949 3,286,929
Furniture and office equipment.............................. 5,889 64,709
Leasehold improvements...................................... 27,165 204,624
---------- -----------
2,311,003 3,556,262
Less accumulated depreciation and amortization.............. (638,958) (1,167,753)
---------- -----------
$1,672,045 2,388,509
========== ===========
</TABLE>
(3) RELATED PARTY TRANSACTIONS
Amounts due to related party represent net cash transfers between the
Network Division and the other divisions of GES, and are non interest bearing.
(4) EMPLOYEE BENEFIT PLAN
GES has established a defined contribution savings plan which provides for
eligible employees who have met certain age and service requirements to
participate by electing to contribute up to 15% of their gross salary to the
plan, as defined, with GES and the Network Division matching 25% of a
participant's contribution up to a maximum of 10% of gross salary, as defined.
Employee contributions are immediately vested. Contributions to the savings plan
on behalf of the Network Division employees for the years ended December 31,
1994, 1995 and 1996 were $3,253, $1,697 and $6,838, respectively.
F-56
<PAGE> 224
GLOBAL ENTERPRISE SERVICES -- NETWORK DIVISION
(A DIVISION OF GLOBAL ENTERPRISE SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) NATIONAL SCIENCE FOUNDATION GRANTS
The Network Division receives grant revenue from the National Science
Foundation (NSF) to provide network connections to certain not-for-profit
educational institutions. Funding is received on a per entity basis. The grant
revenue is recognized ratably over the term of the contract with the
not-for-profit educational institution, which is generally twelve months. Grant
revenue amounted to $131,166, $99,487 and $47,112, in 1994, 1995 and 1996,
respectively. Total amounts receivable at December 31, 1994, 1995 and 1996 were
$34,990, $72,199 and $23,243, respectively.
In September 1994, GES and the Network Division entered into a four year
cooperative agreement with the NSF to provide for interregional connectivity for
the Network Division's United States research and educational customers in the
aggregate amount of $625,115. Pursuant to the agreement, the Network Division
will be reimbursed by the NSF for costs associated with upgrading the Network
Division's existing telecommunications network. The level of funding for each
year will be determined based upon a progress review of the Network Division by
the NSF and the availability of NSF funds. The Network Division is required to
submit an annual plan to the NSF. For the years ended December 31, 1995 and
1996, respectively, the Network Division recognized $154,344 and $196,169 as a
reduction to internet services operating costs. No amounts were recognized for
the year ended December 31, 1994. Total amounts receivable were $30,904 and
$10,326 as of December 31, 1995 and 1996, respectively.
(6) LEASES
The Network Division has entered into capital and operating leases for
telecommunications equipment and office space. Future minimum lease commitments
under all leases at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ ---------- ---------
<S> <C> <C>
1997................................... $ 650,731 344,562
1998................................... 468,940 360,623
1999................................... 392,382 360,830
2000................................... 89,056 372,295
2001................................... -- 191,466
---------- ---------
Total minimum lease payments............................. 1,601,109 1,629,776
=========
Less amount representing interest.......................... (228,467)
----------
Present value of minimum lease payments.................. $1,372,642
Less current portion....................................... (548,608)
----------
$ 824,034
==========
</TABLE>
Rent expense for the years ended December 31, 1994, 1995 and 1996 was
$193,904, $218,408 and $455,936, respectively.
The Network Division has guaranteed monthly usage levels with its primary
communications vendors at December 31, 1996 as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1997.................................................... $205,000
1998.................................................... 205,000
1999.................................................... 51,250
--------
Total.............................................. $461,250
========
</TABLE>
F-57
<PAGE> 225
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheets of Compute Intensive, Inc.
as of December 31, 1995 and 1996, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the two
year period ended December 31, 1996 and for the period ended February 18, 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 Compute Intensive, Inc. as
of December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the years in the two year period ended December 31, 1996 and
for the period ended February 18, 1997 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
February 25, 1998
F-58
<PAGE> 226
COMPUTE INTENSIVE INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
ASSETS
<TABLE>
<CAPTION>
1995 1996
-------- ---------
<S> <C> <C>
Current assets:
Cash...................................................... $ 20,335 44,328
Trade receivables, net of allowance for doubtful accounts
of $35,033 and $105,858 in 1995 and 1996,
respectively........................................... 455,148 506,017
Income taxes receivable................................... 9,612 15,510
Deferred income taxes (note 7)............................ 16,362 --
Prepaid expenses and other................................ 5,937 183,834
-------- ---------
Total current assets.............................. 507,394 749,689
Equipment, net (note 2)..................................... 344,988 604,358
Other assets................................................ 15,408 48,587
-------- ---------
Total assets...................................... $867,790 1,402,634
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Revolving lines of credit (note 3)........................ $ 28,193 207,115
Current portion of note payable to related party (note
3)..................................................... 18,341 --
Current portion of obligations under capital leases (note
4)..................................................... 60,220 121,535
Accounts payable.......................................... 373,146 809,791
Accrued liabilities....................................... 113,218 142,235
Deferred revenue.......................................... 43,343 53,295
-------- ---------
Total current liabilities......................... 636,461 1,333,971
Note payable to related party, less current portion (note
3)........................................................ 70,384 --
Capital lease obligations, less current portion (note 4).... 104,048 169,476
Deferred income taxes (note 7).............................. 27,790 --
-------- ---------
Total liabilities................................. 838,683 1,503,447
Stockholders' equity (deficit):
Common stock, no par value, 1,000,000 shares authorized,
900,000 shares issued and outstanding.................. 900 900
Additional paid-in capital................................ 41,112 106,266
Accumulated deficit....................................... (12,905) (207,979)
-------- ---------
Total stockholders' equity (deficit).............. 29,107 (100,813)
-------- ---------
Commitments and contingencies (note 4)
Total liabilities and stockholders' equity
(deficit)....................................... $867,790 1,402,634
======== =========
</TABLE>
See accompanying notes to financial statements.
F-59
<PAGE> 227
COMPUTE INTENSIVE INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND PERIOD ENDED FEBRUARY 18, 1997
<TABLE>
<CAPTION>
PERIOD
ENDED
FEBRUARY 18,
1995 1996 1997
---------- --------- ------------
<S> <C> <C> <C>
Revenue:
Internet services....................................... $ 584,174 2,013,098 519,127
Consulting services..................................... 1,562,814 1,878,336 187,812
Computer hardware sales................................. 263,924 387,215 44,540
Computer software sales................................. 5,345 37,881 17,375
Other................................................... 69,145 60,037 24,736
---------- --------- --------
Total revenue................................... 2,485,402 4,376,567 793,590
---------- --------- --------
Operating expenses:
Cost of consulting services............................. 503,454 537,000 107,604
Cost of internet services............................... 317,768 670,158 144,457
Cost of hardware sales.................................. 227,913 292,941 26,394
Cost of software sales.................................. 5,859 28,043 15,032
Marketing and selling................................... 348,006 541,426 137,449
General and administrative.............................. 1,001,736 2,331,945 544,350
Depreciation and amortization........................... 46,174 133,280 15,954
---------- --------- --------
Total operating expenses........................ 2,450,910 4,534,793 991,240
---------- --------- --------
Earnings (loss) from operations................. 34,492 (158,226) (197,650)
Interest expense.......................................... (23,319) (54,174) (7,254)
---------- --------- --------
Earnings (loss) before income taxes............. 11,173 (212,400) (204,904)
Income tax benefit (expense) (note 7)..................... (7,308) 17,326 --
---------- --------- --------
Net earnings (loss)............................. $ 3,865 (195,074) (204,904)
========== ========= ========
</TABLE>
See accompanying notes to financial statements.
F-60
<PAGE> 228
COMPUTE INTENSIVE INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND PERIOD ENDED FEBRUARY 18, 1997
<TABLE>
<CAPTION>
TOTAL
COMMON ADDITIONAL STOCKHOLDERS'
COMMON STOCK PAID-IN ACCUMULATED EQUITY
STOCK SUBSCRIBED CAPITAL DEFICIT (DEFICIT)
------ ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1995........ $ -- 900 41,112 (16,770) 25,242
Issuance of common stock........... 900 (900) -- -- --
Net earnings....................... -- -- -- 3,865 3,865
---- ---- ------- -------- ---------
BALANCES AT DECEMBER 31, 1995...... 900 -- 41,112 (12,905) 29,107
Capital contribution (note 3)...... -- -- 65,154 -- 65,154
Net loss........................... -- -- -- (195,074) (195,074)
---- ---- ------- -------- ---------
BALANCES AT DECEMBER 31, 1996...... 900 -- 106,266 (207,979) (100,813)
Net loss........................... -- -- -- (204,904) (204,904)
---- ---- ------- -------- ---------
BALANCES AT FEBRUARY 18, 1997...... $900 -- 106,266 (412,883) (305,717)
==== ==== ======= ======== =========
</TABLE>
See accompanying notes to financial statements.
F-61
<PAGE> 229
COMPUTE INTENSIVE INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND PERIOD ENDED FEBRUARY 18, 1997
<TABLE>
<CAPTION>
PERIOD
ENDED
FEBRUARY 18,
1995 1996 1997
--------- -------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss).................................... $ 3,865 (195,074) (204,904)
Adjustments to reconcile net earnings (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization....................... 46,174 133,280 15,954
Deferred income tax expense (benefit)............... 11,972 (11,428) --
Provision for bad debts............................. 35,015 135,593 5,580
Changes in operating assets and liabilities:
Increase in receivables........................... (306,539) (186,462) (64,719)
Decrease (increase) in prepaid expenses and
other.......................................... 4,463 (117,897) (33,368)
Increase in other assets.......................... (7,678) (35,191) (2,251)
Increase in accounts payable...................... 306,005 372,637 78,036
Increase in accrued liabilities................... 22,478 29,017 49,219
Increase in income tax receivable................. (17,064) (5,898) 15,510
Increase in deferred revenue...................... 34,358 9,952 (18,215)
--------- -------- ---------
Net cash provided (used) by operating
activities................................... 133,049 128,529 (159,428)
--------- -------- ---------
Cash flows from investing activities -- Purchases of
equipment.............................................. (131,193) (158,549) (119,999)
--------- -------- ---------
Cash flows from financing activities:
Borrowings under revolving lines of credit............. 19,000 305,258 66,057
Repayments of revolving lines of credit................ (1,808) (126,336) (98,225)
Borrowings (payments) on note payable to related
party............................................... (11,275) (19,563) 200,000
Principal payments on capital lease obligations........ (24,880) (105,346) (12,717)
Cash overdraft......................................... -- -- 79,984
--------- -------- ---------
Net cash provided (used) by financing
activities................................... (18,963) 54,013 235,099
--------- -------- ---------
Increase (decrease) in cash.................... (17,107) 23,993 (44,328)
Cash, beginning of period................................ 37,442 20,335 44,328
--------- -------- ---------
Cash, end of period...................................... $ 20,335 44,328 --
========= ======== =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes........................................ $ 10,800 -- $ --
========= ======== =========
Interest............................................ $ 21,571 54,175 $ 7,253
========= ======== =========
Noncash investing and financing activities -- Equipment
acquired through capital lease obligations............. $ 158,006 232,089 $ --
========= ======== =========
</TABLE>
See accompanying notes to financial statements.
F-62
<PAGE> 230
COMPUTE INTENSIVE INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Compute Intensive, Inc. (the Company) was incorporated in the State of
California on December 31, 1993. The Company has three distinct areas of
business; providing regional internet access services to customers in California
and New Mexico, software and hardware consulting and sales, and software
development and implementation.
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 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
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance.
Revenue from consulting services is recognized when services have been
rendered. On fixed price contracts, revenue is recognized over the course of the
contract using the percentage-of-completion method. The Company provides for any
anticipated losses on such contracts in the period in which such losses are
first determinable.
Revenue from hardware and software sales is recognized upon shipment of the
respective products if the Company has no significant future obligations and
collectibility is probable.
Equipment
Equipment, including any assets under capital leases, is stated at cost,
less accumulated depreciation and amortization. Depreciation and amortization is
recorded using the straight-line method over the estimated useful lives of the
related assets on the lease term, which range from five to seven years. Costs
for normal repairs and maintenance are expensed as incurred.
Income Taxes
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, (SFAS 109).
Under SFAS 109, deferred income taxes are recognized for the future tax
consequences of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of December 31, 1995 and 1996 approximate their
carrying values based on their terms and interest rates. The use of different
market assumptions and/or estimation methodologies may have a significant effect
on the estimated fair values.
F-63
<PAGE> 231
COMPUTE INTENSIVE INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121). This
statement was effective for financial statements for fiscal years beginning
after December 15, 1995. Statement No. 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at lower of the carrying amount or
fair value less costs to sell. The adoption of SFAS 121 in 1996 did not have a
significant effect on the Company's financial position or results of operations.
Stock Based Compensation
In October 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, (SFAS No. 123), which establishes a fair value-based method of
accounting for stock-based compensation plans. Companies are encouraged to adopt
all provisions of SFAS No. 123 and are required to comply with the disclosure
requirements of SFAS No. 123, which was effective for fiscal years beginning
after December 15, 1995. The Company will continue to account for stock based
compensation under the provisions of APB Opinion No. 25 and will provide the pro
forma disclosures required by SFAS 123.
Reclassifications
Certain reclassifications have been made to the 1995 financial statements
to conform with the 1996 presentation.
(2) EQUIPMENT
Equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Internet and computer equipment............................. $342,407 730,143
Furniture and office equipment.............................. 55,016 57,718
Leasehold improvements...................................... 1,892 2,092
-------- --------
399,315 789,953
Less accumulated depreciation and amortization.............. (54,327) (185,595)
-------- --------
$344,988 604,358
======== ========
</TABLE>
Equipment includes assets owned under capital leases with a net book value
of $173,607 and $315,303 at December 31, 1995 and 1996, respectively.
(3) DEBT
At December 31, 1995 and 1996, the Company had an $100,000 unsecured
revolving line of credit agreement with a bank, under which $28,193 and $32,167
was outstanding, respectively. Borrowings under the line bear interest at the
bank's prime lending rate plus 4.75% or 4.5%, based on an average daily balance,
payable monthly (12.75% at December 31, 1996) and are due in 1997.
F-64
<PAGE> 232
COMPUTE INTENSIVE INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On October 16, 1996, the Company entered into an additional $200,000
revolving line of credit agreement with a bank, under which $174,948 was
outstanding at December 31, 1996. Borrowings under the line bear interest at the
bank's prime lending rate plus 2%, based on an average daily balance, payable
monthly (10.25% at December 31, 1996) and are due in 1997.
Note payable to related party at December 31, 1995 bore interest at 7.5%
and was due in monthly installments through 2000. During 1996, the unpaid
balance of $65,154 was assumed by the Company's majority stockholder and was
forgiven and recorded as a capital contribution. The Company borrowed $200,000
from Verio Inc. (Verio) (See note 6), during the period ended February 18, 1997.
Such amount was non interest bearing and was repaid in connection with Verio's
investment in the Company.
(4) COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain computer and office equipment under capital
leases. The Company also leases office space under noncancelable operating
leases expiring at various dates through 1997.
Future minimum annual lease payments under capital and noncancelable
operating leases for each of the years ending December 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ---------
<S> <C> <C>
1997........................................................ $ 166,477 200,490
1998........................................................ 123,363 269,220
1999........................................................ 50,815 281,820
2000........................................................ 24,352 307,020
2001........................................................ 11,823 313,320
--------- ---------
Total minimum payments.................................... 376,830 1,371,870
=========
Less amount representing interest........................... (85,819)
---------
Present value of net minimum lease payments............... 291,011
Less current portion........................................ (121,535)
---------
$ 169,476
=========
</TABLE>
Rent expense for the years ended December 31, 1995 and 1996 and the period
ended February 18, 1997 was $83,148, $128,130 and $27,800, respectively.
Concentration of Credit Risk
The Company provides unsecured credit to customers in the normal course of
business. Failure of the customers to pay could result in losses up to the
recorded receivable balances. The Company's largest customer represented
approximately 32% and 20% of total revenues for the years ended December 31,
1995 and 1996, respectively.
The Company conducts business in California and New Mexico. Customers who
operate in California represent at least 75% of the Company's customer base and
accounts receivable.
(5) EMPLOYEE BENEFIT PLAN
The Company has a Simplified Employee Pension Plan (the Plan) covering all
employees who meet certain eligibility requirements. The Company may make
discretionary contributions to the Plan on behalf of
F-65
<PAGE> 233
COMPUTE INTENSIVE INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
employees that meet certain contribution eligibility requirements defined under
the terms of the Plan. The Company did not make any contributions to the Plan
during 1995 or 1996.
(6) STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
On February 18, 1997, the Company issued 770,234 shares of newly authorized
redeemable, convertible preferred stock to Verio for cash consideration of
$4,899,998. The preferred shares are convertible into common shares on a 1.000
for 1.0017 basis and represent a 55% ownership interest in the Company upon
conversion. The preferred shares are redeemable at the option of the holder at
any time, vote on an as-converted basis, and include a liquidation preference
equal to the issuance price. In addition, Verio acquired an option to acquire a
100% common stock ownership in the Company which it may exercise at any time on
or after one year following the issuance date of the preferred shares. Upon the
initial public offering of Verio common stock or a significant strategic
investor in Verio, Verio is required to exercise the option.
The Company's 1995 Stock Option/Stock Issuance Plan (the Plan) was adopted
by the Board of Directors and approved by the shareholders of the Company in
March 1995. The Plan provides that salaried officers or key employees,
non-employee directors, and consultants who provide services to the Company may,
at the discretion of the plan administrator, be granted options to purchase
shares of common stock. 250,000 shares of the Company's Common Stock have been
authorized for issuance under the Plan, of which 131,000 and 29,500 nonqualified
options were granted in 1995 and 1996, respectively, with an exercise price of
$.05 and $.001 per share, respectively. All options were granted at fair value
at the date of grant, as determined by the Company's Board of Directors. There
were no options exercised and 18,176 were canceled during 1996.
Generally, options vest 25% on the first anniversary of the option grant
date and the balance vests thereafter in equal successive monthly installments
over the next 36 months of service. Option grants to nonemployee directors must
be approved by the Board.
During 1995 and 1996, the per share weighted-average fair values of stock
options granted was $.01 and $.65, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for both years; expected dividend yield 0%, risk-free interest rate
of 6%, and expected life of three years. If the Company determined compensation
expense in 1995 and 1996 based on the fair value of the options at the grant
date under SFAS No. 123, net loss and net earnings would not have been
significantly different than the historical results of operations.
(7) INCOME TAXES
Income tax expense (benefit) consists of the following for the years ended
December 31:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Current:
Federal.................................................. $(3,838) (6,698)
State.................................................... (826) 800
------- -------
(4,664) (5,898)
------- -------
Deferred:
Federal.................................................. 9,261 (8,717)
State.................................................... 2,711 (2,711)
------- -------
11,972 (11,428)
------- -------
$ 7,308 (17,326)
======= =======
</TABLE>
No tax benefit was recorded for the period ended February 18, 1997 due to
uncertainty as to realization of the net operating loss for the period.
F-66
<PAGE> 234
COMPUTE INTENSIVE INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income taxes expense (benefit) for the years ended December 31 differs from
the amounts that would result from applying the federal statutory rate of 34% as
follows:
<TABLE>
<CAPTION>
1995 1996
------ -------
<S> <C> <C>
Expected tax expense (benefit).............................. $3,798 (72,216)
State income taxes, net of federal benefit.................. 335 (6,373)
Nondeductible expenses...................................... 3,175 7,142
Increase in valuation allowance for deferred tax assets..... -- 41,066
Other....................................................... -- 13,055
------ -------
Actual income tax expense (benefit).................... $7,308 (17,326)
====== =======
</TABLE>
Temporary differences that give rise to the components of deferred tax
assets and liabilities as of December 31 are as follows:
<TABLE>
<CAPTION>
1995 1996
-------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ -- 50,231
Accounts receivable, due to allowance for doubtful
accounts for financial statement purposes only......... 15,169 37,983
Other..................................................... 1,193 --
-------- -------
Gross deferred tax asset.......................... 16,362 88,214
Valuation allowance......................................... -- (41,066)
-------- -------
Net deferred tax asset............................ 16,362 47,148
-------- -------
Deferred tax liability:
Equipment, due to differences in depreciation for
financial statement and tax purposes................... (23,696) (43,054)
Other..................................................... (4,094) (4,094)
-------- -------
Total deferred tax liability...................... (27,790) (47,148)
-------- -------
Net deferred tax liability........................ $ 11,428 --
======== =======
</TABLE>
As of December 31, 1996, the Company has a net operating loss carryforward
of approximately $132,000 for federal income tax purposes which will expire in
2011, if not utilized. A valuation allowance has been recorded for a portion of
the related deferred tax asset due to the uncertainty relating to the
realization of the entire net operating loss carryforward in the future.
F-67
<PAGE> 235
INDEPENDENT AUDITORS' REPORT
The Board of Directors
NorthWestNet, Inc.:
We have audited the accompanying balance sheet of NorthWestNet, Inc. as of
June 30, 1996, and the related statements of operations, stockholders' equity,
and cash flows for the six months ended June 30, 1996 and the eight months ended
February 28, 1997. We have also audited the accompanying balance sheet of
Northwest Academic Computing Consortium, Inc. (Predecessor Company) as of June
30, 1995 and the related statements of operations, fund balance and cash flows
for the year ended June 30, 1995 and the six months ended December 31, 1995.
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 NorthWestNet, Inc. as of
June 30, 1996, and the results of its operations and its cash flows for the six
months ended June 30, 1996, and the eight months ended February 28, 1997 and the
financial position of Northwest Academic Computing Consortium, Inc. as of June
30, 1995 and the results of its operations and its cash flows for the year ended
June 30, 1995 and the six months ended December 31, 1995 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Seattle, Washington
January 31, 1998
F-68
<PAGE> 236
NORTHWESTNET, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY NORTHWESTNET, INC.
----------- ------------------
JUNE 30, JUNE 30,
1995 1996
----------- ------------------
<S> <C> <C>
Cash and cash equivalents................................... $ 563,952 277,284
Accounts receivable, net.................................... 842,753 1,243,981
Prepaids and other assets................................... 29,605 32,505
---------- ---------
Total current assets.............................. 1,436,310 1,553,770
Equipment, furniture and leasehold improvements, net........ 1,246,180 1,613,981
Deferred income taxes....................................... -- 46,000
---------- ---------
Total assets...................................... $2,682,490 3,213,751
========== =========
LIABILITIES, STOCKHOLDERS' EQUITY AND FUND BALANCE
Accounts payable............................................ $ 108,297 165,606
Accrued liabilities......................................... 102,010 340,677
Deferred revenues and customer advances..................... 965,589 1,374,708
---------- ---------
Total current liabilities......................... 1,175,896 1,880,991
---------- ---------
Stockholders' equity:
Common stock, $.01 par value. Authorized 10,000,000
shares; issued and outstanding 4,000,000 shares and
4,000,100 shares at June 30, 1995 and June 30, 1996,
respectively........................................... -- 40,000
Additional paid-in capital................................ -- 1,193,402
Retained earnings......................................... -- 99,358
---------- ---------
Total stockholders' equity........................ -- 1,332,760
---------- ---------
Fund balance................................................ 1,506,594 --
---------- ---------
Total liabilities and stockholders' equity........ $2,682,490 3,213,751
========== =========
</TABLE>
See accompanying notes to financial statements.
F-69
<PAGE> 237
NORTHWESTNET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR COMPANY NORTHWESTNET, INC.
-------------------------- --------------------------
SIX MONTHS SIX MONTHS EIGHT MONTHS
YEAR ENDED ENDED ENDED ENDED
JUNE 30, DECEMBER 31, JUNE 30, FEBRUARY 28,
1995 1995 1996 1997
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Revenue:
Internet access and connection fees..... $2,218,354 1,197,690 1,655,211 2,572,917
Online information service fees......... 430,031 310,430 380,522 976,404
Grants.................................. 10,000 146,734 78,342 85,795
Other................................... 117,835 15,407 16,949 47,019
---------- --------- --------- ---------
Total revenue................... 2,776,220 1,670,261 2,131,024 3,682,135
Operating expenses:
Salaries and employee benefits.......... 1,145,224 770,215 886,958 2,728,589
Network operations and circuits......... 225,570 356,711 320,396 547,031
Professional fees....................... 254,982 126,789 39,307 61,047
Marketing and advertising............... 55,222 32,460 66,209 114,544
General and administrative.............. 624,314 309,961 364,418 673,541
Depreciation and amortization........... 507,693 248,770 311,261 509,122
---------- --------- --------- ---------
Total operating expenses........ 2,813,005 1,844,906 1,988,549 4,633,874
---------- --------- --------- ---------
Operating income (loss)................... (36,785) (174,645) 142,475 (951,739)
Interest income........................... 46,108 25,639 15,883 25,083
---------- --------- --------- ---------
Earnings (loss) before income
taxes......................... 9,323 (149,006) 158,358 (926,656)
---------- --------- --------- ---------
Income tax expense (benefit).............. -- -- 59,000 (135,000)
---------- --------- --------- ---------
Net earnings (loss)............. $ 9,323 (149,006) 99,358 (791,656)
========== ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-70
<PAGE> 238
NORTHWESTNET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY AND FUND BALANCE
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS TOTAL
FUND COMMON PAID-IN (ACCUMULATED STOCKHOLDERS'
BALANCE STOCK CAPITAL DEFICIT) EQUITY
----------- ------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCES AT JUNE 30, 1994............... $ 1,497,271 -- -- -- --
Net earnings............................ 9,323 -- -- -- --
----------- ------ --------- -------- ---------
BALANCES AT JUNE 30, 1995............... 1,506,594 -- -- -- --
Net loss for the six months ended
December 31, 1995..................... (149,006) -- -- -- --
Distribution to stockholder............. (124,186) -- -- -- --
----------- ------ --------- -------- ---------
BALANCES AT DECEMBER 31, 1995........... 1,233,402 -- -- -- --
Issuance of common stock to effect
corporate reorganization.............. (1,233,402) 40,000 1,193,402 -- 1,233,402
Net earnings for the six months ended
June 30, 1996......................... -- -- -- 99,358 99,358
----------- ------ --------- -------- ---------
BALANCES AT JUNE 30, 1996............... -- 40,000 1,193,402 99,358 1,332,760
Exercise of stock options............... -- 1 86 -- 87
Contingent stock compensation expense... -- -- 451,696 -- 451,696
Net loss for the eight months ended
February 28, 1997..................... -- -- -- (791,656) (791,656)
----------- ------ --------- -------- ---------
BALANCES AT FEBRUARY 28, 1997........... $ -- 40,001 1,645,184 (692,298) 992,887
=========== ====== ========= ======== =========
</TABLE>
See accompanying notes to financial statements.
F-71
<PAGE> 239
NORTHWESTNET, INC.
STATEMENTS OF CASH FLOWS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
PREDECESSOR COMPANY NORTHWESTNET, INC.
------------------------- -------------------------
SIX MONTHS SIX MONTHS EIGHT MONTHS
YEAR ENDED ENDED ENDED ENDED
JUNE 30, DECEMBER 31, JUNE 30, FEBRUARY 28,
1995 1995 1996 1997
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)................... $ 9,323 (149,006) 99,358 (791,656)
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Depreciation and amortization...... 507,693 248,770 311,261 509,122
Contingent stock option
compensation..................... -- -- -- 451,696
Loss on disposition of equipment... -- -- -- 10,526
Deferred tax benefit............... -- -- (46,000) (74,000)
Increases and decreases in:
Accounts receivable.............. (272,151) 418,635 (819,863) 624,707
Prepaids and other assets........ (18,841) (28,347) 25,447 (1,396,570)
Accounts payable................. (73,064) (48,302) (37,056) 304,296
Accrued liabilities.............. (9,079) 110,275 128,392 1,069,605
Deferred revenue................. 331,904 76,759 332,360 (599,775)
--------- ---------- --------- -----------
Net cash provided by (used in)
operating activities........ 475,785 628,784 (6,101) 107,951
--------- ---------- --------- -----------
Cash flows from investing activities:
Purchase of equipment, furniture and
leasehold improvements............. (760,922) (260,850) (524,315) (1,047,283)
Disposition of equipment.............. -- -- -- 22,678
--------- ---------- --------- -----------
Net cash used in investing
activities.................. (760,922) (260,850) (524,315) (1,024,605)
--------- ---------- --------- -----------
Cash flows from financing activities:
Advances from Verio, Inc. ............ -- -- -- 2,560,294
Distribution to stockholder........... -- -- (124,186) --
Exercise of stock options............. -- -- -- 87
--------- ---------- --------- -----------
Net cash provided by (used in)
financing activities........ -- -- (124,186) 2,560,381
--------- ---------- --------- -----------
Increase (decrease) in cash
and cash equivalents........ (285,137) 367,934 (654,602) 1,643,727
Cash and cash equivalents at beginning
of period............................. 849,089 563,952 931,886 277,284
--------- ---------- --------- -----------
Cash and cash equivalents at end of
period................................ $ 563,952 931,886 277,284 1,921,011
========= ========== ========= ===========
Supplemental disclosures of cash flow
information -- cash paid during the
period for income taxes............... $ 900 -- 82,000 118,000
========= ========== ========= ===========
Supplemental schedule of noncash
financing and investing activities:
Accounts payable related to purchase
of equipment....................... $ 15,140 13,523 129,144 --
========= ========== ========= ===========
Issuance of common stock to effect
corporate reorganization........... $ -- 1,233,402 -- --
========= ========== ========= ===========
</TABLE>
See accompanying notes to financial statements.
F-72
<PAGE> 240
NORTHWESTNET, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND FEBRUARY 28, 1997
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
NorthWestNet, Inc. (NorthWestNet), a for-profit corporation incorporated in
the state of Oregon, is a subsidiary of Northwest Academic Computing Consortium,
Inc. (NWACC). NorthWestNet provides Internet access and related on-line
information services to businesses, educational institutions and other
organizations located principally in the Northwest.
(b) Corporate Reorganization
NWACC, a nonprofit corporation organized to promote research, education and
economic development in the Northwest, had been providing Internet access to
businesses and organizations in the Northwest since 1991.
On January 1, 1996, NWACC completed a transaction that included the
creation of NorthWestNet. The transaction consisted of the transfer of
substantially all of NWACC's operating assets and liabilities to NorthWestNet in
exchange for 4,000,000 shares of common stock, which represented all of the
outstanding common stock of NorthWestNet. This transaction represented a
tax-free transfer pursuant to the Internal Revenue Code (IRC) section 351. In
connection with the transaction, all NWACC employees became NorthWestNet
employees.
NWACC's relationship to NorthWestNet, is now that of a stockholder,
currently the majority stockholder. NWACC intends to maintain its tax-exempt
status under IRC section 501(c)(3); however, its activities are independent of
NorthWestNet and its employees.
(c) Basis of Presentation
There was no change in the carrying amounts of assets and liabilities
transferred from NWACC to NorthWestNet effective January 1, 1996. The
accompanying financial statements include the accounts of NWACC through December
31, 1995, presented as Predecessor Company.
The carrying amounts of net assets transferred from NWACC to NorthWestNet
effective January 1, 1996 are summarized as follows:
<TABLE>
<S> <C>
Cash and cash equivalents................................... $ 807,700
Accounts receivable, net.................................... 424,118
Prepaids and other assets................................... 57,952
Equipment, furniture and leasehold improvements, net........ 1,271,783
----------
Total assets...................................... 2,561,553
----------
Accounts payable............................................ 73,518
Accrued expenses............................................ 212,285
Deferred revenue............................................ 1,042,348
----------
Total liabilities................................. 1,328,151
----------
Net assets........................................ $1,233,402
==========
</TABLE>
(d) Cash Equivalents
All short-term investments with original maturities of three months or less
at date of purchase are considered to be cash equivalents.
F-73
<PAGE> 241
NORTHWESTNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(e) Concentrations of Credit Risk
Financial instruments that potentially subject NorthWestNet to
concentrations of credit risk consist principally of cash equivalents and
accounts receivable. NorthWestNet's cash equivalents represent investments in
money market funds which are readily convertible to cash. Accounts receivable
are principally from NorthWestNet's customers located throughout the Northwest.
(f) Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of (SFAS 121). This
statement was effective for financial statements for fiscal years beginning
after December 15, 1995. Statement No. 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. The adoption of SFAS 121 effective July
1, 1996 did not have a significant effect on the NorthWestNet's financial
position or results of operations.
(g) Revenue Recognition
Revenues consist primarily of Internet access fees, connection fees and
on-line information service fees. Internet access fees consist of fixed monthly
amounts and are recognized ratably over the terms of the service contracts.
Connection fees, representing customer site equipment and installation charges,
are recognized upon installation of a customer's Internet connectivity. Fixed
on-line information service fees are recognized ratably over the terms of the
service contracts. Volume-based on-line information service fees are recognized
as such services are delivered. Payments received in advance of providing
services are deferred until the period such services are provided.
(h) Advertising Costs
Advertising costs are expensed as incurred.
(i) Depreciation and Amortization
Equipment, furniture and leasehold improvements are stated at cost.
Depreciation and amortization are provided on the straight-line method over the
estimated useful lives of the assets, or the lease term, if shorter. The
estimated useful lives of the assets are as follows:
<TABLE>
<S> <C>
Network equipment........................................... 3 - 4 years
Computer and office equipment............................... 2 - 3 years
Furniture and fixtures...................................... 7 years
Leasehold improvements...................................... 5 years
</TABLE>
(j) Use of Estimates
NorthWestNet management has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, revenues and expenses, and
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
F-74
<PAGE> 242
NORTHWESTNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(k) Income Taxes
NorthWestNet accounts for income taxes using the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts and tax bases of existing assets and liabilities.
NWACC was exempt from the payment of Federal income taxes under IRC section
501(c)(3). Therefore, no provision for income taxes was required through
December 31, 1995.
(l) Stock-Based Compensation
Prior to July 1, 1996, NorthWestNet accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations. As
such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
July 1, 1996, NorthWestNet adopted Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, which permits entities
to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows
entities to continue to apply the provisions of APB Opinion No. 25 for
transactions with employees and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied to these transactions. NorthWestNet has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123.
(2) EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Equipment, furniture and leasehold improvements and related accumulated
depreciation and amortization consist of the following:
<TABLE>
<CAPTION>
JUNE 30
------------------------
1995 1996
----------- ---------
<S> <C> <C>
Network equipment........................................... $ 1,645,558 1,878,787
Computer and office equipment............................... 603,051 586,653
Furniture and fixtures...................................... 102,010 77,011
Leasehold improvements...................................... 50,301 50,301
----------- ---------
Total cost........................................ 2,400,920 2,592,752
Less accumulated depreciation and amortization.............. (1,154,740) (978,771)
----------- ---------
$ 1,246,180 1,613,981
=========== =========
</TABLE>
(3) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
JUNE 30
-------------------
1995 1996
-------- -------
<S> <C> <C>
Accrued compensation and benefits........................... $102,010 153,447
Network operations and circuits............................. -- 129,080
Other....................................................... -- 58,150
-------- -------
$102,010 340,677
======== =======
</TABLE>
F-75
<PAGE> 243
NORTHWESTNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) BORROWING AGREEMENT
NorthWestNet had a borrowing agreement with a commercial bank, which
expired in June 1997, that provided for a $400,000 operating line of credit
(Line of Credit) and a $600,000 equipment term loan (Term Loan). Borrowings
under the Line of Credit were limited to 75% of eligible accounts receivable and
bear interest at the bank's prime rate plus 1.75%. The Term Loan bore interest
at the bank's prime rate plus 2%. Borrowings under this agreement were secured
by substantially all of NorthWestNet's assets. There were no borrowings under
the Line of Credit or Term Loan as of June 30, 1996.
(5) INCOME TAXES
The components of NorthWestNet's income tax expense (benefit) for the six
months ended June 30, 1996 and the eight months ended February 28, 1997 are as
follows:
<TABLE>
<CAPTION>
SIX EIGHT
MONTHS MONTHS
ENDED ENDED
JUNE 30, FEBRUARY 28,
1996 1997
-------- ------------
<S> <C> <C>
Current:
Federal..................................................... $100,000 (66,000)
State....................................................... 5,000 5,000
Deferred -- Federal......................................... (46,000) (74,000)
-------- --------
$ 59,000 (135,000)
======== ========
</TABLE>
Deferred income taxes result from temporary differences in the recognition
of income and expense between financial statement and income tax reporting.
Temporary differences at June 30, 1996 are primarily attributable to
depreciation and amortization of equipment, furniture and leasehold
improvements. The tax effects of these temporary differences result in deferred
tax assets which are classified as noncurrent on the accompanying June 30, 1996
balance sheet. Actual tax expense for the six months ended June 30, 1996
approximates the amount calculated using the Federal statutory rate of 34%, plus
the provision for state taxes. The tax benefit for the eight months ended
February 28, 1997 differs from the expected benefit, calculated using the
Federal statutory rate of 34%, primarily due to non-deductible stock option
compensation.
(6) STOCKHOLDERS' EQUITY -- EMPLOYEE STOCK OPTION PLAN
NorthWestNet adopted a stock option plan (Plan) in January 1996 to
compensate its employees for future services and has reserved 1.5 million shares
of common stock for option grants under the Plan. Of the reserved shares,
500,000 are for options which are exercisable, upon reaching defined corporate
objectives (Contingent Options), at an exercise price of $.875 per share. The
date the defined corporate objectives are met, any excess of fair market value
per share over the exercise price per share of the outstanding options would be
charged to salaries and benefits expense in the statement of operations with a
corresponding increase in stockholder's equity. As of December 31, 1996, 370,000
contingent shares were outstanding. The remaining 1 million reserved shares are
for options which generally vest, based on continued employment, over periods
ranging from three to four years in equal monthly increments beginning the month
after the grant (Noncontingent Options). All options expire ten years from the
date of grant and are exercisable at the fair market value of the common stock
at the grant date.
F-76
<PAGE> 244
NORTHWESTNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of stock option activity under the Plan follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------------------
WEIGHTED-
SHARES AVERAGE
AVAILABLE NON- EXERCISE
FOR GRANT CONTINGENT CONTINGENT PRICE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Authorization of Plan.......................... 1,500,000 -- -- $ --
Options granted................................ (988,000) 583,000 405,000 0.875
Options relinquished........................... 76,771 (41,771) (35,000) 0.875
Balances at June 30, 1996...................... 588,771 541,229 370,000 0.875
Options granted................................ (54,000) 54,000 -- 1.956
Options exercised.............................. -- (100) -- 0.875
Options relinquished........................... 3,229 (3,229) -- 0.875
Options surrendered for cash................... -- (192,265) -- 0.875
Balances at February 28, 1997.................. 538,000 399,635 370,000 $0.951
</TABLE>
NorthWestNet applies APB Opinion No. 25 in accounting for its Plans, and,
because the Company grants options at fair value, as determined by the Company's
Board of Directors, no compensation cost has been recognized for its employee
stock options in the financial statements. Had NorthWestNet determined
compensation cost of employee stock options based on the fair value at the grant
date for its stock options under SFAS No. 123, NorthWestNet's net earnings would
have been reported as the pro forma amounts indicated below:
<TABLE>
<CAPTION>
SIX EIGHT
MONTHS MONTHS
ENDED ENDED
JUNE 30, FEBRUARY 28,
1996 1997
-------- ------------
<S> <C> <C>
Net earnings (loss):
As reported............................................... $99,359 (791,656)
Pro forma................................................. 26,469 (892,205)
</TABLE>
The per share weighted-average fair value of stock options granted during
the six months ended June 30, 1996 and the eight months ended February 28, 1997
was $0.28 and $0.70 respectively, on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions: six months
ended June 30, 1996 -- expected dividend yield 0%, risk-free interest rate of
5.51% and an expected life of 7 years; eight months ended February 28,
1997 -- expected dividend yield 0%, risk-free interest rate of 6.55%, and an
expected life of 7 years.
F-77
<PAGE> 245
NORTHWESTNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
under the Plan at June 30, 1996 and February 28, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE
--------------- ----------- ---------------------
<S> <C> <C>
June 30, 1996:
$0.875............................................... 911,229 9.5 years
-------
February 28, 1997:
$0.875............................................... 715,635
1.375............................................... 6,000
2.000............................................... 34,500
$2.10................................................ 13,500
-------
$0.875-2.000......................................... 769,635 9.5 years
-------
</TABLE>
All options became vested and exercisable upon completion of the ownership
change described in note 10.
(7) LEASES
NorthWestNet leases its office and certain network operations facilities
under operating leases which expire in 2002. NorthWestNet subleases a portion of
its office space as sublessor under operating leases which expire in 1996 and
1997. Rental expense, net of sublease income, is included in general and
administrative expenses and is comprised of the following:
<TABLE>
<CAPTION>
MINIMUM SUBLEASE
RENTALS INCOME TOTAL
-------- -------- -------
<S> <C> <C> <C>
Year ended June 30, 1995................................ $142,318 34,665 107,653
Six months ended December 31, 1995...................... 88,960 28,623 60,337
Six months ended June 30, 1996.......................... 88,795 24,423 64,372
Eight months ended February 28, 1997.................... 119,696 25,455 94,241
</TABLE>
NorthWestNet leases circuit lines from various vendors under month-to-month
operating leases. Rent expense on these circuit line leases amounted to
$225,570, $316,712, $270,395, and $413,697 for fiscal year ended 1995, the six
months ended December 31, 1995 and June 30, 1996, and the eight months ended
February 28, 1997, respectively, and is included in network operations and
circuits in the statements of operations.
In November 1996, NorthWestNet amended its existing operating lease for its
office facilities. The amendment increased the space leased by NorthWestNet by
approximately 9,000 square feet, beginning in February 1997, and extended the
lease term of existing space to February 2002. Additionally, in December 1996,
NorthWestNet entered into an operating lease for network operations facilities.
The initial term of the lease is five years, beginning in March 1997, with two
three-year extensions available at NorthWestNet's option.
(8) DEFINED CONTRIBUTION PLAN
NorthWestNet and NWACC both sponsor defined contribution plans. For the
NorthWestNet plan, employees who have worked a minimum of three months and
attained age 20 are eligible to participate and employee contributions are
matched by NorthWestNet up to certain limits. Sponsor contributions to the plans
F-78
<PAGE> 246
NORTHWESTNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
totaled $35,765, $17,589, $26,781, and $68,855 for the year ended June 30, 1995
and the six months ended December 31, 1995 and June 30, 1996, and the eight
months ended February 28, 1997, respectively.
(9) BUSINESS CONCENTRATION
One customer accounted for approximately 25%, 23%, 27%, and 23% of revenues
for the year ended June 30, 1995, the six months ended December 31, 1995 and
June 30, 1996, and the eight months ended February 28, 1997, respectively. Such
customer had account receivable balance of $227,662 at June 30, 1996.
Additionally, another customer accounted for approximately 14% of revenues
for the eight months ended February 28, 1997.
(10) OWNERSHIP CHANGE
On January 22, 1997, NorthWestNet, NWACC and Verio Inc. (Verio) executed a
Stock Purchase Agreement (Agreement) pursuant to which Verio acquired all of the
common stock of NorthWestNet owned by NWACC. Under the Agreement, Verio also
agreed to contribute at least $3.4 million to NorthWestNet, of which
approximately $2.3 million was funded in February 1997. The transaction closed
on February 28, 1997.
In connection with the sale to Verio, 370,000 contingent options became
exercisable and $451,696 of compensation expense was recorded by NorthWestNet in
February 1997 which was funded by Verio in addition to the $3.4 million. (See
note 6). In addition, the Plan was amended to provide for Verio's right to
acquire all of the securities outstanding under that plan.
F-79
<PAGE> 247
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
VERIO INC.:
We have audited the accompanying balance sheet of Aimnet Corporation
(wholly-owned by Aimquest Corporation) as of March 31, 1997 and the related
statements of operations, stockholder's equity, and cash flows for the year
ended March 31, 1997 and the period ended May 19, 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 Aimnet Corporation as of
March 31, 1997, and the results of its operations and its cash flows for the
year ended March 31, 1997 and the period ended May 19, 1997 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
February 25, 1998
F-80
<PAGE> 248
AIMNET CORPORATION
(WHOLLY-OWNED BY AIMQUEST CORPORATION)
BALANCE SHEET
MARCH 31, 1997
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash...................................................... $ 201,074
Trade receivables, net of allowance for doubtful accounts
of $52,770............................................. 460,611
Inventory................................................. 39,344
Prepaid expenses and other................................ 44,867
-----------
Total current assets.............................. 745,896
Equipment, net (note 2)..................................... 880,224
-----------
Total assets...................................... $ 1,626,120
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable.......................................... $ 141,680
Accrued expenses.......................................... 31,260
Deferred revenue.......................................... 19,251
Due to parent (note 3).................................... 514,122
Current portion of obligations under capital lease
obligations (note 4)................................... 8,153
-----------
Total current liabilities......................... 714,466
Capital lease obligations, less current portion (note 4).... 17,409
-----------
Total liabilities................................. 731,875
Stockholder's equity (note 6):
Common stock, no par value, 1,000 shares authorized, 100
shares issued and outstanding.......................... 2,307,640
Accumulated deficit....................................... (1,413,395)
-----------
Total stockholder's equity........................ 894,245
Commitments (note 4)
-----------
Total liabilities and stockholder's equity........ $ 1,626,120
===========
</TABLE>
See accompanying notes to financial statements.
F-81
<PAGE> 249
AIMNET CORPORATION
(WHOLLY-OWNED BY AIMQUEST CORPORATION)
STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, 1997 AND PERIOD ENDED MAY 19, 1997
<TABLE>
<CAPTION>
PERIOD ENDED
MAY 19,
1997 1997
----------- ------------
<S> <C> <C>
Revenue:
Internet services......................................... $ 2,649,839 303,600
Other (note 3)............................................ 215,279 87,788
----------- --------
Total revenue..................................... 2,865,118 391,388
----------- --------
Operating expenses:
Internet services and other operating costs............... 1,225,329 124,275
Selling, general and administrative....................... 2,098,958 437,292
Provision for bad debts................................... 425,295 --
Depreciation.............................................. 528,931 94,801
----------- --------
Total operating expenses.......................... 4,278,513 656,368
----------- --------
Net loss.......................................... $(1,413,395) (264,980)
=========== ========
</TABLE>
See accompanying notes to financial statements.
F-82
<PAGE> 250
AIMNET CORPORATION
(WHOLLY-OWNED BY AIMQUEST CORPORATION)
STATEMENT OF STOCKHOLDER'S EQUITY
YEAR ENDED MARCH 31, 1997 AND PERIOD ENDED MAY 19, 1997
<TABLE>
<CAPTION>
INTERCOMPANY
COMMON ACCOUNT ACCUMULATED
STOCK WITH PARENT DEFICIT TOTAL
---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Balance as of March 31, 1996................ $ -- 1,592,490 -- 1,592,490
Incorporation as wholly owned subsidiary and
additional capital contribution by
parent.................................... 2,307,640 (1,592,490) -- 715,150
Net loss.................................... -- -- (1,413,395) (1,413,395)
---------- ---------- ---------- ----------
Balances as of March 31, 1997............... $2,307,640 -- (1,413,395) 894,245
Net loss.................................... -- -- (264,980) (264,980)
---------- ---------- ---------- ----------
Balances as of May 19, 1997................. $2,307,640 -- (1,678,375) 629,265
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-83
<PAGE> 251
AIMNET CORPORATION
(WHOLLY-OWNED BY AIMQUEST CORPORATION)
STATEMENT OF CASH FLOWS
YEAR ENDED MARCH 31, 1997 AND PERIOD ENDED MAY 19, 1997
<TABLE>
<CAPTION>
PERIOD ENDED
MAY 19,
1997 1997
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(1,413,395) (264,980)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation........................................... 528,931 94,801
Provision for bad debts................................ 425,295 --
Changes in operating assets and liabilities:
Decrease (increase) in trade receivables............. (375,042) 40,670
Decrease (increase) in inventory..................... (5,423) 13,107
Decrease in prepaid expenses and other............... 7,047 4,416
Decrease in accounts payable......................... (44,692) (7,459)
Increase (decrease) in accrued expenses.............. (15,248) 18,522
Increase (decrease) in deferred revenue.............. 10,968 (5,171)
----------- --------
Net cash used by operating activities............. (881,559) (106,094)
----------- --------
Cash flows from investing activities -- purchases of
equipment................................................. (320,809) (54,458)
----------- --------
Cash flows from financing activities:
Cash capital contribution by parent....................... 715,150 --
Increase in due to related party.......................... 514,122 55,264
Principal payments on capital lease obligations........... (3,255) (1,548)
----------- --------
Net cash provided by financing activities......... 1,226,017 53,716
----------- --------
Increase (decrease) in cash....................... 23,649 (106,836)
Cash, beginning of period................................... 177,425 201,074
----------- --------
Cash, end of period......................................... $ 201,074 94,238
=========== ========
Noncash investing and financing activities --
Equipment acquired through capital lease obligations...... $ 28,817 --
=========== ========
</TABLE>
See accompanying notes to financial statements.
F-84
<PAGE> 252
AIMNET CORPORATION
(WHOLLY-OWNED BY AIMQUEST CORPORATION)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Aimnet Corporation (the Company) was incorporated in the State of
California on September 26, 1996 as a wholly owned subsidiary of Aimquest
Corporation (Aimquest). Prior to incorporation, the Company's assets,
liabilities, and operations were included in the financial statements of
Aimquest. The Company provides regional internet access services, and hardware
and software sales to customers in California. The accompanying financial
statements include the operations of the Company assuming that the Company had
been operated separately as of April 1, 1996 and thereafter.
Effective May 19, 1997, Verio Inc. acquired a 55% ownership interest in the
Company (see note 6).
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 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
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance. Revenue
from hardware and software sales is recognized upon shipment of the respective
products.
Inventory
Inventory, consisting of systems hardware and software and maintenance
parts and supplies is recorded at the lower of cost (first-in, first-out) or
market.
Equipment
Equipment, including assets held under capital leases, is stated at cost,
less accumulated depreciation and amortization. Depreciation and amortization is
recorded using the straight-line method over the shorter of the estimated useful
lives of the related assets or the lease term, which are two or three years.
Costs for normal repairs and maintenance are expensed as incurred.
Income Taxes
The Company is included in the tax returns of Aimquest. Income taxes are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, (SFAS 109). Under SFAS 109,
deferred income taxes are recognized for the future tax consequences of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and statutory rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized.
No tax benefit has been allocated to the Company due to the Company's net
loss and the uncertainty regarding the ultimate utilization of such loss in the
consolidated income tax returns of Aimquest. A valuation allowance has been
recorded for the entire balance of the deferred tax asset related to the
Company's net loss.
F-85
<PAGE> 253
AIMNET CORPORATION
(WHOLLY-OWNED BY AIMQUEST CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of March 31, 1997 approximate their carrying values
based on their terms and interest rates. The use of different market assumptions
and/or estimation methodologies may have a significant effect on the estimated
fair values.
Customers who operate in California represent substantially all of the
Company's customer base and accounts receivable. However, no single customer
comprised more than 5% of accounts receivable or total revenue as of or for the
year ended March 31, 1997 or the period ended May 19, 1997.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121). This
statement was effective for financial statements for fiscal years beginning
after December 15, 1995. Statement No. 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value, less costs to sell. The adoption of SFAS 121 effective
April 1, 1996 did not have a significant effect on the Company's financial
position or results of operations.
(2) EQUIPMENT
Equipment consisted of the following at March 31, 1997:
<TABLE>
<S> <C>
Internet and computer equipment.......................... $1,712,000
Furniture................................................ 29,144
----------
1,741,144
Less accumulated depreciation............................ (860,920)
----------
$ 880,224
==========
</TABLE>
Equipment includes assets owned under capital leases with a net book value
of $25,562 at March 31, 1997.
(3) RELATED PARTY TRANSACTIONS
The Company provides internet services to Aimquest which totaled $5,924 for
the year ended March 31, 1997 and $20,386 for the period ended May 19, 1997.
Amounts due to parent represent cash transfers from Aimquest which are
noninterest bearing.
F-86
<PAGE> 254
AIMNET CORPORATION
(WHOLLY-OWNED BY AIMQUEST CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain computer and office equipment under capital
leases. The Company also leases office space under noncancelable operating
leases expiring at various dates through 2001. Future minimum annual lease
payments under capital and noncancelable operating leases for each of the years
ending March 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ----------
<S> <C> <C>
1998.................................................... $12,396 327,146
1999.................................................... 12,396 283,916
2000.................................................... 8,780 279,810
2001.................................................... -- 109,488
Less future minimum payments to be received under
noncancelable subleases............................... -- (31,059)
------- -------
Total minimum payments................................ 33,572 969,301
=======
Less amount representing interest....................... (8,010)
-------
Present value of net minimum lease payments........... 25,562
Less current portion.................................... (8,153)
-------
$17,409
=======
</TABLE>
Rent expense for the year ended March 31, 1997 and the period ended May 19,
1997 totaled $314,890 and $38,203, respectively.
(5) EMPLOYEE BENEFIT PLAN
Aimquest has a 401(k) (the Plan) covering all employees of the Company who
meet certain eligibility requirements. Employer contributions are not required
and the Company did not make any contributions to the Plan during the year ended
March 31, 1997 or the period ended May 19, 1997.
(6) SUBSEQUENT EVENT
Effective May 19, 1997, Verio Inc. (Verio) acquired 77 shares of the
Company's series A preferred stock for cash consideration of approximately
$4,171,000. The preferred shares represent a 55% ownership interest in the
Company, on a fully diluted basis, and are convertible into common shares on a
one for one basis. In addition, the preferred shares have a liquidation
preference equal to the issuance price. Verio also acquired an option to acquire
a 100% ownership in the Company in the future upon the occurrence of certain
events, including an initial public offering of Verio common stock.
F-87
<PAGE> 255
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheet of West Coast Online, Inc.
as of September 30, 1997 and the related statements of operations and
accumulated deficit, and cash flows for the nine months 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 audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of West Coast Online, Inc. as
of September 30, 1997, and the results of its operations and its cash flows for
the nine months then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Denver, Colorado
November 21, 1997
F-88
<PAGE> 256
WEST COAST ONLINE, INC.
BALANCE SHEET
SEPTEMBER 30, 1997
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash...................................................... $ 25,907
Trade receivables, net of allowance for doubtful accounts
of $3,588.............................................. 96,659
Prepaid expenses and other................................ 4,933
---------
Total current assets.............................. 127,499
Equipment, net (note 2)..................................... 524,474
Other assets................................................ 7,148
---------
Total assets...................................... $ 659,121
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable:
Trade.................................................. $ 41,270
Related party (note 5)................................. 27,009
Accrued liabilities....................................... 105,487
Deferred revenue.......................................... 99,679
Current portion of capital lease obligations (note 3)..... 57,874
---------
Total current liabilities......................... 331,319
Capital lease obligations, less current portion (note 3).... 69,994
Total liabilities................................. 401,313
---------
Redeemable preferred stock, 2,000,000 shares authorized
(note 4):
Series A, 60,000 shares issued and outstanding............ 225,000
Series B, 50,710 shares issued and outstanding............ 250,000
---------
Total redeemable preferred stock.................. 475,000
---------
Stockholders' deficit (note 4):
Common stock, no par value, 1,000,000 shares authorized,
246,000 shares issued and outstanding.................. 79,775
Accumulated deficit....................................... (296,967)
---------
Total stockholders' deficit....................... (217,192)
Commitments (note 3)
Total liabilities and stockholders' deficit....... $ 659,121
=========
</TABLE>
See accompanying notes to financial statements.
F-89
<PAGE> 257
WEST COAST ONLINE, INC.
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
<S> <C>
Revenue:
Internet services......................................... $1,354,911
Computer hardware sales................................... 171,818
Other..................................................... 126,394
----------
Total revenue..................................... 1,653,123
----------
Operating expenses:
Internet services operating costs......................... 641,106
Cost of hardware sales.................................... 136,978
Selling, general and administrative....................... 913,743
Depreciation.............................................. 106,185
----------
Total operating expenses.......................... 1,798,012
----------
Loss from operations.............................. (144,889)
Interest expense............................................ (22,772)
----------
Net loss.......................................... (167,661)
Accumulated deficit at beginning of period.................. (129,306)
----------
Accumulated deficit at end of period........................ $ (296,967)
==========
</TABLE>
See accompanying notes to financial statements.
F-90
<PAGE> 258
WEST COAST ONLINE, INC.
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(167,661)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation........................................... 106,185
Provision for bad debts................................ 3,588
Changes in operating assets and liabilities:
Receivables.......................................... (39,945)
Prepaid expenses and other current assets............ 5,197
Other assets......................................... (7,148)
Accounts payable and accrued liabilities............. 12,802
Deferred revenue..................................... 35,944
---------
Net cash used by operating activities............. (51,038)
---------
Cash flows from investing activities -- purchase of
equipment................................................. (154,301)
---------
Cash flows from financing activities:
Proceeds from issuance of redeemable preferred stock...... 250,000
Principal payments under capital lease obligations........ (36,541)
---------
Net cash provided by financing activities......... 213,459
---------
Net increase in cash.............................. 8,120
Cash at beginning of period................................. 17,787
---------
Cash at end of period....................................... $ 25,907
=========
Supplemental disclosure of cash flow information -- cash
paid during the year for interest......................... $ 22,772
=========
Noncash investing and finance activities -- equipment
acquired through capital lease obligations................ $ 67,064
=========
</TABLE>
See accompanying notes to financial statements.
F-91
<PAGE> 259
WEST COAST ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
West Coast Online, Inc. (the Company) was incorporated in the State of
California on January 30, 1996. The Company provides internet access services
and computer hardware sales to customers primarily in California.
As of September 30, 1997, Verio Inc. (Verio) acquired all of the
outstanding common stock of the Company, resulting in 100% ownership.
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 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.
Equipment
Equipment is stated at cost, less accumulated depreciation. Depreciation is
recorded using the straight-line method over the shorter of the estimated useful
lives of the related assets or the lease term, which range from three to five
years. Costs of normal repairs and maintenance are expensed as incurred.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations, including goodwill, when indications of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the estimated fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value, less costs to sell.
Revenue Recognition
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance.
Revenue from hardware sales is recognized upon shipment of the respective
products if the Company's future obligations are not significant and
collectibility is probable.
Income Taxes
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109).
Under SFAS 109, deferred income taxes are recognized for the future tax
consequences of differences between the tax bases of assets and liabilities and
their financial reporting amounts at September 30, 1997 based on enacted tax
laws and statutory rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company has a net operating loss carryforward of approximately $181,000
which expires in 2012. No tax benefit has been recorded by the Company for the
nine months ended September 30, 1997 due to the Company's net loss and the
uncertainty regarding the ultimate utilization of such loss carryforward. A
valuation allowance has been
F-92
<PAGE> 260
WEST COAST ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
recorded for the entire balance of the deferred tax asset related to the
carryforward. Other temporary differences between financial statement and income
tax bases of assets and liabilities are not significant.
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of December 31, 1997 approximate their carrying values
based on their terms and interest rates. The use of different market assumptions
and/or estimation methodologies may have a significant effect on the estimated
fair values.
Customers who operate in California represent substantially all of the
Company's customer base. However, no single customer comprised more than 10% of
accounts receivable or total revenue for the nine months ended September 30,
1997.
(2) EQUIPMENT
Equipment consisted of the following at September 30, 1997:
<TABLE>
<S> <C>
Internet and computer equipment............................. $ 733,411
Furniture and office equipment.............................. 21,312
---------
754,723
Less accumulated depreciation and amortization.............. (230,249)
---------
$ 524,474
=========
</TABLE>
Equipment includes assets held under capital leases with a net book value
of $134,362 at September 30, 1997.
(3) COMMITMENTS
The Company leases certain computer and office equipment under capital
leases. The Company also leases office space under noncancelable leases expiring
at various dates through 2001. Future minimum annual lease payments under
noncancelable operating leases for each of the years ending September 30 are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1998................................................... $ 70,104 $ 72,160
1999................................................... 63,728 36,342
2000................................................... 18,974 10,743
2001................................................... -- 7,162
-------- --------
Total minimum payments............................... $152,806 $126,407
========
Less amount representing interest...................... (24,938)
--------
Present value of net minimum lease payments.......... 127,868
Less current portion................................... (57,874)
--------
$ 69,994
========
</TABLE>
Rent expense for the nine months ended September 30, 1997 totaled $64,820.
F-93
<PAGE> 261
WEST COAST ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) REDEEMABLE PREFERRED STOCK
The Company issued 60,000 Series A and 50,710 Series B shares of
redeemable, convertible preferred stock in 1996 and 1997, respectively, to
Verio. The preferred shares were convertible into common shares on a one for one
basis and were mandatorily redeemable in 2000. On September 30, 1997, in
connection with the Verio Acquisition, as described in Note 1, Verio converted
these preferred shares to common stock.
(5) TRANSACTIONS WITH RELATED PARTY
During the nine months ended September 30, 1997, the Company received
certain network services from Verio Inc. The entire cost of these services
remain in Accounts Payable-Related Party at September 30, 1997 and is included
in internet services and network operating costs.
F-94
<PAGE> 262
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheet of Clark Internet Services,
Inc. as of September 30, 1997, and the related statements of operations and
retained earnings, and cash flows for the year ended September 30, 1997 and the
period ended October 17, 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 Clark Internet Services,
Inc. as of September 30, 1997, and the results of its operations and its cash
flows for the year ended September 30, 1997 and the period ended October 17,
1997 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
February 25, 1998
F-95
<PAGE> 263
CLARK INTERNET SERVICES, INC.
BALANCE SHEET
SEPTEMBER 30, 1997
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents................................. $ 54,293
Trade accounts receivable, net of allowance for doubtful
accounts of $28,154.................................... 438,186
Related party receivable (note 5)......................... 42,104
Prepaid expenses and other................................ 122,894
----------
Total current assets.............................. 657,477
Equipment, net (note 2)..................................... 650,001
Other assets, net........................................... 112,475
----------
Total assets...................................... $1,419,953
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 261,194
Accrued liabilities....................................... 91,474
Salaries and commissions payable.......................... 98,220
Deferred revenue and customer advances.................... 514,555
Current portion of long-term debt (note 3)................ 175,800
----------
Total current liabilities......................... 1,141,243
Long-term debt, net of current portion (note 3)............. 264,950
Total liabilities................................. 1,406,193
Stockholders' equity:
Common stock, no par value, 1,000,000 shares authorized,
860,000 shares issued and outstanding.................. 4,000
Retained earnings......................................... 9,760
----------
Total stockholders' equity........................ 13,760
----------
Commitments (note 4)
Total liabilities and stockholders' equity........ $1,419,953
==========
</TABLE>
See accompanying notes to financial statements.
F-96
<PAGE> 264
CLARK INTERNET SERVICES, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
YEAR ENDED SEPTEMBER 30, 1997 AND PERIOD ENDED OCTOBER 17, 1997
<TABLE>
<CAPTION>
PERIOD ENDED
OCTOBER 17,
1997 1997
---------- ------------
<S> <C> <C>
Revenue:
Internet services......................................... $3,601,491 159,079
Other..................................................... 114,193 48,917
---------- -------
Total revenue..................................... 3,715,684 207,996
---------- -------
Operating expenses:
Internet services......................................... 1,672,046 48,346
Selling, general and administrative....................... 2,053,619 195,610
Depreciation and amortization............................. 139,379 9,547
---------- -------
Total operating expenses.......................... 3,865,044 253,503
---------- -------
Loss from operations.............................. (149,360) (45,507)
Other income (expense):
Interest income........................................... 2,702 (1,054)
Interest expense.......................................... (26,929) --
---------- -------
Net loss.......................................... (173,587) (46,561)
Retained earnings (deficit):
Beginning of period....................................... 183,347 9,760
---------- -------
End of period............................................. $ 9,760 (36,801)
========== =======
</TABLE>
See accompanying notes to financial statements.
F-97
<PAGE> 265
CLARK INTERNET SERVICES, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1997 AND PERIOD ENDED OCTOBER 17, 1997
<TABLE>
<CAPTION>
PERIOD ENDED
OCTOBER 17,
1997 1997
--------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(173,587) (46,561)
Adjustments to reconcile net loss to net cash provided by
operating activities -- depreciation and
amortization........................................... 139,379 9,547
Changes in operating assets and liabilities:
Trade and related party accounts receivable, net....... (362,396) 2,483
Prepaid expenses and other............................. (19,671) 32,793
Accounts payable....................................... 157,360 (78,954)
Accrued liabilities, and salaries and commissions
payable............................................... 92,849 30,677
Deferred revenue and customer advances................. 245,114 30,809
Other assets, net...................................... (61,263) 12,179
--------- -------
Net cash provided (used) by operating
activities...................................... 17,785 (7,027)
Cash flows used by investing activities --
purchases of equipment.................................... (425,477) --
--------- -------
Cash flows used by financing activities:
Proceeds from bank lines of credit........................ 90,000 --
Proceeds from bank loan................................... 375,000 --
Repayment of bank loan.................................... (51,929) --
--------- -------
Net cash provided by financing activities......... 413,071 --
--------- -------
Net increase (decrease) in cash and cash
equivalents..................................... 5,379 (7,027)
Cash and cash equivalents, at beginning of period........... 48,914 54,293
--------- -------
Cash and cash equivalents, at end of period................. $ 54,293 47,266
========= =======
Supplemental disclosures of cash flow information --
cash paid during year for interest........................ $ 26,929 1,053
========= =======
</TABLE>
See accompanying notes to financial statements.
F-98
<PAGE> 266
CLARK INTERNET SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Clark Internet Services, Inc. (the Company) is a provider of internet
access services to businesses and individuals, primarily in the Maryland,
Washington DC, and Northern Virginia regions.
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 revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Effective October 17, 1997, Verio Inc. acquired 51% of the outstanding
common stock of the Company.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
Equipment
Equipment is recorded at cost. Depreciation is provided over the estimated
useful lives of the assets ranging from 3 to 5 years using the straight-line
method.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of (Statement No. 121). Statement No. 121 requires impairment losses to be
recorded on long-lived assets used in operations, including goodwill, when
indicators of impairment are present and the undiscounted future cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. If such assets are impaired, the impairment to be recognized is measured
by the amounts by which the carrying amount of the assets exceeds the fair value
of the assets. Assets to be disposed of are reported at the lower of the
carrying value or fair value, less costs to sell.
Revenue Recognition
Internet services revenue is recognized as the services are provided.
Installation charges and set-up fees are recognized when installation is
completed. The Company records deferred revenue for accounts billed and/or
collected in advance.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109).
SFAS 109 requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
At December 31, 1997, the Company has a net operating loss carryforward for
federal income tax purposes of $235,000 which is available to offset future
federal taxable income, if any, through 2012. Due to the uncertainty regarding
the ultimate utilization of the net operating loss carryforward a valuation
allowance
F-99
<PAGE> 267
CLARK INTERNET SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
has been recorded for the full amount of the deferred tax asset related to the
net operating loss carryforward, which represents the only significant temporary
difference as of September 30, 1997.
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statements purposes. Management estimates that the fair values of all
financial instruments as of September 30, 1997 approximate their carrying values
based on their terms and interest rates. The use of different market assumptions
and/or estimation methodologies may have a significant effect on the estimated
fair values.
(2) EQUIPMENT
Equipment consisted of the following at September 30, 1997:
<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures...................................... $ 337,163
Computer and equipment...................................... 656,496
---------
993,659
Less accumulated depreciation............................... (343,658)
---------
$ 650,001
=========
</TABLE>
Depreciation expense for the year ended September 30, 1997 and the period
ended October 17, 1997 totaled $138,054 and $9,547, respectively.
(3) BANK LINE OF CREDIT AND NOTES PAYABLE
In April 1997, the Company entered into a $200,000 line of credit agreement
with a bank, with interest at the prime rate plus 1.5% (10.0% at September 30,
1997). Borrowings under the line of credit are due in April 1998.
In addition, the Company also borrowed $375,000 from a bank under a loan
secured by the Small Business Administration with interest at the prime rate
plus 2% (10.5% at September 30, 1997). Monthly principal payments of $6,250 are
due through April 2002.
(4) LEASES
The Company leases its facilities under long-term operating leases expiring
at various dates through 2002. Future minimum lease payments consist of the
following at September 30:
<TABLE>
<CAPTION>
<S> <C>
1998........................................................ $363,000
1999........................................................ 182,155
2000........................................................ 42,926
2001........................................................ 25,320
2002........................................................ 13,811
--------
Total minimum lease payments...................... $627,212
========
</TABLE>
Rent expense totaled $484,162 for the year ended September 30, 1997.
(5) TRANSACTION WITH RELATED PARTY
The related party receivable at September 30, 1997 is due from an entity
owned by the Company's Chief Executive Officer, for whom the Company provides
general accounting and administrative services. These amounts were repaid
subsequent to September 30, 1997.
F-100
<PAGE> 268
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheets of ATMnet as of October 31,
1996 and 1997, and the related statements of operations, 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, the financial statements referred to above present fairly,
in all material respects, the financial position of ATMnet as of October 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.
KPMG Peat Marwick LLP
Denver, Colorado
December 13, 1997
F-101
<PAGE> 269
ATMNET
BALANCE SHEETS
OCTOBER 31, 1996 AND 1997
ASSETS
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash...................................................... $ 76,037 11,739
Trade receivables, net of allowance for doubtful accounts
of $30,000 and $25,981................................. 279,871 192,726
Other receivables......................................... 13,646 --
Other..................................................... 56,607 65,886
----------- -----------
Total current assets.............................. 426,161 270,351
Equipment and leasehold improvements, net (note 2).......... 1,404,863 1,120,396
Investment in affiliate (note 3)............................ 87,500 --
Intangible assets, net of accumulated amortization of
$99,758 and $52,952....................................... 181,081 134,273
----------- -----------
Total assets...................................... $ 2,099,605 1,525,020
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,736,880 2,738,070
Accrued liabilities....................................... 162,381 589,794
Due to related parties (note 6)........................... 16,235 41,209
Deferred revenue.......................................... 176,481 115,393
Subordinated notes payable to stockholders and related
parties (note 4)....................................... -- 908,979
Current portion of capital lease obligations (note 7)..... 140,223 150,134
----------- -----------
Total current liabilities......................... 2,232,200 4,543,579
Capital lease obligations, less current portion............. 164,514 14,379
----------- -----------
Total liabilities................................. 2,396,714 4,557,958
Stockholders' deficit (note 5):
Common stock, no par value, 83,000,000 shares authorized;
29,100,000 shares issued and outstanding............... 1,158,532 1,158,532
Accumulated deficit....................................... (1,455,641) (4,191,470)
----------- -----------
Total stockholders' deficit....................... (297,109) (3,032,938)
Commitments (note 7)........................................
----------- -----------
Total liabilities and stockholders' deficit....... $ 2,099,605 1,525,020
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-102
<PAGE> 270
ATMNET
STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Revenue:
Internet services (note 6)................................ $ 1,236,478 $ 2,730,732
Equipment sales........................................... 440,315 513,941
----------- -----------
Total revenue..................................... 1,676,793 3,244,673
----------- -----------
Operating expenses:
Cost of internet services................................. 845,465 1,963,858
Cost of equipment sold.................................... 258,517 381,043
Other operating expenses.................................. 645,710 721,012
Selling, general and administrative....................... 957,253 1,927,589
Depreciation and amortization............................. 343,682 649,510
----------- -----------
Total operating expenses.......................... 3,050,627 5,643,012
----------- -----------
Loss from operations...................................... (1,373,834) (2,398,339)
Other expenses:
Interest expense.......................................... (36,203) (167,864)
Other..................................................... (21,000) (169,626)
----------- -----------
Net loss.......................................... $(1,431,037) $(2,735,829)
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-103
<PAGE> 271
ATMNET
STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED OCTOBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON ACCUMULATED
STOCK DEFICIT TOTAL
---------- ----------- -----------
<S> <C> <C> <C>
BALANCE AS OF NOVEMBER 1, 1995....................... $ 458,200 $ (24,604) $ 433,596
Issuance of common stock for cash.................... 700,332 -- 700,332
Net loss............................................. -- (1,431,037) (1,431,037)
---------- ----------- -----------
BALANCES AS OF OCTOBER 31, 1996...................... 1,158,532 (1,455,641) (297,109)
Net loss............................................. -- (2,735,829) (2,735,829)
---------- ----------- -----------
BALANCES AS OF OCTOBER 31, 1997...................... $1,158,532 $(4,191,470) $(3,032,938)
========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-104
<PAGE> 272
ATMNET
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(1,431,037) $(2,735,829)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization.......................... 343,682 649,510
Provision for doubtful accounts........................ 62,000 58,686
Loss on write-off of investment........................ -- 87,500
Changes in operating assets and liabilities:
Trade receivables.................................... (302,792) 28,459
Other receivables.................................... 46,354 13,646
Other current assets................................. (51,943) (9,279)
Accounts payable..................................... 1,710,981 1,001,190
Accrued liabilities and due to related parties....... 172,852 452,387
Deferred revenue..................................... 171,898 (61,088)
----------- -----------
Net cash provided (used) by operating
activities..................................... 721,995 (514,818)
----------- -----------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements.......... (1,235,719) (318,235)
Investment in affiliates, at cost......................... (87,500) --
----------- -----------
Net cash used by investing activities............. (1,323,219) (318,235)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of subordinated debt............... -- 1,018,979
Proceeds from issuance of common stock.................... 700,332 --
Principal payments on subordinated debt................... -- (110,000)
Principal payments on capital lease obligations........... (114,166) (140,224)
----------- -----------
Net cash provided by financing activities......... 586,166 768,755
----------- -----------
Net decrease in cash.............................. (15,058) (64,298)
Cash, beginning of year..................................... 91,095 76,037
----------- -----------
Cash, end of year........................................... $ 76,037 $ 11,739
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest............................................... $ 36,203 $ 25,765
=========== ===========
Noncash investing and financing activities -- equipment
acquired through capital lease obligations................ $ 345,046 $ --
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-105
<PAGE> 273
ATMNET
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
ATMnet (the Company) was incorporated in the State of California on
February 26, 1997. The Company provides regional internet access services, and
hardware sales to customers mainly in California.
Effective November 5, 1997, Verio Inc. acquired substantially all of the
net assets of the Company.
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 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
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance. Revenue
from hardware sales is recognized upon shipment of the respective products.
Equipment and Leasehold Improvements
Equipment and leasehold improvements, including assets held under capital
leases, is stated at cost, less accumulated depreciation and amortization.
Depreciation and amortization is recorded using the straight-line method over
the shorter of the estimated useful lives of the related assets or the lease
term, which are two or three years. Costs for normal repairs and maintenance are
expensed as incurred.
Investment in Affiliates
Investment in affiliate represents common stock of an affiliate
representing less than a 20% ownership interest which is accounted for using the
cost method.
Intangible Assets
The excess of cost over the fair value of net assets acquired, or goodwill,
and organization costs are amortized using the straight-line method over five
years.
Income Taxes
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109).
Under SFAS 109, deferred income taxes are recognized for the future tax
consequences of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
The Company has a net operating loss carryforward for income tax purposes
of approximately $3,883,000 which expires in 2012. No tax benefit has been
recorded by the Company in fiscal 1996 and 1997 due to the Company's net loss
and the uncertainty regarding the ultimate utilization of such loss
carryforward. A valuation allowance has been recorded for the entire balance of
the deferred tax asset related to the carryforward. Other temporary differences
between financial statement and income tax bases of assets and liabilities are
not significant.
F-106
<PAGE> 274
ATMNET
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1996 AND 1997
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of October 31, 1997 and 1996 approximate their carrying
values based on their terms and interest rates. The use of different market
assumptions and/or estimation methodologies may have a significant effect on the
estimated fair values.
Customers who operate in California represent substantially all of the
Company's customer base and accounts receivable. However, no single customer
comprised more than 5% of accounts receivable or total revenue as of or for the
year ended October 31, 1997 or 1996.
Long-Lived Assets
The Company accounts for long-lived assets under the provisions of
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
(SFAS 121). Statement No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value, less
costs to sell.
Stock-Based Compensation
The Company applies APB Opinion 25 and related interpretations in
accounting for its stock compensation plan. Accordingly, since the Company
grants stock options with exercise prices equal to fair value at the date of
grant, no compensation expense has been recognized in 1996 or 1997. Under
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123), entities are permitted to adopt the fair value method
of accounting for employee stock-based compensation plans. However, SFAS 123
allows an entity to continue using the intrinsic value method under APB Opinion
No. 25, but requires the entity to make pro forma disclosures of net income or
loss as if the fair value method of accounting had been applied.
(2) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment consisted of the following at October 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
---------- ---------
<S> <C> <C>
Internet and computer equipment............................. $1,613,305 1,786,575
Furniture and fixtures...................................... 77,668 133,730
Leasehold improvements...................................... 12,080 100,983
---------- ---------
1,703,053 2,021,288
Less accumulated depreciation............................... (298,190) (900,892)
---------- ---------
$1,404,863 1,120,396
========== =========
</TABLE>
Equipment and leasehold improvements includes assets owned under capital
leases with a net book value of $195,294 and $333,079 at October 31, 1996 and
1997, respectively.
F-107
<PAGE> 275
ATMNET
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1996 AND 1997
(3) INVESTMENT IN AFFILIATE
During fiscal 1996, the Company acquired a 10% interest in Turpike
Corporation for a purchase price of $87,500. The investment was written off in
fiscal 1997.
(4) SUBORDINATED NOTES PAYABLE
Subordinated notes payable as of October 31, 1997 consists of notes payable
to stockholders and related parties, with interest at rates varying from prime
plus 2% (10.5% at October 31, 1997) to 18%, due in June 1998. The notes are
subordinate to all other senior indebtedness of the Company. Interest expense
related to the subordinated notes totaled $104,130 in 1997.
(5) STOCK COMPENSATION PLANS
The Company established a Stock Option Plan in March 1996, whereby. at the
discretion of the Board of Directors (the Board), the Company may grant stock
options to certain key employees of the Company. The option price is determined
by the Board at the time the option is granted, but in no event is less than the
fair market value of the Company's common stock at the date of grant, as
determined by the Board. The options vest over a five year period or, in certain
circumstances, earlier based on the fair value of the Company's common shares,
as defined, and expire ten years from the date of grant. As of October 31, 1997,
no options had been exercised or are exercisable. The weighted-average
contractual life of outstanding options as of October 31, 1997 is approximately
two years.
The following table summarizes option activity for two years ended October
31, 1997:
Options granted during fiscal 1996 at the following exercise price:
<TABLE>
<S> <C>
Options granted during fiscal 1996 at the following exercise
price:
$0.30 per share........................................... 4,410,000
$0.33 per share........................................... 1,000,000
----------
Options outstanding at October 31, 1996..................... 5,410,000
Options cancelled......................................... (1,545,000)
----------
Options outstanding at October 31, 1997..................... 3,865,000
==========
Weighted average exercise price of outstanding options...... $.31
==========
</TABLE>
During the years ended October 31, 1996 and 1997, the per share
weighted-average fair value of stock options granted was $.03 on the date of
grant using the Black-Scholes opinion-pricing model with the following
weighted-average assumptions; no dividends or volatility, risk-free interest
rate of 6%, and expected life of two years. If the Company had determined
compensation expense for the years ended October 31, 1996 and 1997 based on the
fair value of the options at the grant dates under SFAS No. 123, net loss would
increase to $1,595,000 and $2,854,000, respectively.
(6) RELATED PARTY TRANSACTIONS
The Company provides internet services to a company whose founder and CEO
is a shareholder of ATMnet. Revenue earned by ATMnet from this company totaled
$15,523 and $22,581 during the years ended October 31, 1996 and 1997,
respectively.
Amounts due to related parties are for services provided, are non-interest
bearing and are due within one year.
F-108
<PAGE> 276
ATMNET
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1996 AND 1997
(7) LEASES
The Company leases certain computer and office equipment under capital
leases. The Company also leases office space under noncancelable operating
leases expiring at various dates through 2000. Future minimum annual lease
payments under capital and noncancelable operating leases for each of the years
ending October 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ---------
<S> <C> <C>
1998........................................................ $ 161,028 173,868
1999........................................................ 22,524 142,068
2000........................................................ -- 26,209
--------- -------
Total minimum payments.................................... 183,552 342,145
=======
Less amount representing interest........................... (19,039)
---------
Present value of net minimum lease payments............... 164,513
Less current portion........................................ (150,134)
---------
$ 14,379
=========
</TABLE>
Rent expense for the years ended October 31, 1996 and 1997 totaled $72,686
and $168,410, respectively.
F-109
<PAGE> 277
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheets of Global Internet Network
Services, Inc. (wholly-owned by Global Internet.Com Inc.) as of December 31,
1996 and November 26, 1997, and the related statements of operations,
stockholder's equity (deficit), and cash flows for the year ended December 31,
1996 and the period ended November 26, 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 Global Internet Network
Services, Inc. as of December 31, 1996 and November 26, 1997 and, and the
results of its operations and its cash flows for the year ended December 31,
1996 and the period ended November 26, 1997 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
February 20, 1998
F-110
<PAGE> 278
GLOBAL INTERNET NETWORK SERVICES, INC.
(WHOLLY-OWNED BY GLOBAL INTERNET.COM INC.)
BALANCE SHEETS
DECEMBER 31, 1996 AND NOVEMBER 26, 1997
ASSETS
<TABLE>
<CAPTION>
1996 1997
---------- ---------
<S> <C> <C>
Current assets:
Cash...................................................... $ 132,118 30,681
Trade receivables, net of allowance for doubtful accounts
of $59,777 in 1996 and $86,166 in 1997................. 935,979 449,959
Receivables from affiliates (note 3)...................... 40,497 53,542
Inventory................................................. 126,020 102,801
Prepaid expenses and other................................ 60,869 83,323
---------- ---------
Total current assets.............................. 1,295,483 720,306
Equipment, net (note 2)..................................... 557,142 799,179
Other assets................................................ 3,864 3,723
---------- ---------
Total assets...................................... $1,856,489 1,523,208
========== =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 631,660 109,651
Accrued liabilities....................................... 17,996 18,168
Deferred revenue.......................................... 486,167 418,885
Current portion of obligations under capital leases (note
4)..................................................... 37,828 106,720
Due to parent (note 3).................................... 942,098 --
---------- ---------
Total current liabilities......................... 2,115,749 653,424
Capital lease obligations, less current portion (note 4).... 31,687 193,630
---------- ---------
Total liabilities................................. 2,147,436 847,054
---------- ---------
Stockholder's equity (deficit):
Common stock, $1.00 par value, 10,000 shares authorized,
5,000 shares issued and outstanding.................... 5,000 5,000
Additional paid-in capital................................ 245,000 1,412,849
Accumulated deficit....................................... (540,947) (741,695)
---------- ---------
Total stockholder's equity (deficit)................... (290,947) 676,154
---------- ---------
Commitments (note 4)
Total liabilities and stockholder's equity (deficit)... $1,856,489 1,523,208
========== =========
</TABLE>
See accompanying notes to financial statements.
F-111
<PAGE> 279
GLOBAL INTERNET NETWORK SERVICES, INC.
(WHOLLY-OWNED BY GLOBAL INTERNET.COM INC.)
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 AND
PERIOD ENDED NOVEMBER 26, 1997
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Revenue:
Internet services......................................... $1,979,201 2,501,037
Consulting services (note 3).............................. 344,233 564,150
Computer hardware and software sales (note 3)............. 853,396 355,731
National Science Foundation revenue (note 7).............. 440,119 114,982
Other..................................................... 80,401 248,816
---------- ----------
Total revenue..................................... 3,697,350 3,784,716
---------- ----------
Operating expenses:
Internet services operating costs......................... 1,530,020 1,960,653
Cost of hardware and software sales....................... 591,227 292,874
Engineering and network................................... 507,843 425,430
Marketing and selling..................................... 248,986 238,982
General and administrative................................ 956,052 785,960
Depreciation and amortization............................. 259,956 280,445
---------- ----------
Total operating expenses.......................... 4,094,084 3,984,344
---------- ----------
Loss from operations.............................. (396,734) (199,628)
Other income (expense):
Interest expense.......................................... (9,897) (8,229)
Other, net................................................ 43,577 7,109
---------- ----------
Net loss.......................................... $ (363,054) (200,748)
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-112
<PAGE> 280
GLOBAL INTERNET NETWORK SERVICES, INC.
(WHOLLY-OWNED BY GLOBAL INTERNET.COM INC.)
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31, 1996 AND
PERIOD ENDED NOVEMBER 26, 1997
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL STOCKHOLDER'S
COMMON PAID-IN ACCUMULATED EQUITY
STOCK CAPITAL DEFICIT (DEFICIT)
------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1996..................... $5,000 245,000 (177,893) 72,107
Net loss........................................ -- -- (363,054) (363,054)
------ --------- -------- --------
BALANCES AT DECEMBER 31, 1996................... 5,000 245,000 (540,947) (290,947)
Transfer of net assets to parent (note 6)....... -- (101,088) -- (101,088)
Conversion of note payable to parent to equity
(note 6)...................................... -- 1,156,437 -- 1,156,437
Capital contribution by parent (note 6)......... -- 112,500 -- 112,500
Net loss........................................ -- -- (200,748) (200,748)
------ --------- -------- --------
BALANCES AT NOVEMBER 26, 1997................... $5,000 1,412,849 (741,695) 676,154
====== ========= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-113
<PAGE> 281
GLOBAL INTERNET NETWORK SERVICES, INC.
(WHOLLY-OWNED BY GLOBAL INTERNET.COM INC.)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996 AND
PERIOD ENDED NOVEMBER 26, 1997
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(363,054) (200,748)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization.......................... 259,956 280,445
Provision for bad debts................................ 70,445 95,913
Changes in operating assets and liabilities:
Trade receivables.................................... (231,005) 377,062
Inventory............................................ (43,335) 23,219
Other current assets................................. (26,954) (22,454)
Accounts payable..................................... 575,188 (522,009)
Accrued liabilities.................................. (382,897) 172
Deferred revenue..................................... 58,277 (67,282)
Other................................................ (3,241) --
--------- ---------
Net cash used by operating activities............. (86,620) (35,682)
--------- ---------
Cash flows from investing activities -- purchases of
equipment................................................. (336,795) (334,161)
--------- ---------
Cash flows from financing activities:
Capital contribution by parent............................ -- 112,500
Advances by parent........................................ 544,707 214,339
Principal payments made under capital lease obligations... (39,720) (58,433)
--------- ---------
Net cash provided by financing activities......... 504,987 268,406
--------- ---------
Increase (decrease) in cash....................... 81,572 (101,437)
Cash, beginning of year..................................... 50,546 132,118
--------- ---------
Cash, end of year........................................... $ 132,118 30,681
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 10,095 15,681
========= =========
Noncash investing and financing activities:
Equipment acquired through capital lease obligations... $ -- 299,940
========= =========
Transfer of assets to parent........................... $ -- 101,088
========= =========
</TABLE>
See accompanying notes to financial statements.
F-114
<PAGE> 282
GLOBAL INTERNET NETWORK SERVICES, INC.
(WHOLLY-OWNED BY GLOBAL INTERNET.COM INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND NOVEMBER 26, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Global Internet Network Services, Inc. (the Company) is engaged in
providing regional internet access services, software and hardware consulting
and sales to customers in a ten state region. The Company was incorporated in
Nebraska in September 1987, as Midnet Inc., a nonprofit corporation organized to
promote research, education and economic development. On July 15, 1994, Midnet
Inc. became a for profit corporation and was purchased by Global Internet.Com
Inc. (Parent) on August 8, 1994. On March 12, 1997, the Company changed its
corporate name from Midnet Inc. to Global Internet Network Services, Inc.
Effective November 26, 1997, Verio Inc. (Verio) acquired a 100% ownership
interest in the Company. (see note 6).
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 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
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance. Revenue
from consulting services is recognized when services have been rendered. Revenue
from hardware and software sales is recognized upon shipment of the respective
products.
Inventory
Inventory, consisting of systems hardware and software and maintenance
parts and supplies is recorded at the lower of cost (first-in, first-out) or
market.
Equipment
Equipment, including any assets held under capital leases, is recorded at
cost, less accumulated depreciation and amortization. Depreciation and
amortization is recorded using the straight-line method over the estimated
useful lives of the related assets or the lease term, which range from three to
five years. Costs for normal repairs and maintenance are expensed as incurred.
Income Taxes
The Company is included in the tax returns of the Parent. Income taxes are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (SFAS 109). Under SFAS 109,
deferred income taxes are recognized for the future tax consequences of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and statutory rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized.
The Company has a net operating loss carryforward of approximately
$518,000, which expires in 2012. No tax benefit has been recorded by the Company
for 1996 or 1997 due to the Company's net loss and the uncertainty regarding the
ultimate utilization of such loss in the consolidated income tax returns of the
Parent. A valuation allowance has been recorded for the entire balance of the
deferred tax asset related to the
F-115
<PAGE> 283
GLOBAL INTERNET NETWORK SERVICES, INC.
(WHOLLY-OWNED BY GLOBAL INTERNET.COM INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company's net loss. Other temporary differences between financial statement and
income tax bases of assets and liabilities are not significant.
Concentration of Credit Risk
The Company provides unsecured credit to customers in the normal course of
business. Failure of the customers to pay could result in losses up to the
recorded receivable balances. The Company did not have any customers that
represent greater than 5% of total revenue for the year ended December 31, 1996
and the period ended November 26, 1997, respectively.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121). This
statement was effective for financial statements for fiscal years beginning
after December 15, 1995. Statement No. 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at lower of the carrying amount or
fair value less costs to sell. SFAS 121 did not have a significant effect on the
Company's financial position or results of operations in 1997 and 1996.
(2) EQUIPMENT
Equipment is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 26,
1996 1997
------------ ------------
<S> <C> <C>
Internet and computer equipment............................ $821,921 1,342,321
Furniture and office equipment............................. 137,847 150,254
Leasehold improvements..................................... 1,228 2,001
-------- ---------
960,996 1,494,576
Less accumulated depreciation and amortization............. (403,854) (695,397)
-------- ---------
$557,142 799,179
======== =========
</TABLE>
(3) TRANSACTIONS WITH PARENT
Amounts due to Parent represent noninterest bearing cash transfers from the
Parent (see note 6).
Hardware and software sales and consulting revenue from affiliates of the
Parent for the year ended December 31, 1996 and the period ended November 27,
1997 were $92,273 and $561,438, respectively.
(4) LEASES
The Company leases certain internet and computer equipment under capital
leases. At December 31, 1996 and November 26, 1997, leased equipment was
included in internet and computer equipment with net book values of $80,117 and
$367,003, respectively. The Company also leases office space under a
noncancelable operating lease expiring in November 2002.
F-116
<PAGE> 284
GLOBAL INTERNET NETWORK SERVICES, INC.
(WHOLLY-OWNED BY GLOBAL INTERNET.COM INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum annual lease payments under capital and noncancelable
operating leases for years ending November 30 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ---------
<S> <C> <C>
1998........................................................ $ 131,748 47,634
1999........................................................ 116,448 50,016
2000........................................................ 95,435 52,516
2001........................................................ -- 55,142
2002........................................................ -- 57,899
--------- -------
Total minimum payments.................................... 343,631 263,207
=======
Less amount representing interest........................... (43,281)
---------
Present value of net minimum lease payments............... 300,350
Less current portion........................................ (106,720)
---------
$ 193,630
=========
</TABLE>
Rent expense for the year ended December 31, 1996 and the period ended
November 26, 1997 was $71,738 and $63,724, respectively.
(5) EMPLOYEE BENEFIT PLAN
The Parent has a 401(k) (the Plan) covering all employees of the Company
who meet certain eligibility requirements. Employer contributions are not
required and the Parent did not make any contributions to the Plan during the
year ended December 31, 1996 and the period ended November 26, 1997.
(6) STOCKHOLDER'S EQUITY
In connection with the acquisition of common stock of the Company by Verio
Inc. (Verio) amounts due to parent totaling $1,156,437 were converted to equity
and the Parent made a cash contribution to the Company in the amount of
$112,500.
Prior to the Verio acquisition in November 1997, the Company transferred
certain net assets of a division to the Parent in the amount of $101,088, which
division was not acquired by Verio.
(7) NATIONAL SCIENCE FOUNDATION GRANTS
The Company receives grant revenue under contracts with the National
Science Foundation (NSF) to provide network connections to certain
not-for-profit educational institutions. Grant revenue is recognized ratably
over the term of the contract, which is generally twelve months. Grant revenue
amounted to $440,119 and $114,982 for the year ended December 31, 1996 and the
period ended November 26, 1997, respectively. Total amounts receivable at
December 31, 1996 and November 26, 1997 were $65,858 and $16,439, respectively.
F-117
<PAGE> 285
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheets of the Pennsylvania
Research Partnership Network (PREPnet) as of November 30, 1996 and 1997, and the
related statements of operations and owners' deficit, and cash flows for the
years then ended and the period ended December 24, 1997. These financial
statements are the responsibility of PREPnet'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 the Pennsylvania Research
Partnership Network (PREPnet) as of November 30, 1996 and 1997, and the results
of its operations and its cash flows for the years then ended and for the period
ended December 24, 1997 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Denver, Colorado
February 20, 1998
F-118
<PAGE> 286
THE PENNSYLVANIA RESEARCH PARTNERSHIP NETWORK
(PREPNET)
BALANCE SHEETS
NOVEMBER 30, 1996 AND 1997
ASSETS
<TABLE>
<CAPTION>
1996 1997
----------- ---------
<S> <C> <C>
Current assets:
Trade receivables, net of allowance for doubtful accounts
of $14,631 and $13,313, respectively................... $ 73,943 $ 102,041
Prepaid expenses and other................................ 1,769 15,409
----------- ---------
Total current assets.............................. 75,712 117,450
Equipment, net (note 2)..................................... 200,538 138,008
----------- ---------
Total assets...................................... $ 276,250 $ 255,458
=========== =========
LIABILITIES AND OWNER'S DEFICIT
Current liabilities:
Accounts payable.......................................... $ 88,639 $ 132,039
Accrued liabilities....................................... 44,555 3,020
Current portion of obligations under capital leases (note
3)..................................................... 57,468 56,262
Deferred revenue.......................................... 1,084,501 683,371
----------- ---------
Total current liabilities......................... 1,275,163 874,692
Capital lease obligations, less current portion (note 3).... 55,502 --
----------- ---------
Total liabilities................................. 1,330,665 874,692
Owners' deficit............................................. (1,054,415) (619,234)
Commitments (note 3)
----------- ---------
Total liabilities and owner's deficit............. $ 276,250 $ 255,458
=========== =========
</TABLE>
See accompanying notes to financial statements.
F-119
<PAGE> 287
THE PENNSYLVANIA RESEARCH PARTNERSHIP NETWORK
(PREPNET)
STATEMENTS OF OPERATIONS AND OWNERS' DEFICIT
YEARS ENDED NOVEMBER 30, 1996 AND 1997 AND PERIOD ENDED DECEMBER 24, 1997
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 24,
1996 1997 1997
----------- ----------- ------------
<S> <C> <C> <C>
Revenue:
Internet services.................................... $ 2,027,682 $ 2,026,439 $ 156,459
Grant revenue (note 4)............................... 194,343 98,711 --
Other................................................ 6,309 22,477 --
----------- ----------- ----------
Total revenue................................ 2,228,334 2,147,627 156,459
----------- ----------- ----------
Costs and expenses:
Internet services operating costs.................... 588,543 792,684 80,972
Selling, general and administrative (note 5)......... 831,230 773,174 64,625
Depreciation......................................... 92,251 121,192 8,285
----------- ----------- ----------
Total costs and expenses..................... 1,512,024 1,687,050 153,882
----------- ----------- ----------
Earnings from operations..................... 716,310 460,577 2,577
Interest expense, net.................................. (18,331) (11,261) (938)
----------- ----------- ----------
Net earnings................................. 697,979 449,316 1,639
Owners' deficit at beginning of period................. (726,569) (1,054,415) (619,234)
Net advances to owners................................. (1,025,825) (14,135) (23,911)
----------- ----------- ----------
Owners' deficit at end of period....................... $(1,054,415) $ (619,234) $ (641,506)
=========== =========== ==========
Pro forma information:
Historical net earnings.............................. $ 697,979 $ 449,316 $ 1,639
Pro forma adjustment for income tax expense.......... (265,000) (171,000) (600)
----------- ----------- ----------
Pro forma net earnings....................... $ 432,979 $ 278,316 $ 1,039
=========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-120
<PAGE> 288
THE PENNSYLVANIA RESEARCH PARTNERSHIP NETWORK
(PREPNET)
STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 1996 AND 1997 AND PERIOD ENDED DECEMBER 24, 1997
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 24,
1996 1997 1997
----------- --------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings........................................ $ 697,979 $ 449,316 $ 1,639
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation..................................... 92,251 121,192 8,285
Provision for bad debts.......................... 14,631 13,313 --
Changes in operating assets and liabilities:
Trade receivables.............................. 58,406 (41,411) (38,747)
Prepaid expenses and other assets.............. -- (13,640) 6,294
Accounts payable and accrued liabilities....... 100,318 1,865 (5,400)
Deferred revenue............................... 178,313 (401,130) 57,131
----------- --------- ---------
Net cash provided by operating activities... 1,141,898 129,505 29,202
----------- --------- ---------
Cash flows from investing activities -- purchase of
equipment........................................... (61,987) (58,662) --
----------- --------- ---------
Cash flows from financing activities:
Repayments of capital lease obligations............. (54,086) (56,708) (5,291)
Net advances to owners.............................. (1,025,825) (14,135) (23,911)
----------- --------- ---------
Net cash used by financing activities....... (1,079,911) (70,843) (29,202)
----------- --------- ---------
Net change in cash and cash at beginning and
end of period............................. $ -- $ -- $ --
=========== ========= =========
Supplemental disclosure of cash flow
information -- cash paid for interest............... $ 18,331 $ 11,261 $ 938
=========== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-121
<PAGE> 289
THE PENNSYLVANIA RESEARCH PARTNERSHIP NETWORK
(PREPNET)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
The accompanying financial statements include the accounts of the
Pennsylvania Research Partnership Network (PREPnet), the data communications
network of a consortium of research institutions in Pennsylvania. A joint
venture between Carnegie Mellon University and the University of Pittsburgh
serves as the legal entity and coordinator of the consortium. The accompanying
financial statements have been prepared assuming that PREPnet had been operated
separately as of December 1, 1995 and thereafter. PREPnet provides internet
services to businesses, educational institutions, not-for-profit organizations,
and individual subscribers.
Effective December 24, 1997, the net assets of PREPnet were acquired by
Verio Inc. in a purchase business combination.
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 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
Internet services are recognized as the services are provided. PREPnet
records deferred revenue for amounts billed and/or collected in advance.
Equipment
Equipment, including any assets held under capital leases, is stated at
cost, less accumulated depreciation. Depreciation is recorded using the
straight-line method over the estimated useful lives of the related assets or
the lease term, which is 3 years. Costs for normal repairs and maintenance are
expensed as incurred.
Long-Lived Assets
PREPnet evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). Statement No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
Income Taxes
The operations of PREPnet are included in the income tax returns of the
joint venture, which is a non-profit entity and is exempt from income taxes.
However, pro forma information has been included in the accompanying statement
of operations to reflect a pro forma adjustment for income tax expense as if
PREPnet had been a separate taxable entity subject to federal and state income
taxes for all periods presented.
F-122
<PAGE> 290
THE PENNSYLVANIA RESEARCH PARTNERSHIP NETWORK
(PREPNET)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statements purposes. Management estimates that the fair values of all
financial instruments as of November 30, 1996 and 1997 approximate their
carrying values based on their terms and interest rates. The use of different
market assumptions and/or estimation methodologies may have a significant effect
on the estimated fair values.
(2) EQUIPMENT
Equipment consisted of the following at November 30:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Internet and computer equipment............................. $ 321,434 $ 376,014
Furniture and office equipment.............................. 5,854 9,936
--------- ---------
327,288 385,950
Less accumulated depreciation and amortization.............. (126,750) (247,942)
--------- ---------
$ 200,538 $ 138,008
========= =========
</TABLE>
(3) COMMITMENTS
PREPnet leases certain computer and office equipment under capital leases.
PREPnet also leases office space under noncancelable operating leases expiring
at various dates through 2001.
Future minimum annual lease payments under capital and noncancelable
operating leases for each of the years ending November 30 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1998........................................................ $ 58,810 $ 50,731
1999........................................................ -- 50,341
2000........................................................ -- 27,867
2001........................................................ -- 49,171
-------- --------
Total minimum payments.................................... 58,810 $178,110
========
Less amount representing interest........................... (2,548)
--------
Present value of net minimum lease payments............... 56,262
Less current portion........................................ (56,262)
--------
$ --
========
</TABLE>
Rent expense for the years ended November 30, 1996 and 1997 and the period
ended December 24, 1997 was $47,674, $73,218 and $6,102, respectively.
(4) GRANT REVENUE
PREPnet receives grant revenue from the National Science Foundation and
other government agencies to provide network connections to certain
not-for-profit educational institutions. Grant revenue is recognized ratably
over the term of the contract, which is generally twelve months. Total deferred
grant revenue at November 30, 1996 was $71,667.
F-123
<PAGE> 291
THE PENNSYLVANIA RESEARCH PARTNERSHIP NETWORK
(PREPNET)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) RELATED PARTY TRANSACTIONS
Carnegie Mellon University provides administrative support and use of
facilities to PREPnet and allocates the cost of these services to the entity.
Such allocations totalled approximately $69,188 and $81,886 for the years ended
November 30, 1996 and 1997, respectively.
F-124
<PAGE> 292
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheets of Monumental Network
Systems, Inc. as of December 31, 1996 and 1997, and the related statements of
operations, 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Monumental Network Systems,
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.
KPMG Peat Marwick LLP
Denver, Colorado
February 25, 1998
F-125
<PAGE> 293
MONUMENTAL NETWORK SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
ASSETS
<TABLE>
<CAPTION>
1996 1997
--------- -----------
<S> <C> <C>
Current assets:
Cash...................................................... $ 63,693 $ --
Trade receivables, net of allowance for doubtful accounts
of $15,363 and $41,207................................. 138,263 214,440
--------- -----------
Total current assets.............................. 201,956 214,440
Equipment, net (note 2)..................................... 359,327 440,406
Other assets, net........................................... 17,664 66,562
--------- -----------
Total assets...................................... $ 578,947 $ 721,408
========= ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 186,526 $ 258,319
Accrued liabilities....................................... 23,052 163,436
Current portion of notes payable (note 3):
Related party.......................................... 30,025 132,954
Other.................................................. 9,789 49,694
Current portion of obligations under capital lease (note
4)..................................................... 70,736 82,194
Deferred revenue.......................................... 326,924 573,057
Cash overdraft............................................ -- 166,157
--------- -----------
Total current liabilities......................... 647,052 1,425,811
Notes payable, less current portion (note 3)................ 8,915 21,067
Capital lease obligations, less current portion (note 4).... 114,764 97,208
--------- -----------
Total liabilities................................. 770,731 1,544,086
Stockholders' deficit:
Common stock, $1.00 par value, 500,000 shares authorized,
300,944 and 302,779 shares issued and outstanding as of
December 31, 1996 and 1997............................. 300,944 302,779
Additional paid-in capital................................ 197,494 199,329
Accumulated deficit....................................... (690,222) (1,324,786)
--------- -----------
Total stockholders' deficit....................... (191,784) (822,678)
Commitments (note 4)
--------- -----------
Total liabilities and stockholders' deficit....... $ 578,947 $ 721,408
========= ===========
</TABLE>
See accompanying notes to financial statements.
F-126
<PAGE> 294
MONUMENTAL NETWORK SYSTEMS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Revenue:
Internet services......................................... $1,250,789 $2,425,121
Computer hardware and software sales...................... 95,557 41,733
Other..................................................... 24,197 4,653
---------- ----------
Total revenue..................................... 1,370,543 2,471,507
---------- ----------
Operating expenses:
Internet services operating costs......................... 385,439 743,524
Cost of hardware and software sales....................... 198,486 417,559
Selling, general and administrative....................... 1,246,716 1,756,956
Depreciation.............................................. 74,607 172,092
---------- ----------
Total operating expenses.......................... 1,905,248 3,090,131
---------- ----------
Loss from operations.............................. (534,705) (618,624)
Interest expense, net....................................... 18,448 15,940
---------- ----------
Net loss.......................................... $ (553,153) $ (634,564)
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-127
<PAGE> 295
MONUMENTAL NETWORK SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
------------------ PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1996.............. 114,015 $114,015 $ -- $ (137,069) $ (23,054)
Issuance of common shares for cash....... 100,000 100,000 100,000 -- 200,000
Issuance of common shares for services or
equipment.............................. 86,929 86,929 97,494 -- 184,423
Net loss................................. -- -- -- (553,153) (553,153)
------- -------- -------- ----------- ---------
BALANCES AT DECEMBER 31, 1996............ 300,944 300,944 197,494 (690,222) (191,784)
Issuance of common shares for cash....... 1,000 1,000 1,000 -- 2,000
Issuance of common shares for services... 835 835 835 -- 1,670
Net loss................................. -- -- -- (634,564) (634,564)
------- -------- -------- ----------- ---------
BALANCES AT DECEMBER 31, 1997............ 302,779 $302,779 $199,329 $(1,324,786) $(822,678)
======= ======== ======== =========== =========
</TABLE>
See accompanying notes to financial statements.
F-128
<PAGE> 296
MONUMENTAL NETWORK SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(553,153) $(634,564)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation........................................... 74,607 172,092
Provision for bad debts................................ 15,363 170,634
Changes in operating assets and liabilities:
Trade receivables.................................... (127,442) (246,811)
Other assets......................................... (15,691) (48,898)
Accounts payable..................................... 120,414 71,793
Accrued liabilities.................................. 13,704 140,384
Deferred revenue..................................... 278,172 246,133
--------- ---------
Net cash used by operating activities............. (194,026) (129,237)
--------- ---------
Cash flows from investing activities -- purchases of
equipment................................................. (142,367) (178,377)
--------- ---------
Cash flows from financing activities:
Net change in cash overdraft.............................. -- 166,157
Borrowings under note payable to related parties.......... 30,848 130,000
Principal payments on note payable to related parties..... (823) (27,071)
Borrowings under notes payable............................ 18,704 66,229
Repayments of notes payable............................... -- (14,172)
Principal payments on capital lease obligations........... (36,824) (80,892)
Issuance of common stock.................................. 384,423 3,670
--------- ---------
Net cash provided by financing activities......... 396,328 243,921
--------- ---------
Increase (decrease) in cash....................... 59,935 (63,693)
Cash at beginning of year................................... 3,758 63,693
--------- ---------
Cash at end of year......................................... $ 63,693 $ --
========= =========
Supplemental disclosure of cash flow information -- cash
paid during the year for interest......................... $ 18,739 $ 16,508
========= =========
Noncash investing and financing activities -- equipment
acquired through capital lease obligations................ $ 219,242 $ 74,794
========= =========
</TABLE>
See accompanying notes to financial statements.
F-129
<PAGE> 297
MONUMENTAL NETWORK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Monumental Network Systems, Inc. (the Company) was incorporated in the
State of Virginia on April 13, 1994. The Company's business consists of
providing regional internet access services, hardware and software sales, and
consulting to customers in Virginia, Maryland and the Washington D.C. area.
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 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.
Effective December 31, 1997, Verio Inc. acquired all of the outstanding
common stock of the Company.
Equipment
Equipment, including any assets held under capital leases, is stated at
cost, less accumulated depreciation. Depreciation is recorded using the
straight-line method over the estimated useful lives of the related assets, or
over the lease term, which range from three to seven years. Costs for normal
repairs and maintenance are expensed as incurred.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). Statement No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at lower of the carrying amount or fair value less
costs to sell.
Revenue Recognition
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance.
Revenue from consulting services is recognized when services have been
rendered.
Revenue from hardware and software sales is recognized upon shipment of the
respective products, if significant future vendor obligations do not exist and
collectibility is probable.
Income Taxes
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109).
Under SFAS 109, deferred income taxes are recognized for the future tax
consequences of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
F-130
<PAGE> 298
MONUMENTAL NETWORK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of December 31, 1996 and 1997 approximate their
carrying values based on their terms and interest rates. The use of different
market assumptions and/or estimation methodologies may have a significant effect
on the estimated fair values.
Customers who operate in Virginia, Maryland and the Washington D.C. area
represent substantially all of the Company's customer base. No single customer
comprised more than 10% of accounts receivable or total revenue as of or for the
years ended December 31, 1996 or 1997.
Stock-Based Compensation
The Company accounts for its stock-based employee compensation plan using
the intrinsic value based method prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations (APB 25). The Company has provided pro forma disclosures of net
loss as if the fair value based method of accounting for the plan, as prescribed
by Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123), had been applied. Pro forma disclosures
include the effects of employee stock options granted during the years ended
December 31, 1996 and 1997.
(2) EQUIPMENT
Equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
-------- ---------
<S> <C> <C>
Equipment................................................... $413,615 $ 642,498
Furniture and office equipment.............................. 39,310 55,505
Leasehold improvements...................................... -- 8,093
-------- ---------
452,925 706,096
Less accumulated depreciation............................... (93,598) (265,690)
-------- ---------
$359,327 $ 440,406
======== =========
</TABLE>
Equipment includes assets held under capital leases with a net book value
of $198,445 and $201,745 at December 31, 1996 and 1997, respectively.
Depreciation expense totaled $74,607 and $172,092 for the years ended December
31, 1996 and 1997, respectively.
(3) DEBT
Notes payable consists of the following as of December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Notes payable with interest rates ranging from 8.25% to
8.39%, secured by vehicles due through 2002............... $14,319 $ 34,625
Unsecured notes payable to vendors with interest at 15% due
in 1998................................................... 4,385 36,136
------- --------
18,704 70,761
Less current portion........................................ (9,789) (49,694)
------- --------
$ 8,915 $ 21,067
======= ========
</TABLE>
F-131
<PAGE> 299
MONUMENTAL NETWORK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During 1996, the Company issued notes payable to stockholders of the
Company in the amount of $30,848, with interest at 6%, and monthly payments of
principal and interest due in various dates through 1998. The total unpaid
balance as of December 31, 1997 was $30,025.
During 1997, the Company issued additional notes payable to stockholders of
the Company totaling $130,000, which bear interest at 9%, with interest payable
annually, and are due on demand.
(4) COMMITMENTS
The Company leases certain computer and office equipment under capital
leases. The Company also leases office space under noncancelable operating
leases expiring at various dates through 2001. Future minimum annual lease
payments under capital and noncancelable operating leases for each of the years
ending December 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1998........................................................ $103,978 $29,132
1999........................................................ 66,919 5,736
2000........................................................ 39,031 1,710
2001........................................................ 3,818 --
-------- -------
Total minimum payments.................................... 213,746 $36,578
=======
Less amount representing interest........................... (34,344)
--------
Present value of net minimum lease payments............... 179,402
Less current portion........................................ (82,194)
--------
$ 97,208
========
</TABLE>
Rent expense for the years ended December 31, 1996 and 1997 was $38,967 and
$53,084, respectively.
(5) INCOME TAXES
As of December 31, 1997, the Company has a net operating loss carryforward
of approximately $470,000 which will expire in 2012, if not utilized. A
valuation allowance has been recorded for the entire deferred tax asset related
primarily to the net operating loss carryforward due to the uncertainty relating
to the realization of the benefit of the deferred tax asset in the future.
(6) STOCK OPTION PLAN
The Company's 1997 Option Plan (the Plan) was adopted by the Board of
Directors and approved by the stockholders of the Company on January 1, 1997.
The Plan provides that salaried officers or key employees, non-employee
directors, and consultants who provide services to the Company may, at the
discretion of the plan administrator, be granted Incentive or Non-statutory
stock options to purchase shares of common stock. 200,000 shares of the
Company's common stock have been authorized for issuance under the Plan, of
which 11,872 incentive stock options were granted in 1997, with an exercise
price of $2.00 per share. None of the options were exercised or canceled during
1997.
Options vest 25% on the first anniversary of the option grant date and 25%
on each of the following three anniversary dates. As of December 31, 1997, no
options were vested or exercisable. The weighted average contractual term of
outstanding options was approximately 9 years at December 31, 1997.
The per share weighted-average fair value of stock options granted was $.33
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions; expected dividend yield
F-132
<PAGE> 300
MONUMENTAL NETWORK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
0%, risk-free interest rate of 6%, and expected life of three years. If the
Company determined compensation expense in 1997 based on the fair value of the
options at the grant date under SFAS No. 123, net loss would not have been
significantly different from the historical results of operations other than for
compensation expense recognized for options granted at less than fair value, as
discussed below.
None of the incentive stock option shares were exercisable or vested as of
December 31, 1997. However, in accordance with the acquisition agreement between
the Company and Verio Inc., Monumental Network Systems, Inc. purchased the
11,872 options outstanding as of December 31,1997 at fair market value, less the
exercise price per share, and recorded a charge to operations of $84,152.
F-133
<PAGE> 301
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheets of Internet Servers, Inc.
as of December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for the period from inception (August 23,
1995) to 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 Internet Servers, Inc. as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for the period from inception (August 23, 1995) to December 31, 1995 and the
years ended December 31, 1996 and 1997 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
March 2, 1998
F-134
<PAGE> 302
INTERNET SERVERS, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
ASSETS
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 18,021 $1,161,510
Receivables:
Trade, net of allowance for doubtful accounts of
$11,029 in 1997....................................... 98,675 220,571
Employees.............................................. -- 67,000
Prepaid expenses and other................................ -- 85,478
-------- ----------
Total current assets.............................. 116,696 1,534,559
Equipment, net (note 2)..................................... 484,240 714,205
-------- ----------
Total assets...................................... $600,936 $2,248,764
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 35,061 $ 118,241
Accrued liabilities....................................... 11,731 159,366
Income taxes payable...................................... 111,314 316,456
Deferred revenue.......................................... -- 14,388
-------- ----------
Total current liabilities......................... 158,106 608,451
Stockholders' equity (note 5):
Common stock, no par value, 100,000 shares authorized,
10,895 and 11,092 shares issued and outstanding........ 70,918 426,129
Retained earnings......................................... 371,912 1,214,184
-------- ----------
Total stockholders' equity........................ 442,830 1,640,313
Commitments (note 4)
-------- ----------
Total liabilities and stockholders' equity........ $600,936 $2,248,764
======== ==========
</TABLE>
See accompanying notes to financial statements.
F-135
<PAGE> 303
INTERNET SERVERS, INC.
STATEMENTS OF OPERATIONS
PERIOD FROM INCEPTION (AUGUST 23, 1995) TO DECEMBER 31, 1995 AND
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 23,
1995) TO
DECEMBER 31,
1995 1996 1997
------------ ---------- ----------
<S> <C> <C> <C>
Revenue:
Enhanced services................................... $48,380 $1,507,875 $3,476,045
Internet services................................... -- -- 704,187
Other............................................... 2,520 -- 211,962
------- ---------- ----------
Total revenue............................... 50,900 1,507,875 4,392,194
======= ========== ==========
Operating costs and expenses:
Enhanced and internet services operating costs...... 8,240 631,111 1,820,757
Selling, general and administrative................. 35,698 166,751 721,337
Depreciation........................................ 5,728 90,343 259,984
------- ---------- ----------
Total costs and expenses.................... 49,666 888,205 2,802,078
------- ---------- ----------
Earnings from operations.................... 1,234 619,670 1,590,116
Other income, net..................................... -- 322 26,215
------- ---------- ----------
Earnings before income taxes................ 1,234 619,992 1,616,331
Income tax expense (note 3)........................... -- (111,314) (602,059)
------- ---------- ----------
Net earnings................................ $ 1,234 $ 508,678 $1,014,272
======= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-136
<PAGE> 304
INTERNET SERVERS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM INCEPTION (AUGUST 23, 1995) TO DECEMBER 31, 1995 AND
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK
------------------ RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ -------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCES AT INCEPTION......................... -- $ -- $ -- $ --
Issuances of common stock for cash............ 9,800 13,000 -- 13,000
Net earnings.................................. -- -- 1,234 1,234
------ -------- ---------- ----------
BALANCES AT DECEMBER 31, 1995................. 9,800 13,000 1,234 14,234
Issuance of common stock for services......... 1,095 57,918 -- 57,918
Dividends paid in cash........................ -- -- (138,000) (138,000)
Net earnings.................................. -- -- 508,678 508,678
------ -------- ---------- ----------
BALANCES AT DECEMBER 31, 1996................. 10,895 70,918 371,912 442,830
Issuance of common stock for services......... 197 355,211 -- 355,211
Dividends paid in cash........................ -- -- (172,000) (172,000)
Net earnings.................................. -- -- 1,014,272 1,014,272
------ -------- ---------- ----------
BALANCES AT DECEMBER 31, 1997................. 11,092 $426,129 $1,214,184 $1,640,313
====== ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-137
<PAGE> 305
INTERNET SERVERS, INC.
STATEMENTS OF CASH FLOWS
PERIOD FROM INCEPTION (AUGUST 23, 1995) TO DECEMBER 31, 1995 AND
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 23,
1995) TO
DECEMBER 31,
1995 1996 1997
------------ --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings......................................... $ 1,234 $ 508,678 $1,014,272
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation...................................... 5,728 90,343 259,984
Provision for bad debts........................... -- -- 58,371
Common stock issued for services.................. -- 57,918 355,211
Changes in operating assets and liabilities:
Receivables..................................... (12,611) (86,064) (247,267)
Prepaid expenses and other...................... -- -- (85,478)
Accounts payable................................ 13,224 21,837 83,180
Accrued liabilities............................. 4,896 6,835 147,635
Income taxes payable............................ -- 111,314 205,142
Deferred revenue................................ -- -- 14,388
-------- --------- ----------
Net cash provided by operating activities.... 12,471 710,861 1,805,438
-------- --------- ----------
Cash flows from investing activities -- purchases of
equipment............................................ (35,144) (545,167) (489,949)
-------- --------- ----------
Cash flows from financing activities:
Borrowings on debt................................... 7,000 -- --
Repayments of debt................................... -- (7,000) --
Proceeds from issuance of common stock............... 13,000 -- --
Dividends............................................ -- (138,000) (172,000)
Net change in cash overdraft......................... 2,673 (2,673) --
-------- --------- ----------
Net cash provided (used) by financing
activities................................. 22,673 (147,673) (172,000)
-------- --------- ----------
Increase in cash and cash equivalents........ -- 18,021 1,143,489
Cash and cash equivalents at beginning of period....... -- -- 18,021
-------- --------- ----------
Cash and cash equivalents at end of period............. $ -- $ 18,021 $1,161,510
======== ========= ==========
Supplemental disclosure of cash flow information --
cash paid during the year for income taxes........... $ -- $ 40,000 $ 349,743
======== ========= ==========
</TABLE>
See accompanying notes to financial statements.
F-138
<PAGE> 306
INTERNET SERVERS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Internet Servers, Inc. (the Company) was incorporated in the State of Utah
on August 23, 1995. The Company's business consists of providing regional
internet enhanced services and consulting to customers in Utah and throughout
the Western states.
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 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.
Effective December 31, 1997, Verio Inc. acquired 100% of the outstanding
common stock of the Company.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue related to enhanced and internet services is recognized as the
services are provided. Enhanced services consists primarily of web hosting
services to customers. The Company records deferred revenue for accounts billed
and/or collected in advance.
Revenue from hardware and software sales is recognized upon shipment of the
respective products if the Company's future obligations are not significant and
collectibility is probable.
Equipment
Equipment is stated at cost, less accumulated depreciation. Depreciation is
provided over the estimated useful lives of the assets ranging from three to
seven years using the straight-line method. Costs for normal repairs and
maintenance are expensed as incurred.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations including goodwill when indications of impairment are
present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
impaired the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the estimated fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value less costs to sell.
Income Taxes
From inception to September 1, 1996, the Company elected to be treated as a
subchapter S Corporation for income tax purposes. Accordingly, taxable income
through September 1, 1996 was included in the income tax returns of the
shareholders. On September 1, 1996, the Company converted to a C Corporation.
F-139
<PAGE> 307
INTERNET SERVERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109).
SFAS 109 requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the difference is expected to reverse.
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of December 31, 1996 and 1997 approximate their
carrying values based on their terms and interest rates. The use of different
market assumptions and/or estimation methodologies may have a significant effect
on the estimated fair values.
Customers who operate in Utah represent substantially all of the Company's
customer base and accounts receivable. However, no single customer comprised
more than 10% of accounts receivable or total revenue as of or for the years
ended December 31, 1995, 1996 or 1997.
(2) EQUIPMENT
Equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Internet and computer equipment............................. $561,296 $1,044,691
Furniture and office equipment.............................. 19,015 25,569
-------- ----------
580,311 1,070,260
Less accumulated depreciation and amortization.............. (96,071) (356,055)
-------- ----------
$484,240 $ 714,205
======== ==========
</TABLE>
(3) INCOME TAXES
Income tax expense consists of the following for the years ended December
31:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Current:
Federal...................................... $ 91,314 $548,794
State........................................ 20,000 53,265
-------- --------
$111,314 $602,059
======== ========
</TABLE>
Income tax expense for the years ended December 31 differs from the amounts
computed using the federal statutory tax rate of 34% to earnings before income
taxes as follows:
<TABLE>
<CAPTION>
1996 1997
--------- --------
<S> <C> <C>
Expected tax expense........................................ $ 210,797 $549,553
State income taxes, net of federal benefit.................. 20,460 53,341
S Corporation taxable income................................ (120,693) --
Other....................................................... 750 (835)
--------- --------
Actual income tax expense......................... $ 111,314 $602,059
========= ========
</TABLE>
F-140
<PAGE> 308
INTERNET SERVERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Temporary differences in the bases of assets and liabilities for financial
statement and income tax purposes are not significant as of December 31, 1996
and 1997.
(4) COMMITMENTS
The Company leases certain computer equipment and office space under
noncancelable operating leases expiring at various dates through 2000. Future
minimum annual lease payments under noncancelable operating leases for each of
the years ending December 31 are as follows:
<TABLE>
<S> <C>
1998.............................................. $359,139
1999.............................................. 345,684
2000.............................................. 148,654
--------
Total minimum payments............................ $853,477
========
</TABLE>
Rent expense for the years ended December 31, 1996 and 1997 was $14,500 and
$241,402, respectively.
(5) STOCKHOLDERS' EQUITY
On October 21, 1996, the Company entered into an employment agreement with
an officer. The agreement included a compensation and benefit package which also
included a long-term incentive provision consisting of the granting of shares of
the Company's common stock equal to two percent of the total common shares
outstanding. As of December 31, 1996, 25 shares had been issued resulting in
compensation expense of $45,078 based on the estimated fair value of the stock,
as determined by the Company's Board of Directors.
In accordance with the acquisition agreement between the Company and Verio
Inc., the unvested shares under the employment agreement were fully vested at
December 31, 1997. An additional 197 shares were issued as of December 31, 1997
and compensation expense of $355,211 was recognized by the Company based on the
estimated fair value of the stock using the acquisition price in the Verio Inc.
transaction.
F-141
<PAGE> 309
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheets of NSNet, Inc. as of
December 31, 1996 and 1997, and the related statements of operations, owner's
and stockholder's equity, 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, the financial statements referred to above present fairly,
in all material respects, the financial position of NSNet, 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.
KPMG Peat Marwick LLP
Denver, Colorado
March 13, 1998
F-142
<PAGE> 310
NSNET, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
ASSETS (NOTE 3)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Current assets:
Cash...................................................... $ 4,188 $ 20,169
Receivables:
Trade, net of allowance for doubtful accounts of $3,133
and $12,158 in 1996 and 1997, respectively............ 27,494 85,881
Other.................................................. -- 20,377
Prepaid expenses and other................................ 124,829 333,130
-------- --------
Total current assets.............................. 156,511 459,557
Equipment, net (note 2)..................................... 177,410 378,874
Other assets................................................ -- 67,665
-------- --------
Total assets...................................... $333,921 $906,096
======== ========
LIABILITIES AND OWNER'S AND STOCKHOLDER'S EQUITY
Current liabilities:
Cash overdraft............................................ $ 41,057 $ --
Accounts payable.......................................... 7,614 94,252
Accrued liabilities....................................... 37,778 44,866
Revolving lines of credit (note 3)........................ -- 200,000
Current portion of capital lease obligations (note 4)..... -- 34,231
Deferred revenue and customer advances.................... 42,827 82,699
-------- --------
Total current liabilities......................... 129,276 456,048
Capital lease obligations, less current portion (note 4).... -- 61,636
-------- --------
Total liabilities................................. 129,276 517,684
Owner's and Stockholder's equity:
Owner's equity............................................ 204,645 --
Common stock, no par value, 2,000,000 shares authorized,
100,000 shares issued and outstanding at December 31,
1997................................................... -- 204,645
Retained earnings......................................... -- 183,767
-------- --------
Total owner's and stockholder's equity............ 204,645 388,412
Commitments (note 4)
-------- --------
Total liabilities and owner's and stockholder's
equity.......................................... $333,921 $906,096
======== ========
</TABLE>
See accompanying notes to financial statements.
F-143
<PAGE> 311
NSNET, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Revenue:
Internet services......................................... $887,939 $1,832,374
Other..................................................... -- 14,550
-------- ----------
Total revenue..................................... 887,939 1,846,924
-------- ----------
Operating expenses:
Internet services operating costs......................... 210,517 471,247
Selling, general and administrative....................... 485,128 938,523
Depreciation.............................................. 61,106 126,301
-------- ----------
Total operating expenses.......................... 756,751 1,536,071
-------- ----------
Earnings from operations.......................... 131,188 310,853
Other income (expense), net................................. 1,885 (5,508)
-------- ----------
Net earnings...................................... $133,073 305,345
======== ==========
Pro forma information:
Historical net earnings................................... 133,073 305,345
Pro forma adjustment for income tax expense............... (51,000) (116,000)
-------- ----------
Pro forma net earnings............................ $ 82,073 $ 189,345
======== ==========
</TABLE>
See accompanying notes to financial statements.
F-144
<PAGE> 312
NSNET, INC.
STATEMENTS OF OWNER'S AND STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
TOTAL
OWNER'S COMMON RETAINED STOCKHOLDER'S
EQUITY STOCK EARNINGS EQUITY
--------- -------- --------- -------------
<S> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1996..................... $ 75,037 $ -- $ -- $ 75,037
Distributions................................. (3,465) -- -- (3,465)
Net earnings.................................. 133,073 -- -- 133,073
--------- -------- --------- ---------
BALANCES AT DECEMBER 31, 1996................... 204,645 -- -- 204,645
Issuance of common stock upon incorporation
(note 1)................................... (204,645) 204,645 -- --
Distributions................................. -- -- (121,578) (121,578)
Net earnings.................................. -- -- 305,345 305,345
--------- -------- --------- ---------
BALANCES AT DECEMBER 31, 1997................... $ -- $204,645 $ 183,767 $ 388,412
========= ======== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-145
<PAGE> 313
NSNET, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 133,073 $ 305,345
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation........................................... 61,106 126,301
Provision for bad debts................................ 3,133 24,334
Changes in operating assets and liabilities:
Receivables.......................................... (17,073) (103,098)
Prepaid expenses and other........................... (124,829) (208,301)
Accounts payable and accrued liabilities............. 26,911 93,726
Deferred revenue and customer advances............... 25,647 39,872
--------- ---------
Net cash provided by operating activities......... 107,968 278,179
--------- ---------
Cash flows from investing activities:
Purchases of equipment.................................... (141,372) (217,958)
Increase in other assets.................................. -- (67,665)
--------- ---------
Net cash used by investing activities............. (141,372) (285,623)
--------- ---------
Cash flows from financing activities:
Cash overdraft............................................ 41,057 (41,057)
Borrowings under revolving lines of credit................ -- 240,000
Repayments under revolving lines of credit................ -- (40,000)
Principal payments under capital lease obligations........ -- (13,940)
Distributions............................................. (3,465) (121,578)
--------- ---------
Net cash provided by financing activities......... 37,592 23,425
--------- ---------
Increase in cash.................................. 4,188 15,981
Cash at beginning of year................................... -- 4,188
--------- ---------
Cash at end of year......................................... $ 4,188 $ 20,169
========= =========
Supplemental disclosure of cash flow information -- cash
paid during the year for interest......................... $ -- $ 5,508
========= =========
Noncash investing and financing activities -- equipment
acquired through capital lease obligations................ $ -- $ 109,807
========= =========
</TABLE>
See accompanying notes to financial statements.
F-146
<PAGE> 314
NSNET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
NSNet, Inc. (the Company) was incorporated as a subchapter S Corporation in
the State of California on January 1, 1997. Prior to incorporation, the Company
was operating as NextGen Systems Internet Services, a sole proprietorship formed
in 1992. All assets and liabilities of the sole proprietorship were contributed
to the Company upon incorporation and recorded at historical cost. The Company
provides internet access services to customers in California.
Effective February 27, 1998, Verio Inc. acquired 100% of the outstanding
common stock of the Company.
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 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
Internet services are recognized as the services are provided. The Company
records deferred revenue for accounts billed and/or collected in advance.
Equipment
Equipment, including assets held under capital leases, is stated at cost,
less accumulated depreciation. Depreciation is recorded using the straight-line
method over the shorter of the estimated useful lives of the related assets or
the lease term, which is three years. Costs for normal repairs and maintenance
are expensed as incurred.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations, including goodwill, when indications of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the estimated fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value, less costs to sell.
Income Taxes
No provision for income taxes has been included in the accompanying
financial statement for 1996 or 1997 due to the Company's status as a sole
proprietorship and subchapter S Corporation. Accordingly, net earnings as of
December 31, 1996 were included in owner's equity and taxable income has been
included in the tax returns of the owner and stockholder. However, pro forma
information has been included in the accompanying statements of operations to
reflect a pro forma adjustment for income tax expense as if the Company had been
a separate taxable entity subject to federal and state income taxes for both
years presented.
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair
F-147
<PAGE> 315
NSNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
values of all financial instruments as of December 31, 1996 and 1997 approximate
their carrying values based on their terms and interest rates. The use of
different market assumptions and/or estimation methodologies may have a
significant effect on the estimated fair values.
Customers who operate in California represent substantially all of the
Company's customer base. No single customer comprised more than 10% of accounts
receivable or total revenue as of or for the years ended December 31, 1996 or
1997.
(2) EQUIPMENT
Equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
-------- ---------
<S> <C> <C>
Internet and computer equipment............................. $255,112 $ 568,239
Furniture................................................... 10,000 24,638
-------- ---------
265,112 592,877
Less accumulated depreciation............................... (87,702) (214,003)
-------- ---------
$177,410 $ 378,874
======== =========
</TABLE>
Equipment includes assets held under capital leases with a net book value
of $94,248 at December 31, 1997.
(3) DEBT
At December 31, 1997, the Company had a $150,000 unsecured revolving line
of credit agreement with a bank, under which $100,000 was outstanding.
Borrowings under the line bear interest at the bank's prime rate plus 2.975%
(11.475% at December 31, 1997), and are due in 1998. The agreement included
various restrictive covenants including limitations on indebtedness and payment
of dividends. As of December 31, 1997, the Company was not in compliance with
the restrictions on additional indebtedness. All borrowings under this line were
paid in full subsequent to the acquisition by Verio, Inc.
At December 31, 1997, the Company had an additional $125,000 revolving line
of credit agreement with a second bank, secured by substantially all of the
assets of the Company, under which $100,000 was outstanding. Borrowings under
the line bear interest at the bank's prime rate plus 1.5% (10% at December 31,
1997), and are due in 1998.
(4) COMMITMENTS
The Company leases certain computer and office equipment under capital
leases. The Company also leases office space under noncancelable operating
leases expiring at various dates through 2002. Future
F-148
<PAGE> 316
NSNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
minimum annual lease payments under capital and noncancelable operating leases
for each of the years ending December 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1998........................................................ $ 43,434 $ 95,767
1999........................................................ 43,434 110,092
2000........................................................ 23,227 114,004
2001........................................................ -- 118,862
2002........................................................ -- 108,956
-------- --------
Total minimum payments.................................... 110,095 $547,681
========
Less amount representing interest........................... (14,228)
--------
Present value of net minimum lease payments............... 95,867
Less current portion........................................ (34,231)
--------
$ 61,636
========
</TABLE>
Rent expense for the years ended December 31, 1996 and 1997 totaled $19,801
and $34,082, respectively.
F-149
<PAGE> 317
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheet of Access One, Inc. as of
December 31, 1997 and the related statements of operations and accumulated
deficit, and cash flows for the year 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 audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Access One, Inc. as of
December 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
April 9, 1998
F-150
<PAGE> 318
ACCESS ONE, INC.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash...................................................... $ 259,144
Trade receivables, net of allowance for doubtful accounts
of $148,040 (note 3)................................... 344,773
Inventory................................................. 40,635
Prepaid expenses and other................................ 105,365
----------
Total current assets.............................. 749,917
Equipment, net (notes 2 and 3).............................. 678,752
Other assets................................................ 9,853
----------
Total assets...................................... $1,438,522
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Revolving line of credit.................................. $ 110,000
Accounts payable:
Trade.................................................. 144,297
Related party (note 5)................................. 273,306
Accrued liabilities....................................... 376,330
Notes payable (note 3).................................... 88,550
Current portion of capital lease obligations (note 4)..... 8,858
Note payable to related party (note 5).................... 32,194
Deferred revenue.......................................... 294,266
----------
Total current liabilities......................... 1,327,801
Capital lease obligations, less current portion (note 4).... 6,812
----------
Total liabilities................................. 1,334,613
Redeemable preferred stock, $0.01 par value, 500,000 shares
authorized, 200,000 shares issued and outstanding (note
6)........................................................ 508,748
Stockholders' deficit (note 6):
Common stock, $0.01 par value, 2,000,000 shares
authorized, 800,000 shares issued and outstanding...... 8,000
Additional paid-in capital................................ 85,476
Accumulated deficit....................................... (498,315)
----------
Total stockholders' deficit....................... (404,839)
Commitments (note 4)
----------
Total liabilities and stockholders' deficit....... $1,438,522
==========
</TABLE>
See accompanying notes to financial statements.
F-151
<PAGE> 319
ACCESS ONE, INC.
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Revenue:
Internet services......................................... $2,485,583
Enhanced services......................................... 702,639
Computer hardware and software sales...................... 303,465
Other..................................................... 27,019
----------
Total revenue..................................... 3,518,706
----------
Operating expenses:
Internet and enhanced services operating costs (note 5)... 613,084
Cost of hardware and software sales....................... 226,205
Selling, general and administrative (note 5).............. 2,922,073
Depreciation.............................................. 245,003
----------
Total operating expenses.......................... 4,006,365
----------
Loss from operations.............................. (487,659)
Other expense:
Interest expense.......................................... (21,833)
Other, net................................................ (3,808)
----------
Net loss.......................................... $ (513,300)
==========
Retained earnings at beginning of year...................... 14,985
Accumulated deficit at end of year.......................... (498,315)
==========
</TABLE>
See accompanying notes to financial statements.
F-152
<PAGE> 320
ACCESS ONE, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(513,300)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation......................................... 245,003
Provision for bad debts.............................. 386,983
Changes in operating assets and liabilities:
Receivables....................................... (445,284)
Inventory......................................... (40,635)
Prepaid expenses and other current assets......... (96,000)
Other assets...................................... (9,708)
Accounts payable and accrued liabilities.......... 541,280
Deferred revenue.................................. 148,798
---------
Net cash provided by operating activities.... 217,137
---------
Cash flows from investing activities -- purchase of
equipment................................................. (559,530)
---------
Cash flows from financing activities:
Borrowings under revolving line of credit................. 110,000
Borrowings under note payable............................. 127,916
Principal payments on note payable........................ (39,366)
Borrowings under notes to related parties................. 6,965
Principal payments under capital lease obligations........ (15,501)
---------
Net cash provided by financing activities.... 190,014
---------
Net decrease in cash......................... (152,379)
Cash at beginning of year................................... 411,523
---------
Cash at end of year......................................... $ 259,144
=========
Supplemental disclosure of cash flow information -- cash
paid during the year for interest......................... $ 21,822
=========
</TABLE>
See accompanying notes to financial statements.
F-153
<PAGE> 321
ACCESS ONE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Access One, Inc. (the Company) was originally organized as a limited
liability company on July 1, 1994. The Company reincorporated on December 9,
1996 as a C corporation in the state of Washington. The Company provides
internet access and enhanced services and computer hardware and software sales
to customers primarily in Washington.
Effective February 27, 1998, Verio Inc. (Verio) acquired all of the
outstanding common stock of the Company, resulting in 100% ownership (see Note
6).
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 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.
Equipment
Equipment is stated at cost, less accumulated depreciation. Depreciation is
recorded using the straight-line method over the shorter of the estimated useful
lives of the related assets or the lease terms, which range from three to five
years. Costs for normal repairs and maintenance are expensed as incurred.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations, including goodwill, when indications of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the estimated fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value, less costs to sell.
Revenue Recognition
Internet and enhanced services are recognized as the services are provided.
Enhanced services consist primarily of web hosting and collocation services to
customers. The Company records deferred revenue for amounts billed and/or
collected in advance.
Revenue from hardware sales is recognized upon shipment of the respective
products if the Company's future obligations are not significant and
collectibility is probable.
Income Taxes
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109).
Under SFAS 109, deferred income taxes are recognized for the future tax
consequences of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
F-154
<PAGE> 322
ACCESS ONE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has a net operating loss carryforward for income tax purposes
of approximately $337,000 which expires in 2012. No tax benefit has been
recorded by the Company in 1997 due to the Company's net loss and the
uncertainty regarding the ultimate utilization of such loss carryforward. The
Company also has a deferred tax asset related to the allowance for doubtful
accounts of approximately $56,000. A valuation allowance has been recorded for
the entire balance of the deferred tax asset related to the carryforward and the
allowance for doubtful accounts. Other temporary differences between financial
statement and income tax bases of assets and liabilities are not significant.
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of December 31, 1997 approximate their carrying values
based on their terms and interest rates. The use of different market assumptions
and/or estimation methodologies may have a significant effect on the estimated
fair values.
Customers who operate in Washington represent substantially all of the
Company's customer base. No single customer comprised more than 10% of revenue
or accounts receivable as of or for the year ended December 31, 1997.
(2) EQUIPMENT
Equipment consisted of the following at December 31, 1997:
<TABLE>
<S> <C>
Internet and computer equipment........................... $ 926,175
Furniture and office equipment............................ 120,657
---------
1,046,832
Less accumulated depreciation and amortization.............. (368,080)
---------
$ 678,752
=========
</TABLE>
Equipment includes assets held under capital lease with a net book value of
$12,990 at December 31, 1997.
(3) DEBT
Lines of credit and notes payable consist of the following as of December
31, 1997:
<TABLE>
<S> <C>
Revolving line of credit, maximum credit available of
$300,000, bearing interest at 1.5% above the bank's prime
lending rate, (10% at December 31, 1997), due in 1998, and
secured by accounts receivable............................ $ 110,000
Notes payable, bearing interest at 10.25%, due on demand, or
if no demand is made, in monthly payments of principal and
interest of $5,945 through April, 1999, and secured by
certain equipment of the Company.......................... 88,550
---------
198,550
Less current portion........................................ (198,550)
---------
Long-term debt, less current portion...................... $ --
=========
</TABLE>
The Company's revolving line of credit includes various restrictive
covenants including limitations on indebtedness and maintaining a specified debt
to equity ratio. As of December 31, 1997, the Company was not
F-155
<PAGE> 323
ACCESS ONE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
in compliance with limitations placed by the debt to equity ratio. All
borrowings under the line were repaid upon completion of the buyout by Verio
Inc. in February 1998.
(4) COMMITMENTS
Leases
The Company leases certain computer and office equipment under capital
leases. The Company also leases office space under noncancelable operating
leases expiring at various dates through 1999. Future minimum annual lease
payments under noncancelable capital and operating leases for each of the years
ending December 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1998.................................... $ 8,280 $80,808
1999.................................... 7,589 1,512
------- -------
Total minimum payments................ $15,869 $82,320
======= =======
Less amount representing interest....... (199)
-------
Present value of net minimum lease
payments.............................. 15,670
Less current portion.................... (8,858)
-------
$ 6,812
=======
</TABLE>
Rent expense for the year ended December 31, 1997 totaled $219,500.
The Company has commitments with two different telecommunications companies
to receive future services from such companies. Future payments under these
agreements total $8,200 per month through September 1999.
(5) TRANSACTIONS WITH RELATED PARTIES
During 1997, the Company received customer service, technical support, and
backbone transport services provided by Verio. Total amounts charged to the
Company by Verio in this manner were $79,421 included in internet and enhanced
services operating costs and $178,969 included in selling, general, and
administrative expenses. Verio also purchased approximately $14,916 of equipment
on behalf of the Company. Amounts due to related party at December 31, 1997
relate to these services and purchases of equipment and are non interest
bearing.
Note payable to related party is a non interest bearing, unsecured note
payable to the majority stockholder of the Company.
(6) REDEEMABLE PREFERRED STOCK
During 1996, the Company issued 200,000 shares of redeemable, convertible
Series A preferred stock to Verio. The preferred shares are convertible into
common shares on a one for one basis and are mandatorily redeemable in 2002. In
connection with the Verio acquisition disclosed in note 1, the preferred shares
were converted to common stock.
F-156
<PAGE> 324
ACCESS ONE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(7) EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) Plan (the Plan) for all full time employees.
The Company makes matching contributions of 25% of employee contributions up to
6% of the respective employee's salary. During 1997 the Company made
contributions to the Plan totaling $11,876.
F-157
<PAGE> 325
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheet of STARnet, L.L.C. as of
December 31, 1997 and the related statements of operations, members' equity and
cash flows for the year 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 audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of STARnet, L.L.C. as of
December 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
March 27, 1998
F-158
<PAGE> 326
STARNET, L.L.C.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash...................................................... $210,089
Trade receivables, net of allowance for doubtful accounts
of $22,944............................................. 111,541
Inventory................................................. 69,089
Prepaid expenses and other................................ 18,779
--------
Total current assets.............................. 409,498
Equipment, net (note 2)..................................... 208,336
Other assets................................................ 4,583
--------
Total assets...................................... $622,417
========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 31,371
Accrued liabilities....................................... 12,895
Deferred revenue.......................................... 371,608
--------
Total current liabilities......................... 415,874
Members' equity............................................. 206,543
Commitments (note 3)
--------
Total liabilities and members' equity............. $622,417
========
</TABLE>
See accompanying notes to financial statements.
F-159
<PAGE> 327
STARNET, L.L.C.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Revenue:
Internet services......................................... $1,201,504
Computer hardware sales................................... 386,376
Other..................................................... 13,094
----------
Total revenue..................................... 1,600,974
----------
Operating expenses:
Internet services operating costs......................... 397,019
Cost of hardware sales.................................... 319,486
Selling, general and administrative....................... 570,461
Depreciation.............................................. 155,968
----------
Total operating expenses.......................... 1,442,934
----------
Earnings from operations.......................... 158,040
Other income (expense):
Interest income........................................... 9,411
Other, net................................................ (6,282)
----------
Net earnings...................................... $ 161,169
==========
Pro forma information:
Historical net earnings................................... 161,169
Pro forma adjustment for income tax expense............... (61,000)
----------
Pro forma net earnings............................ $ 100,169
==========
</TABLE>
See accompanying notes to financial statements.
F-160
<PAGE> 328
STARNET, L.L.C.
STATEMENT OF MEMBERS' EQUITY
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Balance at January 1, 1997.................................. $ 290,109
Distributions to members.................................... (244,735)
Net earnings................................................ 161,169
---------
Balance at December 31, 1997................................ $ 206,543
=========
</TABLE>
See accompanying notes to financial statements.
F-161
<PAGE> 329
STARNET, L.L.C.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 161,169
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation........................................... 155,968
Provision for bad debts................................ 44,484
Loss on sale of assets................................. 6,282
Changes in operating assets and liabilities:
Receivables.......................................... (40,725)
Inventory............................................ 50,205
Prepaid expenses and other current assets............ (13,944)
Other assets......................................... 834
Accounts payable and accrued liabilities............. (54,304)
Deferred revenue..................................... (3,346)
---------
Net cash provided by operating activities......... 306,623
---------
Cash flows from investing activities -- purchase of
equipment................................................. (117,202)
---------
Cash flows from financing activities -- distributions to
members................................................... (244,735)
---------
Net decrease in cash.............................. (55,314)
Cash at beginning of year................................... 265,403
---------
Cash at end of year......................................... $ 210,089
=========
</TABLE>
See accompanying notes to financial statements.
F-162
<PAGE> 330
STARNET, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
STARnet, L.L.C. (the Company) was originally organized as a limited
liability company in the State of Missouri as Internetix, L.L.C. on June 21,
1994. On August 18, 1997, the Company changed its name to STARnet, L.L.C. The
Company provides internet access services and computer hardware sales to
customers primarily in Missouri and Illinois.
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 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.
Equipment
Equipment is stated at cost, less accumulated depreciation. Depreciation is
recorded using a method that estimates the straight-line method over the
estimated useful lives of the related assets, which is three years. Costs for
normal repairs and maintenance are expensed as incurred.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations, including goodwill, when indications of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the estimated fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value, less costs to sell.
Revenue Recognition
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance.
Revenue from hardware sales is recognized upon shipment of the respective
products if the Company's future obligations are not significant and
collectibility is probable.
Income Taxes
No provision for income taxes has been included in the accompanying
financial statements due to the Company's status as a limited liability
corporation. Accordingly, taxable income has been included in the tax returns of
the members. However, pro forma information has been included in the
accompanying statement of operations to reflect a pro forma adjustment for
income tax expense as if the Company had been a separate taxable entity subject
to federal and state income taxes for the year ended December 31, 1997.
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of December 31, 1997 approximate their carrying values
based on their
F-163
<PAGE> 331
STARNET, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
terms and interest rates. The use of different market assumptions and/or
estimation methodologies may have a significant effect on the estimated fair
values.
Customers who operate in Missouri and Illinois represent substantially all
of the Company's customer base. Three customers comprised approximately 38% of
accounts receivable as of December 31, 1997. However, no single customer
comprised more than 10% of revenue for the year ended December 31, 1997.
(2) EQUIPMENT
Equipment consisted of the following at December 31, 1997:
<TABLE>
<S> <C>
Internet and computer equipment............................. $ 503,324
Furniture and office equipment.............................. 2,750
---------
506,074
Less accumulated depreciation and amortization.............. (297,738)
---------
$ 208,336
=========
</TABLE>
(3) COMMITMENTS
The Company leases office space and equipment under noncancelable leases
expiring at various dates through 2002. Future minimum annual lease payments
under noncancelable operating leases for each of the years ending December 31
are as follows:
<TABLE>
<S> <C>
1998............................................... $32,873
1999............................................... 26,236
2000............................................... 2,716
2001............................................... 870
2002............................................... 400
-------
Total minimum payments................... $63,095
=======
</TABLE>
Rent expense for the year ended December 31, 1997 totaled $39,630.
In addition, the Company has a verbal agreement to guarantee certain
obligations of a related party with a telecommunications company for one year in
the amount of $250,000.
F-164
<PAGE> 332
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheets of Computing Engineers Inc.
as of December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Computing Engineers 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.
KPMG Peat Marwick LLP
Denver, Colorado
March 27, 1998
F-165
<PAGE> 333
COMPUTING ENGINEERS INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
ASSETS (NOTE 3)
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Current assets:
Cash...................................................... $ -- $ 15,995
Trade receivables, net of allowance for doubtful accounts
of $133,739 and $62,085 in 1996 and 1997,
respectively........................................... 340,799 429,171
Inventory................................................. -- 37,411
Prepaid expenses and other................................ 2,014 2,014
---------- ----------
Total current assets.............................. 342,813 484,591
Equipment, net (note 2)..................................... 821,637 1,049,662
Other assets, net........................................... -- 20,420
---------- ----------
Total assets...................................... $1,164,450 $1,554,673
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft............................................ $ 54,352 $ --
Accounts payable.......................................... 355,223 225,153
Accrued liabilities....................................... 5,252 33,373
Current portion of note payable (note 3).................. -- 84,352
Current portion of obligations under capital leases (note
4)..................................................... 193,873 223,826
Deferred revenue.......................................... 146,010 249,817
---------- ----------
Total current liabilities......................... 754,710 816,521
Note payable, less current portion (note 3)................. -- 585,002
Capital lease obligations, less current portion (note 4).... 49,776 28,811
---------- ----------
Total liabilities................................. 804,486 1,430,334
Stockholders' equity:
Common stock, $10 par value, 1,000 shares authorized, 100
shares issued and outstanding.......................... 1,000 1,000
Additional paid-in capital................................ 5,000 5,000
Retained earnings......................................... 353,964 118,339
---------- ----------
Total stockholders' equity........................ 359,964 124,339
---------- ----------
Commitments (note 4)
Total liabilities and stockholders' equity........ $1,164,450 $1,554,673
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-166
<PAGE> 334
COMPUTING ENGINEERS INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Revenue:
Internet services......................................... $2,326,898 $3,321,562
Consulting services....................................... -- 162,683
Computer hardware and software sales...................... 88,664 537,057
Other..................................................... -- 58,176
---------- ----------
Total revenue..................................... 2,415,562 4,079,478
---------- ----------
Operating expenses:
Internet services operating costs......................... 606,522 632,653
Costs of hardware and software sales...................... 148,770 392,676
Marketing and selling..................................... 47,155 299,990
General and administrative................................ 1,179,149 2,041,265
Depreciation and amortization............................. 144,953 329,296
---------- ----------
Total operating expenses.......................... 2,126,549 3,695,880
---------- ----------
Earnings from operations.......................... 289,013 383,598
Interest expense............................................ (19,254) (95,223)
---------- ----------
Net earnings...................................... $ 269,759 $ 288,375
========== ==========
Pro forma information:
Historical net earnings................................... $ 269,759 $ 288,375
Pro forma adjustment for income tax expense............... (103,000) (110,000)
---------- ----------
Pro forma net earnings............................ $ 166,759 $ 178,375
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-167
<PAGE> 335
COMPUTING ENGINEERS INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1996............ 100 $1,000 $5,000 $ 207,104 $ 213,104
Distributions to stockholders.......... -- -- -- (122,899) (122,899)
Net earnings........................... -- -- -- 269,759 269,759
--- ------ ------ --------- ---------
BALANCES AT DECEMBER 31, 1996.......... 100 1,000 5,000 353,964 359,964
Distributions to stockholders.......... -- -- -- (524,000) (524,000)
Net earnings........................... -- -- -- 288,375 288,375
--- ------ ------ --------- ---------
BALANCES AT DECEMBER 31, 1997.......... 100 $1,000 $5,000 $ 118,339 $ 124,339
=== ====== ====== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-168
<PAGE> 336
COMPUTING ENGINEERS INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 269,759 $ 288,375
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization.......................... 144,953 329,296
Provision for bad debts................................ 133,739 165,153
Changes in operating assets and liabilities:
Trade receivables.................................... (472,524) (253,525)
Inventory............................................ -- (37,411)
Prepaid expenses and other........................... 142 --
Accounts payable..................................... 355,223 (130,070)
Accrued liabilities.................................. 238 28,121
Deferred revenue..................................... 146,010 103,807
--------- ---------
Net cash provided by operating activities......... 577,540 493,746
--------- ---------
Cash flows from investing activities -- purchases of
equipment................................................. (336,776) (228,892)
--------- ---------
Cash flows from financing activities:
Net change in cash overdraft.............................. (15,314) (54,352)
Borrowings under note payable............................. -- 700,000
Debt issuance costs....................................... -- (20,420)
Principal payments on note payable........................ -- (30,646)
Principal payments on capital lease obligations........... (102,551) (319,441)
Distributions to shareholders............................. (122,899) (524,000)
--------- ---------
Net cash used by financing activities............. (240,764) (248,859)
--------- ---------
Increase in cash.................................. -- 15,995
Cash at beginning of year................................... -- --
--------- ---------
Cash at end of year......................................... $ -- $ 15,995
========= =========
Supplemental disclosure of cash flow information -- cash
paid during the year for interest......................... $ 19,254 $ 95,223
========= =========
Noncash investing and financing activities -- equipment
acquired through capital lease obligations................ $ 346,200 $ 328,429
========= =========
</TABLE>
See accompanying notes to financial statements.
F-169
<PAGE> 337
COMPUTING ENGINEERS INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Computing Engineers Inc. (the Company) was incorporated in the State of
Illinois on November 1, 1993. The Company is a provider of internet access
services to businesses and individuals, primarily in Illinois.
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 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.
Equipment
Equipment, including any assets held under capital leases, is stated at
cost, less accumulated depreciation and amortization. Depreciation and
amortization is recorded using the straight-line method over the shorter of the
estimated useful lives of the related assets or the lease term, which is three
years. Costs for normal repairs and maintenance are expensed as incurred.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). Statement No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at lower of the carrying amount or fair value less
costs to sell.
Revenue Recognition
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance.
Revenue from consulting services is recognized when services have been
rendered.
Revenue from hardware and software sales is recognized upon shipment of the
respective products if the Company's future obligations are not significant and
collectibility is probable.
Income Taxes
No provision for income taxes has been included in the accompanying
financial statements for 1996 or 1997 due to the Company's status as a
subchapter S corporation. Accordingly, taxable income has been included in the
tax returns of the stockholders. However, pro forma information has been
included in the accompanying statements of operations to reflect a pro forma
adjustment for income tax expense as if the Company had been a separate taxable
entity subject to federal and state income taxes for all periods presented.
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of December 31, 1996 and 1997 approximate their
carrying values based
F-170
<PAGE> 338
COMPUTING ENGINEERS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
on their terms and interest rates. The use of different market assumptions
and/or estimation methodologies may have a significant effect on the estimated
fair values.
(2) EQUIPMENT
Equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
--------- ----------
<S> <C> <C>
Internet and computer equipment............................ $ 973,392 $1,522,201
Furniture and office equipment............................. 22,048 30,560
--------- ----------
995,440 1,552,761
Less accumulated depreciation and amortization............. (173,803) (503,099)
--------- ----------
$ 821,637 $1,049,662
========= ==========
</TABLE>
Equipment includes assets owned under capital leases with a net book value
of $305,530 and $474,893 at December 31, 1996 and 1997, respectively.
(3) DEBT
Debt consists of the following as of December 31, 1997:
<TABLE>
<S> <C>
Note payable bearing interest at prime plus 2.75% (11.25% at
December 31, 1997), monthly principal and interest
payments of $11,986 through May 12, 2004, secured by
substantially all the assets of the Company............... $669,354
Less current portion........................................ (84,352)
--------
$585,002
========
</TABLE>
(4) COMMITMENTS
The Company leases certain computer and office equipment under capital
leases. The Company also leases office space under noncancelable operating
leases expiring at various dates through 2005. Future minimum annual lease
payments under capital and noncancelable operating leases for each of the years
ending December 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
1998........................................................ $ 252,242 $ 234,353
1999........................................................ 29,695 219,153
2000........................................................ -- 192,161
2001........................................................ -- 197,120
2002........................................................ -- 202,079
Thereafter.................................................. -- 472,345
--------- ----------
Total minimum payments.................................... 281,937 $1,517,211
==========
Less amount representing interest........................... (29,300)
---------
Present value of net minimum lease payments............... 252,637
Less current portion........................................ (223,826)
---------
$ 28,811
=========
</TABLE>
Rent expense for the years ended December 31, 1996 and 1997 was $93,501 and
$134,777, respectively.
F-171
<PAGE> 339
INDEPENDENT AUDITORS' REPORT
The Board of Directors
LI Net, Inc.:
We have audited the accompanying balance sheets of LI Net, Inc. as of April
30, 1997 and January 31, 1998, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the years ended April 30,
1996 and 1997 and the nine months ended January 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 LI Net, Inc. as of April 30,
1997 and January 31, 1998, and the results of its operations and its cash flows
for the years ended April 30, 1996 and 1997 and the nine months ended January
31, 1998 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
March 27, 1998
F-172
<PAGE> 340
LI NET, INC.
BALANCE SHEETS
APRIL 30, 1997 AND JANUARY 31, 1998
ASSETS
<TABLE>
<CAPTION>
1997 1998
-------- ---------
<S> <C> <C>
Current assets:
Cash...................................................... $ 49,036 $ 24,575
Receivables (note 3):
Trade, net of all allowance for doubtful accounts of
$28,948 and $50,000, respectively..................... 157,643 225,148
Other.................................................. -- 6,000
Prepaid expenses and other................................ 3,850 3,850
-------- ---------
Total current assets.............................. 210,529 259,573
Equipment, net (notes 2 and 3).............................. 355,906 500,654
Other assets................................................ 25,057 28,708
-------- ---------
Total assets...................................... $591,492 $ 788,935
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $171,038 $ 245,777
Accrued liabilities....................................... 13,942 22,521
Current portion of notes payable (note 3):
Bank................................................... -- 22,476
Related party (note 6)................................. 9,038 8,885
Revolving line of credit (note 3)......................... 15,265 39,993
Current portion of obligations under capital leases (note
4)..................................................... 52,090 81,652
Deferred revenue.......................................... 77,766 158,740
-------- ---------
Total current liabilities......................... 339,139 580,044
Notes payable, less current portion (note 3):
Bank...................................................... -- 93,542
Related party (note 6).................................... 126,052 114,029
Capital lease obligations, less current portion (note 4).... 87,826 62,453
-------- ---------
Total liabilities................................. 553,017 850,068
Stockholders' equity (deficit):
Common stock, no par value, 100 shares authorized and
issued................................................. 44,000 44,000
Additional paid-in capital................................ -- 273,100
Retained earnings (deficit)............................... 6,375 (378,233)
Treasury stock -- 5 shares at April 30, 1997, at cost..... (11,900) --
-------- ---------
Total stockholders' equity (deficit).............. 38,475 (61,133)
-------- ---------
Commitments (note 4)
Total liabilities and stockholders' equity
(deficit)....................................... $591,492 $ 788,935
======== =========
</TABLE>
See accompanying notes to financial statements.
F-173
<PAGE> 341
LI NET, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED APRIL 30, 1996 AND 1997 AND NINE MONTHS ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
1996 1997 1998
-------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Internet services..................................... $608,714 $1,033,595 $1,430,480
Computer hardware sales............................... 152,854 325,723 90,233
-------- ---------- ----------
Total revenue................................. 761,568 1,359,318 1,520,713
-------- ---------- ----------
Operating expenses:
Internet services operating costs..................... 197,025 317,225 551,993
Costs of hardware sold................................ 73,370 156,347 42,987
Selling, general and administrative expenses(note
7)................................................. 358,627 769,898 1,180,146
Depreciation.......................................... 64,470 77,762 100,902
-------- ---------- ----------
Total operating expenses...................... 693,492 1,321,232 1,876,028
Earnings (loss) from operations............... 68,076 38,086 (355,315)
Interest expense........................................ (10,596) (55,325) (29,293)
-------- ---------- ----------
Earnings (loss) before income taxes........... 57,480 (17,239) (384,608)
Income tax expense (note 5)............................. (7,600) -- --
-------- ---------- ----------
Net earnings (loss)........................... $ 49,880 $ (17,239) $ (384,608)
======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-174
<PAGE> 342
LI NET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED APRIL 30, 1996 AND 1997 AND NINE MONTHS ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL RETAINED STOCKHOLDERS'
COMMON PAID-IN EARNINGS TREASURY EQUITY
STOCK CAPITAL (DEFICIT) STOCK (DEFICIT)
------- ---------- --------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES AT MAY 1, 1995............ $44,000 $ -- $ (26,266) $ -- $ 17,734
Purchase of treasury stock......... -- -- -- (10,000) (10,000)
Net earnings....................... -- -- 49,880 -- 49,880
------- -------- --------- -------- ---------
BALANCES AT APRIL 30, 1996......... 44,000 -- 23,614 (10,000) 57,614
Purchase of treasury stock......... -- -- -- (13,800) (13,800)
Issuance of treasury stock for
services (note 7)................ -- -- -- 11,900 11,900
Net loss........................... -- -- (17,239) -- (17,239)
------- -------- --------- -------- ---------
BALANCES AT APRIL 30, 1997......... 44,000 -- 6,375 (11,900) 38,475
Issuance of treasury stock for
services (note 7)................ -- 273,100 -- 11,900 285,000
Net loss........................... -- -- (384,608) -- (384,608)
------- -------- --------- -------- ---------
BALANCES AT JANUARY 31, 1998....... $44,000 $273,100 $(378,233) $ -- $ (61,133)
======= ======== ========= ======== =========
</TABLE>
See accompanying notes to financial statements.
F-175
<PAGE> 343
LI NET, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED APRIL 30, 1996 AND 1997 AND NINE MONTHS ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)..................................... $ 49,880 $ (17,239) $(384,608)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation......................................... 64,470 77,762 100,902
Provision for bad debts.............................. -- 28,948 50,000
Issuance of treasury stock for services.............. -- 11,900 285,000
Changes in operating assets and liabilities:
Receivables........................................ (66,218) (103,079) (123,505)
Prepaid expenses and other current assets.......... -- (3,850) --
Other assets....................................... (13,602) (6,580) (3,651)
Accounts payable and accrued liabilities........... 88,042 67,313 83,318
Deferred revenue................................... -- 77,766 80,974
--------- --------- ---------
Net cash provided by operating activities....... 122,572 132,941 88,430
--------- --------- ---------
Cash flows from investing activities -- purchases of
equipment............................................... (149,667) (94,633) (182,471)
--------- --------- ---------
Cash flows from financing activities:
Borrowings under revolving lines of credit.............. -- 15,265 24,728
Proceeds from borrowings from bank...................... -- -- 130,000
Principal payments on notes payable to bank............. -- -- (13,982)
Proceeds from borrowings from related parties........... 107,713 -- --
Principal payments on notes payable to related party.... (21,128) (13,677) (12,176)
Principal payments on capital lease obligations......... -- (39,872) (58,990)
Purchase of treasury stock.............................. (10,000) (13,800) --
--------- --------- ---------
Net cash provided (used) by financing
activities.................................... 76,585 (52,084) 69,580
--------- --------- ---------
Net increase (decrease) in cash................. 49,490 (13,776) (24,461)
Cash at beginning of year................................. 13,322 62,812 49,036
--------- --------- ---------
Cash at end of year....................................... $ 62,812 $ 49,036 $ 24,575
========= ========= =========
Supplemental disclosure of cash flow information -- cash
paid during the year for interest....................... $ 10,596 $ 39,621 $ 22,593
========= ========= =========
Noncash investing and financing activities -- equipment
acquired through capital lease obligations.............. $ 32,876 $ 146,912 $ 63,179
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-176
<PAGE> 344
LI NET, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1996 AND 1997 AND NINE MONTHS ENDED JANUARY 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
LI Net, Inc. (the Company) was incorporated in the State of New York and
provides regional internet access services to customers in New York.
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 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.
Equipment
Equipment, including assets held under capital leases, is stated at cost,
less accumulated depreciation. Depreciation is recorded using the straight-line
method over the shorter of the estimated useful lives of the related assets or
the lease terms, which range from three to five years. Costs for normal repairs
and maintenance are expensed as incurred.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations, including goodwill, when indications of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the estimated fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value, less costs to sell.
Revenue Recognition
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance.
Revenue from hardware sales is recognized upon shipment of the respective
products if the Company's future obligations are not significant and
collectibility is probable.
Income Taxes
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, (SFAS 109).
Under SFAS 109, deferred income taxes are recognized for the future tax
consequences of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of April 30, 1997 and January 31, 1998, approximate
their carrying values
F-177
<PAGE> 345
LI NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
based on their terms and interest rates. The use of different market assumptions
and/or estimation methodologies may have a significant effect on the estimated
fair values.
(2) EQUIPMENT
Equipment consisted of the following at April 30, 1997 and January 31,
1998:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Internet and computer equipment............................. $ 409,376 $ 641,881
Furniture and office equipment.............................. 67,532 80,677
Leasehold improvements...................................... 32,297 32,297
--------- ---------
509,205 754,855
Less accumulated depreciation and amortization.............. (153,299) (254,201)
--------- ---------
$ 355,906 $ 500,654
========= =========
</TABLE>
Equipment includes assets held under capital leases with a net book value
of approximately $139,000 and $155,000 at April 30, 1997 and January 31, 1998,
respectively.
(3) DEBT
During fiscal 1998, the Company entered into a loan agreement with a bank
and borrowed $130,000. The loan is secured by the Company's equipment, and bears
interest at 8.75%. Principal and interest payments of $2,683 are due monthly
through 2002. At January 31, 1998, the outstanding balance was $116,018.
At April 30, 1997 and January 31, 1998, the Company had a $50,000 revolving
line of credit agreement with a bank, secured by receivables, under which
$15,265 and $39,993 was outstanding, respectively. Borrowings under the line
bear interest at the bank's prime lending rate plus 2% (10.5% at January 31,
1997) and are due in 1998.
Maturities of the line of credit and note payable for each of the years
ending January 31 are as follows:
<TABLE>
<S> <C>
1999.............................................. $ 62,469
2000.............................................. 25,384
2001.............................................. 27,247
2002.............................................. 29,732
2003.............................................. 11,179
--------
$156,011
========
</TABLE>
(4) COMMITMENTS
The Company leases certain computer and office equipment under capital
leases. The Company also leases office space under noncancelable operating
leases expiring at various dates through 2002.
F-178
<PAGE> 346
LI NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum annual lease payments under capital and noncancelable
operating leases for each of the years ending January 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1999........................................................ $100,042 $ 63,879
2000........................................................ 53,085 47,121
2001........................................................ 17,937 23,386
2002........................................................ 10,060 5,459
-------- --------
Total minimum payments.................................... 181,124 $139,845
========
Less amount representing interest........................... (37,019)
--------
Present value of net minimum lease payments............... 144,105
Less current portion........................................ (81,652)
--------
$ 62,453
========
</TABLE>
Rent expense for the years ended April 30, 1996 and 1997 and nine months
ended January 31, 1998, was $25,335, $35,353, and $52,779 respectively.
(5) INCOME TAXES
Income tax expense (benefit) for the years ended April 30, 1996 and 1997
and nine months ended January 31, 1998 differs from the amounts that would
result from applying the federal statutory rate of 34% as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- ---------
<S> <C> <C> <C>
Expected tax expense (benefit)...................... $19,543 $(5,861) $(130,777)
State income taxes, net of federal benefit.......... 2,300 (690) (15,374)
Nondeductible expenses.............................. -- 622 1,653
Change in valuation allowance for deferred tax
assets............................................ (14,243) 5,929 144,498
------- ------- ---------
Actual income tax expense................. $ 7,600 $ -- $ --
======= ======= =========
</TABLE>
Temporary differences that give rise to the components of deferred tax
assets and liabilities as of April 30, 1997 and January 31, 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
-------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 12,738 $ 148,824
Accounts receivable, due to allowance for doubtful
accounts for financial statement purposes only......... 11,000 30,000
Other..................................................... 173 140
-------- ---------
Total deferred tax assets......................... 23,911 178,964
Valuation allowance....................................... (5,929) (150,427)
-------- ---------
Net deferred tax assets........................... 17,982 28,537
-------- ---------
Deferred tax liability:
Equipment, due to differences in depreciation for
financial statement and tax purposes................... (17,982) (28,537)
-------- ---------
Net deferred tax asset (liability)................ $ -- $ --
======== =========
</TABLE>
F-179
<PAGE> 347
LI NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of January 31, 1998, the Company has a net operating loss carryforward
of approximately $392,000 for federal income tax purposes which will expire in
2013, if not utilized. A valuation allowance has been recorded for a portion of
the related deferred tax asset due to the uncertainty relating to the
realization of the net operating loss carryforward in the future.
(6) TRANSACTIONS WITH RELATED PARTIES
Notes payable to related party at April 30, 1997 and January 31, 1998
included $93,917 and $89,334, respectively, of unsecured notes due to
stockholders of the Company. The loans bear interest at 10% with the principal
and interest due in total on July 1, 1999 or upon sale of 50% or more of the
stock of the stockholders.
Also included in notes payable to related party at April 30, 1997 and
January 31, 1998 was an unsecured note due to a relative of a stockholder of the
Company. Principal outstanding on the note was $41,176 and $33,580 at April 30,
1997 and January 31, 1998, respectively. The note bears interest at 10% and is
payable in monthly principal and interest payments of $1,062 until 2001.
Maturities of notes payable to related parties for each of the years ending
January 31 are as follows:
<TABLE>
<S> <C>
1999.............................................. $ 8,885
2000.............................................. 100,087
2001.............................................. 11,878
2002.............................................. 2,064
--------
$122,914
========
</TABLE>
(7) STOCKHOLDERS' EQUITY
During the year ended April 30, 1997 and the nine months ended January 31,
1998, the Company issued treasury shares to an officer as compensation for
services. The Company recorded compensation expense of $11,900 and $285,000,
respectively, which, in the opinion of the Company's Board of Directors,
represented fair value of the shares at the date of issuance.
F-180
<PAGE> 348
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheet of NTX, Inc. as of June 30,
1998, and the related statements of operations, stockholders' deficit, and cash
flows for the nine months 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 audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NTX, Inc. as of June 30,
1998, and the results of its operations and its cash flows for the nine months
then ended, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Denver, Colorado
August 5, 1998
F-181
<PAGE> 349
NTX, INC.
BALANCE SHEET
JUNE 30, 1998
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash...................................................... $ 91,373
Restricted cash........................................... 537,572
Receivables:
Trade, net of allowance for doubtful accounts of
$337,063.............................................. 1,080,965
Other.................................................. 25,000
Prepaid expenses and other................................ 20,523
-----------
Total current assets.............................. 1,755,433
Equipment and leasehold improvements, net (note 2).......... 525,942
Other assets, net........................................... 21,231
-----------
Total assets...................................... $ 2,302,606
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 721,248
Accrued liabilities....................................... 346,370
Deferred revenue.......................................... 1,904,564
-----------
Total current liabilities......................... 2,972,182
-----------
Stockholders' deficit (note 3):
Common stock, no par value, 4,210,524 shares authorized,
issued and outstanding................................. 3,640,000
Accumulated deficit....................................... (4,309,576)
-----------
Total stockholders' deficit....................... (669,576)
-----------
Commitments (note 4)
Total liabilities and stockholders' deficit....... $ 2,302,606
===========
</TABLE>
See accompanying notes to financial statements.
F-182
<PAGE> 350
NTX, INC.
STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1998
<TABLE>
<S> <C>
Revenue:
Web hosting............................................... $ 3,552,716
Domain name registration.................................. 2,733,506
Other..................................................... 316,320
-----------
Total revenue..................................... 6,602,542
-----------
Costs and expenses:
Operating................................................. 1,315,039
Selling, general and administrative....................... 5,750,785
Stock-based compensation (note 3)......................... 3,640,000
Depreciation and amortization............................. 124,818
-----------
Total costs and expenses.......................... 10,830,642
-----------
Loss from operations.............................. (4,228,100)
-----------
Other income (expense):
Interest income........................................... 6,131
Interest expense.......................................... (380)
-----------
Net loss.......................................... $(4,222,349)
===========
</TABLE>
See accompanying notes to financial statements.
F-183
<PAGE> 351
NTX, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
NINE MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
TOTAL
MEMBERS' COMMON ACCUMULATED STOCKHOLDERS'
DEFICIT STOCK DEFICIT DEFICIT
--------- --------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCES AT OCTOBER 1, 1997................. $(160,936) -- $ -- $ (160,936)
Contributions from members.................. 73,709 -- -- 73,709
Issuance of common stock in connection with
reincorporation........................... 87,227 -- (87,227) --
Stock-based compensation expense (note 3)... -- 3,640,000 -- 3,640,000
Net loss.................................... -- -- (4,222,349) (4,222,349)
--------- --------- ----------- -----------
BALANCE AT JUNE 30, 1998.................... $ -- 3,640,000 $(4,309,576) $ (669,576)
========= ========= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-184
<PAGE> 352
NTX, INC.
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(4,222,349)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 124,818
Provision for bad debts................................ 259,499
Stock-based compensation expense....................... 3,640,000
Changes in operating assets and liabilities:
Trade and other accounts receivable.................. (1,118,363)
Prepaid expenses and other........................... (20,523)
Accounts payable..................................... 434,822
Accrued liabilities.................................. 209,994
Deferred revenue..................................... 1,469,194
Other assets, net.................................... (21,231)
-----------
Net cash provided by operating activities......... 755,861
-----------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements......... (419,386)
Restricted cash........................................... (461,841)
-----------
Net cash used by investing activities............. (881,227)
-----------
Cash flows from financing activities -- contributions from
members................................................... 73,709
-----------
Net decrease in cash.............................. (51,657)
Cash at the beginning of period............................. 143,030
-----------
Cash at end of period....................................... $ 91,373
===========
</TABLE>
See accompanying notes to financial statements.
F-185
<PAGE> 353
NTX, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
NTX, Inc. d/b/a TABNet (the Company), was incorporated as a subchapter S
Corporation in the State of California on November 24, 1997. Prior to
incorporation as a subchapter S Corporation, the Company was operating as NTX,
L.L.C., a limited liability corporation. All assets and liabilities of the
L.L.C. were contributed to the Company upon incorporation and recorded at
historical cost. The Company provides web hosting and domain name registration
services to customers primarily in the United States.
Effective July 7, 1998, Verio Inc. acquired 100% of the outstanding common
stock of the Company.
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 revenue and expenses during the
reporting period. Actual results may differ from those estimates.
RESTRICTED CASH
Restricted cash represents the retained portion of customer payments by the
Company's credit card merchant bank processors and is restricted for a period of
approximately six months after each payment transaction.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are recorded at cost, less accumulated
depreciation. Depreciation is recorded over the estimated useful lives of the
assets ranging from 3 to 5 years using the straight-line method. Leasehold
improvements are amortized over the shorter of the lease term or the estimated
useful life of the asset. Costs for normal repairs and maintenance are expensed
as incurred.
LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of (Statement No. 121). Statement No. 121 requires impairment losses to be
recognized on long-lived assets used in operations, including goodwill, when
indications of impairment are present and the undiscounted future cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. If such assets are impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds their fair
value. Assets to be disposed of are reported at the lower of the carrying amount
or fair value, less costs to sell.
REVENUE RECOGNITION
Web hosting and domain name registration revenue is recognized as the
services are provided. Set-up fees are recognized when installation is
completed. The Company records deferred revenue for accounts billed and/or
collected in advance.
INCOME TAXES
No provision for income taxes has been included in the accompanying
financial statements for the nine months ended June 30, 1998 due to the
Company's status as a limited liability corporation and subchapter S
Corporation. Accordingly, net losses for the period were included in the
respective individual tax returns of the members and stockholders.
F-186
<PAGE> 354
NTX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STOCK-BASED COMPENSATION
The Company accounts for its stock-based employee compensation using the
intrinsic value based method prescribed by Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations
(APB 25). The Company has no options outstanding at June 30, 1998, and no formal
stock option plan in place. The Company will provide the pro forma disclosures
of net loss as if the fair value based method of accounting for the stock-based
compensation, as prescribed by Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation (SFAS 123), had been applied, in
the future as applicable.
CONCENTRATION OF CREDIT RISK AND FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of June 30, 1998 approximate their carrying amounts
based on their terms and interest rates. The use of different market assumptions
and/or estimation methodologies may have a significant effect on the estimated
fair values.
(2) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consisted of the following at June 30,
1998:
<TABLE>
<S> <C>
Internet and computer equipment............................. $ 668,307
Furniture and leasehold improvements........................ 52,396
---------
720,703
Less accumulated depreciation............................. (194,761)
---------
$ 525,942
=========
</TABLE>
(3) STOCKHOLDERS' DEFICIT
During the nine months ended June 30, 1998, the Company granted rights to
acquire a specific percentage ownership in the Company to four employees as
compensation. The Company recorded stock-based compensation expense of
$3,640,000 which, in the opinion of the Company's Board of Directors,
represented fair value at the date of grant based on the per share price paid by
Verio Inc. in the acquisition of the Company's common stock.
(4) COMMITMENTS
The Company leases its facilities under long-term operating leases expiring
at various dates through 2003. Future minimum lease payments consist of the
following at June 30, 1998:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30:
--------------------
<S> <C>
1999...................................................... $120,148
2000...................................................... 70,188
2001...................................................... 23,610
2002...................................................... 22,920
2003...................................................... 19,100
--------
Total minimum lease payments...................... $255,966
========
</TABLE>
Rent expense totaled $78,688 for the nine months ended June 30, 1998.
F-187
<PAGE> 355
NTX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has entered into marketing agreements for internet search
engines and an agreement which provides for internet access. Future payments
under these noncancelable agreements as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30:
--------------------
<S> <C>
1999...................................................... $4,672,300
2000...................................................... 1,438,500
</TABLE>
F-188
<PAGE> 356
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheet of NTX, Inc. as of June 30,
1998, and the related statements of operations, stockholders' deficit, and cash
flows for the nine months 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 audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NTX, Inc. as of June 30,
1998, and the results of its operations and its cash flows for the nine months
then ended, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Denver, Colorado
August 5, 1998
F-189
<PAGE> 357
NTX, INC.
BALANCE SHEET
JUNE 30, 1998
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash...................................................... $ 91,373
Restricted cash........................................... 537,572
Receivables:
Trade, net of allowance for doubtful accounts of
$337,063.............................................. 1,080,965
Other.................................................. 25,000
Prepaid expenses and other................................ 20,523
-----------
Total current assets.............................. 1,755,433
Equipment and leasehold improvements, net (note 2).......... 525,942
Other assets, net........................................... 21,231
-----------
Total assets...................................... $ 2,302,606
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 721,248
Accrued liabilities....................................... 346,370
Deferred revenue.......................................... 1,904,564
-----------
Total current liabilities......................... 2,972,182
-----------
Stockholders' deficit (note 3):
Common stock, no par value, 4,210,524 shares authorized,
issued and outstanding................................. 3,640,000
Accumulated deficit....................................... (4,309,576)
-----------
Total stockholders' deficit....................... (669,576)
-----------
Commitments (note 4)
Total liabilities and stockholders' deficit....... $ 2,302,606
===========
</TABLE>
See accompanying notes to financial statements.
F-190
<PAGE> 358
NTX, INC.
STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1998
<TABLE>
<S> <C>
Revenue:
Web hosting............................................... $ 3,552,716
Domain name registration.................................. 2,733,506
Other..................................................... 316,320
-----------
Total revenue..................................... 6,602,542
-----------
Costs and expenses:
Operating................................................. 1,315,039
Selling, general and administrative....................... 5,750,785
Stock-based compensation (note 3)......................... 3,640,000
Depreciation and amortization............................. 124,818
-----------
Total costs and expenses.......................... 10,830,642
-----------
Loss from operations.............................. (4,228,100)
-----------
Other income (expense):
Interest income........................................... 6,131
Interest expense.......................................... (380)
-----------
Net loss.......................................... $(4,222,349)
===========
</TABLE>
See accompanying notes to financial statements.
F-191
<PAGE> 359
NTX, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
NINE MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
TOTAL
MEMBERS' COMMON ACCUMULATED STOCKHOLDERS'
DEFICIT STOCK DEFICIT DEFICIT
--------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCES AT OCTOBER 1, 1997................ $(160,936) $ -- $ -- $ (160,936)
Contributions from members................. 73,709 -- -- 73,709
Issuance of common stock in connection with
reincorporation.......................... 87,227 -- (87,227) --
Stock-based compensation expense (note
3)....................................... -- 3,640,000 -- 3,640,000
Net loss................................... -- -- (4,222,349) (4,222,349)
--------- ---------- ----------- -----------
BALANCE AT JUNE 30, 1998................... $ -- $3,640,000 $(4,309,576) $ (669,576)
========= ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-192
<PAGE> 360
NTX, INC.
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(4,222,349)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 124,818
Provision for bad debts................................ 259,499
Stock-based compensation expense....................... 3,640,000
Changes in operating assets and liabilities:
Trade and other accounts receivable.................. (1,118,363)
Prepaid expenses and other........................... (20,523)
Accounts payable..................................... 434,822
Accrued liabilities.................................. 209,994
Deferred revenue..................................... 1,469,194
Other assets, net.................................... (21,231)
-----------
Net cash provided by operating activities......... 755,861
-----------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements......... (419,386)
Restricted cash........................................... (461,841)
-----------
Net cash used by investing activities............. (881,227)
-----------
Cash flows from financing activities -- contributions from
members................................................... 73,709
-----------
Net decrease in cash.............................. (51,657)
Cash at the beginning of period............................. 143,030
-----------
Cash at end of period....................................... $ 91,373
===========
</TABLE>
See accompanying notes to financial statements.
F-193
<PAGE> 361
NTX, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
NTX, Inc. d/b/a TABNet (the Company), was incorporated as a subchapter S
Corporation in the State of California on November 24, 1997. Prior to
incorporation as a subchapter S Corporation, the Company was operating as NTX,
L.L.C., a limited liability corporation. All assets and liabilities of the
L.L.C. were contributed to the Company upon incorporation and recorded at
historical cost. The Company provides web hosting and domain name registration
services to customers primarily in the United States.
Effective July 7, 1998, Verio Inc. acquired 100% of the outstanding common
stock of the Company.
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 revenue and expenses during the
reporting period. Actual results may differ from those estimates.
RESTRICTED CASH
Restricted cash represents the retained portion of customer payments by the
Company's credit card merchant bank processors and is restricted for a period of
approximately six months after each payment transaction.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are recorded at cost, less accumulated
depreciation. Depreciation is recorded over the estimated useful lives of the
assets ranging from 3 to 5 years using the straight-line method. Leasehold
improvements are amortized over the shorter of the lease term or the estimated
useful life of the asset. Costs for normal repairs and maintenance are expensed
as incurred.
LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of (Statement No. 121). Statement No. 121 requires impairment losses to be
recognized on long-lived assets used in operations, including goodwill, when
indications of impairment are present and the undiscounted future cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. If such assets are impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds their fair
value. Assets to be disposed of are reported at the lower of the carrying amount
or fair value, less costs to sell.
REVENUE RECOGNITION
Web hosting and domain name registration revenue is recognized as the
services are provided. Set-up fees are recognized when installation is
completed. The Company records deferred revenue for accounts billed and/or
collected in advance.
INCOME TAXES
No provision for income taxes has been included in the accompanying
financial statements for the nine months ended June 30, 1998 due to the
Company's status as a limited liability corporation and subchapter S
Corporation. Accordingly, net losses for the period were included in the
respective individual tax returns of the members and stockholders.
F-194
<PAGE> 362
NTX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STOCK-BASED COMPENSATION
The Company accounts for its stock-based employee compensation using the
intrinsic value based method prescribed by Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations
(APB 25). The Company has no options outstanding at June 30, 1998, and no formal
stock option plan in place. The Company will provide the pro forma disclosures
of net loss as if the fair value based method of accounting for the stock-based
compensation, as prescribed by Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation (SFAS 123), had been applied, in
the future as applicable.
CONCENTRATION OF CREDIT RISK AND FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of June 30, 1998 approximate their carrying amounts
based on their terms and interest rates. The use of different market assumptions
and/or estimation methodologies may have a significant effect on the estimated
fair values.
(2) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consisted of the following at June 30,
1998:
<TABLE>
<S> <C>
Internet and computer equipment............................. $ 668,307
Furniture and leasehold improvements........................ 52,396
---------
720,703
Less accumulated depreciation..................... (194,761)
---------
$ 525,942
=========
</TABLE>
(3) STOCKHOLDERS' DEFICIT
During the nine months ended June 30, 1998, the Company granted rights to
acquire a specific percentage ownership in the Company to four employees as
compensation. The Company recorded stock-based compensation expense of
$3,640,000 which, in the opinion of the Company's Board of Directors,
represented fair value at the date of grant.
(4) COMMITMENTS
The Company leases its facilities under long-term operating leases expiring
at various dates through 2003. Future minimum lease payments consist of the
following at June 30, 1998:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30:
- --------------------
<S> <C>
1999................................................ $120,148
2000................................................ 70,188
2001................................................ 23,610
2002................................................ 22,920
2003................................................ 19,100
--------
Total minimum lease payments.............. $255,966
========
</TABLE>
Rent expense totaled $78,688 for the nine months ended June 30, 1998.
F-195
<PAGE> 363
NTX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has entered into marketing agreements for internet search
engines and an agreement which provides for internet access. Future payments
under these noncancelable agreements as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30:
- --------------------
<S> <C>
1999............................................... $4,672,300
2000............................................... 1,438,500
</TABLE>
F-196
<PAGE> 364
APPENDICES TO THE
PROXY STATEMENT/PROSPECTUS
APPENDIX A AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
APPENDIX B FORM OF PROXY OF HIWAY
APPENDIX C OPINION OF BT ALEX. BROWN INCORPORATED
APPENDIX D CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW
<PAGE> 365
APPENDIX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
VERIO INC.,
PURPLE ACQUISITION, INC.
AND
BEST INTERNET COMMUNICATIONS, INC.
NOVEMBER 17, 1998
<PAGE> 366
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE 1 THE MERGER................................................
1.1 The Merger..................................................
1.2 Effective Time of the Merger................................
ARTICLE 2 THE SURVIVING CORPORATION.................................
2.1 Articles of Incorporation...................................
2.2 Bylaws......................................................
2.3 Directors and Officers of Surviving Corporation.............
ARTICLE 3 CONVERSION OF SHARES......................................
3.1 Conversion of Shares........................................
3.2 Options and Warrants........................................
3.3 Exchange of Shares..........................................
3.4 Dividends; Transfer Taxes...................................
3.5 No Fractional Shares........................................
3.6 Closing of Company Transfer Books...........................
3.7 Closing.....................................................
3.8 Supplementary Action........................................
3.9 Dissenting Shares...........................................
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY.............
4.1 Due Organization; Good Standing; Authority; Binding Nature
of Agreements...............................................
4.2 Articles of Incorporation and Bylaws; Records...............
4.3 Capitalization; Ownership of Stock; Solvency, Etc. .........
4.4 Financial Statements........................................
4.5 Absence of Changes..........................................
4.6 Title to Assets; Equipment; Real Property, Leases;
Inventory...................................................
4.7 Receivables; Major Customers................................
4.8 Accounts Payable; Major Suppliers...........................
4.9 Proprietary Assets..........................................
4.10 Contracts...................................................
4.11 Compliance With Legal Requirements..........................
4.12 Governmental Authorizations.................................
4.13 Tax Matters.................................................
4.14 Employee and Labor Matters..................................
4.15 Benefit Plans; ERISA........................................
4.16 Environmental Matters.......................................
4.17 Sale of Products; Performance of Services...................
4.18 Insurance...................................................
4.19 Proceedings; Orders.........................................
4.20 Non-Contravention; Consents.................................
4.21 Brokers.....................................................
4.22 Full Disclosure.............................................
4.23 Powers of Attorney..........................................
4.24 Securities Law Compliance...................................
4.25 Takeover Statutes...........................................
4.26 Voting Arrangements.........................................
4.27 Financial Projections.......................................
4.28 Ownership of Shares of Verio Common Stock...................
</TABLE>
i
<PAGE> 367
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF VERIO AND MERGER SUB....
5.1 Due Organization; Good Standing; Authority; Binding Nature
of Agreements...............................................
5.2 Proceedings; Orders.........................................
5.3 Non-Contravention; Consents.................................
5.4 Brokers.....................................................
5.5 Financial Capacity..........................................
5.6 Full Disclosure; SEC Reports................................
ARTICLE 6 PRE-CLOSING PERIOD COVENANTS OF THE COMPANY...............
6.1 Access and Investigation. The Company shall ensure that, at
all times during the Pre-Closing Period:....................
6.2 Operation of Business.......................................
6.3 Filings and Consents; Cooperation...........................
6.4 Notification; Updates to Disclosure Schedule................
6.5 Payment of Indebtedness by Related Parties..................
6.6 No Negotiation or Solicitation..............................
6.7 Best Efforts................................................
6.8 Confidentiality; Publicity..................................
6.9 FIRPTA Certification........................................
6.10 Proprietary Information and Inventions Agreements...........
6.11 Letters of the Company's Auditors...........................
6.12 Reports of Company Transaction Expenses.....................
6.13 Affiliates..................................................
6.14 Takeover Statutes...........................................
6.15 Bank Accounts...............................................
6.16 Supplier Information........................................
6.17 Employee Information........................................
6.18 Insurance Information.......................................
6.19 Company Accruals and Reserves...............................
6.20 Termination of Employment Agreements........................
6.21 Subsidiary and other Equity Interests.......................
ARTICLE 7 PRE-CLOSING PERIOD COVENANTS OF VERIO.....................
7.1 Notification................................................
7.2 Best Efforts................................................
7.3 Confidentiality; Publicity..................................
ARTICLE 8 ADDITIONAL AGREEMENTS.....................................
8.1 Proxy Statement/Prospectus..................................
8.2 Company Shareholder Approval................................
8.3 Reserved....................................................
8.4 Nasdaq National Market......................................
8.5 Antitrust Laws..............................................
8.6 Certain Employee Benefit Plans Matters......................
8.7 Integration Matters.........................................
8.8 Stock Options and Warrants..................................
8.9 Expenses....................................................
8.10 Additional Agreements.......................................
</TABLE>
ii
<PAGE> 368
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE 9 CONDITIONS TO CONSUMMATION OF THE MERGER..................
9.1 Conditions to Each Party's Obligation to Effect the
Merger......................................................
9.2 Additional Conditions to Verio's and Merger Sub's Obligation
to Consummate the Merger....................................
9.3 Additional Conditions to the Company's Obligation to
Consummate the Merger.......................................
ARTICLE 10 TERMINATION..............................................
10.1 Termination.................................................
10.2 Termination Procedures......................................
10.3 Effect of Termination.......................................
10.4 Exclusivity of Termination Rights...........................
ARTICLE 11 MISCELLANEOUS PROVISIONS.................................
11.1 Further Assurances..........................................
11.2 Fees and Expenses...........................................
11.3 Attorneys' Fees.............................................
11.4 Notices.....................................................
11.5 Time of the Essence.........................................
11.6 Headings....................................................
11.7 Counterparts................................................
11.8 Governing Law; Venue........................................
11.9 Successors and Assigns......................................
11.10 Remedies Cumulative; Specific Performance...................
11.11 Waiver......................................................
11.12 Amendments..................................................
11.13 Severability................................................
11.14 Parties in Interest.........................................
11.15 Entire Agreement............................................
11.16 No Survival.................................................
11.17 Investigation...............................................
11.18 Original Merger Agreement Superseded........................
11.19 Construction................................................
</TABLE>
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AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
This AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "Agreement"),
dated as of November 17, 1998, by and among VERIO INC. ("Verio"), a Delaware
corporation, PURPLE ACQUISITION, INC. ("Merger Sub"), a California corporation,
and BEST INTERNET COMMUNICATIONS, INC. (the "Company"), a California
corporation. Certain capitalized terms used in this Agreement are defined in
Exhibit A.
WHEREAS, the Boards of Directors of Verio, Merger Sub and the Company each
have determined that the acquisition of the Company by Verio is in the best
interests of their respective companies and stockholders and presents an
opportunity for their respective companies to achieve long-term strategic and
financial benefits, and accordingly have agreed to effect the merger provided
for herein upon the terms and subject to the conditions set forth herein;
WHEREAS, Verio, Merger Sub and the Company entered into an Agreement and
Plan of Merger dated as of July 28, 1998 (the "Original Merger Agreement"),
providing for the merger of the Company with and into Merger Sub;
WHEREAS, Verio, Merger Sub and the Company desire to amend and restate the
Original Merger Agreement as provided herein; and
WHEREAS, concurrently herewith Verio has entered into voting agreements
("Voting Agreements") with certain holders of capital stock of the Company
pursuant to which such holders have, among other things, agreed to vote their
shares of Company capital stock in favor of the merger contemplated herein and
have granted Verio irrevocable proxies to vote such shares in such manner;
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE 1
THE MERGER
1.1 The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time Merger Sub shall be merged with and into the Company, the
Company shall be the surviving corporation (the "Surviving Corporation") and the
separate existence of the Company shall thereupon cease (the "Merger"). The
Merger shall have the effects set forth in the applicable provisions of the
California General Corporation Law ( the "CGCL"). Without limiting the
generality of the foregoing, at and after the Effective Time the Surviving
Corporation shall possess all the rights, privileges, powers and franchises of a
public as well as of a private nature, and be subject to all the restrictions,
disabilities and duties, of each of the constituent corporations in the Merger.
1.2 Effective Time of the Merger. The Merger shall become effective when a
properly executed agreement of merger (the "Agreement of Merger"), in such form
as may be agreed by the parties hereto and as required by the relevant
provisions of the CGCL, is duly filed with the Secretary of State of the State
California, which filing shall be made in connection with the closing of the
Transactions in accordance with Section 3.7 upon satisfaction or waiver of the
conditions set forth in Article 9. When used in this Agreement, the term
"Effective Time" shall mean the date and time at which such Agreement of Merger
has been so filed or at such later time as is provided in the Agreement of
Merger.
ARTICLE 2
THE SURVIVING CORPORATION
2.1 Articles of Incorporation. The Articles of Incorporation of the
Company shall be the Articles of Incorporation of the Surviving Corporation,
provided, that effective as of the Effective Time the Articles of
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Incorporation of the Company shall be amended in their entirety to conform to
the Articles of Incorporation of Merger Sub (other than with respect to the name
of the Surviving Corporation), and shall continue as the Articles of
Incorporation of the Surviving Corporation until duly amended in accordance with
the terms thereof and the CGCL.
2.2 Bylaws. The Bylaws of the Company as in effect at the Effective Time
shall be the Bylaws of the Surviving Corporation, provided, that effective as of
the Effective Time the Bylaws of the Company shall be amended in their entirety
to conform to the Bylaws of Merger Sub, and shall continue as the Bylaws of the
Surviving Corporation until duly amended in accordance with the terms thereof
and the CGCL.
2.3 Directors and Officers of Surviving Corporation.
(a) The directors of Merger Sub shall be the initial directors of the
Surviving Corporation and shall hold office from the Effective Time until their
respective successors are duly elected or appointed and qualified, or until
their earlier death, resignation or removal in accordance with the Articles of
Incorporation and Bylaws of the Surviving Corporation, or as otherwise provided
by law.
(b) The officers of Merger Sub at the Effective Time shall be the initial
officers of the Surviving Corporation and shall hold office from the Effective
Time until their respective successors are duly elected or appointed and
qualified, or until their earlier death, resignation or removal in accordance
with the Articles of Incorporation and Bylaws of the Surviving Corporation, or
as otherwise provided by law.
ARTICLE 3
CONVERSION OF SHARES
3.1 Conversion of Shares.
(a) At the Effective Time, by virtue of the Merger and without any action
on the part of the holders thereof, each share of the Common Stock, no par value
per share, of the Company ("Company Common Stock") that is issued and
outstanding immediately prior to the Effective Time shall be converted into the
right to receive, upon surrender of the certificate (the "Certificate") formerly
representing such share of Company Common Stock, (i) that number of shares of
the Common Stock, $0.001 par value per share, of Verio ("Verio Common Stock") as
equals the Common Stock Exchange Ratio and (ii) that amount of cash as equals
the Per Share Cash Amount; provided, however, that each share of Company Common
Stock that is held in the treasury of the Company, by any subsidiary of the
Company, by Verio or by any subsidiary of Verio immediately prior to the
Effective Time shall not be so converted but shall be canceled and retired, and
no consideration shall be delivered in exchange therefor.
(b) As used herein, the following terms shall be defined as follows.
(i) "Aggregate Transaction Value" shall be equal to Two Hundred Forty
One Million Five Hundred Thirty Eight Thousand Three Hundred Fifteen
dollars ($241,538,315) less all Excess Company Transaction Expenses.
(ii) "Common Stock Exchange Ratio" shall be equal to the quotient of
the Per Share Stock Amount divided by $16.00.
(iii) "Company Capitalization Number" shall be equal to the number of
shares of Company Common Stock issued and outstanding on the Closing Date,
on a fully-diluted, as-converted-to-common basis, including without
limitation (i) all shares of Company Common Stock then issued and
outstanding, and (ii) all shares of Company Common Stock issuable upon the
exercise of any options, warrants or other rights to purchase Company
Common Stock then issued and outstanding (in each case whether or not
vested).
(iv) "Company Transaction Expenses" shall be all expenses that are
incurred or paid by the Company, or which the Company may be legally
obligated to pay or reimburse, in connection with or related to the Merger
and the Transactions or the Company's proposed initial public offering, in
each case
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whether before or after Closing (other than amounts actually paid prior to
June 30, 1998), including, without limitation, (i) all legal, printing,
investment banking and accounting fees, (ii) all payments that may be made
in respect of noncompetition covenants or agreements (other than
performance bonuses earned prior to the date hereof), and (iii) all
payments that may be made in respect of the termination of the employment
agreements between the Company and each of the Company Specified Officers
as required by Section 6.20 or that would constitute "parachute payments"
within the meaning of Section 280G of the Code made to such Company
Specified Officers.
(v) "Excess Company Transaction Expenses" shall be equal to the sum of
all Company Transaction Expenses in excess of $9.338 million.
(vi) "Outstanding Shares Number" shall be equal to the number of
shares of Company Common Stock issued and outstanding on the Closing Date.
(vii) "Per Share Cash Amount" shall be equal to the quotient of $176
million divided by the Outstanding Shares Number.
(viii) "Per Share Price" shall be equal to the quotient obtained when
(i) the Aggregate Transaction Value plus proceeds that would be receivable
upon exercise of Company Stock Options and warrants outstanding at July 28,
1998 or issued subsequent to such date and prior to the Closing Date, and
in any such case which remain outstanding on, or are exercised prior to,
the Closing Date, is divided by (ii) the Company Capitalization Number.
(ix) "Per Share Stock Amount" shall be equal to the Per Share Price
minus the Per Share Cash Amount.
(c) At the Effective Time, by virtue of the Merger and without any action
on the part of the holder thereof, each share of the Common Stock, no par value
per share, of Merger Sub that is issued and outstanding immediately prior to the
Effective Time shall be converted into and continue as one share of the Common
Stock of the Surviving Corporation.
3.2 Options and Warrants. At the Effective Time, all stock options,
warrants and convertible securities to purchase Company Common Stock then
outstanding shall be assumed by Verio in accordance with Section 8.8.
3.3 Exchange of Shares.
(a) Prior to the Effective Time, Verio shall select, and enter into an
agreement (in form and substance reasonably satisfactory to the Company) with, a
bank or trust company to act as exchange agent hereunder (the "Exchange Agent").
On the Closing Date, Verio shall deposit by wire transfer or other transfer of
immediately available funds with the Exchange Agent the cash and shares of Verio
Common Stock required to be delivered hereunder in connection with the
conversion of Company Common Stock at the Effective Time. After the Effective
Time, each holder of shares of Company Common Stock (other than Dissenting
Shares) will be entitled to receive, upon surrender to the Exchange Agent of one
or more Certificates and a duly executed letter of transmittal as described
below, certificates representing the number of whole shares of Verio Common
Stock and cash into which such shares of Company Common Stock are converted in
the Merger. The shares of Verio Common Stock into which the shares of Company
Common Stock shall be converted in the Merger shall be deemed to have been
issued at the Effective Time.
(b) As soon as reasonably practicable after the Effective Time, the
Exchange Agent shall mail to each holder of record of Company Common Stock (i) a
letter of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such other
provisions as Verio may reasonably specify that are not inconsistent with the
terms of this Agreement) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing shares
of Verio Common Stock. Upon surrender of a Certificate for cancellation to the
Exchange Agent together with such letter of transmittal, duly executed, the
holder of such Certificate shall be entitled to receive in exchange therefor (i)
a certificate representing that number of whole shares of Verio Common Stock and
(ii) a check representing the amount
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of cash which such holder has the right to receive in respect of the Certificate
so surrendered pursuant to the provisions of this Article 3.
(c) In the event that any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed, the Exchange Agent will issue
or cause to be issued in exchange for such lost, stolen or destroyed Certificate
the number of whole shares of Verio Common Stock and cash into which the shares
of Company Common Stock represented by the Certificate are converted in the
Merger in accordance with this Article 3. When authorizing such issuance in
exchange therefor, Verio and/or the Exchange Agent may, in its discretion and as
a condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed Certificate to give Verio and/or the Exchange Agent a bond
in such sum as it may direct as indemnity, or such other form of indemnity, as
it shall direct, against any claim that may be made against Verio or the
Exchange Agent with respect to the Certificate alleged to have been lost, stolen
or destroyed.
3.4 Dividends; Transfer Taxes.
(a) No dividends that are declared on shares of Verio Common Stock after
the Effective Time (if any) will be paid to persons entitled to receive
certificates representing shares of Verio Common Stock until such persons
surrender their Certificates. Upon such surrender, there shall be paid to the
person in whose name the certificates representing such shares of Verio Common
Stock shall be issued any dividends which shall have become payable with respect
to such shares of Verio Common Stock between the Effective Time and the time of
such surrender. In no event shall the person entitled to receive such dividends
be entitled to receive interest on such dividends.
(b) If any certificates for any shares of Verio Common Stock are to be
issued in a name other than that in which the Certificate surrendered in
exchange therefor is registered, it shall be a condition of such exchange that
the Person requesting such exchange shall (i) pay to the Exchange Agent any
transfer or other taxes required by reason of the issuance of certificates for
such shares of Verio Common Stock in a name other than that of the registered
holder of the Certificate surrendered or (ii) establish to the satisfaction of
the Exchange Agent that such tax has been paid or is not applicable.
(c) Notwithstanding anything in this Agreement to the contrary, neither the
Exchange Agent nor any party hereto shall be liable to a holder of shares of
Company Common Stock for any shares of Verio Common Stock or dividends thereon
or the cash payments otherwise due hereunder delivered to a public official
pursuant to applicable escheat laws following the passage of time specified
therein.
3.5 No Fractional Shares. Notwithstanding anything herein to the contrary,
no fractional shares of Verio Common Stock shall be issued pursuant to the
Merger. In lieu of the issuance of any such fractional share of Verio Common
Stock, cash will be paid in respect of any fractional share of Verio Common
Stock that would otherwise be issuable. The amount of such cash shall be the
product of (i) such fraction of a share of Verio Common Stock (after aggregating
all the shares of Verio Common Stock to be issued to a holder) multiplied by
(ii) $16.00.
3.6 Closing of Company Transfer Books. At the Effective Time, the stock
transfer books of the Company shall be closed and no transfer of shares of
Company Common Stock shall thereafter be made. If, after the Effective Time,
Certificates are presented to the Surviving Corporation, they shall be canceled
and exchanged for certificates representing shares of Verio Common Stock and
cash in accordance with the terms hereof. At and after the Effective Time, the
holders of shares of Company Common Stock to be exchanged for shares of Verio
Common Stock pursuant to this Agreement shall cease to have any rights as
shareholders of the Company, except for the right to surrender such Certificates
in exchange for shares of Verio Common Stock as provided hereunder or such
dissenters' rights as are provided under applicable law.
3.7 Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Morrison & Foerster
LLP, 425 Market Street, San Francisco, California 94105 at 9:00 a.m., local
time, on the date (the "Closing Date") that is the later of (i) January 1, 1999,
or as soon thereafter as is reasonably practical, and (ii) the first business
day following the date on which the Company's shareholders have given any
requisite approvals of this Agreement and the Transactions in accordance with
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Legal Requirements; provided, however, that if all of the other conditions set
forth in Article 9 hereof are not satisfied or waived at such date, the Closing
Date shall be the business day following the day on which all such conditions
have been satisfied or waived, or at such other date, time and place as Verio,
Merger Sub and the Company shall agree.
3.8 Supplementary Action. If, at any time after the Effective Time, any
further assignments or assurances in law or any other things are necessary or
desirable to vest or to perfect or confirm of record in the Surviving
Corporation the title to any property or rights of the Company, or otherwise to
carry out the provisions of this Agreement, the officers and directors of the
Surviving Corporation are hereby authorized and empowered on behalf of the
Company in the name of and on behalf of the Company to execute and deliver any
and all things necessary or proper to vest or to perfect or confirm title to
such property or rights in the Surviving Corporation, and otherwise to carry out
the purposes and provisions of this Agreement.
3.9 Dissenting Shares.
(a) Notwithstanding any provisions of this Agreement to the contrary, any
shares of Company Common Stock held by a holder who has exercised such holder's
dissenters' rights in accordance with the CGCL and who, as of the Effective
Time, has not effectively withdrawn or lost such dissenters' rights ("Dissenting
Shares"), shall not be converted into or represent a right to receive the
consideration described in Section 3.1, but the holder of the Dissenting Shares
shall only be entitled to such rights as are granted by the CGCL.
(b) Notwithstanding the provisions of subsection (a) above, if any holder
of shares of Company Common Stock who demands dissenters' rights with respect to
such shares shall effectively withdraw or lose (through the failure to perfect
or otherwise) such holder's dissenters' rights under the CGCL, then, as of the
Effective Time or the occurrence of such event, such holder's shares shall
automatically be converted into and represent only the right to receive the
consideration described in Section 3.1 upon surrender of the applicable
Certificate(s) as provided herein.
(c) The Company shall give Verio (i) prompt written notice of any written
demands for payment with respect to any shares of Company Common Stock pursuant
to dissenters' rights, and any withdrawals of such demands or losses of such
rights, and any other instruments served pursuant to the CGCL, and (ii) the
opportunity to participate in all negotiations and proceedings with respect to
demands for dissenters' rights. The Company shall not, except with the prior
written consent of Verio, voluntarily make any payment with respect to demands
for dissenters' rights or offer to settle or settle any such demands. It is the
opinion of the Company's Board of Directors that, subject to receipt of a
favorable fairness opinion from the financial advisor to the Company, the fair
market value of a share of Company Common Stock as of the day before the first
announcement of the terms of the proposed Merger, excluding any appreciation or
depreciation in consequence of the proposed Merger, in no event exceeds $6.30.
Following approval of the Merger by the shareholders of the Company, the Company
shall promptly mail to its shareholders a notice of such approval in accordance
with the provisions of the CGCL relating to dissenters' rights, provided, that
the Company shall not issue any such notice of approval or make any other offer
to purchase shares of Company Common Stock without Verio's prior consent.
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as specifically set forth in the disclosure schedule provided by the
Company simultaneously herewith (the "Disclosure Schedule"), the parts of which
are numbered to correspond to the Section numbers of this Agreement, the Company
hereby represents and warrants to Verio and Merger Sub as follows:
4.1 Due Organization; Good Standing; Authority; Binding Nature of
Agreements.
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of California, and has all necessary
corporate power and authority:
(i) to conduct its business in the manner in which its business is
currently being conducted and in the manner in which its business is
proposed to be conducted prior to the Closing;
(ii) to own and use its assets in the manner in which its assets are
currently owned and used and in the manner in which its assets are proposed
to be owned and used prior to the Closing;
(iii) to perform its obligations under all Company Contracts; and
(iv) to enter into and perform all of its obligations under the
Transactional Agreements.
(b) The Company has never conducted directly or through any subsidiary any
business under or otherwise used, for any purpose or in any jurisdiction, any
fictitious name, assumed name, trade name or name other than "Best Internet
Communications, Inc.," "Hiway Technologies, Inc.," and "RapidSite, Inc."
(c) The Company is duly qualified and in good standing as a foreign
corporation in each of the jurisdictions in which the nature of its business or
the ownership or leasing of its properties requires such qualification. Section
4.1(c) of the Disclosure Schedule sets forth a true and complete list of each
jurisdiction in which the Company has an officer or a paid representative
(employee or consultant) or owns or leases property and of each jurisdiction in
which the Company is qualified to do business.
(d) Section 4.1(d) of the Disclosure Schedule accurately sets forth (i) the
names of the members of the Company's Board of Directors, and (ii) the names and
titles of the Company's officers. The Company has no committee of the Company's
Board of Directors.
(e) Neither the Company nor any of its shareholders has ever approved, or
commenced any proceeding or made any election contemplating, the dissolution or
liquidation of the Company or the winding up or cessation of the Company's
business or affairs.
(f) Except as indicated in Section 4.1(f) of the Disclosure Schedule, the
Company has no subsidiaries, and the Company has never owned, beneficially or
otherwise, any shares or other securities of, or any direct or indirect interest
of any nature in, any Entity. Each subsidiary of the Company, and each other
Entity in which the Company owns equity interests, indicated on Section 4.1(f)
of the Disclosure Schedule is a corporation duly organized, validly existing and
in good standing under the laws of its jurisdiction of incorporation. The shares
of capital stock owned by the Company in its subsidiaries or in other Entities
as indicated in Section 4.1(f) of the Disclosure Schedule have been duly
authorized and validly issued, and are fully paid and nonassessable.
(g) The execution, delivery and performance of the Transactional Agreements
have been duly authorized by all necessary action on the part of Company, its
officers, and its Board of Directors, subject to the approval of the
shareholders of the Company.
(h) The Transactional Agreements each constitute the legal, valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms and conditions, subject to the approval of the shareholders of
the Company.
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4.2 Articles of Incorporation and Bylaws; Records.
(a) The Company has delivered to Verio accurate and complete copies of:
(i) the Company's Articles of Incorporation and Bylaws, including all
amendments thereto;
(ii) the stock records of the Company; and
(iii) the minutes and other records of the meetings and other
proceedings (including any actions taken by written consent or otherwise
without a meeting) of the shareholders of the Company and the Board of
Directors of the Company.
There have been no meetings or other proceedings of the shareholders of the
Company or the Board of Directors of the Company that are not reflected in such
minutes or other records.
(b) There has not been any violation of any of the provisions of the
Company's Articles of Incorporation or Bylaws or of any resolution adopted by
the Company's shareholders or the Company's Board of Directors, and to the
Knowledge of the Company no event has occurred, and no condition or circumstance
exists, that likely would (with or without notice or lapse of time) constitute
or result directly or indirectly in such a violation.
(c) The books of account, stock records, minute books and other records of
the Company are accurate, up to date and complete, and have been maintained in
accordance with sound and prudent business practices. All of the records of the
Company are in the actual possession and direct control of the Company.
4.3 Capitalization; Ownership of Stock; Solvency, Etc.
(a) The authorized capital stock of the Company consists of (i) ten million
(10,000,000) shares of Preferred Stock, no par value per share, of which five
hundred thousand (500,000) are designated Series A Preferred Stock and four
million (4,000,000) are designated Series B Preferred Stock, and (ii) sixty
million (60,000,000) shares of Company Common Stock, no par value per share. As
of November 13, 1998: (i) thirty five million eight hundred eighty seven
thousand nine hundred thirteen (35,887,913) shares of Company Common Stock, (ii)
no shares of Preferred Stock, (iii) options to purchase one million three
hundred ninety nine thousand two hundred five (1,399,205) shares of Company
Common Stock, and (iv) warrants to purchase three million one hundred fifteen
thousand one hundred twenty-three (3,115,123) shares of Company Common Stock
have been issued and are outstanding. All of such Company Common Stock, warrants
and options are owned of record by the shareholders, warrantholders and
optionholders specified in Section 4.3 of the Disclosure Schedule, in each case
free and clear of any Encumbrances. The aggregate proceeds receivable by the
Company upon exercise of all options and warrants outstanding as of November 13,
1998 was $13,182,800. On the Closing Date, the Company shall deliver to Verio a
true and correct update of the information in this Section 4.3(a) as of the
Closing Date.
(b) All of the shares of Company Common Stock currently outstanding (i)
have been duly authorized and validly issued, (ii) are fully paid and
nonassessable, and (iii) have been issued in full compliance with all applicable
securities laws and other applicable Legal Requirements. The Company has
delivered to Verio accurate and complete copies of the stock certificates
evidencing the currently outstanding shares of Company Common Stock.
(c) Other than as set forth in Section 4.3(a) above or on Section 4.3(a) of
the Disclosure Schedule, there is no:
(i) outstanding preemptive right, subscription, option, call, warrant
or right (whether or not currently exercisable) to acquire any shares of
the capital stock or other securities of the Company;
(ii) outstanding security, instrument or obligation that is or may
become convertible into or exchangeable for any shares of the capital stock
or other securities of the Company;
(iii) Contract under which the Company is or may become obligated to
sell or otherwise issue any shares of its capital stock or any other
securities; or
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(iv) condition or circumstance that likely would directly or
indirectly give rise to or provide a basis for the assertion of a claim by
any Person to the effect that such Person is entitled to acquire or receive
any shares of capital stock or other securities of the Company.
(d) The Company has neither repurchased, redeemed or otherwise reacquired
(and, except as contemplated by this Agreement, has not agreed, committed or
offered (in writing or otherwise) to reacquire) any shares of capital stock or
other securities. Any securities reacquired by the Company were (or will have
been) reacquired in full compliance with the applicable provisions of all
applicable Legal Requirements.
4.4 Financial Statements.
(a) The Company has delivered to Verio the following financial statements
and notes (collectively, the "Financial Statements"), which are attached hereto
as Exhibit B:
(i) the audited balance sheet of the Company as of December 31, 1997,
and the related statements of operations, changes in shareholders' equity
and fund balance and cash flows of the Company as of December 31, 1997,
together with the notes thereto; and
(ii) the unaudited balance sheets of the Company as of September 30,
1998 (the "Unaudited Interim Balance Sheet") and related unaudited
statements of operations, for the 9 months then ended.
(b) All of the Financial Statements are accurate and complete in all
respects. The Financial Statements are in accordance with the books and records
of the Company, present fairly the financial position of the Company as of the
respective dates thereof and the results of operations and, with respect to the
unaudited Financial Statements, changes in shareholders' equity and fund balance
and cash flows of the Company for the respective periods covered thereby, and
have been prepared in conformity with GAAP applied on a consistent basis,
subject, in the case of the unaudited financial statements, to normal recurring
year-end adjustments, the effect of which will not be material and the absence
of notes and statements of cash flows and changes in shareholders' equity.
(c) At the date of the Unaudited Interim Balance Sheet, (i) the Company had
no Liabilities of any nature (matured or unmatured, fixed or contingent)
required by GAAP consistently applied to be provided for in such Unaudited
Interim Balance Sheet which were not provided for, (ii) the Company had no
material Liabilities of any nature (matured or unmatured, fixed or contingent)
which were not required by GAAP to be provided for in the Unaudited Interim
Balance Sheet and (iii) all reserves established by the Company and set forth in
the Unaudited Interim Balance Sheet were adequate for the purposes for which
they were established.
(d) As of the date of this Agreement, the Company has no Liabilities in
excess of $100,000 individually, or $250,000 in the aggregate, except for:
(i) Liabilities identified as such in the "liabilities" column of the
Unaudited Interim Balance Sheet;
(ii) accounts payable and Liabilities (of the type required to be
reflected as current liabilities in the "liabilities" column of a balance
sheet prepared in accordance with GAAP) incurred and accrued by the Company
in the Ordinary Course of Business since the date of the Unaudited Interim
Balance Sheet; and
(iii) the Company Transaction Expenses, the Company's good faith
estimate of which is included in Section 4.4(d) of the Disclosure Schedule.
4.5 Absence of Changes. Since the date of the Unaudited Balance Sheet:
(a) there has not been any material adverse change in the Company's
business, condition, assets, liabilities, operations, financial performance or
results of operations, and no event has occurred that likely would have an
adverse effect on the Company's business, condition, assets, liabilities,
operations, financial performance or results of operations;
(b) there has not been any material loss, damage or destruction to, or any
interruption in the use of, any of the Company's assets (whether or not covered
by insurance);
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(c) the Company has not (i) declared, accrued, set aside or paid any
dividend or made any other distribution in respect of any shares of capital
stock, or (ii) repurchased, redeemed or otherwise reacquired any shares of
capital stock or other securities, other than pursuant to existing agreements
with Company employees at the original purchase price upon termination of such
employee's employment with the Company;
(d) the Company has not sold or otherwise issued any shares of capital
stock or any other securities, other than upon exercise of options or warrants
outstanding at the date hereof or pursuant to the exercise of options granted
after the date hereof to new employees as permitted pursuant to Section 6.2(f);
(e) the Company has not amended its Articles of Incorporation or Bylaws and
has not effected or been a party to any transaction relating to an Acquisition
Proposal, recapitalization, reclassification of shares, stock split, reverse
stock split or similar transaction;
(f) the Company has not purchased or otherwise acquired any asset from any
other Person, except for assets acquired by the Company in the Ordinary Course
of Business;
(g) the Company has not leased or licensed any asset from any other Person,
except for assets leased or licensed in the Ordinary Course of Business;
(h) the Company has not made any capital expenditures outside the Ordinary
Course of Business, except for such capital expenditures as in the aggregate,
measured by invoice amount, do not exceed $2 million or were consented to by
Verio in writing;
(i) the Company has not sold or otherwise transferred, and has not leased
or licensed, any asset to any other Person, except for products sold by the
Company from its inventory in the Ordinary Course of Business;
(j) the Company has not written off as uncollectible, or established any
extraordinary reserve with respect to, any account receivable or other
indebtedness, except in the Ordinary Course of Business;
(k) the Company has not pledged or hypothecated any of its assets or
otherwise permitted any of its assets to become subject to any Encumbrance,
except in the Ordinary Course of Business;
(l) the Company has not made any loan or advance to any other Person,
including without limitation, any shareholder of the Company;
(m) the Company has not (i) established or adopted any Employee Benefit
Plan or (ii) paid any bonus or made any profit sharing or similar payment to, or
increased the amount of the wages, salary, commissions, fringe benefits or other
compensation or remuneration payable to, any of its directors, officers or
employees, other than as required under agreements existing on the date hereof
as disclosed in Section 4.5(m) of the Disclosure Schedule;
(n) the Company has not entered into, and neither the Company nor any of
the assets owned or used by the Company has become bound by, any Contract,
except in the Ordinary Course of Business;
(o) no Contract by which the Company or any of the assets owned or used by
the Company is or was bound, or under which the Company has or had any rights or
interest, has been amended or terminated, other than in the Ordinary Course of
Business;
(p) there has been no borrowing or agreement to borrow by the Company
(other than borrowings in the Ordinary Course of Business under the Company's
line of credit with Silicon Valley Bank, up to a maximum of $2 million in the
aggregate) or change in any guaranty, endorsement, indemnity, warranty or other
obligation of the Company in respect of the obligations of others, or grant of a
mortgage or security interest in any property of the Company, and the Company
has not incurred, assumed or otherwise become subject to any Liabilities, other
than accounts payable (of the type required to be reflected as current
liabilities on a balance sheet prepared in accordance with GAAP) incurred by the
Company in the Ordinary Course of Business;
(q) the Company has not discharged any Encumbrance or discharged or paid
any indebtedness or other Liability, except any that (i) are reflected as
current liabilities in the Unaudited Interim Balance Sheet or
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have been incurred by the Company since the date thereof in the Ordinary Course
of Business, and (ii) have been discharged or paid in the Ordinary Course of
Business;
(r) the Company has not forgiven any debt or otherwise released or waived
any right or claim;
(s) the Company has not changed any of its methods of accounting or
accounting practices in any respect;
(t) the Company has not entered into any transaction or taken any other
action outside the Ordinary Course of Business; and
(u) the Company has not agreed or committed (in writing or otherwise), to
take any of the actions referred to in clauses (c) through (t) above.
4.6 Title to Assets; Equipment; Real Property, Leases; Inventory.
(a) The Company owns, and has good, valid and marketable title to, all
assets it purports to own, including:
(i) all assets reflected on the Unaudited Interim Balance Sheet
(except for inventory sold by the Company since the date thereof in the
Ordinary Course of Business);
(ii) all assets acquired by the Company since the date of the
Unaudited Interim Balance Sheet (except for inventory sold by the Company
since the date of the Unaudited Interim Balance Sheet in the Ordinary
Course of Business);
(iii) all assets referred to in Sections 4.6(b), 4.7 and 4.9 of the
Disclosure Schedule, except leased assets identified in Section 4.6(b) of
the Disclosure Schedule, and all of the Company's rights under Company
Contracts; and
(iv) all other assets reflected in the Company's books and records as
being owned by the Company.
All of said assets are owned by the Company free and clear of any Encumbrances,
except liens for current taxes and assessments not delinquent.
(b) Section 4.6(b) of the Disclosure Schedule identifies all computers,
routers, networking equipment, telecommunications equipment and other tangible
and intangible assets owned by or leased to the Company and used by the Company
in its web hosting and Internet access businesses, other than ordinary office
furniture and office supplies.
(c) To the Knowledge of the Company, each asset identified in Section
4.6(b) of the Disclosure Schedule:
(i) is in good condition and repair, consistent with its age and
intended use (ordinary wear and tear excepted);
(ii) complies in all respects and is being operated and otherwise used
in full compliance with all applicable Legal Requirements; and
(iii) is adequate for the uses to which it is being put.
(d) The Company does not own any real property or any interest in real
property, except for the leaseholds created under the real property leases
identified in Section 4.6(d) of the Disclosure Schedule (the "Leased Premises").
Section 4.6(d) of the Disclosure Schedule provides an accurate and complete
description of the premises covered by said leases and the facilities located on
such premises. The Company enjoys peaceful and undisturbed possession of such
premises. The Company has delivered to Verio complete copies of all such leases.
The Surviving Corporation will obtain a valid leasehold interest in such leases,
in each case free and clear of all title defects, Encumbrances and restrictions
of any kind, except: (i) mechanics', carriers', workers' and other similar liens
arising in the Ordinary Course of Business since the date of the Unaudited
Interim Balance Sheet and (ii) liens for current taxes not yet due and payable.
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(e) Section 4.6(e) of the Disclosure Schedule identifies all personal
property assets that are being leased or licensed to the Company.
(f) All leases pursuant to which the Company leases real or personal
property are valid and effective in accordance with their respective terms and,
to the Company's Knowledge, there exists no default thereunder or occurrence or
condition which could result in a default thereunder or termination thereof.
(g) The Company's Leased Premises are in a condition adequate for the
conduct of the business in the Ordinary Course of Business, and the Company
owns, or has a valid leasehold interest in or license to, all assets necessary
for the conduct of its business as presently conducted.
4.7 Receivables; Major Customers.
(a) Section 4.7 of the Disclosure Schedule provides an accurate and
complete breakdown and aging of the aggregate accounts and notes receivable and
a list of all other receivables of the Company as of September 30, 1998,
categorized by period of aging (30, 60, 90 or 120 or more days), and a detail of
the aging of the accounts receivables of each customer of the Company accounting
for revenues in 1997 or annualized for 1998 in excess of $10,000.
(b) All existing accounts receivable of the Company (including those
accounts receivable reflected on the Unaudited Interim Balance Sheet that have
not yet been collected and those accounts receivable that have arisen since such
date and have not yet been collected):
(i) represent valid obligations of ongoing customers of the Company
arising from bona fide transactions entered into in the Ordinary Course of
Business; and
(ii) are current and in the aggregate, will be collected in full
(without any counterclaim or setoff), net of reserves, on or before the
later of 90 days from the date of invoice or 60 days from the Closing Date.
(c) The Company has not received any notice or other communication (in
writing or otherwise), or received any other information, indicating that
customers representing a material portion of the Company's revenues may cease
dealing with the Company or may otherwise reduce the volume of business
transacted by such Person with the Company below historical levels.
(d) The Company has provided to Verio a copy of each of the Company's two
standard forms of customer contract. Customers covered by contracts in forms
other than such standard forms or with material deviations from such standard
forms do not constitute a material portion of the Company's revenues. The
Company has no oral contracts or agreements to provide services.
4.8 Accounts Payable; Major Suppliers.
(a) Section 4.8 of the Disclosure Schedule:
(i) provides an accurate and complete breakdown and aging of the
Company's aggregate accounts payable as of September 30, 1998; and
(ii) provides an accurate and complete breakdown of the Company's
long-term debt as of the date of this Agreement.
4.9 Proprietary Assets.
(a) Section 4.9 of the Disclosure Schedule sets forth each registered or
material Proprietary Asset that is owned by or licensed to the Company or that
is otherwise used in connection with Company's business.
(b) The Company has taken all reasonable measures and precautions necessary
to protect the confidentiality and value of each Proprietary Asset identified or
required to be identified in Section 4.9 of the Disclosure Schedule.
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(c) All current and former consultants of the Company involved in the
development of Proprietary Assets have executed an employee or consultant
proprietary information and inventions agreement substantially in one of the
forms attached as Exhibit C hereto. To the Knowledge of the Company, no such
consultant is in violation thereof. The Company does not believe it is or will
be necessary to utilize any inventions, trade secrets or proprietary information
of owned by any Company employee, except for inventions, trade secrets or
proprietary information identified in Schedule 4.9(c) of the Disclosure
Schedule.
(d) The Company has conducted its business without infringement or claim of
infringement of any license, patent, copyright, service mark, trademark, trade
name, trade secret or other intellectual property right of others. The Company
is not infringing and has not at any time infringed or received any notice or
other communication (in writing or otherwise) of any actual, alleged, possible
or potential infringement of any Proprietary Asset owned or used by any other
Person. To the Company's Knowledge, no Person is infringing, and no Proprietary
Asset owned or used by any other Person infringes or conflicts with, any
Proprietary Asset owned or used by Company.
(e) There are no royalties, honoraria, fees or other payments payable by
the Company to any person by reason of the ownership, use, license, sale or
disposition of any Proprietary Asset of the Company.
(f) The Proprietary Assets identified in Section 4.9 of the Disclosure
Schedule constitute all of the material Proprietary Assets necessary to enable
the Company to conduct its business in the manner in which its business is
currently being conducted, and the Company owns, or has the right to use, and to
license others to use all such Proprietary Assets. Such ownership or right to
use, and to license others to use, are, or with respect to patents to the
Company's Knowledge are, free and clear of, and without liability under, all
claims and right of third parties.
4.10 Contracts.
(a) Section 4.10 of the Disclosure Schedule lists each material Company
Contract. All material Company Contracts are in writing. The Company has
delivered to Verio accurate and complete copies of all material Company
Contracts, including all amendments thereto.
(b) Each Company Contract is valid and in full force and effect, and is
enforceable by the Company in accordance with its material terms. Neither any
Company Contract with any customer of the Company nor any material Company
Contract contains any material term or provision that is extraordinary or that
is not customarily found in Contracts entered into by comparable Entities.
(c) The Company is not in default under any Company Contract, and to the
Company's Knowledge: (i) no Person acting for the Company has violated or
breached, or declared or committed any material default under, any Company
Contract; (ii) no event has occurred, and no circumstance or condition exists,
that likely would (with or without notice or lapse of time) (A) result in a
material violation or breach of any of the provisions of any Company Contract,
(B) give any Person the right to declare a default or exercise any remedy or
hinder any Company Contract, (C) give any Person the right to accelerate the
maturity or performance of any Company Contract, or (D) give any Person the
right to cancel, terminate or modify any Company Contract; and (iii) the Company
has not waived any of its rights under any Company Contract.
(d) The Company has not received any notice that any Person against which
the Company has or may acquire any rights under any Company Contract is not
solvent and is not able to satisfy all of such Person's current and future
monetary obligations and other obligations and Liabilities to the Company.
(e) (i) The Company has never guaranteed or otherwise agreed to cause,
insure or become liable for, and has never pledged any of its assets to secure,
the performance or payment of any obligation or other Liability of any other
Person except in the Ordinary Course of Business; and (ii) the Company has never
been a party to or bound by (A) any joint venture agreement, partnership
agreement, profit sharing agreement, cost sharing agreement, loss sharing
agreement or similar Contract, or (B) any Contract that creates or grants to any
Person, or provides for the creation or grant of, any stock appreciation right,
phantom stock right or similar right or interest.
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(f) To the Knowledge of the Company, the performance of the Company
Contracts will not result in any violation of or failure to comply with any
Legal Requirement.
(g) No Person is materially renegotiating, nor has the contractual right to
materially renegotiate, any amount paid or payable to the Company under any
material Company Contract or any other material term or provision of any
material Company Contract.
(h) Schedule 4.10(h) of the Disclosure Schedule identifies and provides an
accurate and brief description, as of the date of this Agreement, of each
proposed material Contract as to which any bid, offer, written proposal, term
sheet or similar document has been submitted or received by the Company that
would commit the Company to provide services and is outstanding.
(i) No party to any material Company Contract has notified the Company or
made a claim to the effect that the Company has failed to perform an obligation
thereunder. In addition, to the Knowledge of the Company, there is no plan,
intention or indication of any contracting party to any material Company
Contract to cause the termination, cancellation or modification of such Contract
or to reduce or otherwise change its activity thereunder so as to adversely
affect the benefits derived or expected to be derived therefrom by the Company.
(j) The Company has all material Contracts necessary to conduct its
business in the manner in which it is being conducted or is proposed to be
conducted prior to the Closing.
4.11 Compliance With Legal Requirements.
(a) To the Knowledge of the Company, the Company is in compliance with each
Legal Requirement that is applicable to it or to the conduct of its business or
the ownership or use of any of its assets.
(b) To the Knowledge of the Company, no event has occurred, and no
condition or circumstance exists, that likely would (with or without notice or
lapse of time) constitute or result directly or indirectly in a violation by the
Company of, or a failure on the part of the Company to comply with, any Legal
Requirement.
(c) The Company has not received, at any time, any notice or other
communication (in writing or otherwise) from any Governmental Body, or any other
Person, regarding (i) any actual, alleged, possible or potential violation of,
or failure to comply with, any Legal Requirement, or (ii) any actual, alleged,
possible or potential obligation on the part of the Company to undertake, or to
bear all or any portion of the cost of, any cleanup or any remedial, corrective
or response action of any nature.
4.12 Governmental Authorizations.
(a) Section 4.12 of the Disclosure Schedule identifies:
(i) each material Governmental Authorization that is held by the
Company, if any; and
(ii) each other Governmental Authorization that, to the Knowledge of
the Company, is held by any of the Company's employees and is used in
connection with the Company's business.
The Company has delivered to Verio accurate and complete copies of all
Governmental Authorizations identified in Section 4.12 of the Disclosure
Schedule (if any), including all renewals thereof and all amendments thereto.
Each Governmental Authorization identified or required to be identified in
Section 4.12 of the Disclosure Schedule (if any) is valid and in full force and
effect.
(b) The Company has all Governmental Authorizations necessary (i) to enable
the Company to conduct its business in the manner in which its business is
currently being conducted or is proposed to be conducted prior to the Closing,
and (ii) to permit the Company to own and use its assets in the manner in which
they are currently owned and used.
4.13 Tax Matters.
(a) Each Tax required to have been paid, or claimed by any Governmental
Body to be payable, by the Company (whether pursuant to any Tax Return or
otherwise) has been duly paid in full on a timely basis, or
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the Company has established adequate reserves therefor (identified as such) in
the Financial Statements. Any Tax required to have been withheld or collected by
the Company has been duly withheld and collected, and (to the extent required)
each such Tax has been paid to the appropriate Governmental Body.
(b) Section 4.13(b) of the Disclosure Schedule accurately identifies all
Tax Returns required to be filed by or on behalf of the Company with any
Governmental Body with respect to any taxable period ending on or before the
Closing Date ("Company Returns"). All Company Returns (i) have been or will be
filed when due, and (ii) have been, or will be when filed, prepared in material
compliance with all applicable Legal Requirements. All amounts shown on the
Company Returns to be due on or before the Closing Date, and all amounts
otherwise payable in connection with the Company Returns on or before the
Closing Date, have been or will be paid on or before the Closing Date. The
Company has delivered to Verio accurate and complete copies of Company Returns
filed by the Company.
(c) The Company's liability for unpaid Taxes for all periods ending on or
before the date of the Financial Statements does not, in the aggregate, exceed
the amount of the current liability accruals for Taxes (excluding reserves for
deferred taxes) reported in the Financial Statements, and the Company's
liability for unpaid Taxes for all periods or partial periods through the
Closing Date will not exceed such accruals, adjusted for operations in the
Ordinary Course of Business after the date of the Unaudited Interim Balance
Sheet.
(d) Section 4.13(d) of the Disclosure Schedule accurately identifies each
examination or audit of any Company Return that has been conducted by any
Governmental Body. The Company has delivered to Verio accurate and complete
copies of all audit reports and similar documents relating to Company Returns.
No extension or waiver of the limitation period applicable to any of the Company
Returns has been granted (by the Company or any other Person), and no such
extension or waiver has been requested from the Company.
(e) No claim or other Proceeding is pending or to the Company's Knowledge
has been threatened against or with respect to Company in respect of any Tax.
There are no unsatisfied Liabilities for Taxes (including liabilities for
interest, additions to tax and penalties thereon and related expenses) with
respect to any notice of deficiency or similar document received by the Company.
The Company has not entered into or become bound by any agreement or consent
pursuant to Section 341(f) of the Code. The Company has not been, and will not
be, required to include any adjustment in taxable income for any tax period (or
portion thereof) pursuant to Section 481 or 263A of the Code or any comparable
provision under state or foreign Tax laws as a result of transactions or events
occurring, or accounting methods employed, prior to the Closing.
(f) There is no agreement, plan, arrangement or other Contract covering any
employee or independent contractor or former employee or independent contractor
of the Company that, individually or collectively, could give rise directly or
indirectly to the payment of any amount that would not be deductible pursuant to
Section 28OG or Section 162(m) of the Code.
(g) The Company is not a United States real property holding corporation
within the meaning of Section 897(c)(2) of the Code and has not been a United
States real property holding corporation within the applicable period specified
in Section 897(c)(1)(A)(ii) of the Code.
(h) The Company is not liable for Taxes incurred by any individual, trust,
corporation, partnership or other entity other than Company, either as a
transferee or pursuant to Treasury Regulations Section 1.1502-6, or pursuant to
any other provision of federal, state or local law or regulation. The Company is
not, and has never been, a party to or bound by any tax indemnity agreement, tax
sharing agreement, tax allocation agreement or similar Contract.
(i) The Company is not a party to any joint venture, partnership or other
arrangement or contract which could be treated as a partnership for United
States federal income tax purposes.
4.14 Employee and Labor Matters.
(a) The organization chart included in the Disclosure Schedule is complete
and accurate as of the date of this Agreement.
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(b) Schedule 4.14(b) of the Disclosure Schedule contains a list of
individuals who are currently performing services for the Company in connection
with the development of Proprietary Assets and are classified as "consultants"
or "independent contractors," and the respective compensation of each such
"consultant" or "independent contractor."
(c) There is no former employee of the Company who is receiving or is
scheduled to receive (or whose spouse or other dependent is receiving or is
scheduled to receive) any benefits (whether from the Company or otherwise)
relating to such former employee's employment with the Company; and Section
4.14(c) of the Disclosure Schedule accurately describes any such benefits.
(d) The Company is not a party to or bound by, and has never been a party
to or bound by, any employment agreement or any union contract, collective
bargaining agreement or similar Contract. The Company has terminated all
employment agreements to which it has been a party or by which it or any of its
subsidiaries was bound, and has no obligation to make any additional payments
with respect to such terminations, and is not otherwise obligated in any way
with respect to such terminations. The Company has delivered to Verio copies of
all written agreements relating to such terminations.
(e) The employment of each of the Company's employees is terminable by the
Company at will. The Company has delivered to Verio accurate and complete copies
of all employee manuals and handbooks, disclosure materials, policy statements,
employment agreements and other materials relating to the employment of the
current and former employees of the Company.
(f) The Company has not received any notice that any key employee of the
Company intends to terminate his or her employment with the Company, and the
Company does not have a present intention to terminate the employment of any
employee.
(g) To the Knowledge of the Company (but with no investigation), no
employee of the Company is a party to or is bound by any confidentiality
agreement, noncompetition agreement or other Contract (with any Person) that
likely would have an adverse effect on (A) the performance by such employee of
any of his duties or responsibilities as an employee of the Company, or (B) the
Company's business or operations.
(h) To the Company's Knowledge, the Company is not engaged, and has never
been engaged, in any unfair labor practice of any nature. There has never been
any slowdown, work stoppage, labor dispute or union organizing activity, or any
similar activity or dispute, affecting the Company or any of its employees.
There is not now pending, and to the Knowledge of the Company no Person has
threatened to commence, any such slowdown, work stoppage, labor dispute or union
organizing activity or any similar activity or dispute, nor has any event
occurred, nor does any condition or circumstance exist, that likely would
directly or indirectly give rise to or provide a basis for the commencement of
any such slowdown, work stoppage, labor dispute or union organizing activity or
any similar activity or dispute.
4.15 Benefit Plans; ERISA.
(a) Section 4.15 of the Disclosure Schedule provides a true and complete
list of each Current Benefit Plan maintained by the Company and each Past
Benefit Plan maintained by the Company. The Company has never established,
adopted, maintained, sponsored, contributed to, participated in or incurred any
Liability with respect to, and does not maintain, sponsor, contribute to or
participate in, any Employee Benefit Plan, except for the Company Plans
identified in Section 4.15 of the Disclosure Schedule; and the Company has never
provided or made available any fringe benefit or other benefit of any nature to
any of its employees, whether or not the value of such benefit is includable in
the recipient's gross income, as determined in accordance with Section 132 of
the Code or other applicable sections, or other material benefit of any nature
to any of its employees, except as set forth in Section 4.15 of the Disclosure
Schedule.
(b) No Company Plan:
(i) provides or provided any benefit guaranteed by the Pension Benefit
Guaranty Corporation;
(ii) is or was a "multiemployer plan" as defined in Section 4001(a)(3)
of ERISA;
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(iii) is or was subject to the minimum funding standards of Section
412 of the Code, Section 4001(a)(3) of ERISA, or Section 302 of ERISA; or
(iv) is or was a "Multi-employer Plan" as defined in Section 3(37)(A)
of ERISA. There is no Person that (by reason of common control or
otherwise) is or has at any time been treated together with the Company as
a single employer within the meaning of Section 414 of the Code.
(c) The Company has delivered or made available to Verio, with respect to
each Current Benefit Plan and, to the extent specifically requested by Verio,
each Past Benefit Plan, a current, accurate and complete copy of such Company
Plan and all other documents with respect to which the administrator of such
plan would be required to provide copies pursuant to Section 104(b)(4) of ERISA
including without limitation, to the extent applicable, copies of the most
recent (i) IRS determination letter and any outstanding request for a
determination letter, (ii) Form 5500 series Annual Return/Report that may have
been prepared, in draft or final form, with respect to the Plan Year Ending
December 31, 1997, whether or not such form was actually filed with the Internal
Revenue Service, (iii) with respect to any pension benefit plan, a comprehensive
financial statement of plan assets held in the accompanying trust and statements
of financial activity in the individual participant accounts for the Plan Year
Ending December 31, 1997, including the fair market value of assets as of
December 31, 1997, (iv) attorney's response to auditor's request for
information; (v) collective bargaining agreements or other supplemental
agreements relating thereto; (vi) letter ruling and any outstanding request for
a letter ruling with regard to any aspect of a Company Plan; and (vii) general
notification to employees of their rights under Section 4980B(f)(6) of the Code
and form of letter(s) distributed upon the occurrence of a qualifying event
described in Section 4980B(f)(3) of the Code, in the case of a Company Plan that
is a "group health plan" as defined in Section 4980B(g)(2) of the Code.
(d) Each Current Benefit Plan maintained by the Company is being operated
and administered in compliance with the provisions thereof, and each Company
Plan maintained by the Company has at all times been operated and administered
in full compliance with the provisions thereof. Each contribution or other
payment that is required to have been accrued or made under or with respect to
any Company Plan maintained by the Company has been duly accrued and made on a
timely basis, including, without limitation, any contribution that is required
to satisfy the requirements of Section 401(a) et seq., as well as Sections
401(k) and 401(m) of the Code.
(e) With respect to each Current Benefit Plan which is an employee pension
benefit plan (as such term is defined in ERISA Section 3(2)) intended to qualify
under Section 401(a) of the Code, the Company has received a favorable
determination letter as to its qualification under the Code and, to the
Company's Knowledge, nothing has occurred, whether by action or failure to act,
which would cause the loss of such qualification.
(f) The Company's financial statement(s) reflect all of the Company's
employee benefit liabilities in a manner satisfying the requirements set forth
in FASB Statement Nos. 87, 106 and 112.
(g) Each Current Benefit Plan maintained by the Company complies and is
being operated and administered in compliance with, and each Company Plan
maintained by the Company has at all times complied and been operated and
administered in compliance with, all applicable reporting, disclosure and other
requirements of ERISA and the Code and all other applicable Legal Requirements.
The Company has never incurred any Liability to the Internal Revenue Service nor
any other Governmental Body with respect to any Company Plan maintained by the
Company; and no event has occurred, and, to the Company's Knowledge, no
condition or circumstance exists, that likely would (with or without notice or
lapse of time) give rise directly or indirectly to any such Liability. To the
Company's Knowledge, neither the Company nor any Person that is or was an
administrator or fiduciary of any Company Plan maintained by the Company, has
engaged in any transaction or has otherwise acted or failed to act in a manner
that has subjected or likely would subject the Company to any Liability for
breach of any fiduciary duty or any other duty. There are no actions, suits or
claims (other than routine claims for benefits in the ordinary course) pending
with respect to any Company Plan, or to the Knowledge of the Company,
threatened, and the Company has no Knowledge of any facts which would give rise
to any such actions, suits or claims (other than routine claims for benefits in
the ordinary course).
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(h) Since December 31, 1997, no Company Plan maintained by the Company has
been or will be (i) terminated by Company, (ii) amended in any manner which
would directly or indirectly increase the benefits accrued, or which may be
accrued, by any participant thereunder, or (iii) amended in any manner which
would materially increase the cost to the Company or Verio or any Person of
maintaining such Company Plan.
(i) With respect to any Company Plan maintained by the Company which is an
employee welfare benefit plan (within the meaning of ERISA Section 3(1)) (a
"Welfare Benefit Plan"): (i) each such Welfare Benefit Plan which is intended to
meet the requirement for tax favored treatment under Subchapter B of Chapter 1
of the Code meets all such requirements; (ii) there is no disqualified benefit
(as such term is defined in Section 4976(b) of the Code); (iii) each and every
Welfare Benefit Plan which is a group health plan (as such term is defined in
Section 4980B(g)(2)) complies with, and in each and every case has complied
with, the applicable requirements of Code Section 4980B; and (iv) each such
Welfare Benefit Plan (including any plan covering former employees of Company)
may be amended or terminated by the Company or Verio on or at any time after the
Closing Date.
4.16 Environmental Matters. The Company is and, to the Knowledge of the
Company, has been at all times in compliance in all material respects with all
Environmental Laws. The Company has now and at all times has had all the
necessary permits required under Environmental Laws for the operation of its
business, and is not and has not been in violation of any of the terms and
conditions of any of its permits. The Company has not received any notice or
other communication (in writing or otherwise) that alleges that the Company is
not in compliance with any Environmental Law. The Company has not generated,
manufactured, produced, transported, imported, used, treated, refined,
processed, handled, stored, discharged, released, or disposed of any Hazardous
Materials (whether lawfully or unlawfully) at any of the Leased Premises
occupied or controlled by the Company on or at any time prior to the Closing
Date, other than common household and office products in de minimis quantities.
To the Knowledge of the Company: (a) there are not and have not been any
releases or threatened releases of any Hazardous Materials in any quantity
(other than common household and office products in de minimis quantities) at,
on, or from the Leased Premises, (b) there are no circumstances that may prevent
or interfere with the Company's compliance with any Environmental Law, and (c)
no former owner or user of the Leased Premises engaged in any type of
manufacturing or commercial activity which might be reasonably expected to
generate, manufacture, produce, transport, import, use, treat, refine, process,
handle, store, discharge, release, or dispose of any Hazardous Materials
(whether lawfully or unlawfully) on the Leased Premises.
4.17 Sale of Products; Performance of Services.
(a) The Company will not incur or otherwise become subject to any Liability
arising directly or indirectly from any product manufactured or sold, or any
repair services or other services performed by, the Company on or at any time
prior to the Closing Date, other than normal warranty claims.
(b) No customer or other Person has ever asserted or threatened to assert
any material claim against the Company (i) under or based upon any warranty
provided by or on behalf of the Company, or (ii) under or based upon any other
warranty relating to any services performed by the Company, other than normal
warranty claims in the Ordinary Course of Business, the costs of which in the
aggregate are not material. To the Knowledge of the Company, no event has
occurred, and no condition or circumstance exists, that likely would (with or
without notice or lapse of time) directly or indirectly give rise to or serve as
a basis for the assertion of any such claim.
(c) The Company believes that its quality control program is adequate.
4.18 Insurance.
(a) The Company believes that it maintains insurance that it is adequate
and customary for like companies. The Company currently has in force the
insurances indicated on the insurance certificate attached to Section 4.18 of
the Disclosure Schedule.
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(b) Each of the insurance policies carried by the Company is valid,
enforceable and in full force and effect, and has been issued by an insurance
carrier that, to the Knowledge of the Company, is solvent, financially sound and
reputable. All of the information contained in the applications submitted in
connection with said policies was (at the times said applications were
submitted) accurate and complete, and all premiums and other amounts owing with
respect to said policies have been paid in full on a timely basis. The nature,
scope and dollar amounts of the insurance coverage provided by said policies are
sufficient to adequately insure the Company's business, assets, operations, key
employees, services and potential liabilities and comply with all insurance
coverage requirements of Company Contracts.
(c) There is no pending claim under or based upon any of the Company's
insurance policies, and to the Company's Knowledge no event has occurred, and no
condition or circumstance exists, that likely would (with or without notice or
lapse of time) directly or indirectly give rise to or serve as a basis for any
such claim.
(d) The Company has not received:
(i) any notice or other communication (in writing or otherwise)
regarding the actual or possible cancellation or invalidation of any of the
Company's insurance policies or regarding any actual or possible adjustment
in the amount of the premiums payable with respect to any of said policies;
(ii) any notice or other communication (in writing or otherwise)
regarding any actual or possible refusal of coverage under, or any actual
or possible rejection of any claim under, any of the Company's insurance
policies; or
(iii) any indication that the issuer of any of the Company's insurance
policies may be unwilling or unable to perform any of its obligations
thereunder.
4.19 Proceedings; Orders.
(a) There is no pending Proceeding, and to the Knowledge of the Company, no
Person has threatened to commence any Proceeding:
(i) that involves the Company or that otherwise relates to or likely
would affect the Company's business or any of the assets owned or used by
the Company (whether or not the Company is named as a party thereto); or
(ii) that challenges, or that may have the effect of preventing,
delaying, making illegal or otherwise interfering with, any of the
Transactions.
(b) The Company has delivered to Verio accurate and complete copies of all
pleadings, correspondence and other written materials to which the Company has
access that relate to the Proceedings identified in Section 4.19 of the
Disclosure Schedule.
(c) There is no Order expressly applicable to the Company or any of the
assets owned or used by the Company.
(d) To the Knowledge of the Company, no officer or employee of the Company
is subject to any Order that prohibits such officer or employee from engaging in
or continuing any conduct, activity or practice relating to the Company's
business.
(e) There is no Order or, to the Knowledge of the Company, proposed Order
(other than any proposed Order that would be applicable generally to the
Internet connectivity industry) that, if issued or otherwise put into effect,
(i) likely would have an adverse effect on the Company's business, condition,
assets, liabilities, operations, financial performance, net income or prospects
(or on any aspect or portion thereof) or on the ability of the Company to comply
with or perform any covenant or obligation under this Agreement or any of the
other Transactional Agreements, or (ii) may have the effect of preventing,
delaying, making legal or otherwise interfering with any of the Transactions.
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4.20 Non-Contravention; Consents. Neither the execution and delivery of
this Agreement or the other Transactional Agreements, nor the consummation or
performance of any of the Transactions, will directly or indirectly (with or
without notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of the
provisions of the Company's Articles of Incorporation or Bylaws, or (ii) any
resolution adopted by the Company's shareholders, the Company's Board of
Directors or any committee of the Company's Board of Directors;
(b) to the Knowledge of the Company, contravene, conflict with or result in
a violation of, or give any Governmental Body or other Person the right to
challenge any of the Transactions or to exercise any remedy or obtain any relief
under, any Legal Requirement or any Order to which the Company, or any of the
assets owned or used by the Company, is subject (assuming approval by the
shareholders of the Company);
(c) cause the Company to become subject to, or to become liable for the
payment of, any Tax;
(d) cause any of the assets owned or used by the Company to be reassessed
or revalued by any taxing authority or other Governmental Body;
(e) to the Knowledge of the Company, contravene, conflict with or result in
a violation of any of the terms or requirements of, or give any Governmental
Body the right to revoke, withdraw, suspend, cancel, terminate or modify, any
Governmental Authorization that is held by the Company or any of its employees
or that otherwise relates to the Company's business or to any of the assets
owned or used by the Company;
(f) contravene, conflict with or result in a violation or breach of, or
result in a default under, any material provision of any of the Company
Contracts;
(g) give any Person the right to (i) declare a default or exercise any
remedy under any Company Contract, (ii) accelerate the maturity or performance
of any Company Contract, or (iii) cancel, terminate or modify any Company
Contract;
(h) give any Person the right to any payment by the Company or give rise to
any acceleration or change in the award, grant, vesting or determination of
options, warrants, rights, severance payments or other contingent obligations of
any nature whatsoever of the Company in favor of any Person, in any such case as
a result of the change in control of the Company or otherwise resulting from the
Transactions.
(i) result in the imposition or creation of any Encumbrance upon or with
respect to any asset owned or used by the Company.
The Company will not be required to make any filing with or give any notice to,
or obtain any Consent from, any Person in connection with the execution and
delivery of this Agreement and the other Transactional Agreements or the
consummation or performance of any of the Transactions. As of the date hereof,
all such filings, notices and Consents have been duly made, given or obtained
and are in full force and effect, other than those which by their nature are
required to be made, given or obtained after the Closing, all of which shall be
made, given or obtained within the time required therefor.
4.21 Brokers. The Company has not agreed or become obligated to pay, or
taken any action that likely would result in any Person, other than Bear,
Stearns & Co. Inc. and BT Alex. Brown Incorporated, claiming to be entitled to
receive, any brokerage commission, finder's fee or similar commission or fee in
connection with any of the Transactions. Copies of the engagement letters for
Bear, Stearns & Co. Inc. and BT Alex. Brown Incorporated have been provided to
Verio.
4.22 Full Disclosure.
(a) Neither this Agreement (including all Schedules and Exhibits hereto),
nor any of the other Transactional Agreements, contains or will contain any
untrue statement of material fact or omits or will omit to state any fact
necessary to make any of the representations, warranties or statements contained
therein on behalf of the Company or any of the Shareholders not misleading. To
the extent any representation or warranty permits omission of items otherwise
required to be discussed because they are not material or do not
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or would not have a material adverse effect on the Company, such omissions in
the aggregate will not and do not have a material adverse effect on the Company.
(b) The Company has filed a registration statement on Form S-1 with the
Securities and Exchange Commission (the "SEC") in connection with its proposed
initial public offering (collectively, the "Company S-1"), and has previously
furnished or made available to Verio true and complete copies of the Company S-1
(including any exhibits thereto) and will promptly deliver to Verio any other
filings by the Company with the SEC filed between the date hereof and the
Effective Time (collectively with the Company S-1, the "Company SEC Filings"),
and any comments or requests received from the SEC in connection therewith. None
of such Company SEC Filings, as of their respective dates (as amended through
the date hereof), contained or, with respect to the Company SEC Filings filed
after the date hereof, will contain any untrue statement of a material fact or
omitted or, with respect to the Company SEC Filings filed after the date hereof,
will omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. If applicable, each of the balance sheets (including the
related notes) included in the Company SEC Filings fairly presents the
consolidated financial position of the Company and its subsidiaries as of the
date thereof, and the other related statements (including the related notes)
included therein fairly present the results of operations and the changes in
cash flows of the Company and its subsidiaries for the respective periods set
forth therein, all in conformity with GAAP consistently applied during the
periods involved.
(c) The information relating to the Company and its subsidiaries and the
Shareholders to be contained in the Proxy Statement/Prospectus will not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
4.23 Powers of Attorney. The Company has not given a power of attorney to
any Person.
4.24 Securities Law Compliance. The Company has complied with all federal
and state securities laws in connection with all offers and sales of securities
issued by the Company prior to the date of this Agreement. The Company has not
heretofore granted any other purchaser of its securities the right to require
the Company to register any securities under the Securities Act or to qualify
for any exemption thereunder.
4.25 Takeover Statutes. No "fair price," "moratorium," "control share
acquisition" or other similar antitakeover statute is applicable to the Company
in connection with the Merger, except for such statutes or regulations as to
which all necessary action has been taken by the Company and its Board of
Directors to permit the consummation of the Merger in accordance with the terms
hereof.
4.26 Voting Arrangements. There are no outstanding shareholder agreements,
voting trusts, proxies or other arrangements or understandings to which the
Company is a party or, to the Knowledge of the Company, to which any other
Person is a party, relating to the voting of any shares of the capital stock of
the Company, other than the Voting Agreements.
4.27 Financial Projections. The Company's projections as heretofore
provided to Verio have been prepared by the Company based on the Company's good
faith estimates (based on reasonable investigation) of the projected financial
performance of the Company following the Closing (without reference to any
changes to the Company's operating plan, expense structure or sales and
marketing that may be instituted by Verio after the Closing) and based on these
and other assumptions set forth therein, which assumptions the Company believes
are reasonable. The Company has concluded after reasonable investigation that
the assumptions and conclusions of the Company's projections constitute
reasonable estimates of the Company's performance, but such estimates are no
guarantee of actual performance.
4.28 Ownership of Shares of Verio Common Stock. As of the date hereof,
neither Company nor, to its Knowledge, any of its affiliates or associates (as
such terms are defined under the Exchange Act), (a) beneficially owns, directly
or indirectly, or (b) is party to any agreement, arrangement or understanding
for the purpose of acquiring, holding, voting or disposing of, in each case,
shares of Verio Common Stock, except for shares of Verio Common Stock in the
aggregate representing less than 1% of the outstanding shares of Verio Common
Stock.
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ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF VERIO AND MERGER SUB
Except as set forth in the disclosure letter delivered to the Company at or
prior to the execution of this Agreement ("Verio Disclosure Schedule"), Verio
and Merger Sub represent and warrant to the Company as follows:
5.1 Due Organization; Good Standing; Authority; Binding Nature of
Agreements.
(a) Verio is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, and has all necessary
corporate power and authority to enter into and perform its obligations under
the Transactional Agreements to which it is or is to be a party. Merger Sub is a
corporation duly organized, validly existing and in good standing under the laws
of the State of California, and has all necessary corporate power and authority
to enter into and perform its obligations under the Transactional Agreements to
which it is or is to be a party.
(b) The execution, delivery and performance of each of the Transactional
Agreements to which it is or is to be a party have been duly authorized by all
necessary action on the part of each of Verio and Merger Sub and their
respective Boards of Directors.
(c) Each of the Transactional Agreements to which it is or is to be a party
constitutes the legal, valid and binding obligation of Verio and Merger Sub, as
the case may be, enforceable against Verio and Merger Sub, as the case may be,
in accordance with its terms.
5.2 Proceedings; Orders. There is no pending Proceeding, and to Verio's
Knowledge no Person has threatened to commence any Proceeding that challenges,
or that may have the effect of preventing, delaying, making illegal or otherwise
interfering with, any of the Transactions. There is no Order that likely would,
or, to the Knowledge of Verio, proposed Order that if issued or otherwise put
into effect likely would, have an adverse effect on Verio's business, condition,
assets, liabilities, operations, financial performance, net income or prospects
(or on any aspect or portion thereof) or on the ability of Verio or Merger Sub
to comply with or perform any covenant or obligation under this Agreement, or
may have the effect of preventing, delaying, making illegal or otherwise
interfering with any of the Transactions.
5.3 Non-Contravention; Consents. Neither the execution and delivery of
this Agreement or the other Transactional Agreements to which Verio or Merger
Sub, as the case may be, is or is to be a party, nor the consummation or
performance of any of the Transactions, will directly or indirectly (with or
without notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of the
provisions of Verio's or Merger Sub's Certificate or Articles of Incorporation
or Bylaws, or (ii) any resolution adopted by Verio's or Merger Sub's
stockholders, Verio's or Merger Sub's Board of Directors or any committee of
Verio's or Merger Sub's Board of Directors;
(b) to Verio's Knowledge, contravene, conflict with or result in a
violation of, or give any Governmental Body or other Person the right to
challenge any of the Transactions or to exercise any remedy or obtain any relief
under, any Legal Requirement or any Order to which Verio or Merger Sub, or any
of the assets owned or used by Verio or Merger Sub, is subject; or
(c) contravene, conflict with or result in a violation or breach of, or
result in a material default under, any of Verio's material agreements for
borrowed money, including bond indentures.
With the exception of the filing of the Agreement of Merger in the State of
California and any necessary filings pursuant to federal and state securities
and antitrust laws, Verio and Merger Sub will not be required to make any filing
with or give any notice to, or to obtain any Consent from, any Person in
connection with the execution and delivery of this Agreement or the consummation
or performance of any of the Transactions.
5.4 Brokers. Verio has not agreed or become obligated to pay, and has not
taken any action that likely would result in any Person, other than Lazard
Freres & Co. LLC, claiming to be entitled to receive, any
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brokerage commission, finder's fee or similar commission or fee in connection
with any of the Transactions. Verio shall be responsible for the payment of such
amounts to Lazard Freres & Co. LLC.
5.5 Financial Capacity. Verio has the capacity and financial capability to
comply with and perform all of its covenants and obligations under each of the
Transactional Agreements, on the terms and subject to the conditions of this
Agreement.
5.6 Full Disclosure; SEC Reports.
(a) Neither this Agreement (including all Schedules and Exhibits hereto),
nor any of the Transactional Agreements, contains or will contain any untrue
statement of material fact or omits or will omit to state any fact necessary to
make any of the representations, warranties or statements contained therein on
behalf of Verio and Merger Sub not misleading with respect to Verio or Merger
Sub. The Registration Statement and the Proxy Statement/Prospectus (to the
extent information is provided by Verio) and any amendment thereto do not
contain, and will not contain, any untrue statement of a material fact and do
not omit, and will not omit, to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they are made, not misleading.
(b) As of the date of this Agreement, Verio has provided the Company and
the Company's Representatives with full and complete access to all of Verio's
records and other documents and data requested by them.
(c) Verio has filed all reports required to be filed with the SEC pursuant
to the Exchange Act since May 12, 1998 (all such reports and amendments thereto,
collectively, the "Verio SEC Reports"), and has previously furnished or made
available to the Company true and complete copies of all Verio SEC Reports filed
with respect to periods beginning after May 12, 1998 (including any exhibits
thereto) and will promptly deliver to the Company any Verio SEC Reports filed
between the date hereof and the Effective Time. None of such Verio SEC Reports,
as of their respective dates (as amended through the date hereof), contained or,
with respect to Verio SEC Reports filed after the date hereof, will contain any
untrue statement of a material fact or omitted or, with respect to Verio SEC
Reports filed after the date hereof, will omit to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. Each of the
balance sheets (including the related notes) included in the Verio SEC Reports
fairly presents the consolidated financial position of Verio and its
subsidiaries as of the date thereof, and the other related statements (including
the related notes) included therein fairly present the results of operations and
the changes in cash flows of Verio and its subsidiaries for the respective
periods set forth therein, all in conformity with GAAP consistently applied
during the periods involved, except as otherwise noted therein and subject, in
the case of the unaudited interim financial statements, to (i) normal year end
adjustments which would not in the aggregate be material in amount or effect and
(ii) the permitted exclusion of all footnotes that would otherwise be required
by GAAP.
ARTICLE 6
PRE-CLOSING PERIOD COVENANTS OF THE COMPANY
6.1 Access and Investigation. The Company shall ensure that, at all times
during the Pre-Closing Period:
(a) The Company and its Representatives provide Verio and its
Representatives with free and complete access, at reasonable times and with
reasonable notice from Verio to the Company, to all of the Company's premises
and assets, to all existing books, records, Tax Returns, work papers and other
documents and information relating to the Company, and to responsible officers
and employees of the Company, and the Company and its Representatives provide
Verio and its Representatives with copies of such existing books, records, Tax
Returns, work papers and other documents and information relating to the Company
as Verio may request in good faith;
(b) The Company and its Representatives compile and provide Verio and its
Representatives with such additional financial, operating and other data and
information regarding the Company as Verio may request in good faith; and
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(c) The Company and its Representatives confer regularly (not less than
semi-monthly and as Verio may otherwise request) with Verio concerning
operational matters and otherwise report regularly (not less than semi-monthly
and as Verio may otherwise request) to Verio and discuss with Verio and its
Representatives concerning the status of the Company's business, condition,
assets, liabilities, operations, financial performance and prospects, and
promptly notify Verio of any material change in the Company's business,
condition, assets, liabilities, operations, financial performance or prospects,
or any event reasonably likely to lead to any such change.
6.2 Operation of Business. The Company shall ensure that, during the
Pre-Closing Period:
(a) The Company conducts its operations exclusively in the Ordinary Course
of Business and in the same manner as such operations have been conducted prior
to the date of this Agreement;
(b) The Company uses its Best Efforts to preserve intact its current
business organization, keep available the services of its current officers and
employees and maintain its relations and goodwill with all suppliers, customers,
landlords, creditors, licensors, licensees, employees and other Persons having
business relationships with the Company;
(c) The Company keeps in full force all insurance policies identified in
Section 4.18 of the Disclosure Schedule;
(d) The Company immediately notifies Verio in writing of any inquiry,
proposal or offer from any Person relating to any Acquisition Proposal;
(e) The Company does not declare, accrue, set aside or pay any dividend or
make any other distribution in respect of any shares of capital stock, and does
not repurchase, redeem or otherwise reacquire any shares of capital stock or
other securities, except with respect to the repurchase of shares of Company
Common Stock upon termination of employees at the original purchase price
pursuant to agreements existing at the date hereof;
(f) The Company does not sell or otherwise issue (or grant any warrants,
options or other rights to purchase) any shares of capital stock or any other
securities, except the issuance of shares of Company Common Stock pursuant to
option grants to employees made in the ordinary course of business;
(g) The Company does not amend its Articles of Incorporation or Bylaws, and
does not effect or become a party to any transaction related to an Acquisition
Proposal or any recapitalization, reclassification of shares, stock split,
reverse stock split or similar transaction;
(h) The Company does not form any subsidiary or acquire any equity interest
or other interest in any other Entity;
(i) The Company does not establish or adopt any Employee Benefit Plan, and
does not pay any bonus or make any profit sharing or similar payment to, or
increase the amount of the wages, salary, commissions, fringe benefits or other
compensation or remuneration payable to, any of its directors, officers or
employees;
(j) The Company does not change any of its methods of accounting or
accounting practices in any respect;
(k) The Company does not make any Tax election;
(l) The Company does not commence any Proceeding;
(m) The Company does not (i) acquire, dispose of, transfer, lease, license,
mortgage, pledge or encumber any fixed or other assets, other than in the
Ordinary Course of Business; (ii) incur, assume or prepay any indebtedness,
Liability or obligation or any other liabilities or issue any debt securities,
other than in the Ordinary Course of Business; (iii) assume, guarantee, endorse
or otherwise become liable or responsible (whether directly, contingently or
otherwise) for the obligations of any other person, other than in the Ordinary
Course of Business; (iv) make any loans, advances or capital contributions to,
or investments in, any other Person, other than in the Ordinary Course of
Business; or (v) fail to maintain insurance consistent with past practices for
its business and property;
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(n) The Company pays all debts and Taxes, and pays or performs all other
obligations, when due;
(o) The Company does not transfer to any Person any Proprietary Asset,
other than in the Ordinary Course of Business;
(p) The Company does not enter into or amend any agreements pursuant to
which any other Person is granted distribution, marketing or other rights of any
type or scope with respect to any of its services, products or technology;
(q) The Company does not pay, discharge or satisfy, in any amount in excess
of $100,000 in any one case or $250,000 in the aggregate, any claim, liability
or obligation (absolute, accrued, asserted or unasserted, contingent or
otherwise) arising other than in the Ordinary Course of Business, other than the
payment, discharge or satisfaction of liabilities reflected or reserved against
in the Financial Statements or which Verio has consented to in writing;
(r) The Company does not hire any new director level or officer-level
employee;
(s) The Company gives all notices and other information (including any
notices and information required based on any instructions of Verio related to
post-Closing operations) required prior to the Closing to be given to the
employees of the Company and any applicable Governmental Body under the National
Labor Relations Act, the Code, the Consolidated Omnibus Budget Reconciliation
Act, and other applicable law in connection with the Transactions;
(t) The Company does not revalue any of its assets, including, without
limitation, writing down the value of inventory or writing off notes or accounts
receivable, except as required under GAAP and in the Ordinary Course of
Business;
(u) Except as otherwise contemplated hereunder, the Company does not enter
into any transaction or take any other action outside the Ordinary Course of
Business; and
(v) The Company does not enter into any transaction or take any other
action that likely would cause or constitute a Breach of any representation or
warranty made by the Company or any of the Shareholders in this Agreement or in
any of the other Transactional Agreements.
6.3 Filings and Consents; Cooperation. The Company shall ensure that:
(a) Each filing or notice required to be made or given (pursuant to any
applicable Legal Requirement, Order or Contract, or otherwise) by the Company in
connection with the execution and delivery of this Agreement or the other
Transactional Agreements, or in connection with the consummation or performance
of any of the Transactions, is made or given as soon as possible after the date
of this Agreement;
(b) Each Consent required to be obtained (pursuant to any applicable Legal
Requirement, Order or Contract, or otherwise) by the Company in connection with
the execution and delivery of this Agreement or the other Transactional
Agreements, or in connection with the consummation or performance of any of the
Transactions (including each of the Consents identified in Section 4.20 of the
Disclosure Schedule), is obtained as soon as possible after the date of this
Agreement and remains in full force and effect through the Closing Date;
(c) The Company promptly delivers to Verio a copy of each filing made, each
notice given and each Consent obtained by the Company during the Pre-Closing
Period; and
(d) During the Pre-Closing Period, the Company and its Representatives
cooperate with Verio and Verio's Representatives, and prepare and make available
such documents and take such other actions as Verio may request in good faith,
in connection with any filing, notice or Consent that Verio is required or
elects to make, give or obtain.
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6.4 Notification; Updates to Disclosure Schedule.
(a) During the Pre-Closing Period, the Company shall promptly notify Verio
in writing of:
(i) the discovery by the Company of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of this
Agreement and that caused or constitutes a Breach of any representation or
warranty made by the Company or any of the Shareholders in this Agreement
or any of the other Transactional Agreements;
(ii) any event, condition, fact or circumstance that occurs, arises or
exists after the date of this Agreement (except as a result of actions
taken pursuant to the written consent of Verio) and that would cause or
constitute a Breach of any representation or warranty made by the Company
or any of the Shareholders in this Agreement or any of the other
Transactional Agreements if (A) such representation or warranty had been
made as of the time of the occurrence, existence or discovery of such
event, condition, fact or circumstance, or (B) such extent, condition, fact
or circumstance had occurred, arisen or existed on or prior to the date of
this Agreement or any of the other Transactional Agreements;
(iii) any Breach of any covenant or obligation of the Company; and
(iv) any event, condition, fact or circumstance that may make the
timely satisfaction of any of the conditions set forth in Section 9.1 or
Section 9.2 impossible or unlikely.
(b) If any event, condition, fact or circumstances that is required to be
disclosed pursuant to Section 6.4(a) requires any material change in the
Disclosure Schedule, or if any such event, condition, fact or circumstance would
require such a change assuming the Disclosure Schedule were dated as of the date
of the occurrence, existence or discovery of such event, condition, fact or
circumstances, then the Company shall promptly deliver to Verio an update to the
Disclosure Schedule specifying such change (a "Disclosure Schedule Update");
provided, however, that no such update shall be deemed to supplement or amend
the Disclosure Schedule for the purpose of (i) determining the accuracy of any
of the representations and warranties made by the Company or the Shareholders in
this Agreement or any of the other Transactional Agreements, or (ii) determining
whether any of the conditions set forth in Article 9 has been satisfied, unless
the specific updated information has been consented to by Verio in writing as a
waiver of such inaccuracy or determination.
(c) The Company will promptly update any relevant and material information
provided to Verio after the date hereof pursuant to the terms of this Agreement.
6.5 Payment of Indebtedness by Related Parties. Except as otherwise
provided in Section 6.5 of the Disclosure Schedule, the Company shall cause all
indebtedness and other Liabilities of each Related Party to the Company to be
discharged and paid in full at or prior to the Closing (which may include
payment from net cash proceeds received by a Related Party with respect to the
conversion of shares of Company Common Stock in the Merger).
6.6 No Negotiation or Solicitation. The Company shall ensure that neither
the Company nor any of the Company's Representatives directly or indirectly,
from the date hereof until the earlier of termination of this Agreement or
consummation of the Merger, (a) initiate, solicit or encourage, or take any
other action to facilitate any inquiries or the making of any proposal with
respect to, or (b) consider the merits or engage or participate in negotiations
concerning, provide any nonpublic information or data to, or have any
discussions with, any person other than a party hereto or their Representatives
relating to, any (i) acquisition, (ii) tender offer (including a self-tender
offer), (iii) exchange offer, (iv) merger, (v) consolidation, (vi) acquisition
of beneficial ownership of (or the right to vote securities representing) any
securities of the Company, or any rights to acquire, or other instruments
convertible into, securities of the Company, (vii) dissolution, (viii) business
combination, (ix) purchase of all or any significant portion of the assets or
any division of (or any equity interest in) the Company or any subsidiary, or
(x) any similar transaction other than the Merger (such proposals,
announcements, or transactions being referred to as "Acquisition Proposals").
The Company will notify Verio orally (within one business day) and in writing
(as promptly as practicable) if any such
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Acquisition Proposals (including the identity of the persons making such
proposals and the terms of such proposals) are received and furnish to Verio a
copy of any written proposal relating thereto.
6.7 Best Efforts. During the Pre-Closing Period, the Company shall use its
commercially reasonable Best Efforts to cause the conditions set forth in
Section 9.1 and Section 9.2 to be satisfied on a timely basis and so that the
Closing can take place on January 1, 1999 or as soon thereafter as is reasonably
practical, in accordance with Section 3.7, and shall not take any action or omit
to take any action, the taking or omission of which would or could reasonably be
expected to result in any of the representations and warranties of the Company
or the Shareholders set forth in this Agreement or any of the other
Transactional Agreements becoming untrue, or in any of the conditions of Closing
set forth in Section 9.1 or Section 9.2 not being satisfied.
6.8 Confidentiality; Publicity. The Company shall use its commercially
reasonable Best Efforts to ensure that, during the Pre-Closing Period:
(a) the Company and its Representatives keep strictly confidential the
existence and terms of this Agreement and, not in any way limiting the
generality of the foregoing, comply with the terms and provisions of the letter
agreement by and between Verio and the Company, dated as of July 15, 1998 (the
"Nondisclosure Agreement"); and
(b) neither the Company nor any of its Representatives issues or
disseminates any press release or other publicity or otherwise makes any
disclosure of any nature (to any of the Company's suppliers, customers,
landlords, creditors or employees or to any other Person) regarding any of the
Transactions;
except in each case to the extent that the Company is required by law to make
any such disclosure regarding such transactions or as separately agreed by the
parties; provided, however, that if the Company is required by law to make any
such disclosure, the Company advises Verio, at least five business days before
making such disclosure, of the nature and content of the intended disclosure.
6.9 FIRPTA Certification. The Company shall furnish to Verio on or within
thirty days prior to the Closing Date certification in the form required by
Treasury Regulation ss. 1.1445-2(c)(3) that the stock of the Company is not a
U.S. real property interest. In addition, simultaneously with delivery of such
certification, the Company shall have provided Verio, as agent for the Company,
a form of notice to the Internal Revenue Service in accordance with the
requirements of Treasury Regulation Section 1.897-2(h)(2) along with written
authorization for Verio to deliver such notice form to the Internal Revenue
Service on behalf of the Company upon the Closing of the Merger.
6.10 Proprietary Information and Inventions Agreements. On or prior to
Closing, the Company shall enter into Proprietary Information and Inventions
Agreements, substantially in the form attached as Exhibit C-1 or C-2 hereto or
in such other form as Verio may approve, with all of the Company's employees and
consultants, except for such employees and consultants as shall have previously
entered into a form of such agreement reasonably acceptable to Verio.
6.11 Letters of the Company's Auditors. The Company shall use its Best
Efforts to cause to be delivered to Verio at or prior to the date two business
days prior to the Closing a letter of PricewaterhouseCoopers LLP (the "Company
Auditors"), the Company's independent auditors, dated a date within two business
days before the date on which the Registration Statement shall become effective
and addressed to Verio, in form and substance reasonably satisfactory to Verio,
and in scope and substance consistent with applicable professional standards for
letters delivered by independent public accountants in connection with
registration statements similar to the Registration Statement (the "Accounting
Comfort Letter"). The Company shall use its Best Efforts to cause to be
delivered to Verio an update, dated the Closing Date, of the letter of the
Company Auditors described in the preceding sentence.
6.12 Reports of Company Transaction Expenses. At or prior the date two
business days prior to the Closing, the Company shall provide Verio with: (i)
final invoices from every law firm, investment banking firm and accounting firm
that has provided services to or on behalf of the Company in connection with the
Merger or any of the other Transactions, and including the Company's proposed
initial public offering; (ii) final
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statements for any other expenses related to the Merger and the other
Transactions, and including the Company's proposed initial public offering, that
are includable in Company Transaction Expenses; and (iii) a written
representation on behalf of the Company by the Chief Executive Officer of the
Company that the foregoing invoices and statements constitute all of the
expenses includable in Company Transaction Expenses, which representation shall
be included in the Company Closing Certificate. Such sums will be paid by the
Company at the Closing.
6.13 Affiliates.
(a) The Company shall deliver to Verio a list identifying all Persons
("Affiliates"), if any, who at the time the Merger is submitted for approval to
the shareholders of the Company, may be deemed "affiliates" of the Company for
purposes of Rule 145 under the Securities Act. The Company shall use its Best
Efforts to cause each Affiliate to deliver to Verio, on or prior to December 15,
1998, a written agreement ("Affiliate Agreement"), in the form of Exhibit D
hereto.
(b) The Company shall promptly advise Verio if any Person becomes or ceases
to be an Affiliate.
6.14 Takeover Statutes. If any Takeover Statute shall become applicable to
any of the Transactions, the Company and the members of the Board of Directors
of the Company shall grant such approvals and take such actions as are necessary
so that the Merger and the other Transactions may be commenced as promptly as
practicable in the terms contemplated hereby and otherwise act to eliminate or
minimize the effects of such statute or regulation in the Transaction.
6.15 Bank Accounts. Promptly after the date hereof, the Company will
deliver to Verio a written statement which accurately sets forth, with respect
to each account maintained by or for the benefit of the Company at any bank or
other financial institution:
(a) the name and location of the institution at which such account is
maintained;
(b) the name in which such account is maintained and the account number of
such account;
(c) a description of such account and the purpose for which such account is
used;
(d) the then current balance in such account;
(e) the rate of interest then being earned on the funds in such account;
and
(f) the names of all individuals authorized to draw on or make withdrawals
from such account.
6.16 Supplier Information. Promptly following the date hereof, the Company
shall provide Verio with a written statement that accurately identifies, and
provides an accurate and complete breakdown of the amounts paid to, each
supplier or other Person that received more than $500,000 from the Company in
the fiscal year ended December 31, 1997 or the period from January 1, 1998 to
September 30, 1998 (on an annualized basis), other than amounts paid to
employees or consultants and described in Section 4.14 of the Disclosure
Schedule.
6.17 Employee Information.
(a) Promptly following the date hereof, the Company will deliver to Verio a
written statement showing, with respect to each employee of the Company
(including any employee of the Company who is on a leave of absence or on layoff
status):
(i) the name of such employee and the date as of which such employee
was originally hired by the Company;
(ii) such employee's title;
(iii) such employee's annualized compensation as of the date of this
Agreement;
(iv) each Current Benefit Plan in which such employee participates or
is eligible to participate; and
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(v) any Governmental Authorization that is held by such employee and
that is used in connection with the Company's business.
6.18 Insurance Information.
(a) Promptly following the Closing, the Company will deliver to Verio a
written statement stating, with respect to each insurance policy maintained by
or at the expense of, or for the direct or indirect benefit of, the Company:
(i) the name of the insurance carrier that issued such policy and the
policy number of such policy;
(ii) whether such policy is a "claims made" or an "occurrences"
policy;
(iii) a description of the coverage provided by such policy and the
material terms and provisions of such policy (including all applicable
coverage limits, deductible amounts and co-insurance arrangements);
(iv) the annual premium payable with respect to such policy, and the
cash value (if any) of such policy; and
(v) a description of any claims pending, and any claims that have been
asserted in the past, with respect to such policy.
Such statement shall also identify (1) each pending application for insurance
that has been submitted by or on behalf of the Company, and (2) each
self-insurance or risk-sharing arrangement affecting the Company or any of its
assets. The Company also shall deliver to Verio accurate and complete copies of
all of its insurance policies (including all renewals thereof and endorsements
thereto) and binders relating thereto indicating that such policies are in full
force and effect as of the date hereof.
6.19 Company Accruals and Reserves. Prior to the Closing Date, the Company
shall review and, to the extent determined necessary or advisable and requested
in writing by Verio, consistent with GAAP, modify and change its accrual,
reserve and provision policies and practices to (a) reflect the Surviving
Corporation's plans with respect to the conduct of Company's business following
the Merger and (b) make adequate provision for the costs and expenses relating
thereto so as to be applied consistently on a mutually satisfactory basis with
those of Verio. The parties agree to cooperate in preparing for the
implementation of the adjustments contemplated by this Section 6.19. The parties
further agree that no such modifications or changes made at the written request
of Verio shall constitute a Breach of any obligation or representation or
warranty or covenant of the Company hereunder by virtue of the Company's
compliance with such Verio request or by virtue of the Company's making such
changes.
6.20 Termination of Employment Agreements. Prior to or on the Closing
Date, the Company shall cause the termination of each of the employment
agreements between the Company and each of the Company Specified Officers, in
each case in such a manner that the Company will not be required to make any
payments or otherwise bear any liability, before or after the Closing, with
respect to "excess parachute payments" within the meaning of Section 280G of the
Code.
6.21 Subsidiary and other Equity Interests. During the Pre-Closing Period,
the Company shall use its Best Efforts to obtain definitive evidence, consistent
with applicable local custom and Legal Requirements, with respect to its
ownership interests in the Entities in which the Company holds equity interests,
as disclosed in Section 4.1(f) of the Disclosure Schedule.
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ARTICLE 7
PRE-CLOSING PERIOD COVENANTS OF VERIO
7.1 Notification. During the Pre-Closing Period, Verio shall promptly
notify the Company in writing of:
(a) the discovery by Verio of any event, condition, fact or circumstance
that occurred or existed on or prior to the date of this Agreement and that
caused or constitutes a Breach of any representation or warranty made by Verio
in this Agreement or any of the other Transactional Agreements;
(b) any event, condition, fact or circumstance that occurs, arises or
exists after the date of this Agreement (except as a result of actions taken
pursuant to the written consent of the Company) and that would cause or
constitute a Breach of any representation or warranty made by Verio or Merger
Sub in this Agreement or any of the other Transactional Agreements if (i) such
representation or warranty had been made as of the time of the occurrence,
existence or discovery of such event, condition, fact or circumstance, or (ii)
such event, condition, fact or circumstance had occurred, arisen or existed on
or prior to the date of this Agreement or any of the other Transactional
Agreements;
(c) any Breach of any covenant or obligation of Verio or Merger Sub; and
(d) any event, condition, fact or circumstance that may make the timely
satisfaction of any of the conditions set forth in Section 9.1 or Section 9.3
impossible or unlikely.
7.2 Best Efforts. During the Pre-Closing Period, Verio shall use its
commercially reasonable Best Efforts to cause the conditions set forth in
Section 9.1 and 9.3 to be satisfied on a timely basis and so that the Closing
can take place on January 1, 1999 or as soon thereafter as is reasonably
practical, in accordance with Section 3.7, and shall not take any action or omit
to take any action, the taking or omission of which would or could reasonably be
expected to result in any of the representations and warranties or Verio set
forth in this Agreement or in any other Transactional Agreement becoming untrue
or in any of the conditions of closing set forth in Section 9.1 or Section 9.3
not being satisfied.
7.3 Confidentiality; Publicity. Verio shall use its commercially
reasonable Best Efforts to ensure that, during the Pre-Closing Period:
(a) Verio and its Representatives keep strictly confidential the existence
and terms of this Agreement prior to the issuance or dissemination of any
mutually agreed upon press release or other disclosure of the Transactions and,
not in any way limiting the generality of the foregoing, comply with the terms
and provisions of the Nondisclosure Agreement; and
(b) neither Verio nor any of its Representatives issues or disseminates any
press release or other publicity or otherwise makes any disclosure of any nature
(to any of the Company's suppliers, customers, landlords, creditors or employees
or to any other Person) regarding any of the Transactions;
except, in each case, to the extent that Verio is required by law to make any
such disclosure regarding the Transactions or as otherwise agreed by the
parties; provided, however, that if Verio is required by law to make any
disclosure regarding the Transactions, Verio advises the Company in writing, at
least five business days before making such disclosure, if reasonably practical,
of the nature and content of the intended disclosure.
Notwithstanding the foregoing, Verio and the Company shall cooperate to
make a joint announcement and issue a press release with respect to the
execution of this Agreement at or promptly following the execution hereof.
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ARTICLE 8
ADDITIONAL AGREEMENTS
8.1 Proxy Statement/Prospectus.
(a) Verio has prepared a document (the "Proxy Statement/Prospectus") to be
used as a Proxy Statement with respect to the solicitation by the Company Board
of Directors of the vote of the outstanding shares of Company Common Stock and
by Verio as part of a Registration Statement on Form S-4 under the Securities
Act and as a prospectus with respect to the shares of Verio Common Stock to be
issued in connection with the Closing pursuant to Section 3.1. Verio has filed
the Proxy Statement/Prospectus with the SEC, and will respond to any comments of
the SEC with respect thereto as promptly as reasonably practical. Such document,
as filed by Verio under the Securities Act in connection with the registration
of the shares of Verio Common Stock to be issued in the Merger, is referred to
herein as the "Registration Statement."
(b) The Company shall cooperate fully, and shall cause the Shareholders to
cooperate fully, with Verio in the preparation of the Proxy
Statement/Prospectus. In furtherance of the foregoing, the Company shall provide
Verio with all information concerning the Company and the holders of its capital
stock and shall take such other action as Verio may reasonably request in
connection with such document and the issuance of shares of Verio Common Stock.
(c) Whenever any event occurs which should be set forth in an amendment or
a supplement to the Proxy Statement/Prospectus or any filing required to be made
with the SEC, each party will promptly inform the other and will cooperate in
filing with the SEC such amendment or supplement.
8.2 Company Shareholder Approval.
(a) The Company, acting through its Board of Directors, shall, in
accordance with the requirements of applicable law and the Company's Articles of
Incorporation and Bylaws:
(i) cause the Proxy Statement/Prospectus to be mailed to the Company
shareholders promptly upon the effectiveness thereof and duly call, give
notice of, convene and hold as soon as practicable a meeting (or solicit an
action by written consent in lieu thereof) of its shareholders for the
purpose of voting to approve and adopt this Agreement and the other
Transactional Agreements, to the extent required in accordance with Legal
Requirements, and use its Best Efforts to obtain such shareholders'
approval; and
(ii) recommend approval and adoption of this Agreement and the other
Transactional Agreements by the shareholders of the Company, to the extent
required in accordance with Legal Requirements, which recommendation shall
be included in the Proxy Statement/Prospectus.
(b) If requested by Verio, the Company shall, in addition to calling a
meeting of the Company shareholders as provided above, seek the approval and
adoption of this Agreement and the other Transactional Agreements by written
consent promptly following the effectiveness of the Proxy Statement/Prospectus.
(c) Whenever any event occurs which should be set forth in an amendment or
a supplement to the Proxy Statement/Prospectus, the Company will promptly inform
Verio and will mail to the Company's shareholders such amendment or supplement.
8.3 Reserved.
8.4 Nasdaq National Market. Verio shall notify the Nasdaq National Market
of the listing of the shares of Verio Common Stock to be issued pursuant to the
Merger.
8.5 Antitrust Laws. Each of the Company and Verio has made all filings and
submissions required to be made by it under the HSR Act in connection with the
Transactions. Subject to Sections 6.8 and 7.3 hereof, the Company will furnish
to Verio, and Verio will furnish to the Company, such information and assistance
as the other may reasonably request in connection with the preparation of any
such filings or submissions. Subject to Sections 6.8 and 7.3 hereof, the Company
will provide Verio, and Verio will provide the Company,
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with copies of all correspondence, filings or communications (or memoranda
setting forth the substance thereof) between such party or any of its
representatives, on the one hand, and any Governmental Body or members of their
respective staffs, on the other hand, with respect to this Agreement and the
Transactions, except to the extent that Verio or the Company is advised by
independent counsel that the provision of such information would be inadvisable
under applicable antitrust laws.
8.6 Certain Employee Benefit Plans Matters. The Company shall take no
action from and after the date hereof to deposit into any trust (including any
"rabbi trust") amounts in respect of any employee benefit obligations.
8.7 Integration Matters. The Company and Verio will work cooperate in good
faith to identify and, to the extent practicable, resolve matters regarding the
orderly integration of their respective operations, including matters relating
to acceptable positions with Verio for key management personnel of the Company,
and the retention of other Company employees who will remain after the Merger.
The Company and Verio will work together to facilitate the development of a plan
for the transition to common network and back office systems, to the extent
consistent with antitrust laws.
8.8 Stock Options and Warrants.
(a) The Company hereby confirms to Verio that:
(i) all the Company Stock Options under all the Company stock option
plans shall carry over and become options to acquire Verio Common Stock;
and
(ii) the Company's Board of Directors shall not cause such options
vesting or exercisability to be accelerated unless and except to the extent
that such acceleration is automatic under the terms of the applicable
agreement.
(b) As of the Effective Time, all options ("Company Stock Options") and
warrants to purchase Company Common Stock, and all securities convertible into
Company Common Stock, which are outstanding and not expired as of the Effective
Time, shall be assumed by Verio and converted into options or warrants to
purchase, or securities convertible into, such shares of Verio Common Stock as
the holder thereof would have received in the Merger had such option, warrant or
security been exercised or converted prior to the Effective Time (and had the
entire Per Share Price for the Company Common Stock resulting from such exercise
or conversion been paid in the form of Verio Common Stock based upon a Verio
Common Stock price of $16.00), at an aggregate purchase price equal to the
aggregate purchase price applicable prior to such conversion; provided, however,
that in the case of any Company Stock Option to which Section 421 of the Code
applies by reason of its qualification under Section 422 of the Code, the
conversion formula shall be adjusted, if necessary, to comply with Section
424(a) of the Code to the effect that the number of shares shall be rounded down
to the nearest whole share and the exercise price shall be rounded up to the
nearest penny. Except as provided above, the converted stock options, warrants
or convertible securities, as the case may be, shall be subject to the same
terms and conditions (including, without limitation, expiration date, vesting
and exercise provisions) as were applicable to the stock options, warrants or
convertible securities, as the case may be, immediately prior to the Effective
Time.
(c) No such option, warrant or convertible security shall be converted into
a stock option, warrant or convertible security to purchase a partial share of
Verio Common Stock.
(d) The consummation of the Merger shall not be treated as a termination of
employment for purposes of such stock options, warrants or convertible
securities.
(e) Verio agrees that as soon as reasonably practicable after the Effective
Time it will cause to be filed one or more registration statements on Form S-8
under the Securities Act, or amendments to its existing registration statements
on Form S-8 or amendments to the Registration Statement, in order to register
the shares of Verio Common Stock issuable upon exercise of the aforesaid
converted Company Stock Options.
8.9 Expenses. Except for adjustments to the Aggregate Transaction Value as
provided in Section 3.1 with respect to Excess Company Transaction Expenses, all
costs and expenses incurred in connection with this
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Agreement and the Transactional Agreements and the transactions contemplated
hereby and thereby (whether or not the Merger is consummated) shall be paid by
the party incurring such expenses, except as otherwise provided herein or in the
Transactional Agreements.
8.10 Additional Agreements.
(a) Subject to the terms and conditions herein provided, each of the
parties hereto agrees to use its Best Efforts to take, or cause to be taken, all
action and to do, or cause to be done, all things necessary, proper or advisable
under applicable laws and regulations to consummate and make effective the
Transactions, including using all reasonable efforts to obtain all necessary
waivers, consents and approvals, and to effect all necessary registrations and
filings and to obtain from each natural person who owns of record any shares of
the capital stock of any subsidiary of the Company a power of attorney, in form
acceptable to Verio and its counsel, appointing one or more representatives of
Verio as attorney in fact for such Person, effective as of the Effective Time,
for purposes of executing any reports and taking any other actions required to
transfer record ownership of such shares to such Entity as Verio shall
determine. In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement, the proper
officers and/or directors of Verio and the Company (or of the Surviving
Corporation on behalf of the Company) shall take all such necessary action.
(b) Verio and the Company each will cooperate with one another and use all
reasonable efforts to prepare all necessary documentation to effect promptly all
necessary filings and to obtain all necessary permits, consents, approvals,
orders and authorizations of or any exemptions by, all third parties and
governmental bodies necessary to consummate the transactions contemplated by
this Agreement. Each party will keep the other party apprised of the status of
any inquiries made of such party by the Department of Justice, the SEC, or any
other governmental agency or authority or members of their respective staffs
with respect to this Agreement or the transactions contemplated herein.
(c) For a period of 3 years after the Closing, Verio shall maintain, with
respect to claims arising from facts or events which occurred before the
Closing, officers' and directors' liability insurance covering the directors and
officers of the Company who are currently covered (in their capacities as
officers and directors of the Company or any of its subsidiaries) by the
Company's existing officers' and directors' liability insurance policy (a copy
of which has been provided to Verio), on terms substantially no less
advantageous to such officers and directors than such existing insurance;
provided, however, that Verio shall not be required to expend an amount per
annum to maintain such coverage in excess of 150% of the current annual policy
premiums payable by the Company with respect to its directors' and officers'
liability insurance coverage. Subject to, and to the extent required by, the
preceding sentence, Verio shall continue the Company's current officers' and
directors' liability insurance or shall provide such substantially similar
insurance as the Company may reasonably agree.
(d) Verio's Board of Directors shall take all action necessary to cause one
person specified by the Company and reasonably acceptable to Verio to be
designated to serve on the Board of Directors of Verio effective at the
Effective Time. Such designation by the Company shall be made prior to the date
of the mailing of the Proxy Statement/Prospectus to the shareholders of the
Company. Such designee may be appointed to serve on the Board of Directors of
Verio either by means of a stockholder vote or by means of appointment by the
Board of Directors to fill any vacancy that may exist in Verio's Board of
Directors.
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ARTICLE 9
CONDITIONS TO CONSUMMATION OF THE MERGER
9.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to consummate the Merger and to take the
other actions required to be taken by it at the Closing shall be subject to the
satisfaction, at or prior to the Closing, of each of the following conditions
(any of which may be waived by both the Company and Verio, in whole or in part):
(a) Any waiting period applicable to the consummation of the Merger under
the HSR Act shall have expired or been terminated.
(b) The Registration Statement shall have become effective in accordance
with the provisions of the Securities Act, and shall be effective at the
Effective Time, no stop order suspending effectiveness of the Registration
Statement shall have been issued, and no action, suit, proceeding or
investigation by the SEC to suspend the effectiveness thereof shall have been
initiated and be continuing.
(c) All necessary approvals under federal and state securities laws and
other authorizations relating to the issuance or trading of the Verio Common
Stock to be issued to Company shareholders in connection with the Merger shall
have been received.
(d) The shares of Verio Common Stock to be issued in the Merger shall have
been approved for listing on the Nasdaq National Market.
(e) This Agreement and the Transactions shall have been approved and
adopted by the favorable vote of a majority of the shares of the outstanding
capital stock of the Company entitled to vote thereon at a shareholders meeting
at which a quorum is present in accordance with Legal Requirements.
(f) No preliminary or permanent injunction or other order by any federal,
state or foreign court of competent jurisdiction which prohibits the
consummation of the Merger shall have been issued and remain in effect. No
statute, rule, regulation, executive order, stay, decree, or judgment shall have
been enacted, entered, issued, promulgated or enforced by any court or
governmental authority which prohibits or restricts the consummation of the
Merger. Other than the filing of the Agreement of Merger with the Secretary of
State of California, all authorizations, consents, orders or approvals of, or
declarations or filings with, and all expirations of waiting periods imposed by,
any Governmental Body which are necessary for the consummation of the Merger,
other than those the failure to obtain which would not materially adversely
affect the consummation of the Merger or in the aggregate have a material
adverse effect on the Surviving Corporation and its subsidiaries, taken as a
whole, shall have been filed, occurred or been obtained (all such permits,
approvals, filings and consents and the lapse of all such waiting periods being
referred to as the "Requisite Regulatory Approvals") and all such Requisite
Regulatory Approvals shall be in full force and effect.
(g) There shall not be any action taken, or any statute, rule, regulation
or order enacted, entered, enforced or deemed applicable to the Merger, by any
federal or state Governmental Body which, in connection with the grant of a
Requisite Regulatory Approval, imposes any condition or restriction upon the
Surviving Corporation or its subsidiaries (or, in the case of any disposition of
assets required in connection with such Requisite Regulatory Approval, upon
Verio or its subsidiaries or the Company or its subsidiaries), including,
without limitation, requirements relating to the disposition of assets, which in
any such case would so materially adversely impact the economic or business
benefits of the Transactions as to render inadvisable the consummation of the
Merger.
9.2 Additional Conditions to Verio's and Merger Sub's Obligation to
Consummate the Merger. Verio's and Merger Sub's obligations to consummate the
Merger and to take the other actions required to be taken by Verio and Merger
Sub at the Closing is subject to the satisfaction, at or prior to the Closing,
of each of the following conditions (any of which may be waived by Verio, in
whole or in part):
(a) All of the representations and warranties made by the Company and each
of the Shareholders in this Agreement and the other Transactional Agreements
(considered collectively) shall have been accurate in all material respects as
of the date of this Agreement, and shall be accurate in all material respects as
of the
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Closing Time (without giving effect to any Disclosure Schedule Update) (other
than any such inaccuracies resulting from actions taken at the written request
of or with the written consent of Verio).
(b) The Company or the Shareholders, as the case may be, shall have
executed and delivered each of the agreements, instruments and documents
required to be executed and delivered, and performed all actions required by the
Company or any of the Shareholders, as the case may be, pursuant to Section 4.22
and Article 6, except as Verio has otherwise consented in writing.
(c) Each of the members of the Company's management listed on Schedule 1
shall have executed and delivered to Verio a lock-up letter in the form of
Exhibit E hereto.
(d) Each of the employees of the Company specified on Schedule 2 shall have
executed and delivered to Verio a Noncompetition and Nonsolicitation Agreement
in the form of Exhibit F hereto, with such changes to Section 3 thereof as may
be agreed between each such employee and Verio.
(e) All of the other covenants and obligations that the Company or any
Shareholder is required to comply with or to perform pursuant to this Agreement
or any other Transactional Agreement at or prior to the Closing (considered
collectively) shall have been duly complied with and performed in all material
respects.
(f) Each individual that has executed a Voting Agreement shall have entered
into a Registration Rights Agreement with Verio.
(g) Each of the Consents identified or required to have been identified in
Section 4.20 of the Disclosure Schedule shall have been obtained and shall be in
full force and effect, other than those Consents the absence of which shall not
have a material adverse effect on the Company.
(h) There shall not have been any material adverse change in the Company's
business, condition, assets, liabilities, operations or financial performance
since the date of this Agreement.
(i) In addition to the documents required to be received under this Section
9.2, Verio shall also have received the following documents:
(i) the opinion letter from Fenwick & West LLP, counsel to the
Company, dated the Closing Date, in the form attached as Exhibit H;
(ii) a certificate (the "Company Closing Certificate"), dated the
Closing Date, duly executed by the Company, (1) certifying that (A) each of
the representations and warranties made by the Company or any Shareholder
in this Agreement and in the other Transactional Agreements was accurate in
all material respects as of the date of the applicable Agreement and is
accurate in all material respects as of the Closing Date as if made on the
Closing Date, (B) each of the covenants and obligations that the Company or
any Shareholder is required to have complied with or performed pursuant to
this Agreement or any of the other Transactional Agreements at or prior to
the Closing has been duly complied with and performed in all material
respects, and (C) each of the conditions set forth in Section 9.2 has been
satisfied in all respects, and (2) providing the information required by
Section 6.12;
(iii) duly executed Affiliate Agreements from each Affiliate of the
Company;
(iv) copies of resolutions of the Company, certified by a Secretary,
Assistant Secretary or other appropriate officer of the Company,
authorizing the execution, delivery and performance of the Transactional
Agreements and the Transactions, and copies of resolutions of the meeting
of shareholders of the Company (or written consent in lieu thereof),
certified by a Secretary, Assistant Secretary or other appropriate officer
of the Company, authorizing the execution, delivery and performance of the
Transactional Agreements and the Transactions;
(v) good standing certificate for the States of California and
Florida;
(vi) the updated capitalization information for the Company required
by Section 4.3(a), certified as true and correct by an executive officer of
the Company; and
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(vii) such other documents as Verio may request in good faith for the
purpose of (i) evidencing the accuracy of any representation or warranty
made by the Company or any Shareholder, (ii) evidencing the compliance by
the Company, or the performance by the Company of, any covenant or
obligation set forth in this Agreement or any of the other Transactional
Agreements, (iii) evidencing the satisfaction of any condition set forth in
Section 9.1 or this Section 9.2, or (iv) otherwise facilitating the
consummation or performance of any of the Transactions.
(j) Since the date of this Agreement, there shall not have been commenced
or threatened against Verio, or against any Person affiliated with Verio, any
Proceeding (i) involving any challenge to, or seeking Damages or other relief in
connection with, any of the Transactions, or (ii) that may have the effect of
preventing, delaying, making illegal or otherwise interfering with any of the
Transactions or any of the Transactional Agreements or having a material adverse
effect on the Company.
(k) No Person shall have made or threatened any claim asserting that such
Person (i) may be the holder or the beneficial owner of, or may have the right
to acquire or to obtain beneficial ownership of, any capital stock or other
securities of the Company, or (ii) may be entitled to all or any portion of the
consideration to be issued in connection with the Merger pursuant to Section
3.1.
(l) Neither the consummation nor the performance of any of the Transactions
or any of the Transactional Agreements will, directly or indirectly (with or
without notice or lapse of time), contravene or conflict with or result in a
violation of, or cause Verio or any Person affiliated with Verio to suffer any
material adverse consequence under (i) any applicable Legal Requirement or Order
or (ii) any Legal Requirement or Order that has been proposed by or before any
Governmental Body.
(m) Each Person (other than Verio and Merger Sub) shall have executed and
delivered prior to or on the Closing Date all Transactional Agreements to which
it is to be a party.
(n) Verio shall have received from the Company the reports of Company
Transaction Expenses required to be delivered pursuant to Section 6.12.
(o) The holders of no more than ten percent (10%) of the outstanding shares
of Company Common Stock shall have demanded and not lost or withdrawn, or shall
be eligible to demand, dissenters' rights.
(p) Each of the Company's employees and consultants shall have entered into
a Proprietary Information and Inventions Agreement substantially in the form of
Exhibit C-1 or C-2 hereto or such other form as shall have been provided to and
approved by Verio.
(q) Each of the employment agreements between the Company and the Company
Specified Officers shall have been terminated as required by Section 6.20, and
Verio shall be satisfied in its reasonable discretion that there are no Company
employee benefit plans, arrangements, agreements or understandings that would,
whether upon the closing of the Merger or otherwise in connection with the
Merger (including after the passage of time and the taking of any action such as
the termination of an employee), constitute "excess parachute payments" within
the meaning of Section 280G of the Code.
(r) Verio, since the date of this Agreement, shall have raised such
additional financing, on terms and conditions satisfactory to Verio in its sole
discretion, to allow it to fulfill its obligations under this Agreement with
respect to the conversion of shares of Company Common Stock as provided in
Section 3.1.
9.3 Additional Conditions to the Company's Obligation to Consummate the
Merger. The Company's obligation to consummate the Merger and to take the other
actions required to be taken by the Company at the Closing shall be subject to
the satisfaction, at or prior to the Closing, of each of the following
conditions (any of which may be waived by the Company, in whole or in part):
(a) All of the representations and warranties made by Verio and Merger Sub
in this Agreement (considered collectively) shall have been accurate in all
material respects as of the date of this Agreement and shall be accurate in all
material respects as of the Closing Time.
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(b) The Company shall have received the following documents:
(i) a certificate (the "Verio Closing Certificate"), dated the Closing
Date, duly executed by Verio, certifying that (A) each of the
representations and warranties made by Verio and the Merger Sub in this
Agreement and in the other Transactional Agreements was accurate in all
material respects as of the date of the applicable Agreement and is
accurate in all material respects as of the Closing Date as if made on the
Closing Date, (B) each of the covenants and obligations that Verio or the
Merger Sub is required to have complied with or performed pursuant to this
Agreement or any of the other Transactional Agreements at or prior to the
Closing has been duly complied with and performed in all material respects,
and (C) each of the conditions set forth in Section 9.3 has been satisfied
in all respects; and
(ii) such other documents as the Company may request in good faith for
the purpose of (A) evidencing the accuracy of any representation or
warranty made by Verio and Merger Sub, (B) evidencing the compliance by
Verio and Merger Sub with, or the performance by Verio and Merger Sub of,
any covenant or obligation set forth in this Agreement or any of the other
Transactional Agreements, (C) evidencing the satisfaction of any condition
set forth in this Article 9, or (D) otherwise facilitating the consummation
or performance of any of the Transactions.
(c) All of the covenants and obligations that either Verio or Merger Sub is
required to comply with or to perform pursuant to this Agreement at or prior to
the Closing (considered collectively) shall have been duly complied with and
performed in all material respects.
(d) Verio shall have executed an delivered a Registration Rights Agreement
to each individual that has executed and delivered to Verio a Voting Agreement.
(e) Subject to the terms and conditions of this Agreement, Verio and Merger
Sub shall have executed and delivered prior to or on the Closing Date all
Transactional Agreements to which it is to be a party.
(f) Neither the consummation nor the performance of any of the Transactions
or any of the Transactional Agreements will, directly or indirectly (with or
without notice or lapse of time), contravene or conflict with or result in a
violation of, or cause the Shareholders to suffer any material adverse
consequences under, (a) any applicable Legal Requirement or Order or (b) any
Legal Requirement or Order that has been proposed by or before any Governmental
Body.
(g) There shall not have been any material adverse change in Verio's
business, condition, assets, liabilities, operations or financial performance
since the date of this Agreement; provided, however, that a decrease in the
trading price of Verio Common Stock shall not of itself be considered a material
adverse change.
(h) The person designated by the Company as a member of the Verio Board of
Directors pursuant to Section 8.10(d) shall have been appointed to the Verio
Board of Directors (if so designated), effective at the Effective Time.
ARTICLE 10
TERMINATION
10.1 Termination. This Agreement may be terminated and the Merger
abandoned at any time prior to the Effective Time, whether before or after
approval by the shareholders of the Company:
(a) by mutual written consent of Verio and the Company;
(b) by Verio if (i) there is a material Breach of any covenant or
obligation of the Company or any of the Shareholders, or (ii) Verio reasonably
determines that the timely satisfaction of any condition set forth in Section
9.1 or 9.2 has become impossible or impractical (other than as a result of any
failure on the part of Verio to comply with or perform its covenants and
obligations under this Agreement);
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(c) by the Company if (i) there is a material Breach of any covenant or
obligation of Verio or Merger Sub, or (ii) the Company reasonably determines
that the timely satisfaction of any condition set forth in Section 9.1 or 9.3
has become impossible or impractical (other than as a result of any failure on
the part of the Company or any Shareholder to comply with or perform any
covenant or obligation set forth in this Agreement or any of the other
Transactional Agreements);
(d) by Verio if the Closing has not taken place on or before February 28,
1999 (other than as a result of any failure on the part of Verio or Merger Sub
to comply with or perform its covenants and obligations under this Agreement);
(e) by the Company if the Closing has not taken place on or before February
28, 1999 (other than as a result of the failure on the part of the Company or
any of the Shareholders to comply with or perform any covenant or obligation set
forth in this Agreement or in any other Transactional Agreement);
(f) by either Verio or the Company if any court of competent jurisdiction
in the United States or other United States governmental body shall have issued
an order, decree or ruling or taken any other action restraining, enjoining or
otherwise prohibiting the Merger and such order, decree, ruling or any other
action shall have become final and non-appealable; provided, however, that the
party seeking to terminate this Agreement pursuant to this clause (f) shall have
used all reasonable efforts to remove such order, decree or ruling; or
(g) by Verio, upon written notice to the Company, if any approval of the
shareholders of the Company required for the consummation of the Merger
submitted for approval shall not have been obtained by reason of the failure to
obtain the required vote at a duly held meeting of shareholders or at any
adjournment thereof.
10.2 Termination Procedures. If Verio wishes to terminate this Agreement
pursuant to Section 10.1, Verio shall deliver to the Company a written notice
stating that Verio is terminating this Agreement and setting forth a brief
description of the basis on which Verio is terminating this Agreement. If the
Company wishes to terminate this Agreement pursuant to Section 10.1, the Company
shall deliver to Verio a written notice stating that the Company is terminating
this Agreement and setting forth a brief description of the basis on which the
Company is terminating this Agreement.
10.3 Effect of Termination. If this Agreement is terminated pursuant to
Section 10.1, all further obligations of the parties under this Agreement shall
terminate; provided, however, that:
(a) the parties shall, in all events, remain bound by and continue to be
subject to the applicable provisions set forth in Article 11;
(b) the Company shall, in all events, remain bound by and continue to be
subject to Section 6.8;
(c) Verio shall, in all events, remain bound by and continue to be subject
to Section 7.3; and
(d) the parties shall, in all events, remain bound by the terms and
provisions of the Nondisclosure Agreement.
Notwithstanding the above, both Verio and the Company shall be entitled to
announce the termination of this Agreement.
10.4 Exclusivity of Termination Rights. Except as provided in Section
11.12, the termination rights and obligations provided in this Article 10 shall
be deemed to be exclusive. The parties shall not have any other or further
Liabilities to or with respect to one another by reason of this Agreement or its
termination.
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ARTICLE 11
MISCELLANEOUS PROVISIONS
11.1 Further Assurances. Each party hereto shall execute and cause to be
delivered to each other party hereto such instruments and other documents, and
shall take such other actions, as such other party may reasonably request (prior
to, at or after the Closing) for the purpose of carrying out or evidencing any
of the Transactions.
11.2 Fees and Expenses.
(a) Subject to the provisions of Article 3, the Company shall bear and pay
all fees, costs and expenses that have been incurred or that are in the future
incurred by or on behalf of the Company.
(b) Subject to the provisions of Article 3, Verio shall bear and pay all
fees, costs and expenses that have been incurred or that are in the future
incurred by or on behalf of Verio.
11.3 Attorneys' Fees. If any legal action or other legal proceeding
relating to this Agreement, or the other Transactional Agreements in connection
herewith, or the enforcement of any provision of such items is brought against
any party hereto, the prevailing party shall be entitled to recover reasonable
attorneys' fees, costs and disbursements (in addition to any other relief to
which the prevailing party may be entitled).
11.4 Notices. Any notice or other communication required or permitted to
be delivered to any party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by telecopier during
business hours) to the address or telecopier number set forth beneath the name
of such party below (or to such other address or telecopier number as such party
shall have specified in a written notice given to the other parties hereto):
if to the Company:
Best Internet Communications, Inc.
5050 Blue Lake Drive, Suite 100
Boca Raton, FL 33431
Attention: Scott Adams
Telecopier: (561) 912-2401
with a copy to:
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, CA 94306
Attention: Jacqueline A. Daunt, Esq.
Telecopier: (650) 494-1417
if to Verio or Merger Sub:
Verio Inc.
8005 South Chester
Suite 200
Englewood, CA 80112
Attention: Carla Hamre Donelson, Esq.
Telecopier: (303) 792-3879
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with a copy to:
Morrison & Foerster LLP
425 Market Street
San Francisco, California 94105
Attention: Gavin Grover, Esq.
Telecopier: 415-268-7522
11.5 Time of the Essence. Time is of the essence in the performance of
each of the terms hereof with respect to the obligations and rights of each
party hereto.
11.6 Headings. The headings contained in this Agreement are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction or
interpretation of this Agreement.
11.7 Counterparts. This Agreement may be executed in several counterparts,
each of which shall constitute an original and all of which, when taken
together, shall constitute one agreement.
11.8 Governing Law; Venue.
(a) This Agreement shall be construed in accordance with, and governed in
all respects by, the internal laws of the State of California (without giving
effect to principles of conflicts of laws).
(b) Any legal action or other legal proceeding relating to this Agreement
or the enforcement of any provision of this Agreement may be brought or
otherwise commenced in any state or federal court located in the County of
Denver, Colorado. Each party to this Agreement:
(i) expressly and irrevocably consents and submits to the jurisdiction
of each state and federal court located in the County of Denver, Colorado
(including each appellate court located in the State of Colorado) in
connection with any such legal proceeding;
(ii) agrees that each state and federal court located in the County of
Denver, Colorado shall be deemed to be a convenient forum; and
(iii) agrees not to assert (by way of motion, as a defense or
otherwise), in any such legal proceeding commenced in any state or federal
court located in the County of Denver, Colorado, any claim that such party
is not subject personally to the jurisdiction of such court, that such
legal proceeding has been brought in an inconvenient forum, that the venue
of such proceeding is improper or that this Agreement or the subject matter
of this Agreement may not be enforced in or by such court.
(c) The parties agree that if any Proceeding is commenced against the
Company, Verio or Merger Sub or any of their respective Representatives by any
Person in or before any court or other tribunal anywhere in the world, then such
party may proceed against the applicable party in such court or tribunal with
respect to any indemnification claim or other claim arising directly or
indirectly from or relating directly or indirectly to such Proceeding or any
matters alleged therein or any of the circumstances giving rise thereto.
(d) Nothing contained in Section 11.8(b) or (c) shall be deemed to limit or
otherwise affect the right of any party hereto to commence any legal proceeding
or otherwise proceed against any other party hereto in any other forum or
jurisdiction.
(e) Each of the parties irrevocably waives the right to a jury trial in
connection with any legal proceeding relating to this Agreement or the
enforcement of any provision of this Agreement.
11.9 Successors and Assigns. This Agreement shall be binding upon the
parties and their respective successors and assigns. This Agreement shall inure
to the benefit of the Company, the Shareholders, Merger Sub, Verio, and the
respective successors and assigns (if any) of the foregoing. Verio and Merger
Sub may freely assign any or all of their respective rights under this
Agreement, in whole or in part, to any other Person without obtaining the
consent or approval of any other party hereto or of any other Person.
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11.10 Remedies Cumulative; Specific Performance. Except as otherwise
provided herein, and not in limitation of any remedies available under
applicable law, the rights and remedies of the parties hereto shall be
cumulative (and not alternative). Each of the parties agrees that:
(a) in the event of any Breach or threatened Breach by a party of any
covenant, obligation or other provision set forth in this Agreement, the other
party or parties shall be entitled (in addition to any other remedy that may be
available to it under the Agreement) to (i) a decree or order of specific
performance or mandamus to enforce the observance and performance of such
covenant, obligation or other provision, and (ii) an injunction restraining such
Breach or threatened Breach; and
(b) neither Verio, on the one hand, nor the Shareholders, on the other,
shall be required to provide any bond or other security in connection with any
such decree, order or injunction or in connection with any related action or
Proceeding.
11.11 Waiver.
(a) No failure on the part of any Person to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any Person
in exercising any power, right, privilege or remedy under this Agreement, shall
operate as a waiver of such power, right, privilege or remedy; and no single or
partial exercise or waiver of any such power, right, privilege or remedy shall
preclude any other or further exercise thereof or of any other power, right,
privilege or remedy.
(b) No Person shall be deemed to have waived any claim arising out of this
Agreement, or any power, right, privilege or remedy under this Agreement, unless
the waiver of such claim, power, right, privilege or remedy is expressly set
forth in a written instrument duly executed and delivered on behalf of such
Person; and any such waiver shall not be applicable or have any effect except in
the specific instance in which it is given.
11.12 Amendments. This Agreement may not be amended, modified, altered or
supplemented other than by means of a written instrument duly executed and
delivered on behalf of Verio and the Company.
11.13 Severability. In the event that any provision of this Agreement, or
the application of any such provision to any Person or set of circumstances,
shall be determined to be invalid, unlawful, void or unenforceable to any
extent, the remainder of this Agreement, and the application of such provision
to Persons or circumstances other than those as to which it is determined to be
invalid, unlawful, void or unenforceable, shall not be impaired or otherwise
affected and shall continue to be valid and enforceable to the fullest extent
permitted by law.
11.14 Parties in Interest. None of the provisions of this Agreement is
intended to provide any rights or remedies to any Person other than the parties
hereto and their respective successors and assigns (if any).
11.15 Entire Agreement. The Transactional Agreements (including Schedules
and Exhibits thereto) set forth the entire understanding of the parties relating
to the subject matter thereof and supersede all prior agreements and
understandings among or between any of the parties relating to the subject
matter thereof.
11.16 No Survival. The representations and warranties contained herein
shall terminate and be of no further force and effect from and after the
Closing. Notwithstanding anything herein to the contrary, the agreements
contained in Article 2, Article 3, Sections 8.8, 8.10(a), 8.10(c), and 8.10(d)
and Article 11 shall survive the Effective Time.
11.17 Investigation. The respective representations and warranties of the
parties hereto contained herein or in the certificates or other reports
delivered prior to the Closing shall not be deemed waived or otherwise affected
by any investigation made by any party hereto.
11.18 Original Merger Agreement Superseded. Pursuant to Section 11.12 of
the Original Merger Agreement, the parties hereto hereby amend and restate the
Original Merger Agreement to read in its entirety as set forth in this
Agreement, such that as of the date hereof the Original Merger Agreement is
entirely replaced and superseded by this Agreement.
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11.19 Construction.
(a) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine gender
shall include the feminine and neuter genders; the feminine gender shall include
the masculine and neuter genders; and the neuter gender shall include the
masculine and feminine genders.
(b) The parties hereto agree that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall not be
applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and "including," and
variations thereof, shall not be deemed to be terms of limitation, but rather
shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Agreement to
"Sections," "Exhibits" and "Schedules" are intended to refer to Sections of this
Agreement and Exhibits and Schedules to this Agreement.
IN WITNESS WHEREOF, each of Verio, Merger Sub and the Company has caused
this Agreement to be executed on its behalf by its officers thereunto duly
authorized, all as of the date first above written.
VERIO INC.
By: /s/ CARLA HAMRE DONELSON
----------------------------------
Name: Carla Hamre Donelson
Title: Vice President and General
Counsel
PURPLE ACQUISITION, INC.
By: /s/ CARLA HAMRE DONELSON
----------------------------------
Name: Carla Hamre Donelson
Title: President
BEST INTERNET COMMUNICATIONS, INC.
By: /s/ ARTHUR L. CAHOON
----------------------------------
Name: Arthur L. Cahoon
Title: Chief Executive Officer
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EXHIBIT A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit A):
ACCOUNTING COMFORT LETTER. "Accounting Comfort Letter" shall have the
meaning specified in Section 6.11 of the Agreement.
ACQUISITION PROPOSAL. "Acquisition Proposal" shall have the meaning
specified in Section 6.6 of the Agreement.
AFFILIATE. "Affiliate" shall have the meaning specified in Section 6.13(a)
of the Agreement.
AFFILIATE AGREEMENT. "Affiliate Agreement" shall have the meaning specified
in Section 6.13(a) of the Agreement.
AGGREGATE TRANSACTION VALUE. "Aggregate Transaction Value" shall have the
meaning specified in Section 3.1(b) of the Agreement.
AGREEMENT. "Agreement" shall mean the Amended and Restated Agreement and
Plan of Merger to which this Exhibit A is attached (including the Disclosure
Schedule and all Exhibits), as it may be amended from time to time.
AGREEMENT OF MERGER. "Agreement of Merger" shall have the meaning specified
in Section 1.2 of the Agreement.
BEST EFFORTS. "Best Efforts" shall mean the efforts that a prudent Person
desiring to achieve a particular result would use in order to ensure that such
result is achieved as expeditiously as possible. An obligation to use "Best
Efforts" under this Agreement does not require the Person subject to that
obligation to take actions that would result in a materially adverse change in
the benefits to such Person under the agreement or arrangement in question or
under this Agreement, the other Transactional Agreements and the Transactions.
BREACH. There shall be deemed to be a "Breach" of a representation,
warranty, covenant, obligation or other provision if there is or has been (a)
any inaccuracy in or breach of, or any failure to comply with or perform, such
representation, warranty, covenant, obligation or other provision, or (b) any
claim (by any Person) or other circumstance that is inconsistent with such
representation, warranty, covenant, obligation or other provision; and the term
"Breach" shall be deemed to refer to any such inaccuracy, breach, failure, claim
or circumstance.
CERTIFICATES. "Certificates" shall have the meaning specified in Section
3.1(a) of the Agreement.
CGCL. "CGCL" shall have the meaning specified in Section 1.1 of the
Agreement.
CLOSING. "Closing" shall have the meaning specified in Section 3.7 of the
Agreement.
CLOSING DATE. "Closing Date" shall have the meaning specified in Section
3.7 of the Agreement.
CODE. "Code" shall have the meaning specified in the Recitals of the
Agreement.
COMMON STOCK EXCHANGE RATIO. "Common Stock Exchange Ratio" shall have the
meaning specified in Section 3.1(b) of the Agreement.
COMPANY. The "Company" shall have the meaning specified in the first
paragraph of the Agreement and shall include, unless the context clearly
indicates otherwise, all subsidiaries of the Company.
COMPANY AUDITORS. "Company Auditors" shall have the meaning specified in
Section 6.11 of the Agreement.
COMPANY CAPITALIZATION NUMBER. "Company Capitalization Number" shall have
the meaning specified in Section 3.1(b) of the Agreement.
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COMPANY CLOSING CERTIFICATE. "Company Closing Certificate" shall have the
meaning specified in Section 9.2 of the Agreement.
COMPANY COMMON STOCK. "Company Common Stock" shall have the meaning
specified in Section 3.1(a) of the Agreement.
COMPANY CONTRACT. "Company Contract" shall mean any Contract:
(a) to which the Company is a party;
(b) by which the Company or any of its assets is or may become bound
or under which the Company has, or may become subject to, any obligation;
or
(c) under which the Company has or may acquire any right or interest.
COMPANY PLAN. "Company Plan" shall mean any Current Benefit Plan or Past
Benefit Plan.
COMPANY RETURNS. "Company Returns" shall have the meaning specified in
Section 4.13(b) of the Agreement.
COMPANY S-1. "Company S-1" shall have the meaning specified in Section
4.22(b) of the Agreement.
COMPANY SEC FILINGS. "Company SEC Filings" shall have the meaning specified
in Section 4.22(b) of the Agreement.
COMPANY SPECIFIED OFFICERS. "Company Specified Officers" shall mean the
Company's executive officers as indicated in the Company S-1 filed prior to the
date hereof.
COMPANY STOCK OPTIONS. "Company Stock Options" shall have the meaning
specified in Section 8.8 of the Agreement.
COMPANY TRANSACTION EXPENSES. "Company Transaction Expenses" shall have the
meaning specified in Section 3.1 of the Agreement.
CONSENT. "Consent" shall mean any approval, consent, ratification,
permission, waiver or authorization (including any Governmental Authorization).
CONTRACT. "Contract" shall mean, with respect to any Person, any written,
oral, implied or other agreement, contract, understanding, arrangement,
instrument, note, guaranty, indemnity, representation, warranty, deed,
assignment, power of attorney, certificate, purchase order, work order,
insurance policy, benefit plan, commitment, covenant, assurance, obligation,
promise or undertaking of any nature to which such Person is a party or by which
its properties or assets maybe bound or affected or under which it or its
business, properties or assets receive benefits.
CURRENT BENEFIT PLAN. "Current Benefit Plan" shall mean any Employee
Benefit Plan that is currently in effect and:
(a) that was established or adopted by the Company or any ERISA
Affiliate or is maintained or sponsored by the Company;
(b) in which the Company participates;
(c) with respect to which the Company or any ERISA Affiliate is or may
be required or permitted to make any contribution; or
(d) with respect to which the Company or any ERISA Affiliate is or may
become subject to any Liability.
DAMAGES. "Damages" shall mean the amount of any loss, damage, injury,
Liability, claim, fee (including any legal fee, expert fee, accounting fee or
advisory fee), demand, settlement, judgment, award, fine, penalty, Tax, charge
or cost (including any cost of investigation).
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DISCLOSURE SCHEDULE. "Disclosure Schedule" shall have the meaning specified
in Section 4 of the Agreement.
DISCLOSURE SCHEDULE UPDATE. "Disclosure Schedule Update" shall have the
meaning specified in Section 6.4(b) of the Agreement.
DISSENTING SHARES. "Dissenting Shares" shall have the meaning specified in
Section 3.9 of the Agreement.
EFFECTIVE TIME. "Effective Time" shall have the meaning specified in
Section 1.2 of the Agreement.
EMPLOYEE BENEFIT PLAN. "Employee Benefit Plan" shall have the meaning
specified in Section 3(3) of ERISA.
ENCUMBRANCE. "Encumbrance" shall mean any lien, pledge, hypothecation,
charge, mortgage, security interest, encumbrance, equity, trust, equitable
interest, claim, preference, right of possession, lease, tenancy, license,
encroachment, covenant, infringement, interference, Order, proxy, option, right
of first refusal, preemptive right, community property interest, legend, defect,
impediment, exception, reservation, limitation, impairment, imperfection of
title, condition or restriction of any nature (including any restriction on the
voting of any security, any restriction on the transfer of any security or other
asset, any restriction on the receipt of any income derived from any asset, any
restriction on the use of any asset and any restriction on the possession,
exercise or transfer of any other attribute of ownership of any asset).
ENTITY. "Entity" shall mean any corporation (including any non profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, cooperative, foundation, society,
political party, union, company (including any limited liability company or
joint stock company), firm or other enterprise, association, organization or
entity.
ENVIRONMENTAL LAW. "Environmental Law" shall mean any federal, state, local
or foreign Legal Requirement relating to pollution or protection of human health
or the environment.
ERISA. "ERISA" shall mean the Employee Retirement Income Security Act of
1974.
ERISA AFFILIATE. "ERISA Affiliate" shall mean any Person that is, was or
would be treated as a single employer with the Company under Section 414 of the
Code.
EXCESS COMPANY TRANSACTION EXPENSES. "Excess Company Transaction Expenses"
shall have the meaning specified in Section 3.1(b) of the Agreement.
EXCHANGE ACT. "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
EXCHANGE AGENT. "Exchange Agent" shall have the meaning specified in
Section 3.3(a) of the Agreement.
FINANCIAL STATEMENTS. "Financial Statements" shall have the meaning
specified in Section 4.4 of the Agreement.
GAAP. "GAAP" shall mean Generally Accepted Accounting Principles, applied
on a basis consistent with the basis on which the Financial Statements were
prepared.
GOVERNMENTAL AUTHORIZATION. "Governmental Authorization" shall mean any:
(a) permit, license, certificate, franchise, concession, approval,
consent, ratification, permission, clearance, confirmation, endorsement,
waiver, certification, designation, rating, registration, qualification or
authorization that is issued, granted, given or otherwise made available by
or under the authority of any Governmental Body or pursuant to any Legal
Requirement; or
(b) right under any Contract with any Governmental Body.
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GOVERNMENTAL BODY. "Governmental Body" shall mean any:
(a) nation, principality, state, commonwealth, province, territory,
county, municipality, district or other jurisdiction of any nature;
(b) federal, state, local, municipal, foreign or other government;
(c) governmental or quasi-governmental authority of any nature
(including any governmental division, subdivision, department, agency,
bureau, branch, office, commission, council, board, instrumentality,
officer, official, representative, organization, unit, body or Entity and
any court or other tribunal);
(d) multinational organization or body; or
(e) individual, Entity or body exercising, or entitled to exercise,
any executive, legislative, judicial, administrative, regulatory, police,
military or taxing authority or power of any nature.
HAZARDOUS MATERIAL. "Hazardous Material" shall mean any substance,
chemical, waste or other material which is listed, defined or otherwise
identified as hazardous, toxic or dangerous under any applicable law; as well as
any petroleum, petroleum product or by-product, crude oil, natural gas, natural
gas liquids, liquefied natural gas, or synthetic gas useable for fuel, and
"source," "special nuclear," and "by-product" material as defined in the Atomic
Energy Act of 1954, 42 U.S.C. sec.sec..sec.sec. 2011 et seq.
HSR ACT. "HSR Act" shall mean the Hart-Scott-Rodino Anti-Trust Improvements
Act of 1976, as amended.
KNOWLEDGE. An individual shall be deemed to have "Knowledge" of a
particular fact or other matter if:
(a) such individual is actually aware of such fact or other matter; or
(b) a prudent individual could be expected to discover or otherwise
become aware of such fact or other matter in the course of conducting a
reasonably comprehensive investigation concerning the existence of such
fact or other matter.
A corporation shall be deemed to have "Knowledge" of a particular fact or
matter only if a director or officer of such corporation has or had Knowledge of
such fact or matter.
LEASED PREMISES. "Leased Premises" shall have the meaning specified in
Section 4.6(d) of the Agreement.
LEGAL REQUIREMENT. "Legal Requirement" shall mean any federal, state,
local, municipal, foreign or other law, statute, legislation, constitution,
principle of common law, resolution, ordinance, code, edict, decree,
proclamation, treaty, convention, rule, regulation, ruling, directive,
pronouncement, requirement, specification, determination, decision, opinion or
interpretation that is or has been issued, enacted, adopted, passed, approved,
promulgated, made, implemented or otherwise put into effect by or under the
authority of any Governmental Body, and, where applicable, shall include any
rule or requirement of the Nasdaq National Market.
LIABILITY. "Liability" shall mean any debt, obligation, duty or liability
of any nature including any unknown, undisclosed, unmatured, unaccrued,
unasserted, contingent, indirect, conditional, implied, vicarious, derivative,
joint, several or secondary liability, regardless of whether such debt,
obligation, duty or liability would be required to be disclosed on a balance
sheet prepared in accordance with generally accepted accounting principles and
regardless of whether such debt, obligation, duty or liability is immediately
due and payable.
MERGER. "Merger" shall have the meaning specified in Section 1.1 of the
Agreement.
MERGER SUB. "Merger Sub" shall have the meaning specified in the first
paragraph of the Agreement.
NONCOMPETE AGREEMENT. "Noncompete Agreement" shall mean a Noncompetition
and Solicitation Agreement substantially in the form of Exhibit F to the
Agreement.
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NONDISCLOSURE AGREEMENT. "Nondisclosure Agreement" shall have the meaning
specified in Section 6.8(a) of the Agreement.
ORDER. "Order" shall mean any:
(a) order, judgment, injunction, edict, decree, ruling, pronouncement,
determination, decision, opinion, verdict, sentence, subpoena, writ or
award that is issued, made, entered, rendered or otherwise put into effect
by or under the authority of any court, administrative agency or other
Governmental Body or any arbitrator or arbitration panel; or
(b) Contract with any Governmental Body that is entered into in
connection with any Proceeding.
ORDINARY COURSE OF BUSINESS. An action taken by or on behalf of the Company
shall not be deemed to have been taken in the "Ordinary Course of Business"
unless:
(a) such action is recurring in nature, consistent with the Company's
past practices and taken in the ordinary course of the Company's normal day
to day operations;
(b) such action is taken in accordance with such party's customary
business practices;
(c) such action is not required to be authorized by the Company's
shareholders, the Company's board of directors or any committee of the
Company's board of directors and does not require any other separate or
special authorization of any nature; and
(d) such action is similar in nature and magnitude to actions
customarily taken, without any special or separate authorization, in the
ordinary course of the normal day to day operations of other Entities that
are employed in businesses similar to Company's business.
ORIGINAL MERGER AGREEMENT. "Original Merger Agreement" shall have the
meaning specified in the Recitals to the Agreement.
OUTSTANDING SHARES NUMBER. "Outstanding Shares Number" shall have the
meaning specified in Section 3.1(b) of the Agreement.
PAST BENEFIT PLAN. "Past Benefit Plan" shall mean any Employee Benefit Plan
(other than a Current Benefit Plan):
(a) of which the Company or any ERISA Affiliate has ever been a "plan
sponsor" (as defined in Section 3(16)(B) of ERISA) or that otherwise has at
any time been established, adopted, maintained or sponsored by the Company
or by any ERISA Affiliate;
(b) in which the Company or any ERISA Affiliate has ever participated;
(c) with respect to which the Company or any ERISA Affiliate has ever
made, or has ever been required or permitted to make, any contribution; or
(d) with respect to which the Company or any ERISA Affiliate has ever
been subject to any Liability.
PER SHARE CASH AMOUNT. "Per Share Cash Amount" shall have the meaning
specified in Section 3.1(b) of the Agreement.
PER SHARE PRICE. "Per Share Price" shall have the meaning specified in
Section 3.1(b) of the Agreement.
PER SHARE STOCK AMOUNT. "Per Share Stock Amount" shall have the meaning
specified in Section 3.1(b) of the Agreement.
PERSON. "Person" shall mean any individual, Entity or Governmental Body.
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PRE-CLOSING PERIOD. "Pre-Closing Period" shall mean the period commencing
as of the date of the Agreement and ending on the Closing Date.
PROCEEDING. "Proceeding" shall mean any action, suit, litigation,
arbitration, proceeding (including any civil, criminal, administrative,
investigative or appellate proceeding and any informal proceeding), prosecution,
contest, hearing, inquiry, inquest, audit, examination or investigation,
commenced, brought, conducted or heard by or before, or otherwise has involved,
any Governmental Body or any arbitrator or arbitration panel.
PROPRIETARY ASSET. "Proprietary Asset" shall mean any patent, patent
application, trademark (whether registered or unregistered and whether or not
relating to a published work), trademark application, trade name, fictitious
business name, service mark (whether registered or unregistered), service mark
application, copyright (whether registered or unregistered), copyright
application, maskwork, maskwork application, trade secret, know how, franchise,
system, computer software, invention, design, blueprint, proprietary product,
technology, proprietary right or other intellectual property right.
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. "Proprietary Information
and Inventions Agreement" shall mean an agreement substantially in the form of
Exhibit C to the Agreement.
PROXY STATEMENT/PROSPECTUS. "Proxy Statement/Prospectus" shall have the
meaning specified in Section 8.1(a) of the Agreement.
REGISTRATION RIGHTS AGREEMENT. "Registration Rights Agreement" shall mean a
Registration Rights Agreement in the form of Exhibit G to the Agreement.
REGISTRATION STATEMENT. "Registration Statement" shall have the meaning
specified in Section 8.1 of the Agreement.
RELATED PARTY. Each of the following shall be deemed to be a "Related
Party":
(a) each individual who is, or who has at any time been, an officer of
the Company;
(b) each member of the family of each of the individuals referred to
in clause "(a)" above;
(c) any Entity (other than the Company) in which any one of the
Persons referred to in clauses "(a)" or "(b)" above holds (or in which more
than one of such individuals collectively hold), beneficially or otherwise,
a material voting, proprietary or equity interest.
REPRESENTATIVES. "Representatives" of a specified party shall mean
officers, directors, employees, attorneys, accountants, advisors and
representatives of such party, including, without limitation, in the case of
Company, all subsidiaries of Company and all such Persons with respect to such
subsidiaries. The Related Parties shall be deemed to be "Representatives" of
Company.
REQUISITE REGULATORY APPROVALS. "Requisite Regulatory Approvals" shall have
the meaning specified in Section 9.1 of the Agreement.
SEC. "SEC" shall have the meaning specified in Section 4.22(b) of the
Agreement.
SECURITIES ACT. "Securities Act" shall mean the Securities Act of 1933, as
amended.
SHAREHOLDER. "Shareholder" shall mean a holder of shares of the Company's
capital stock.
SURVIVING CORPORATION. "Surviving Corporation" shall have the meaning
specified in Section 1.1 of the Agreement.
TAKEOVER STATUTE. "Takeover Statute" shall mean any fair price, moratorium,
control share acquisition or other similar anti-takeover statute.
TAX. "Tax" shall mean any tax (including any income tax, franchise tax,
capital gains tax, estimated tax, gross receipts tax, value added tax, surtax,
excise tax, ad valorem tax, transfer tax, stamp tax, sales tax, use tax,
property tax, business tax, occupation tax, inventory tax, occupancy tax,
withholding tax or payroll tax), levy, assessment, tariff, impost, imposition,
toll, duty (including any customs duty), deficiency or fee, and any
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related charge or amount (including any fine, penalty or interest), (a) imposed,
assessed or collected by or under the authority of any Governmental Body, or (b)
payable pursuant to any tax sharing agreement or similar Contract.
TAX RETURN. "Tax Return" shall mean any return (including any information
return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information that
is, has been or may in the future be filed with or submitted to, or required to
be filed with or submitted to, any Governmental Body in connection with the
determination, assessment, collection or payment of any Tax or in connection
with the administration, implementation or enforcement of or compliance with any
Legal Requirement relating to any Tax.
TRANSACTIONAL AGREEMENTS. "Transactional Agreements" shall mean:
(a) the Agreement;
(b) the Company Closing Certificate;
(c) the Proprietary Information and Inventions Agreements between the
Company and its employees and consultants;
(d) the Noncompete Agreements;
(e) the Voting Agreements;
(f) the Affiliate Agreements;
(g) the Registration Rights Agreement;
(h) the Lock-Up Letters; and
(i) the Agreement of Merger.
TRANSACTIONS. "Transactions" shall mean (a) the execution and delivery of
the respective Transactional Agreements, and (b) all of the transactions
contemplated by the respective Transactional Agreements, including, without
limitation, the Merger, and the performance by Company, Verio, the Shareholders,
and the other parties to the Transactional Agreements of their respective
obligations under the Transactional Agreements.
UNAUDITED INTERIM BALANCE SHEET. "Unaudited Interim Balance Sheet" shall
have the meaning specified in Section 4.4(a)(ii) of the Agreement.
VERIO. "Verio" shall have the meaning specified in the first paragraph of
the Agreement.
VERIO COMMON STOCK. "Verio Common Stock" shall have the meaning specified
in Section 3.1 of the Agreement.
VERIO SEC REPORTS. "Verio SEC Reports" shall have the meaning specified in
Section 5.6 of the Agreement.
VOTING AGREEMENTS. "Voting Agreements" shall have the meaning specified in
the Recitals to the Agreement.
WELFARE BENEFIT PLAN. "Welfare Benefit Plan" shall have the meaning
specified in Section 4.15(i) of the Agreement.
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APPENDIX B
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF BEST INTERNET COMMUNICATIONS, INC.
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 1998
The undersigned shareholder of Best Internet Communications, Inc., a
California corporation (the "Company"), hereby (i) acknowledges receipt of the
Notice of Special Meeting of Shareholders and the Proxy Statement/Prospectus
("Proxy Statement/Prospectus"), each dated , 1998, and (ii) appoints
, and , or any one of them, proxies, with
full power to each of substitution, on behalf and in the name of the
undersigned, to represent the undersigned at the Special Meeting of Shareholders
of the Company to be held on , 1998 at a.m. Pacific Time, at
its executive offices located at 345 East Middlefield Road, Mountain View,
California 94043, and at any adjournment or adjournments thereof, and to vote
all shares (the "Shares") of common stock of the Company which the undersigned
would be entitled to vote if then and there personally present, on the matters
set forth below.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED FOR THE PROPOSAL SET FORTH BELOW, AS MORE FULLY
DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS.
Proposal: To approve and adopt an Amended and Restated Agreement and Plan
Merger, dated as of November 17, 1998, among Verio Inc., a Delaware corporation
("Verio"), Purple Acquisition, Inc., a California corporation and a wholly-owned
subsidiary of Verio ("Merger Sub"), and the Company, pursuant to which Merger
Sub will be merged with and into the Company, with the Company as the surviving
company.
<TABLE>
<S> <C> <C>
- ------ FOR ------ AGAINST ------ ABSTAIN
</TABLE>
This proxy also grants to the proxies the authority to vote the Shares in
their discretion on any other matters as may properly come before the Special
Meeting.
DATED: , 1998
------------------------------------
Signature
------------------------------------
Signature
This Proxy should be marked, dated
and signed by the shareholder(s)
exactly as his or her name appears
hereon, and returned promptly in the
enclosed envelope. Persons signing
in a fiduciary capacity should so
indicate. If shares are held by
joint tenants or as community
property, both should sign.
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APPENDIX C
[LETTERHEAD OF BT ALEX. BROWN INCORPORATED]
November 20, 1998
Board of Directors
Best Internet Communications, Inc.
345 East Middlefield Road
Mountain View, CA 94043
Dear Sirs:
Best Internet Communications, Inc., a California corporation ("BIC"), Verio
Inc., a Delaware corporation ("Verio") and Purple Acquisition, Inc., a
California corporation and a wholly-owned subsidiary of Verio (the "Merger
Sub"), have entered into an Amended and Restated Agreement and Plan of Merger
dated as of November 17, 1998 (the "Agreement"). Pursuant to the Agreement, the
Merger Sub would be merged with and into BIC (the "Merger"), and each share of
common stock of BIC issued and outstanding immediately prior to the effective
time of the proposed Merger (the "Effective Time") will be converted into the
right to receive (i) that number of shares of common stock of Verio as equals
the Common Stock Exchange Ratio (as such term is defined in the Agreement) and
(ii) that amount of cash as equals the Per Share Cash Amount (as such term is
defined in the Agreement, the right to receive the applicable number of shares
of common stock of Verio and cash into which each share of common stock of BIC
is to be converted being the "Merger Consideration"). We have assumed, with your
consent, that the Merger will qualify for purchase accounting treatment and will
be treated as a sale of common stock of BIC by BIC shareholders to Verio in
exchange for the Merger Consideration. You have requested our opinion as to
whether the Merger Consideration is fair, from a financial point of view, to the
holders of common stock of BIC. The terms and conditions of the proposed Merger
are set out more fully in the Agreement.
BT Alex. Brown Incorporated ("BT Alex. Brown"), as a customary part of its
investment banking business, is engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and other
purposes. We have acted as financial advisor to the Board of Directors of BIC in
connection with the transaction described above and will receive a fee for our
services. In addition, BT Alex. Brown has also served as the lead-managing
underwriter in BIC's proposed initial public offering that constituted an
alternative to the Merger. BT Alex. Brown regularly publishes research reports
regarding the internet service provider industry and the businesses and
securities of publicly owned companies in the internet service provider
industry. In the ordinary course of business, BT Alex. Brown may actively trade
the securities of Verio for our own account and the account of our customers
and, accordingly, may at any time hold a long or short position in securities of
Verio.
In connection with this opinion, we have reviewed certain publicly
available financial information and other information concerning BIC and certain
internal analyses and other information furnished to us by BIC. We have also
held discussions with the members of the senior management of BIC regarding the
business and prospects of BIC. In addition, we have (i) compared certain
financial information for BIC with similar information for companies whose
securities are publicly traded, (ii) reviewed the financial terms of certain
recent business combinations, (iii) reviewed a draft of the Agreement dated
November 17, 1998 and certain related documents, and (iv) performed such other
studies and analyses and considered such other factors as we deemed appropriate.
We have not independently verified the information described above and for
purposes of this opinion have assumed the accuracy, completeness and fairness
thereof. With respect to the information relating to the prospects of BIC, we
have assumed that such information reflects the best currently available
judgements and estimates of the management of BIC as to the likely future
financial performance of BIC. In addition, we have
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not made nor been provided with an independent evaluation or appraisal of the
assets of BIC or Verio, nor have we been furnished with any such evaluations or
appraisals. We have assumed with your consent for purposes of our analysis that
the value of the common stock of Verio to be received in the proposed Merger is
equal to the closing trading price of the common stock of Verio as of November
19, 1998, and we express no opinion or view on the value of the common stock of
Verio. Our opinion is necessarily based upon market, economic and other
conditions as they exist and can be evaluated as of the date of this letter and
on the information noted above available to us as of the date hereof. We do not
express any opinion as to the price at which the shares of common stock of Verio
that are to be issued pursuant to the proposed Merger will be traded in the
future. In addition, we express no opinion as to the fair market value of common
stock of BIC as of any particular date. It should be understood that, although
subsequent developments may affect this opinion, we assume no obligation to
update, revise or reaffirm this opinion. In rendering this opinion, we have
assumed that the proposed Merger will be consummated substantially on the terms
described in the Agreement, without any waiver of any material terms or
conditions by any party thereto. We have also assumed that the proposed Merger
will be consummated in a manner that complies in all respects with the
applicable provisions of the Securities Act of 1933, as amended, the Securities
Exchange Act of 1934, as amended, and all other applicable federal and state
statutes, rules and regulations. We have assumed with your consent that Excess
Company Transaction Expenses (as defined in the Agreement) are $175,212.
We have been retained by the Board of Directors of BIC as financial advisor
in connection with the Merger and for the purpose of rendering this opinion. A
portion of our fee is due and payable upon delivery of this opinion and the
remaining portion of our fee is due and payable upon the consummation of the
proposed Merger.
Our advisory services and the opinion expressed herein were prepared solely
for the use of the Board of Directors of BIC and this opinion is not intended to
be and does not constitute a recommendation to any stockholder of BIC as to how
such stockholder should vote on the proposed Merger. This opinion does not
address the relative merits of the proposed Merger and any other transactions or
business strategies discussed by the Board of Directors of BIC as alternatives
to the proposed Merger, or the underlying business decision of the Board of
Directors of BIC to proceed with the proposed Merger. We are not requested to,
and did not, solicit offers or indications of interest from third parties to
acquire BIC. This opinion may not be published or otherwise used or referred to,
nor shall any public reference to BT Alex. Brown be made, without our prior
written consent. We hereby consent, however, to the inclusion of this opinion in
its entirety as an exhibit to any proxy or registration statement distributed to
the shareholders of BIC in connection with the approval of the proposed Merger
and to any description of, or reference to, this opinion therein in a form and
substance acceptable to us and our legal counsel.
Based upon and subject to the foregoing, it is our opinion that, as of the
date of this letter, the Merger Consideration to be received by the holders of
common stock of BIC pursuant to the Agreement is fair, from a financial point of
view, to the holders of common stock of BIC.
Very truly yours,
/s/ BT ALEX. BROWN INCORPORATED
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APPENDIX D
CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW
SECTION 1300. SHAREHOLDER IN SHORT-FORM MERGER; PURCHASE AT FAIR MARKET
VALUE; "DISSENTING SHARES"; "DISSENTING SHAREHOLDER"
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e)or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split, or share dividend which becomes effective thereafter.
As used in this chapter, "dissenting shares" means shares which come within
all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the list of OTC margin stocks issued by the
Board of Governors of the Federal Reserve System, and the notice of meeting
of shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
As used in this chapter, "dissenting shareholder" means the recordholder of
dissenting shares and includes a transferee of record.
SECTION 1301. NOTICE TO HOLDER OF DISSENTING SHARES OF REORGANIZATION
APPROVAL; DEMAND FOR PURCHASE OF SHARES; CONTENTS OF DEMAND
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any
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dissenting shares as defined in subdivision (b) of Section 1300, unless they
lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
SECTION 1302. STAMPING OR ENDORSING DISSENTING SHARES
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
SECTION 1303. DISSENTING SHAREHOLDER ENTITLED TO AGREED PRICE WITH INTEREST
THEREON; WHEN PRICE TO BE PAID
(d) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(e) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
SECTION 1304. ACTION BY DISSENTERS TO DETERMINE WHETHER SHARES ARE
DISSENTING SHARES OR FAIR MARKET VALUE OF DISSENTING SHARES OR BOTH; JOINDER OF
SHAREHOLDERS; CONSOLIDATION OF ACTIONS; DETERMINATION OF ISSUES; APPOINTMENT OF
APPRAISERS
(f) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
D-2
<PAGE> 422
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(g) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(h) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SECTION 1305. DUTY AND REPORT OF APPRAISERS; COURT'S CONFIRMATION OF
REPORT; DETERMINATION OF FAIR MARKET VALUE BY COURT; JUDGMENT, AND PAYMENT;
APPEAL; COSTS OF ACTION
(i) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(j) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(k) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(l) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(m) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
SECTION 1306. PREVENTION OF PAYMENT TO HOLDERS OF DISSENTING SHARES OF FAIR
MARKET VALUE; EFFECT
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
SECTION 1307. DISPOSITION OF DIVIDENDS UPON DISSENTING SHARES
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
SECTION 1308. RIGHTS AND PRIVILEGES OF DISSENTING SHARES; WITHDRAWAL OF
DEMAND FOR PAYMENT
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
D-3
<PAGE> 423
SECTION 1309. WHEN DISSENTING SHARES LOSE THEIR STATUS
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(n) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(o) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(p) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(q) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SECTION 1310. SUSPENSION OF PROCEEDINGS FOR COMPENSATION OR VALUATION
PENDING LITIGATION
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
SECTION 1311. SHARES TO WHICH CHAPTER INAPPLICABLE
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
SECTION 1312. ATTACK ON VALIDITY OF REORGANIZATION OR SHORT-FORM MERGER;
RIGHTS OF SHAREHOLDERS; BURDEN OF PROOF
(r) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(s) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
D-4
<PAGE> 424
(t) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
D-5
<PAGE> 425
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to Section 145 of the General Corporation Law of the
State of Delaware (the "DGCL"), which provides for indemnification of directors,
officers and other employees in certain circumstances, and to Section 102(b)(7)
of the DGCL, which provides for the elimination or limitation of the personal
liability for monetary damages of directors under certain circumstances. Article
Eight of the Certificate of Incorporation of the Registrant eliminates the
personal liability for monetary damages of directors under certain circumstances
and provides indemnification to directors and officers of the Registrant to the
fullest extent permitted by the DGCL. Among other things, these provisions
provide indemnification for officers and directors against liabilities for
judgments in and settlements of lawsuits and other proceedings and for the
advance and payment of fees and expenses reasonably incurred by the director or
officer in defense of any such lawsuit or proceeding.
See also the undertakings set out in response to Item 22 herein.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1++ -- Amended and Restated Agreement and Plan of Merger, dated
as of November 17, 1998 (the "Merger Agreement"), by and
among the Registrant, Purple Acquisition, Inc., and Best
Internet Communications, Inc.
The schedules and exhibits to the Merger Agreement include
(i) the Disclosure Schedules, which contain exceptions to
representations and warranties made by Best in the Merger
Agreement and certain other information, and (ii) other
forms of agreements that are referred to in the Merger
Agreement. The Registrant agrees to furnish supplementally a
copy of any omitted schedule or exhibit to the Commission
upon request.
3.1** -- Restated Certificate of Incorporation of the Registrant,
as amended.
3.2** -- Certificate of Amendment of Certificate of Incorporation
of the Registrant.
3.3** -- Certificate of Designation Establishing Series D
Preferred Stock of the Registrant.
3.4** -- Bylaws of the Registrant
4.1*** -- Form of Old 1997 Note.
4.2*** -- Form of New 1997 Note.
4.3*** -- Escrow Agreement, dated as of June 24, 1997, among First
Trust National Association (as escrow agent and trustee)
and the Registrant.
4.4** -- 1997 Indenture (See Exhibit 10.1).
4.5** -- 1997 Notes Registration Rights Agreement (See Exhibit
10.4).
4.6*** -- Purchase Agreement, dated as of June 17, 1997, by and
among Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner
& Smith Incorporated, and Lazard Freres & Co. LLC
(collectively, the "Initial 1997 Notes Purchasers"), and
the Registrant.
4.7*** -- Form of Old March 1998 Note.
4.8*** -- Form of New March 1998 Note.
4.9** -- March 1998 Indenture (See Exhibit 10.23).
4.10** -- March 1998 Notes Registration Rights Agreement (See
Exhibit 10.24).
4.11*** -- Purchase Agreement, dated as of March 19, 1998, by and
among Salomon Brothers Inc., Lazard Freres & Co. LLC,
Chase Securities, Inc., and BancBoston Securities Inc.
(collectively, the "Initial March 1998 Notes
Purchasers"), and the Registrant.
</TABLE>
II-1
<PAGE> 426
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.12 -- Purchase Agreement, dated as of November 20, 1998, by and
among Salomon Smith Barney Inc., Credit Suisse First
Boston Corporation, Donaldson, Lufkin & Jenrette
Securities Corporation and First Union Capital Markets
(collectively, the "Initial November 1998 Notes
Purchasers"), and the Registrant.
4.13 -- November 1998 Indenture (See Exhibit 10.34).
4.14 -- November 1998 Notes Registration Rights Agreement (See
Exhibit 10.35).
5.1++ -- Opinion of Morrison & Foerster LLP together with consent.
10.1** -- Indenture, dated as of June 24, 1997, by and among the
Registrant and First Trust National Association (as
trustee).
10.2** -- Warrant Agreement, dated as of June 24, 1997, by and
between First Trust National Association and the
Registrant.
10.3** -- Common Stock Registration Rights Agreement, dated as of
June 17, 1997, by and among the Registrant, Brooks Fiber
Properties, Inc., Norwest Equity Partners V, Providence
Equity Partners, Centennial Fund V, L.P., Centennial Fund
IV, L.P. (as investors), and the Initial 1997 Notes
Purchasers.
10.4** -- Registration Rights Agreement, dated as of June 17, 1997,
by and among the Registrant and the Initial 1997 Notes
Purchasers.
10.5** -- Lease Agreement, dated as of June 20, 1997, by and
between the Registrant and Highland Park Ventures, LLC,
with respect to the property in Englewood, Colorado,
including the First Amendment to Lease Agreement, dated
as of December 16, 1997.
10.6** -- Lease Agreement, dated as of May 24, 1997, by and between
the Registrant and IM Joint Venture, with respect to the
property in Dallas, Texas, as amended.
10.7** -- Form of Indemnification Agreement between the Registrant
and each of its officers and directors.
10.8** -- Amended and Restated Stockholders Agreement, dated as of
May 20, 1997, by and between the Registrant, the Series A
Purchasers, the Series B Purchasers, the Series C
Purchasers and members of the Registrant's management.
10.9** -- The Registrant's 1996 Stock Option Plan, as amended.
10.10** -- The Registrant's 1997 California Stock Option Plan, as
amended.
10.11** -- The Registration's 1998 Employee Stock Purchase Plan, as
amended.
10.12** -- The Registrant's 1998 Stock Incentive Plan, as amended.
10.13** -- Form of Compensation Protection Agreement between the
Registrant and each of its officers.
10.14** -- Master Service Agreement, dated as of August 23, 1996, by
and between the Registrant and MFS Datanet, Inc.
10.15** -- Agreement for Terminal Facility Collocation Space, dated
August 8, 1996, by and between MFS Telecom, Inc. and the
Registrant.
10.16** -- Bilateral Peering Agreement, dated May 19, 1997, between
AT&T Corp. and the Registrant.
10.17** -- Master Lease Agreement, dated November 17, 1997, by and
between Insight Investments Corp. and the Registrant.
10.18** -- Master Lease Agreement, dated October 27, 1997, by and
between Cisco Capital Systems Corporation and the
Registrant.
10.19**+ -- Lateral Exchange Networks Interconnection Agreement,
dated as of February 3, 1997, by and between the
Registrant and Sprint Communications Company L.P.
("Sprint").
10.20**+ -- Cover Agreement, dated September 30, 1996, by and between
the Registrant and Sprint.
</TABLE>
II-2
<PAGE> 427
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.21**+ -- Amendment One to Cover Agreement, dated November 7, 1996,
by and between the Registrant and Sprint.
10.22**+ -- Amendment Two to Cover Agreement, dated March 2, 1998, by
and between the Registrant and Sprint.
10.23** -- Indenture, dated as of March 25, 1998, by and among the
Registrant and First Trust National Association (as
trustee).
10.24** -- Registration Rights Agreement, dated as of March 25,
1998, by and among the Registrant, and the Initial March
1998 Notes Purchasers.
10.25**+ -- Capacity and Services Agreement, dated as of March 31,
1998, by and among the Registrant and Qwest
Communications Corporation.
10.26** -- Credit Agreement, dated as of April 6, 1998, by and among
the Registrant, The Chase Manhattan Bank (as
administrative agent) and Fleet National Bank (as
documentation agent).
10.27** -- Stock Purchase and Master Strategic Relationship
Agreement, dated as of April 7, 1998, by and among the
Registrant and Nippon Telegraph and Telephone Corporation
("NTT"), a Japanese corporation.
10.28**+ -- Investment Agreement, dated as of April 7, 1998, by and
among the Registrant and NTT.
10.29**+ -- Outside Service Provider Agreement, dated as of April 7,
1998, by and among the Registrant and NTT America, Inc.
10.30**+ -- Master Services Agreement, dated as of June 13, 1997, by
and between the Registrant and MCI Telecommunications
Corporation ("MCI").
10.31**+ -- MCI Domestic (US) Public Interconnection Agreement dated
as of June 12, 1997, by and between the Registrant and
MCI, as amended.
10.32** -- The Registrant's 1998 Non-Employee Director Stock
Incentive Plan.
10.33*+ -- Interconnection Agreement, effective as of April 1, 1998
by and between the Registrant and UUNET Technologies,
Inc.
10.34 -- Indenture, dated as of November 25, 1998, by and among
the Registrant and U.S. Bank Trust National Association
(as trustee).
10.35 -- Registration Rights Agreement, dated as of November 25,
1998, by and among the Registrant and the Initial
November 1998 Notes Purchasers.
11.1 -- Not applicable.
21.1** -- List of Subsidiaries of the Registrant.
23.1 -- Consent of KPMG Peat Marwick LLP (Denver).
23.2 -- Consent of KPMG Peat Marwick LLP (Seattle).
23.3 -- Consent of PricewaterhouseCoopers LLP.
23.4 -- Consent of DeMeo, Young, McGrath & Company, P.A.
23.5++ -- Consent of Morrison & Foerster LLP (contained in Exhibit
5.1)
24.1++ -- Power of Attorney.
25.1*** -- Form of T-1 Statement of Eligibility and Qualification
under the Trust Indenture Act of 1939 of First Trust
National Association.
27.1**** -- Financial Data Schedule.
99.1++ -- Consent of Person to Become a Director
99.2++ -- Consent of BT Alex. Brown Incorporated.
</TABLE>
- ---------------
* Incorporated by reference from the Registrant's quarterly report on Form
10-Q filed with the Commission on August 13, 1998.
II-3
<PAGE> 428
** Incorporated by reference from the Registration Statement on Form S-1 of
the Registrant (Registration No. 333-47099) filed with the Commission on
February 27, 1198, as amended.
*** Incorporated by reference from the Registration Statement on Form S-4 of
the Registrant (Registration Statement No. 333-47497) filed with the
Commission on March 6, 1998, as amended.
**** Incorporated by reference from the Registrant's quarterly report on Form
10-Q filed with the Commission on November 16, 1998.
+ Document for which confidential treatment has been requested.
++ Previously filed.
FINANCIAL STATEMENTS AND SCHEDULE:
Financial Statements:
Financial Statements filed as a part of this Registration Statement are
listed in the Index to Financial Statements on page F-1.
Financial Statement Schedules:
<TABLE>
<CAPTION>
SCHEDULE NO. DESCRIPTION
------------ -----------
<S> <C>
II Valuation and Qualifying Accounts
</TABLE>
ITEM 22. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions described in
Item 20 above, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the 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 Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
(d) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-4
<PAGE> 429
(e) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Securities and Exchange Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more than
a 20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement.
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(f) The undersigned Registrant hereby undertakes:
(1) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the Registrant undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(2) That every prospectus: (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
this Registration Statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-5
<PAGE> 430
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement on Form S-4
to be signed on its behalf by the undersigned, thereunto duly authorized, in
Englewood, Colorado, on December 11, 1998.
VERIO INC.
By: /s/ CARLA HAMRE DONELSON
----------------------------------
Carla Hamre Donelson
Vice President, General Counsel
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<C> <S> <C>
/s/ STEVEN C. HALSTEDT* Chairman of the Board December 11, 1998
- -----------------------------------------------------
Steven C. Halstedt
/s/ JUSTIN L. JASCHKE* Chief Executive Officer and Director December 11, 1998
- -----------------------------------------------------
Justin L. Jaschke
/s/ HERBERT R. HRIBAR* President and Chief Operating Officer December 11, 1998
- -----------------------------------------------------
Herbert R. Hribar
/s/ JAMES C. ALLEN* Director December 11, 1998
- -----------------------------------------------------
James C. Allen
/s/ TRYGVE E. MYHREN* Director December 11, 1998
- -----------------------------------------------------
Trygve E. Myhren
/s/ PAUL J. SALEM* Director December 11, 1998
- -----------------------------------------------------
Paul J. Salem
/s/ STEVEN W. SCHOVEE* Director December 11, 1998
- -----------------------------------------------------
Steven W. Schovee
/s/ GEORGE J. STILL, JR.* Director December 11, 1998
- -----------------------------------------------------
George J. Still, Jr.
/s/ YUKIMASA ITO* Director December 11, 1998
- -----------------------------------------------------
Yukimasa Ito
/s/ PETER B. FRITZINGER* Chief Financial Officer December 11, 1998
- ----------------------------------------------------- (Principal Accounting Officer)
Peter B. Fritzinger
*By: /s/ CARLA HAMRE DONELSON
-------------------------------------------------
Carla Hamre Donelson
Attorney-in-Fact
</TABLE>
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<PAGE> 431
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1++ -- Amended and Restated Agreement and Plan of Merger, dated
as of November 17, 1998 (the "Merger Agreement"), by and
among the Registrant, Purple Acquisition, Inc., and Best
Internet Communications, Inc.
The schedules and exhibits to the Merger Agreement include
(i) the Disclosure Schedules, which contain exceptions to
representations and warranties made by Best in the Merger
Agreement and certain other information, and (ii) other
forms of agreements that are referred to in the Merger
Agreement. The Registrant agrees to furnish supplementally a
copy of any omitted schedule or exhibit to the Commission
upon request.
3.1** -- Restated Certificate of Incorporation of the Registrant,
as amended.
3.2** -- Certificate of Amendment of Certificate of Incorporation
of the Registrant.
3.3** -- Certificate of Designation Establishing Series D
Preferred Stock of the Registrant.
3.4** -- Bylaws of the Registrant
4.1*** -- Form of Old 1997 Note.
4.2*** -- Form of New 1997 Note.
4.3*** -- Escrow Agreement, dated as of June 24, 1997, among First
Trust National Association (as escrow agent and trustee)
and the Registrant.
4.4** -- 1997 Indenture (See Exhibit 10.1).
4.5** -- 1997 Notes Registration Rights Agreement (See Exhibit
10.4).
4.6*** -- Purchase Agreement, dated as of June 17, 1997, by and
among Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner
& Smith Incorporated, and Lazard Freres & Co. LLC
(collectively, the "Initial 1997 Notes Purchasers"), and
the Registrant.
4.7*** -- Form of Old March 1998 Note.
4.8*** -- Form of New March 1998 Note.
4.9** -- March 1998 Indenture (See Exhibit 10.23).
4.10** -- March 1998 Notes Registration Rights Agreement (See
Exhibit 10.24).
4.11*** -- Purchase Agreement, dated as of March 19, 1998, by and
among Salomon Brothers Inc., Lazard Freres & Co. LLC,
Chase Securities, Inc., and BancBoston Securities Inc.
(collectively, the "Initial March 1998 Notes
Purchasers"), and the Registrant.
4.12 -- Purchase Agreement, dated as of November 20, 1998, by and
among Salomon Smith Barney Inc., Credit Suisse First
Boston Corporation, Donaldson, Lufkin & Jenrette
Securities Corporation and First Union Capital Markets
(collectively, the "Initial November 1998 Notes
Purchasers"), and the Registrant.
4.13 -- November 1998 Indenture (See Exhibit 10.34).
4.14 -- November 1998 Notes Registration Rights Agreement (See
Exhibit 10.35).
5.1++ -- Opinion of Morrison & Foerster LLP together with consent.
10.1** -- Indenture, dated as of June 24, 1997, by and among the
Registrant and First Trust National Association (as
trustee).
10.2** -- Warrant Agreement, dated as of June 24, 1997, by and
between First Trust National Association and the
Registrant.
10.3** -- Common Stock Registration Rights Agreement, dated as of
June 17, 1997, by and among the Registrant, Brooks Fiber
Properties, Inc., Norwest Equity Partners V, Providence
Equity Partners, Centennial Fund V, L.P., Centennial Fund
IV, L.P. (as investors), and the Initial 1997 Notes
Purchasers.
10.4** -- Registration Rights Agreement, dated as of June 17, 1997,
by and among the Registrant and the Initial 1997 Notes
Purchasers.
</TABLE>
<PAGE> 432
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.5** -- Lease Agreement, dated as of June 20, 1997, by and
between the Registrant and Highland Park Ventures, LLC,
with respect to the property in Englewood, Colorado,
including the First Amendment to Lease Agreement, dated
as of December 16, 1997.
10.6** -- Lease Agreement, dated as of May 24, 1997, by and between
the Registrant and IM Joint Venture, with respect to the
property in Dallas, Texas, as amended.
10.7** -- Form of Indemnification Agreement between the Registrant
and each of its officers and directors.
10.8** -- Amended and Restated Stockholders Agreement, dated as of
May 20, 1997, by and between the Registrant, the Series A
Purchasers, the Series B Purchasers, the Series C
Purchasers and members of the Registrant's management.
10.9** -- The Registrant's 1996 Stock Option Plan, as amended.
10.10** -- The Registrant's 1997 California Stock Option Plan, as
amended.
10.11** -- The Registration's 1998 Employee Stock Purchase Plan, as
amended.
10.12** -- The Registrant's 1998 Stock Incentive Plan, as amended.
10.13** -- Form of Compensation Protection Agreement between the
Registrant and each of its officers.
10.14** -- Master Service Agreement, dated as of August 23, 1996, by
and between the Registrant and MFS Datanet, Inc.
10.15** -- Agreement for Terminal Facility Collocation Space, dated
August 8, 1996, by and between MFS Telecom, Inc. and the
Registrant.
10.16** -- Bilateral Peering Agreement, dated May 19, 1997, between
AT&T Corp. and the Registrant.
10.17** -- Master Lease Agreement, dated November 17, 1997, by and
between Insight Investments Corp. and the Registrant.
10.18** -- Master Lease Agreement, dated October 27, 1997, by and
between Cisco Capital Systems Corporation and the
Registrant.
10.19**+ -- Lateral Exchange Networks Interconnection Agreement,
dated as of February 3, 1997, by and between the
Registrant and Sprint Communications Company L.P.
("Sprint").
10.20**+ -- Cover Agreement, dated September 30, 1996, by and between
the Registrant and Sprint.
10.21**+ -- Amendment One to Cover Agreement, dated November 7, 1996,
by and between the Registrant and Sprint.
10.22**+ -- Amendment Two to Cover Agreement, dated March 2, 1998, by
and between the Registrant and Sprint.
10.23** -- Indenture, dated as of March 25, 1998, by and among the
Registrant and First Trust National Association (as
trustee).
10.24** -- Registration Rights Agreement, dated as of March 25,
1998, by and among the Registrant, and the Initial March
1998 Notes Purchasers.
10.25**+ -- Capacity and Services Agreement, dated as of March 31,
1998, by and among the Registrant and Qwest
Communications Corporation.
10.26** -- Credit Agreement, dated as of April 6, 1998, by and among
the Registrant, The Chase Manhattan Bank (as
administrative agent) and Fleet National Bank (as
documentation agent).
10.27** -- Stock Purchase and Master Strategic Relationship
Agreement, dated as of April 7, 1998, by and among the
Registrant and Nippon Telegraph and Telephone Corporation
("NTT"), a Japanese corporation.
</TABLE>
<PAGE> 433
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.28**+ -- Investment Agreement, dated as of April 7, 1998, by and
among the Registrant and NTT.
10.29**+ -- Outside Service Provider Agreement, dated as of April 7,
1998, by and among the Registrant and NTT America, Inc.
10.30**+ -- Master Services Agreement, dated as of June 13, 1997, by
and between the Registrant and MCI Telecommunications
Corporation ("MCI").
10.31**+ -- MCI Domestic (US) Public Interconnection Agreement dated
as of June 12, 1997, by and between the Registrant and
MCI, as amended.
10.32** -- The Registrant's 1998 Non-Employee Director Stock
Incentive Plan.
10.33*+ -- Interconnection Agreement, effective as of April 1, 1998
by and between the Registrant and UUNET Technologies,
Inc.
10.34 -- Indenture, dated as of November 25, 1998, by and among
the Registrant and U.S. Bank Trust National Association
(as trustee).
10.35 -- Registration Rights Agreement, dated as of November 25,
1998, by and among the Registrant and the Initial
November 1998 Notes Purchasers.
11.1 -- Not applicable.
21.1** -- List of Subsidiaries of the Registrant.
23.1 -- Consent of KPMG Peat Marwick LLP (Denver).
23.2 -- Consent of KPMG Peat Marwick LLP (Seattle).
23.3 -- Consent of PricewaterhouseCoopers LLP.
23.4 -- Consent of DeMeo, Young, McGrath & Company, P.A.
23.5++ -- Consent of Morrison & Foerster LLP (contained in Exhibit
5.1)
24.1++ -- Power of Attorney.
25.1*** -- Form of T-1 Statement of Eligibility and Qualification
under the Trust Indenture Act of 1939 of First Trust
National Association.
27.1**** -- Financial Data Schedule.
99.1++ -- Consent of Person to Become a Director
99.2++ -- Consent of BT Alex. Brown Incorporated.
</TABLE>
- ---------------
* Incorporated by reference from the Registrant's quarterly report on Form
10-Q filed with the Commission on August 13, 1998.
** Incorporated by reference from the Registration Statement on Form S-1 of
the Registrant (Registration No. 333-47099) filed with the Commission on
February 27, 1198, as amended.
*** Incorporated by reference from the Registration Statement on Form S-4 of
the Registrant (Registration Statement No. 333-47497) filed with the
Commission on March 6, 1998, as amended.
**** Incorporated by reference from the Registrant's quarterly report on Form
10-Q filed with the Commission on November 16, 1998.
+ Document for which confidential treatment has been requested.
++ Previously filed.
<PAGE> 1
EXHIBIT 4.12
VERIO INC.
$400,000,000
11 1/4% SENIOR NOTES DUE 2008
PURCHASE AGREEMENT
New York, New York
November 20, 1998
SALOMON SMITH BARNEY INC.
CREDIT SUISSE FIRST BOSTON CORPORATION
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
FIRST UNION CAPITAL MARKETS,
a division of WHEAT FIRST SECURITIES, INC.
c/o Salomon Smith Barney Inc.
Seven World Trade Center
New York, New York 10048
Ladies and Gentlemen:
Verio Inc., a Delaware corporation (the "Company"), proposes to sell,
severally and not jointly, to Salomon Smith Barney Inc., Credit Suisse First
Boston Corporation, Donaldson, Lufkin & Jenrette Securities Corporation and
First Union Capital Markets (together, the "Initial Purchasers") $400,000,000
principal amount of its 11 1/4% Senior Notes Due 2008 (the "Securities") as set
forth on Schedule I hereto, to be issued under an indenture (the "Indenture")
dated as of November 25, 1998 between the Company and First Trust National
Association, as trustee (the "Trustee").
The sale of the Securities to the Initial Purchasers will be made
without registration of the Securities under the Securities Act of 1933, as
amended (the "Securities Act"), in reliance upon exemptions from the
registration requirements of the Securities Act. The Initial Purchasers have
advised the Company that the Initial Purchasers will offer and sell the
Securities purchased by them hereunder in accordance with Section 4 of this
agreement (this "Agreement" or the "Purchase Agreement") as soon as they deem
advisable.
In connection with the sale of the Securities, the Company has prepared
a preliminary offering memorandum, dated November 17, 1998 (including any and
all exhibits thereto and any information incorporated by reference therein, the
"Preliminary Memorandum"),
<PAGE> 2
and a final offering memorandum, dated November 20, 1998 (the "Final
Memorandum"). Each of the Preliminary Memorandum and the Final Memorandum sets
forth certain information concerning the Company and the Securities. The Company
hereby confirms that it has authorized the use of the Preliminary Memorandum and
the Final Memorandum, and any amendment or supplement thereto, in connection
with the offer and sale of the Securities by the Initial Purchasers. Unless
stated to the contrary, all references herein to the Final Memorandum are to the
Final Memorandum at the Execution Time (as defined below) and are not meant to
include any amendment or supplement subsequent to the Execution Time.
The holders of the Securities will be entitled to the benefits of the
Registration Agreement dated as of November 25, 1998, between the Company and
the Initial Purchasers (the "Registration Agreement").
This Agreement, the Indenture, the Securities and the Registration
Agreement are referred to herein as the "Transaction Documents".
Capitalized terms used herein without definitions have the respective
meanings assigned to them in the Final Memorandum.
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, each Initial Purchaser as set forth
below in this Section 1.
(a) The Preliminary Memorandum, at the date thereof, did not contain
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading. The Final Memorandum, at the
date hereof, does not, and at the Closing Date (as defined below) will not
(and any amendment or supplement thereto, at the date thereof and at the
Closing Date, will not), contain any untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that the Company makes no representation or warranty as
to the information contained in or omitted from the Preliminary Memorandum
or the Final Memorandum, or any amendment or supplement thereto, in reliance
upon and in conformity with information furnished in writing to the Company
by or on behalf of the Initial Purchasers specifically for inclusion
therein.
-2-
<PAGE> 3
(b) The Company has been advised by The Portal Market that the
Securities have been designated Portal-eligible securities in accordance
with the rules and regulations of the National Association of Securities
Dealers, Inc. (the "NASD").
(c) None of the Company nor any of its Affiliates (as defined in Rule
501(b) under the Securities Act) has, directly or through any agent, sold,
offered for sale, solicited offers to buy or otherwise negotiated in respect
of, any security (as defined in the Securities Act) which could be
integrated with the sale of the Securities in a manner that would require
the registration of the Securities under the Securities Act.
(d) None of the Company nor any of its Affiliates (as defined in Rule
501(b) under the Securities Act) or any person (other than the Initial
Purchasers, as to whom the Company makes no representation) acting at the
request of the Company has engaged, in connection with the offering of the
Securities, (A) in any form of general solicitation or general advertising
within the meaning of Rule 502(c) under the Securities Act, (B) in any
directed selling efforts within the meaning of Rule 902 under the Securities
Act in the United States in connection with the Securities being offered and
sold pursuant to Regulation S under the Securities Act, (C) in any manner
involving a public offering within the meaning of Section 4(2) of the
Securities Act or (D) in any action which would require the registration of
the offering and sale of the Securities pursuant to this Agreement or which
would violate applicable state securities or "blue sky" laws.
(e) Assuming that the representations and warranties of the Initial
Purchasers contained in Section 4 are true, correct and complete, and
assuming compliance by the Initial Purchasers with their covenants in
Section 4, and assuming that the representations and warranties deemed to be
made by non-U.S. persons and "qualified institutional buyers" ("QIBs") (as
defined in Rule 144A under the Securities Act) purchasing Securities are
true and correct as of the Closing Date, it is not necessary in connection
with the offer, sale and delivery of the Securities to the Initial
Purchasers in the manner contemplated by, or in connection with the initial
resale of such Securities by
-3-
<PAGE> 4
the Initial Purchasers in accordance with, this Agreement to register
the Securities under the Securities Act or to qualify any indenture in
respect of the Securities under the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act").
(f) The subsidiaries of the Company listed on Schedule II hereto (also
referred to herein as the "Subsidiaries") are the only subsidiaries of the
Company that constitute "significant subsidiaries" within the meaning of
Rule 1-02(w) of Regulation S-X under the Securities Act. Each of the Company
and the Subsidiaries has been duly organized or incorporated, as the case
may be, and is validly existing and in good standing under the laws of its
jurisdiction of organization or incorporation, with all requisite power and
authority under such laws (a) to own, lease and operate their respective
properties and to conduct their respective businesses as now conducted and
as described in the Final Memorandum and (b) to enter into, deliver, incur
and perform their respective obligations under the Transaction Documents,
except, in the case of the foregoing subclause (a) for authorizations,
approvals, orders, leases, certificates and permits, the failure of which to
possess could not reasonably be expected to have a Material Adverse Effect
(as defined below); and are all duly qualified to do business as foreign
partnerships or corporations in good standing in all other jurisdictions
where the ownership or leasing of their respective properties or the conduct
of their respective businesses requires such qualification, except where the
failure to be so qualified could not reasonably be expected to have a
material adverse effect (i) on the business, condition (financial or
otherwise), results of operations, business affairs or business prospects of
the Company and the Subsidiaries taken as a whole or (ii) on the ability of
the Company to perform any of its obligations under the Transaction
Documents or to consummate any of the transactions contemplated hereby or
thereby (a "Material Adverse Effect"). The Company has no ISP affiliates
(other than the Subsidiaries) that would individually constitute a
"significant subsidiary" of the Company within the meaning of Rule 1-02(w)
of Regulation S-X under the Securities Act, if any such ISP affiliate were a
subsidiary of the Company.
(g) The Securities, the Exchange Notes and the Private Exchange Notes
have been duly authorized by the Company, and the Company has all requisite
corporate power
-4-
<PAGE> 5
and authority to execute, issue and deliver the Securities, the
Exchange Notes and the Private Exchange Notes and to incur and perform its
obligations provided for therein.
(h) The Securities, when executed, authenticated and issued in
accordance with the terms of the Indenture (assuming the due authorization,
execution and delivery of the Indenture by the Trustee) and when delivered
against payment of the purchase price therefor as provided in this
Agreement, will constitute valid and binding obligations of the Company,
entitled to the benefits of the Indenture and enforceable against the
Company in accordance with the terms thereof; and the Exchange Notes and the
Private Exchange Notes, if any, when executed, authenticated, issued and
delivered by the Company in exchange for the Securities in accordance with
the terms of the Registration Agreement, will constitute valid and binding
obligations of the Company, entitled to the benefits of the Indenture and
enforceable against the Company in accordance with the terms thereof;
subject, in the case of each of the foregoing, to (a) applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws affecting creditors'
rights and remedies generally, (b) general principles of equity (regardless
of whether enforcement is sought in a proceeding in equity or at law) and
(c) the discretion of the court before which any proceeding therefor may be
brought (clauses (a), (b) and (c) being referred to herein as the
"Enforceability Limitations") and except that the waiver of stay or
extension laws contained in Section 5.15 of the Indenture may be
unenforceable.
(i) This Agreement has been, and, as of the Closing Date, the
Indenture, and the Registration Agreement will have been, duly authorized,
executed and delivered by the Company, and upon such execution by the
Company (assuming the due authorization, execution and delivery by parties
thereto other than the Company), as of the Closing Date, the Indenture and
the Registration Agreement will constitute the valid and binding obligations
of the Company, enforceable against the Company in accordance with the terms
hereof or thereof, subject only to the Enforceability Limitations and except
that the waiver of stay or extension laws contained in Section 5.15 of the
Indenture may be unenforceable.
-5-
<PAGE> 6
(j) No consent, waiver, authorization, approval, license, qualification
or order of, or filing or registration with, any court or governmental or
regulatory agency or body, domestic or foreign, is required for the issue
and sale of the Securities or the Exchange Notes or the Private Exchange
Notes, if any, the performance by the Company of its obligations under the
Transaction Documents, or for the consummation of any of the transactions
contemplated hereby or thereby, including, without limitation, the issuance
and sale of the Securities hereunder, except such as may be required (A) in
connection with the registration under the Securities Act of the Exchange
Notes or the Private Exchange Notes, if any, pursuant to the Registration
Agreement (including any filing with the NASD), (B) in order to qualify the
Indenture under the Trust Indenture Act or (C) by state securities or "blue
sky" laws in connection with the offer and sale of the Securities or the
registration thereof or of the Exchange Notes or the Private Exchange Notes
pursuant to the Registration Agreement.
(k) The issuance, sale and delivery of the Securities, the Exchange
Notes and the Private Exchange Notes, if any, the execution, delivery and
performance by the Company of this Agreement, the Indenture and the
Registration Agreement and the consummation by the Company of the
transactions contemplated hereby, thereby and in the Final Memorandum and
the compliance by the Company with the terms of the foregoing do not, and,
at the Closing Date, will not conflict with or constitute or result in a
breach or violation by the Company or any of the Subsidiaries of (A) any of
the terms or provisions of, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) by any of the
Company or the Subsidiaries or give rise to any right to accelerate the
maturity or require the prepayment of any indebtedness under, or result in
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or the Subsidiaries under any contract,
indenture, mortgage, deed of trust, loan agreement, note, lease, license,
franchise agreement, authorization, permit, certificate or other agreement
or document to which any of the Company or the Subsidiaries is a party or by
which any of them may be bound, or to which any of them or any of their
respective assets or businesses is subject (collectively, "Contracts") (and
the Company has no knowledge of any conflict, breach or violation of such
terms or provisions or of any such default, in any such case, which has
occurred or will so result), (B) the articles or by-laws (each, an
"Organizational Document") of each of the
-6-
<PAGE> 7
Company and the Subsidiaries or (C) any law, statute, rule or
regulation, or any judgment, decree or order, in any such case, of any
domestic or foreign court or governmental or regulatory agency or other body
having jurisdiction over the Company or any of the Subsidiaries or any of
their respective properties or assets. Schedule III hereto lists each
Contract with respect to which any conflict, breach or violation of the
terms or provisions thereof or any default with respect thereto could have a
Material Adverse Effect (each such Contract being referred to herein as a
"Material Contract").
(l) The Securities, the Exchange Notes, the Private Exchange Notes, the
Indenture and the Registration Agreement will each conform in all material
respects to the descriptions thereof in the Final Memorandum.
(m) The audited consolidated financial statements included in the Final
Memorandum, including the notes thereto, respectively present fairly the
financial position of each of the Company and its consolidated subsidiaries,
On-Ramp Technologies, Inc., Global Enterprise Services-Network Division,
Compute Intensive Inc., NorthWestNet, Inc., Aimnet Corporation, West Coast
Online, Inc., Clark Internet Services, Inc., ATMnet Corporation, Global
Internet Network Services, Inc., Pennsylvania Research Partnership Network,
Monumental Network Systems, Inc., Internet Servers, Inc., NSNet, Inc.,
Access One, Inc., STARnet, L.L.C., Computing Engineers Inc., LI Net, Inc.,
NTX, Inc. and Hiway Technologies, Inc. and its consolidated subsidiaries at
the dates indicated, and the statement of operations, stockholders'
deficit/equity and cash flows of each of such persons and, where applicable
such persons' consolidated subsidiaries for the periods have been prepared
in conformity with United States generally accepted accounting principles
("GAAP") applied on a consistent basis throughout the periods involved. The
selected financial data and the summary financial information included in
the Final Memorandum present fairly the information shown therein and have
been compiled on a basis consistent with that of the financial statements of
the Company and its consolidated subsidiaries included in the Final
Memorandum. KPMG Peat Marwick LLP, which has examined such financial
statements (excluding those of Hiway Technologies, Inc. and its consolidated
subsidiaries) as set forth in its report included in the Final Memorandum,
is an independent public accounting firm with respect to each of such
persons and, where applicable such persons'
-7-
<PAGE> 8
Subsidiaries within the meaning of Regulation S-X under the Securities
Act. Each of PriceWaterhouseCoopers LLP and De Meo, Young, McGrath &
Company, P.A., which have examined the financial statements of Hiway
Technologies, Inc. and its consolidated subsidiaries as set forth in their
respective reports included in the Final Memorandum, is an independent
public accounting firm with respect to such person and, where applicable,
such persons' subsidiaries and with respect to the Company within the
meaning of Regulation S-X under the Securities Act. Except as disclosed in
the Final Memorandum, the pro forma financial information relating to the
Company and its Subsidiaries and the related notes thereto included in the
Final Memorandum present fairly the information shown therein, have been
prepared in all material respects in accordance with the Commission's rules
and guidelines with respect to pro forma financial adjustments and have been
properly computed on the bases described therein, and the assumptions used
in the preparation thereof are reasonable and the adjustments used therein
are appropriate to give effect to the transactions and circumstances
referred to therein.
(n) Since the respective dates as of which information is given in the
Final Memorandum, except as otherwise specifically stated therein, there has
been no (A) material adverse change in the business, condition (financial or
otherwise), results of operations, business affairs or business prospects of
the Company and the Subsidiaries taken as a whole, whether or not arising in
the ordinary course of business (a "Material Adverse Change"), (B)
transaction entered into by any of the Company or the Subsidiaries, other
than in the ordinary course of business, that is material to the Company and
the Subsidiaries taken as a whole or (C) dividend or distribution of any
kind declared, paid or made by the Company on its capital stock.
(o) The Company has the authorized, issued and outstanding
capitalization set forth in the Final Memorandum under the caption
"Description of Capital Stock"; all of the outstanding capital stock of the
Company has been duly authorized and validly issued, is fully paid and
nonassessable and was not issued in violation of any preemptive or similar
rights (whether provided contractually or pursuant to any Organizational
Document). Except as set forth in the Final Memorandum under the caption
"Business -- The Verio Organization", the Company does not own, directly or
indirectly, any material amount of shares, or
-8-
<PAGE> 9
any other material amount of equity or long-term debt securities or
have any material equity interest in any firm, partnership, joint venture or
other entity. Except as set forth in the Final Memorandum, no holder of any
securities of the Company is entitled to have such securities (other than
the Securities, the Exchange Notes and the Private Exchange Notes, if any)
registered under any registration statement contemplated by the Registration
Agreement. All of the outstanding capital stock of each of the Subsidiaries
has been duly authorized and validly issued, is fully paid and nonassessable
and was not issued in violation of any preemptive or similar rights (whether
provided contractually or pursuant to any Organizational Document).
(p) None of the Company nor the Subsidiaries is (A) in violation of its
respective Organizational Documents, (B) in default (or, with notice or
lapse of time or both, would be in default) in the performance or observance
of any obligation, agreement, covenant or condition contained in any
Contract or (C) in violation of any law, statute, judgment, decree, order,
rule or regulation of any domestic or foreign court with jurisdiction over
the Company or the Subsidiaries or any of their respective assets or
properties, or other governmental or regulatory authority, agency or other
body, other than, in the case of clause (B) or (C), such defaults or
violations which could not, individually or in the aggregate, reasonably be
expected to have or result in a Material Adverse Effect; and any real
property and buildings held under lease by the Company or the Subsidiaries
are held by the Company or such Subsidiary, as the case may be, under valid,
subsisting and enforceable leases with such exceptions which could not,
individually or in the aggregate, reasonably be expected to have or result
in a Material Adverse Effect.
(q) Except as set forth in the Final Memorandum, each of the Company
and the Subsidiaries owns or possesses, or can acquire on reasonable terms,
adequate patents, patent rights, licenses, trademarks, service marks, trade
names, copyrights and know-how (including trade secrets and other
proprietary or confidential information, systems or procedures)
(collectively, "intellectual property") necessary to conduct the business
now or proposed to be operated by it as described in the Final Memorandum,
except where the failure to own, possess or have the ability to acquire any
such intellectual property could not, individually or in the aggregate, be
reasonably expected to have a Material Adverse Effect; and none of the
Company
-9-
<PAGE> 10
nor the Subsidiaries has received any notice of infringement of or
conflict with (nor knows of any such infringement of or conflict with)
asserted rights of others with respect to any of such intellectual property.
(r) Each of the Company and the Subsidiaries has obtained all material
consents, approvals, orders, certificates, licenses, permits, franchises and
other authorizations (collectively, the "Licenses") of and from, and has
made all declarations and filings with, all governmental and regulatory
authorities, all self-regulatory organizations and all courts and other
tribunals necessary to own, lease, license and use its properties and assets
and to conduct its businesses in the manner described in the Final
Memorandum. None of the Company or the Subsidiaries has received any notice
of proceedings relating to the revocation or modification of, or denial of
any application for, any License which, if the subject of any unfavorable
decision, ruling or finding, could, singly or in the aggregate, reasonably
be expected to have or result in a Material Adverse Effect; and no event has
occurred which allows, or after notice or lapse of time, or both, would
allow, revocation or termination thereof or result in any other material
impairment of the rights of the holder of any such License, except where
such revocation or termination could not, singly or in the aggregate,
reasonably be expected to have or result in a Material Adverse Effect; and
the Licenses referred to above place no restrictions on the Company or any
of the Subsidiaries that are not described in the Final Memorandum, except
where such restrictions could not, singly or in the aggregate, reasonably be
expected to have or result in a Material Adverse Effect.
(s) There is no legal action, suit, proceeding, inquiry or
investigation before or by any court or governmental body or agency,
domestic or foreign, now pending or, to the best knowledge of the Company,
threatened against the Company or any of the Subsidiaries or any of their
respective properties which would be required to be disclosed in a
registration statement filed under the Securities Act.
(t) Each of the Company and the Subsidiaries has filed all necessary
federal, state and foreign income and franchise tax returns, and has paid
all taxes shown as due thereon; and no tax deficiency has been asserted
against any of the Company or the Subsidiaries.
-10-
<PAGE> 11
(u) Except as described in the Final Memorandum, including the
financial statements and notes thereto included therein, each of the Company
and the Subsidiaries has good and marketable title to all real and personal
property described in the Final Memorandum as being owned by it and good and
marketable title to a leasehold estate in the real and personal property
described in the Final Memorandum as being leased by it, free and clear of
all liens, charges, encumbrances or restrictions, except to the extent the
failure to have such title or the existence of such liens, charges,
encumbrances or restrictions could not, individually or in the aggregate,
reasonably be expected to have or result in a Material Adverse Effect.
(v) None of the Company or any of the Subsidiaries is an "investment
company" or a company "controlled by" an "investment company" as such terms
are defined in the Investment Company Act of 1940, as amended, and the rules
and regulations thereunder.
(w) None of the Company nor any of the Subsidiaries nor any of their
respective directors, officers or controlling persons has taken, directly or
indirectly, any action designed, or which might reasonably be expected, to
cause or result, under the Securities Act or otherwise, in, or which has
constituted, stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Securities, the Exchange
Notes or the Private Exchange Notes.
(x) No strike, labor problem, dispute, slowdown, work stoppage or
disturbance with the employees of the Company or any of the Subsidiaries
exists or, to the best knowledge of the Company, is threatened which could,
individually or in the aggregate, reasonably be expected to have or result
in a Material Adverse Effect.
(y) The Company has insurance in such amounts and covering such risks
and liabilities as are in accordance with normal industry practice.
(z) The statistical and market-related data included in the Final
Memorandum are based on or derived from independent sources which the
Company believes to be reliable and accurate in all material respects or
represent the Company's good faith estimates that are made on the basis of
data derived from such sources.
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<PAGE> 12
(aa) The Company is, and immediately after the Closing Date will be,
Solvent. As used herein, the term "Solvent" means, with respect to the
Company on a particular date, that on such date (A) the fair market value of
the assets of the Company exceeds its respective liabilities (including
without limitation, stated liabilities and identified contingent
liabilities), (B) the present fair salable value of the assets of the
Company will exceed its respective probable liabilities on its debts
(including without limitation, stated liabilities and identified contingent
liabilities), (C) the fair market value of the Company's total assets
exceeds its total liabilities, including identified contingent liabilities,
by an amount at least equal to the total par value of its common stock both
immediately prior to and after the Offering, (D) the Company is and will be
able to pay its debts (including without limitation, stated liabilities and
identified contingent liabilities) as such debts mature and (E) the Company
will not have unreasonably small capital with which to conduct its present
and anticipated business.
(bb) Except as described in the Final Memorandum or as would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect (A) to the Company's knowledge, each of the Company and the
Subsidiaries is in compliance with and not subject to any known liability
under applicable Environmental Laws (as defined below), (B) to the Company's
knowledge, each of the Company and the Subsidiaries (i) has made all filings
and provided all notices required under any applicable Environmental Law,
and (ii) has, and is in compliance with, all Permits required under any
applicable Environmental Laws, and (iii) each of them is in full force and
effect, (C) to the Company's knowledge, there is no civil, criminal or
administrative action, or, investigation, notice or demand letter or request
for information pending or threatened against the Company or any of the
Subsidiaries under any Environmental Law, and (D) to the Company's
knowledge, no lien, charge, encumbrance or restriction has been recorded
under any Environmental Law with respect to any assets, facility or property
owned, operated, leased or controlled by the Company or any Subsidiary.
For purposes of this Agreement, "Environmental Laws" means the common
law and all applicable federal, state and local laws or regulations relating
to the protection of the environment, including, without limitation, laws
relating to emissions, discharges, releases or threatened
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<PAGE> 13
releases of "hazardous substances," as defined in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended.
(cc) Except as described in the Final Memorandum, none of the Company
nor any of the Subsidiaries has incurred any liability for any prohibited
transaction or funding deficiency or any complete or partial withdrawal
liability with respect to any pension, profit sharing or other plan which is
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), to which the Company or the Subsidiaries makes or ever has made a
contribution and in which any employee of the Company or any such Subsidiary
is or has ever been a participant, which, individually in the aggregate,
could reasonably be expected to have or result in a Material Adverse Effect.
With respect to such plans, each of the Company and the Subsidiaries is in
compliance in all respects with all applicable provisions of ERISA, except
where the failure to so comply could not, individually or in the aggregate,
reasonably be expected to have or a result in a Material Adverse Effect.
(dd) Each of the Company and the Subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurance that
(i) transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (iii)
access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(ee) The Securities satisfy the eligibility requirements of Rule
144A(d)(3) under the Securities Act.
(ff) Any certificate signed by any officer of the Company and delivered
to the Initial Purchasers or to Cahill Gordon & Reindel, counsel for the
Initial Purchasers ("Counsel for the Initial Purchasers") pursuant to the
terms of this Agreement shall be deemed a representation and warranty by the
Company to the Initial Purchasers as to the matters covered thereby.
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<PAGE> 14
2. Purchase and Sale of the Securities. Subject to the terms and
conditions and in reliance upon the representations and warranties herein set
forth, the Company agrees to sell to each Initial Purchaser, and each Initial
Purchaser agrees, severally and not jointly, to purchase from the Company, at a
purchase price of 97.5% of the principal amount thereof, plus accrued interest,
if any, from November 25, 1998 to the Closing Date, the principal amount of
Securities set forth opposite such Initial Purchaser's name in Schedule I
hereto.
3. Delivery and Payment. Delivery of and payment for the Securities
shall be made at 9:00 AM, New York City time, on November 25, 1998 or such later
date as the Initial Purchasers shall designate, which date and time may be
postponed by agreement among the Initial Purchasers and the Company or as
provided in Section 9 hereof (such date and time of delivery and payment for the
Securities being herein called the "Closing Date"). Delivery of the Securities
shall be made to the Initial Purchasers for the respective accounts of the
Initial Purchasers against payment by the Initial Purchasers of the purchase
price thereof to or upon the order of the Company by wire transfer of same day
funds or such other manner of payment as may be agreed by the Company and the
Initial Purchasers. Delivery of the Securities shall be made at such location as
the Initial Purchasers shall reasonably designate at least one business day in
advance of the Closing Date and payment for the Securities shall be made at the
offices of Cahill Gordon & Reindel, 80 Pine Street, New York, New York 10005, or
such other location as may be mutually agreed upon by the Company and the
Initial Purchasers. Certificates for the Securities shall be registered in such
names and in such denominations as the Initial Purchasers may request not less
than two full business days in advance of the Closing Date.
The Company agrees to have the Securities available for inspection,
checking and packaging by the Initial Purchasers in New York, New York, not
later than 10:00 AM on the business day prior to the Closing Date.
4. Offering of Securities. Each Initial Purchaser, severally and not
jointly, represents and warrants to and agrees with the Company that:
(a) It has not offered or sold, and will not offer or sell, any
Securities except (i) to those it reasonably believes to be QIBs and that,
in connection with each such sale, it has taken or will take reasonable
steps to ensure
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<PAGE> 15
that the purchaser of such Securities is aware that such sale is being
made in reliance on Rule 144A, or (ii) in accordance with the restrictions
set forth in Exhibit A hereto.
(b) Neither it nor any person acting on its behalf has made or will
make offers or sales of the Securities in the United States by means of any
form of general solicitation or general advertising within the meaning of
Regulation D in the United States.
5. Agreements of the Company. The Company agrees with each Initial
Purchaser that:
(a) The Company will furnish to each Initial Purchaser and to Counsel
for the Initial Purchasers, without charge, during the period referred to in
paragraph (c) below, as many copies of the Preliminary Memorandum and the
Final Memorandum and any amendments and supplements thereto as each Initial
Purchaser and Counsel for the Initial Purchasers may reasonably request.
(b) The Company will not at any time make any amendment or supplement
to the Preliminary Memorandum or the Final Memorandum without the prior
written consent of the Initial Purchasers.
(c) The Company will immediately notify each Initial Purchaser and
confirm such notice in writing of (x) any filing made by the Company
relating to the offering of the Securities with any securities exchange or
any other regulatory body in the United States or any other jurisdiction and
(y) prior to the completion of the placement of the Securities by the
Initial Purchasers as evidenced by a notice in writing from the Initial
Purchasers to the Company, any material changes in or affecting the
earnings, business affairs or business prospects of the Company and its
Subsidiaries that (i) make any statement in the Final Memorandum false or
misleading in any material respect or (ii) are not disclosed in the Final
Memorandum. In such event or if at any time prior to completion of the
distribution of the Securities by the Initial Purchasers to purchasers who
are not its affiliates (as determined by the Initial Purchasers) any other
event shall occur or condition shall exist as a result of which it is
necessary, in the opinion of the Initial Purchasers or Counsel for the
Initial Purchasers, to amend or supplement the Final Memorandum in order
that the Final Memorandum, as then amended
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<PAGE> 16
or supplemented, will not include an untrue statement of a material
fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances existing at the time
it is delivered to a purchaser, not misleading or if in the opinion of the
Initial Purchasers or Counsel for the Initial Purchasers, such amendment or
supplement is necessary to comply with applicable law, the Company will,
subject to paragraph (b) of this Section 5, promptly prepare, at its own
expense, such amendment or supplement as may be necessary to correct such
untrue statement or omission or to effect such compliance (in form and
substance agreed upon by the Initial Purchasers and Counsel for the Initial
Purchasers), so that as so amended or supplemented, the statements in the
Final Memorandum will not include an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time it is
delivered to a purchaser, not misleading or so that such Final Memorandum as
so amended or supplemented will comply with applicable law, as the case may
be, and furnish to the Initial Purchasers such number of copies of such
amendment or supplement as the Initial Purchasers may reasonably request.
The Company agrees to notify the Initial Purchasers in writing to suspend
use of the Final Memorandum as promptly as practicable after the occurrence
of an event specified in this paragraph (c), and the Initial Purchasers
hereby agree upon receipt of such notice from the Company to suspend use of
the Final Memorandum until the Company has amended or supplemented the Final
Memorandum to correct such misstatement or omission or to effect such
compliance.
(d) Neither the Company nor any of its Affiliates (as defined in Rule
501(b) under the Securities Act) will solicit any offer to buy or offer or
sell the Securities, the Exchange Notes or the Private Exchange Notes, if
any, by means of any form of general solicitation or general advertising (as
such terms are used in Regulation D under the Securities Act), or by means
of any directed selling efforts (as defined in Rule 902 under the Securities
Act) in the United States in connection with the Securities being offered
and sold pursuant to Regulation S or in any manner involving a public
offering within the meaning of Section 4(2) of the Securities Act prior to
the effectiveness of a registration statement with respect to the
Securities, the Exchange Notes or the Private Exchange Notes, as applicable.
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<PAGE> 17
(e) Neither the Company nor any of its Affiliates (as defined in Rule
501(b) under the Securities Act) will offer, sell or solicit offers to buy
or otherwise negotiate in respect of any security (as defined in the
Securities Act) which could be integrated with the sale of the Securities in
a manner that would require the registration of the Securities under the
Securities Act.
(f) The Company (A) will, so long as the Securities are outstanding,
furnish to the Trustee on a timely basis, pursuant to the Indenture, whether
or not the Company has a class of securities registered under the Exchange
Act, (i) within 135 days of the end of each fiscal year, audited year-end
consolidated financial statements of the Company (including a balance sheet,
income statement and statement of changes of cash flow) prepared in
accordance with GAAP and substantially in the form required under Regulation
S-X under the Securities Act and the information described in Item 303 of
Regulation S-K under the Securities Act with respect to such period and (ii)
within 60 days of the end of each fiscal quarter, unaudited quarterly
consolidated financial statements of the Company (including a balance sheet,
income statement and statement of changes of cash flow) prepared in
accordance with GAAP and substantially in the form required by Regulation
S-X under the Securities Act and the information described in Item 303 of
Regulation S-K under the Securities Act with respect to such period, and (B)
will furnish to the Initial Purchasers copies of all such reports and
information, together with such other documents, reports and information as
shall be furnished by the Company to the holders of the Securities or to the
Trustee. In the event the Company is not subject to Section 13 or 15(d) of
the Exchange Act, the Company will furnish to holders of Securities and
prospective purchasers of Securities designated by such holders, upon
request of such holders or such prospective purchasers, the information
required to be delivered pursuant to Rule 144A(d)(4) under the Act to permit
compliance with Rule 144A in connection with resales of the Securities.
(g) The Company will use its reasonable best efforts in cooperation
with the Initial Purchasers to (i) permit the Securities to be eligible for
clearance and settlement through DTC and (ii) permit the Securities to be
designated as securities eligible for trading in The Portal Market in
accordance with the rules and regulations of the NASD.
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<PAGE> 18
(h) Prior to the Closing Date, the Company will furnish to each Initial
Purchaser, if and as soon as they have been prepared, a copy of any
unaudited interim consolidated financial statements of the Company for any
period subsequent to the period covered by the most recent financial
statements of the Company appearing in the Final Memorandum which have been
prepared in the ordinary course of business.
(i) The Company will arrange for the registration and qualification of
the Securities for offering and sale under the applicable securities or
"blue sky" laws of such states and other jurisdictions as the Initial
Purchasers may designate in connection with the resale of the Securities as
contemplated by this Agreement and the Final Memorandum and will continue
such qualifications in effect for as long as may be necessary to complete
the distribution of the Securities; provided that in no event shall the
Company be obligated to (i) qualify as a foreign corporation or as a dealer
in securities in any jurisdiction where it would not otherwise be required
to so qualify but for this Section 5(i), (ii) file any general consent to
service of process in any jurisdiction where it is not at the Closing Time
then so subject or (iii) subject itself to taxation in any such jurisdiction
if it is not so subject. The Company will file such statements and reports
as may be required by the laws of each jurisdiction in which the Securities
have been qualified as above provided. The Company shall promptly advise the
Initial Purchasers of the receipt by the Company of any notification with
respect to the suspension of the qualification or exemption from
qualification of the Securities for offering or sale in any jurisdiction or
the institution, threatening or contemplation of any proceeding for such
purpose.
(j) The Company will use the proceeds received from the Offering in the
manner specified in the Final Memorandum under the heading "Use of
Proceeds."
(k) The Company will not, and will not permit any of its Affiliates (as
defined in Rule 501(b) under the Securities Act) to, resell any Securities
that have been acquired by any of them.
6. Conditions to the Obligations of the Initial Purchasers. The
obligations of the Initial Purchasers to purchase the Securities shall be
subject to the accuracy of the representations and warranties on the part of the
Company contained
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<PAGE> 19
herein at the date and time that this Agreement is executed and delivered by the
parties hereto (the "Execution Time"), and the Closing Date, to the accuracy of
the statements of the Company made in any certificates pursuant to the
provisions hereof, to the performance by the Company of its obligations
hereunder and to the following additional conditions:
(a) (i) At the Closing Date, the Initial Purchasers shall have
received the opinion of Morrison & Foerster LLP, counsel to the Company,
dated as of the Closing Date, in the form set forth below and otherwise
reasonably satisfactory to the Initial Purchasers and Counsel for the
Initial Purchasers, to the effect that:
(1) The Company has been duly incorporated and is validly
existing under the laws of the State of Delaware, with corporate power
and authority to own, lease and operate its assets and properties and
conduct its business as described in the Final Memorandum and to enter
into and perform its obligations under this Agreement and each of the
other Transaction Documents;
(2) The authorized, issued and outstanding capital stock of
the Company is as set forth in the Final Memorandum under the caption
"Description of Capital Stock";
(3) Each of the Subsidiaries has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Final Memorandum; all of the issued and
outstanding capital stock of each of the Subsidiaries has been duly
authorized and validly issued, is fully paid and non-assessable and, to
such counsel's knowledge and information, except as set forth in the
Final Memorandum under the caption "Business -- The Verio
Organization", is owned by the Company directly, free and clear of any
security interest, mortgage, pledge, lien, encumbrance, claim or
equity;
(4) The Company has the requisite corporate power and
authority to execute, deliver and perform its obligations under this
Agreement, the Securities, the Exchange Notes, the Private Exchange
Notes, the
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<PAGE> 20
Indenture and the Registration Agreement; and each of this Agreement,
the Securities, the Exchange Notes, the Private Exchange Notes, the
Indenture and the Registration Agreement has been duly authorized by
the Company;
(5) No consent, waiver, approval, authorization, license,
qualification or order of or filing or registration with any court or
governmental or regulatory agency or body is required for the execution
and delivery by the Company of this Agreement, the Indenture or the
Registration Agreement or for the issue and sale of the Securities, the
Exchange Notes or the Private Exchange Notes, if any, or the
performance by the Company of its obligations under the Transaction
Documents, or for the consummation of any of the transactions
contemplated hereby or thereby, except such as may be required (A) in
connection with the registration under the Securities Act of the
Exchange Notes or the Private Exchange Notes, if any, under the
Registration Agreement, (B) in order to qualify the Indenture under the
Trust Indenture Act and (C) by state securities or "blue sky" laws in
connection with the purchase and distribution of the Securities by the
Initial Purchasers (as to which such counsel need express no opinion);
(6) The issuance, sale and delivery of the Securities, the
Exchange Notes and the Private Exchange Notes, if any, the execution,
delivery and performance by the Company of this Agreement, the
Indenture and the Registration Agreement (in each case assuming due
authorization and execution by each party other than the Company), and
the consummation by the Company of the transactions contemplated hereby
and thereby and the compliance by the Company with the terms of the
foregoing do not, and, at the Closing Date, will not, conflict with or
constitute or result in a breach or violation by the Company or any of
the Subsidiaries of (A) any provision of the Certificate of
Incorporation or By-laws of the Company, (B) any of the terms or
provisions of, or constitute a default (or an event which, with notice
or lapse of time or both, would constitute a default) by the Company,
or give rise to any right to accelerate the maturity or require the
prepayment of any indebtedness under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or
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<PAGE> 21
assets of the Company or any Subsidiary under any Material Contract
identified in Schedule III hereto (provided that such counsel need not
express an opinion as to any potential violation of any financial
covenant contained in any Material Contract) or (C) any law, statute,
rule, or regulation or any order, decree or judgment known to such
counsel to be applicable to the Company or any Subsidiary, of any court
or governmental or regulatory agency or body or arbitrator known to
such counsel to have jurisdiction over the Company or any of the
Subsidiaries or any of their respective properties or assets;
(7) The Purchase Agreement has been duly authorized, executed
and delivered by the Company;
(8) The statements in the Offering Memorandum under the
headings "Offering Memorandum Summary - The Offering," "Description of
Capital Stock," "Description of the 1997 Notes," "Description of the
March 1998 Notes," "Description of the Notes," "Exchange Offer;
Registration Rights" and "Certain Transactions," insofar as such
statements purport to summarize certain provisions of the Securities,
the Exchange Notes, the Indenture, the Registration Agreement, the
Company's authorized and outstanding capital stock, the Company's
13-1/2% Senior Notes due 2004 and the Company's 10-3/8% Senior Notes
Due 2005, provide a fair summary of such provisions of such agreements
and instruments;
(9) The statements in the Offering Memorandum under the
caption "Certain Federal Income Tax Considerations" fairly and
accurately summarize the material United States federal tax
consequences of owning the Securities;
(10) Each of the Indenture and the Registration Agreement has
been duly authorized, executed and delivered by the Company and
(assuming due authorization and execution by each party thereto other
than the Company) constitutes a valid and binding agreement of the
Company, enforceable against the Company in accordance with its terms,
except as such enforceability may be limited by (a) with respect to the
Indenture and the Registration Agreement, the Enforceability
Limitations, including the waiver contained in Section 5.15 of the
Indenture, and (b) with
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<PAGE> 22
respect to the Registration Agreement, as to rights of indemnification
and contribution, principles of public policy or federal or state
securities laws relating thereto;
(11) Each of the Securities, when executed and authenticated
in accordance with the provisions of the Indenture and delivered and
paid for in accordance with the terms of this Agreement, and the
Exchange Notes and the Private Exchange Notes, if any, when executed,
authenticated and delivered in exchange for the Securities in
accordance with the terms of the Registration Agreement, will be
entitled to the benefits of the Indenture and will be valid and binding
obligations of the Company, enforceable in accordance with its terms
except as the enforceability thereof may be limited by the
Enforceability Limitations;
(12) To the knowledge of such counsel, other than as described
in the Final Memorandum, no legal, regulatory or governmental
proceedings are pending to which the Company is a party or to which the
property or assets of the Company are subject which, individually or in
the aggregate, could reasonably be expected to have a Material Adverse
Effect or which, individually or in the aggregate, could have a
material adverse effect on the power or ability of the Company to
perform its obligations under the Transaction Documents or to
consummate the transactions contemplated thereby or by the Offering
Memorandum and to the knowledge of such counsel, no such material
proceedings have been threatened against the Company or with respect to
any of its respective assets or properties;
(13) Assuming (a) the accuracy of, and compliance with, the
representations, warranties and covenants of the Company in subsections
1(c) and 1(d) of the Purchase Agreement, (b) the accuracy of, and
compliance with, the representations, warranties and covenants of the
Initial Purchasers in Section 4 of the Purchase Agreement, (c) the
compliance by the Initial Purchasers with the offering and transfer
procedures and restrictions described in the Final Memorandum and (d)
receipt by the purchasers to whom the Initial Purchasers initially
resell the Securities of a copy of the Final Memorandum prior to such
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<PAGE> 23
sale, it is not necessary in connection with the offer, sale and
delivery of the Securities or in connection with the initial resale of
such Securities in the manner contemplated by the Purchase Agreement
and the Offering Memorandum to register the Securities under the
Securities Act or to qualify the Indenture under the Trust Indenture
Act, it being understood that no opinion is expressed as to any
subsequent resale of any Securities;
(14) When the Securities are issued and delivered pursuant to
this Agreement, such Securities will not be of the same class (within
the meaning of Rule 144A) as securities of the Company which are listed
on a national securities exchange registered under Section 6 of the
Exchange Act or quoted in a U.S. automated inter-dealer quotation
system; and
(15) Neither the consummation of the transactions contemplated
hereby nor the sale, issuance, execution or delivery of the Securities
will violate Regulation T, U or X of the Board of Governors of the
Federal Reserve System.
In addition, such counsel shall state that such counsel has
participated in conferences with representatives of the Initial Purchasers,
officers and other representatives of the Company and representatives of the
independent certified accountants of the Company, at which conferences the
contents of the Preliminary Memorandum and Final Memorandum and the business
and affairs of the Company and the Subsidiaries were discussed, and although
such counsel has not independently verified and does not pass upon or assume
any responsibility for the accuracy, completeness or fairness of the
statements contained in the Final Memorandum (except and only to the extent
set forth in subclauses (8) and (9) above), on the basis of the foregoing
(relying as to materiality to the extent such counsel deemed appropriate
upon the representations and opinions of officers and other representatives
of the Company), no facts have come to the attention of such counsel which
lead such counsel to believe that the Final Memorandum at the date thereof
or as of the Closing Date, contained or contains an untrue statement of a
material fact or omitted or omits to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they
were made, not misleading (it being understood that such counsel need not
express any comment with
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<PAGE> 24
respect to the financial statements, including the notes thereto and
supporting schedules, or any other financial or statistical data set forth
or referred to in the Final Memorandum).
In rendering such opinions, such counsel (A) need not express any
opinion with regard to the application of laws of any jurisdiction other
than the Federal law of the United States, the General Corporation Law of
the State of Delaware and the laws of the State of New York and (B) may
rely, as to matters of fact, to the extent they deem proper on
representations or certificates of responsible officers of the Company and
certificates of public officials.
References to the Final Memorandum in this subsection (a)(i) include
any supplements thereto at or prior to the Closing Date.
(ii) At the Closing Date, the Initial Purchasers shall have
received the opinion of Carla Hamre Donelson, Esq., General Counsel to the
Company, dated as of the Closing Date, in the form set forth below and
otherwise reasonably satisfactory to the Initial Purchasers and Counsel for
the Initial Purchasers, to the effect that:
(1) To the knowledge of such counsel, other than as described
in the Final Memorandum, no legal, regulatory or governmental
proceedings are pending to which any of the Subsidiaries is a party or
to which the property or assets of the Subsidiaries are subject which,
individually or in the aggregate, could reasonably be expected to have
a Material Adverse Effect or which, individually or in the aggregate,
could have a material adverse effect on the power or ability of the
Company to perform its obligations under the Transaction Documents or
to consummate the transactions contemplated thereby or by the Final
Memorandum and to the knowledge of such counsel, no such material
proceedings have been threatened against the Subsidiaries or with
respect to any of their respective assets or properties;
(2) To the best knowledge of such counsel, the Company is duly
qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of
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<PAGE> 25
property or the conduct of business, except where the failure so to
qualify or to be in good standing would not result in a Material
Adverse Effect;
(3) To the best knowledge of such counsel, each of the
Subsidiaries is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the
failure so to qualify or to be in good standing individually or in the
aggregate would not result in a Material Adverse Effect; and
(2) None of the Company or the Subsidiaries is in violation of
its respective Organizational Documents; to the knowledge of such
counsel, no default by the Company or any of the Subsidiaries exists in
the due performance or observance of any material obligation,
agreement, covenant or condition contained in any Material Contract
which could reasonably be expected to have a Material Adverse Effect;
and to the knowledge of such counsel, none of the Company nor the
Subsidiaries is in breach or violation of any law, statute, rule or
regulation, or any judgment, decree or order of any governmental or
regulatory agency or other body having jurisdiction over the Company or
any of the Subsidiaries or any of their respective properties or assets
such that any such breach or violation could reasonably be expected to
have a Material Adverse Effect.
In addition, such counsel shall state that such counsel has
participated in conferences with representatives of the Initial Purchasers,
officers and other representatives of the Company and representatives of the
independent certified accountants of the Company, at which conferences the
contents of the Preliminary Memorandum and Final Memorandum and the business
and affairs of the Company and the Subsidiaries were discussed, and although
such counsel has not independently verified and does not pass upon or assume
any responsibility for the accuracy, completeness or fairness of the
statements contained in the Final Memorandum, on the basis of the foregoing
(relying as to materiality to the extent such counsel deemed appropriate
upon the representations and opinions of officers and other representatives
of the Company), no facts have come to the attention of such counsel which
lead such counsel to
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<PAGE> 26
believe that the Final Memorandum at the date thereof or as of the
Closing Date, contained or contains an untrue statement of a material fact
or omitted or omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading (it being understood that such counsel need not express
any comment with respect to the financial statements, including the notes
thereto and supporting schedules, or any other financial or statistical data
set forth or referred to in the Final Memorandum).
In rendering such opinions, such counsel (A) need not express any
opinion with regard to the application of laws of any jurisdiction other
than the Federal law of the United States, the General Corporation Law of
the State of Delaware and the laws of the State of Colorado and (B) may
rely, as to matters of fact, to the extent she deems proper on
representations or certificates of responsible officers of the Company and
certificates of public officials.
References to the Final Memorandum in this subsection (a)(ii) include
any supplements thereto at or prior to the Closing Date.
(b) The Initial Purchasers shall have received the opinion, dated as of
the Closing Date, of Cahill Gordon & Reindel, Counsel for the Initial
Purchasers, with respect to certain matters set forth in clauses (8) (with
respect to "Description of the Notes" and "Exchange Offer; Registration
Rights,") (10) (assuming the due authorization, execution and delivery of
each of the Indenture and Registration Agreement by each party thereto),
(11) and (13) of subsection (a)(i) of this Section 6.
In rendering such opinions, such counsel (A) need not express any
opinion with regard to the application of laws of any jurisdiction other
than the Federal laws of the United States, the General Corporation Law of
the State of Delaware and the laws of the State of New York and (B) may
rely, as to matters of fact, to the extent they deem proper on
representations or certificates of responsible officers of the Company and
certificates of public officials.
In addition, such counsel shall state that such counsel has
participated in conferences with representative of the Initial Purchasers,
officers and other representatives
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<PAGE> 27
of the Company and representatives of the independent accountants for
the Company at which conferences the contents of the Preliminary Memorandum
and Final Memorandum and related matters were discussed, and although such
counsel has not verified and does not pass upon and does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Final Memorandum, on the basis of the foregoing (relying as
to materiality to the extent such counsel deemed appropriate upon the
representations and opinions of officers and other representatives of the
Company), no facts have come to the attention of such counsel which lead
such counsel to believe that the Final Memorandum, at the date thereof or as
of the Closing Date, contained or contains an untrue statement of a material
fact or omitted to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no comment
with respect to the financial statements, including the notes thereto, or
any other financial or statistical data set forth or referred to in the
Final Memorandum).
(c) The following conditions contained in clauses (i) and (ii) of
this subsection (c) shall have been satisfied at and as of the Closing
Date, and the Company shall have furnished to the Initial Purchasers a
certificate of the Company, signed by the Chairman of the Board or the
President and the principal financial or accounting officer of the Company,
dated the Closing Date, to the effect that the signers of such certificate
have carefully examined the Final Memorandum, any amendment or supplement
to the Final Memorandum and this Agreement and that:
(i) the representations and warranties of the Company in this
Agreement are true and correct in all material respects on and as of
the Closing Date with the same effect as if made on the Closing Date,
and the Company has complied with all the agreements and satisfied all
the conditions on its part to be performed or satisfied hereunder in
all material respects at or prior to the Closing Date; and
(ii) since the date of the most recent financial statements
included in the Final Memorandum (exclusive of any amendment or
supplement thereto), there has been no Material Adverse Change, whether
or not in the ordinary course of business. As used in this
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<PAGE> 28
subparagraph, the term "Final Memorandum" means the Final Memorandum in
the form first used to confirm sales of the Securities.
(d) At the Execution Time and at the Closing Date, KPMG Peat Marwick
LLP shall have furnished to the Initial Purchasers a letter or letters,
dated respectively as of the Execution Time and as of the Closing Date, in
form and substance satisfactory to the Initial Purchasers, confirming that
they are independent accountants within the meaning of the Securities Act
and the Exchange Act and the applicable published rules and regulations
thereunder and Rule 101 of the Code of Professional Conduct of the American
Institute of Certified Public Accountants (the "AICPA") and containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to Initial Purchasers with respect to financial statements
and certain financial information contained in the Final Memorandum, in form
and substance satisfactory to Counsel for the Initial Purchasers.
All references in this Section 6(d) to the Final Memorandum shall be
deemed to include any amendment or supplement thereto at the date of the
letter.
(e) At the Execution Time and at the Closing Date, each of
PriceWaterhouseCoopers LLP and De Meo, Young, McGrath & Company, P.A. shall
have furnished to the Initial Purchasers a letter or letters, dated
respectively as of the Execution Time and as of the Closing Date, in form
and substance satisfactory to the Initial Purchasers, confirming that they
are independent accountants within the meaning of the Securities Act and the
Exchange Act and the applicable published rules and regulations thereunder
and Rule 101 of the Code of Professional Conduct of the American Institute
of Certified Public Accountants (the "AICPA") and containing statements and
information of the type ordinarily included in accountants' "comfort
letters" to Initial Purchasers with respect to financial statements and
certain financial information contained in the Final Memorandum, in form and
substance satisfactory to Counsel for the Initial Purchasers.
All references in this Section 6(e) to the Final Memorandum shall be
deemed to include any amendment or supplement thereto at the date of the
letter.
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<PAGE> 29
(f) Subsequent to the Execution Time or, if earlier, the dates as of
which information is given in the Final Memorandum, there shall not have
been (i) any change or decrease specified in the letter or letters referred
to in paragraph (d) of this Section 6 or (ii) any change, or any development
involving a prospective change, in or affecting the business or properties
of the Company and its subsidiaries the effect of which, in any case
referred to in clause (i) or (ii) above, is, in the judgment of the Initial
Purchasers, so material and adverse as to make it impractical or inadvisable
to market the Securities as contemplated by the Final Memorandum.
(g) On or prior to the Closing Date, the Company shall have furnished
to the Initial Purchasers such further information, certificates and
documents as the Initial Purchasers may reasonably request.
(h) The Company and the Trustee shall have entered into the Indenture.
(i) The Company and the Initial Purchasers shall have entered into the
Registration Agreement.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as provided in this Agreement, or if any of the opinions
and certificates mentioned above or elsewhere in this Agreement shall not be in
all material respects reasonably satisfactory in form and substance to the
Initial Purchasers and Counsel for the Initial Purchasers, this Agreement and
all obligations of the Initial Purchasers hereunder may be canceled at, or at
any time prior to, the Closing Date by the Initial Purchasers. Notice of such
cancellation shall be given to the Company in writing or by telephone or
telegraph confirmed in writing.
The documents required to be delivered by this Section 6 will be
delivered at the office of Counsel for the Initial Purchasers, at 80 Pine
Street, New York, New York, on the Closing Date.
7. Reimbursement of Expenses. (a) Whether or not any sale of the
Securities is consummated, the Company agrees to pay and bear all costs and
expenses incident to the performance of all of its obligations under this
Agreement, including (i) the preparation and printing of the Preliminary
Memorandum, the Final Memorandum and any amendments or supplements thereto and
the cost of furnishing copies thereof to the Initial
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<PAGE> 30
Purchasers, (ii) the preparation, issuance, printing and distribution of the
Securities, the Exchange Notes, the Private Exchange Notes, if any, and any
survey of state securities or "blue sky" laws or legal investment memoranda,
(iii) the delivery to the Initial Purchasers of the Securities, the Exchange
Notes or the Private Exchange Notes, (iv) the fees and disbursements of the
Company's counsel and accountants, (v) the qualification of the Securities under
the applicable state securities or "blue sky" laws in accordance with the
provisions of Section 5(i) hereof and any filing for review of the offering with
the NASD, if required, including filing fees and reasonable fees and
disbursements of counsel to the Initial Purchasers in connection therewith and
in connection with the preparation of any survey of state securities or "blue
sky" laws or legal investment memoranda, (vi) any fees charged by rating
agencies for rating the Securities, the Exchange Notes and the Private Exchange
Notes, if any, (vii) the fees and expenses of the Trustee, including the fees
and disbursements of counsel for the Trustee, (viii) all expenses (including
travel expenses) of the Company and the Initial Purchasers in connection with
any meetings with prospective investors in the Securities and (ix) all expenses
and listing fees in connection with the application for designation of the
Securities as PORTAL securities and to permit the Securities, the Exchange Notes
and the Private Exchange Notes, as applicable, to be eligible to clearance
through The Depository Trust Company.
(b) If the sale of the Securities provided for herein is not
consummated because any condition to the obligations of the Initial Purchasers
set forth in Section 6 hereof is not satisfied, because of any termination
pursuant to Section 10 hereof or because of any refusal, inability or failure on
the part of the Company to perform any agreement herein or comply with any
provision hereof other than by reason of a default by any of the Initial
Purchasers in payment for the Securities on the Closing Date, the Company will
reimburse the Initial Purchasers severally upon demand for all reasonable
out-of-pocket expenses (including reasonable fees and disbursements of counsel)
that shall have been incurred by them in connection with the proposed purchase
and sale of the Securities.
8. Indemnification and Contribution. (a) The Company agrees to
indemnify and hold harmless each Initial Purchaser, the directors, officers,
employees and agents of each Initial Purchaser and each person who controls any
Initial Purchaser within the meaning of either the Securities Act or the
Exchange Act against any and all losses, claims, damages or liabilities, joint
or several, to which they or any of them may
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<PAGE> 31
become subject under the Securities Act, the Exchange Act or other Federal or
state statutory law or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the Preliminary Memorandum or the Final Memorandum or
in any amendment thereof or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, and agree to
reimburse each such indemnified party, as incurred, for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made in
the Preliminary Memorandum or the Final Memorandum, or in any amendment thereof
or supplement thereto, in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Initial Purchasers
specifically for inclusion therein. This indemnity agreement will be in addition
to any liability which the Company may otherwise have.
The foregoing indemnity with respect to any untrue statement contained
in or any omission from the Preliminary Memorandum shall not inure to the
benefit of any Initial Purchaser (or any affiliate or person who controls such
Initial Purchaser within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) from whom the person asserting such loss,
liability, claim, damage or expense purchased any of the Securities that are the
subject thereof if such person was not sent or given a copy of the Final
Memorandum (or any amendment or supplement thereto), if the Company shall have
previously furnished copies thereof to the Initial Purchasers in accordance with
this Agreement, at or prior to the written confirmation of the sale of such
Securities to such person and the untrue statement contained in or the omission
from the Preliminary Memorandum was corrected in the Final Memorandum (or any
amendment or supplement thereto).
(b) Each Initial Purchaser severally and not jointly agrees to
indemnify and hold harmless the Company, its directors, officers and each person
who controls the Company within the meaning of either the Securities Act or the
Exchange Act to the same extent as the foregoing indemnity from the Company to
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<PAGE> 32
each Initial Purchaser, but only with reference to written information relating
to such Initial Purchaser furnished to the Company by or on behalf of such
Initial Purchaser specifically for inclusion in the Preliminary Memorandum or
the Final Memorandum (or in any amendment or supplement thereto). This indemnity
agreement will be in addition to any liability which any Initial Purchaser may
otherwise have. The Company acknowledges that the statements set forth in the
last paragraph of the cover page and in the table, fifth paragraph and tenth
paragraph under the heading "Plan of Distribution" in the Preliminary Memorandum
and the Final Memorandum constitute the only information furnished in writing by
or on behalf of the Initial Purchasers for inclusion in the Preliminary
Memorandum or the Final Memorandum (or in any amendment or supplement thereto).
(c) Promptly after receipt by an indemnified party under this Section 8
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement thereof;
but the failure so to notify the indemnifying party (i) will not relieve it from
liability under paragraph (a) or (b) above unless and to the extent it did not
otherwise learn of such action and such failure results in the forfeiture by the
indemnifying party of substantial rights and defenses and (ii) will not, in any
event, relieve the indemnifying party from any obligations to any indemnified
party other than the indemnification obligation provided in paragraph (a) or (b)
above. The indemnifying party shall be entitled to appoint counsel of the
indemnifying party's choice at the indemnifying party's expense to represent the
indemnified party in any action for which indemnification is sought (in which
case the indemnifying party shall not thereafter be responsible for the fees and
expenses of any separate counsel retained by the indemnified party or parties
except as set forth below); provided, however, that such counsel shall be
satisfactory to the indemnified party. Notwithstanding the indemnifying party's
election to appoint counsel to represent the indemnified party in an action, the
indemnified party shall have the right to employ separate counsel (including
local counsel), and the indemnifying party shall bear the reasonable fees, costs
and expenses of such separate counsel if (i) the use of counsel chosen by the
indemnifying party to represent the indemnified party would present such counsel
with a conflict of interest, (ii) the actual or potential defendants in, or
targets of, any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably
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<PAGE> 33
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, (iii) the indemnifying party shall not have employed
counsel satisfactory to the indemnified party to represent the indemnified party
within a reasonable time after notice of the institution of such action or (iv)
the indemnifying party shall authorize the indemnified party to employ separate
counsel at the expense of the indemnifying party. An indemnifying party will
not, without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any pending
or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim or action)
unless such settlement, compromise or consent includes an unconditional release
of each indemnified party from all liability arising out of such claim, action,
suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a) or (b) of
this Section 8 is unavailable to or insufficient to hold harmless an indemnified
party for any reason, the Company on the one hand and the Initial Purchasers on
the other hand agree to contribute to the aggregate losses, claims, damages and
liabilities (including legal or other expenses reasonably incurred in connection
with investigating or defending same) (collectively, "Losses") to which the
Company or one or more of the Initial Purchasers, as applicable, may be subject
in such proportion as is appropriate to reflect the relative benefits received
by the Company or the Initial Purchasers from the offering of the Securities;
provided, however, that in no case shall any Initial Purchaser be responsible
for any amount in excess of the purchase discount or commission applicable to
the Securities purchased by such Initial Purchaser hereunder. If the allocation
provided by the immediately preceding sentence is unavailable for any reason,
the Company and the Initial Purchasers shall contribute in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company or the Initial Purchasers, as applicable, in connection
with the statements or omissions which resulted in such Losses as well as any
other relevant equitable considerations. Benefits received by the Company shall
be deemed to be equal to the total net proceeds from the offering received by
each of them, respectively, (before deducting expenses), and benefits received
by the Initial Purchasers shall be deemed to be equal to the total purchase
discounts and commissions received by the Initial Purchasers from the Company in
connection with the purchase of the Securities
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<PAGE> 34
hereunder. Relative fault shall be determined by reference to whether any
alleged untrue statement or omission relates to information provided by the
Company or the Initial Purchasers. The Company and the Initial Purchasers agree
that it would not be just and equitable if contribution were determined by pro
rata allocation or any other method of allocation which does not take account of
the equitable considerations referred to above. Notwithstanding the provisions
of this paragraph (d), no person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 8 each person who controls an
Initial Purchaser within the meaning of either the Securities Act or the
Exchange Act and each director, officer, employee and agent of an Initial
Purchaser shall have the same rights to contribution as such Initial Purchaser,
and each person who controls the Company within the meaning of either the
Securities Act or the Exchange Act and each officer and director of the Company
shall have the same rights to contribution as the Company subject in each case
to the applicable terms and conditions of this paragraph (d).
9. Default by an Initial Purchaser. If any one or more Initial
Purchasers shall fail to purchase and pay for any of the Securities agreed to be
purchased by such Initial Purchaser hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Initial Purchasers shall be obligated severally to take
up and pay for (in the respective proportions which the principal amount of
Securities set forth opposite their names in Schedule I hereto bears to the
aggregate principal amount of securities set forth opposite the names of all the
remaining Initial Purchasers) the Securities which the defaulting Initial
Purchaser or Initial Purchasers agreed but failed to purchase; provided,
however, that in the event that the aggregate principal amount of Securities
which the defaulting Initial Purchaser or Initial Purchasers agreed but failed
to purchase shall exceed 10% of the aggregate principal amount of Securities set
forth in Schedule I hereto, the remaining Initial Purchasers shall have the
right to purchase all, but shall not be under any obligation to purchase any, of
the Securities, and if such non-defaulting Initial Purchasers do not purchase
all the Securities, this Agreement will terminate without liability to any
non-defaulting Initial Purchaser or Company. In the event of a default by any
Initial Purchaser as set forth in this Section 9 the Closing Date shall be
postponed for such period, not exceeding seven days, as the Initial Purchasers
shall determine in order that the required changes in
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<PAGE> 35
the Final Memorandum or in any other documents or arrangements may be effected.
Nothing contained in this Agreement shall relieve any defaulting Initial
Purchaser of its liability, if any, to the Company or any non-defaulting Initial
Purchaser for damages occasioned by its default hereunder.
10. Termination. This Agreement shall be subject to termination in the
absolute discretion of the Initial Purchasers, by notice given to the Company
prior to delivery of and payment for the Securities, if prior to such time (i)
trading in any of the Company's securities shall have been suspended by the
Commission or trading in securities generally on the New York Stock Exchange or
the NASDAQ National Market shall have been suspended or limited or minimum
prices shall have been established on either of such exchanges, (ii) a banking
moratorium shall have been declared either by Federal or New York State
authorities or (iii) there shall have occurred any outbreak or escalation of
hostilities, declaration by the United States of a national emergency or war or
other calamity or crisis the effect of which on financial markets is such as to
make it, in the judgment of the Initial Purchasers, impracticable or inadvisable
to proceed with the offering or delivery of the Securities as contemplated by
the Final Memorandum.
11. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers, and of the Initial Purchasers set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation made by or on behalf of the Initial Purchasers or the Company
or any of the officers, directors or controlling persons referred to in Section
8 hereof, and will survive delivery of and payment for the Securities. The
provisions of Sections 7 and 8 hereof shall survive the termination or
cancellation of this Agreement.
12. Notices. All communications hereunder will be in writing and
effective only on receipt, and, if sent to the Initial Purchasers, will be
mailed, delivered or telegraphed and confirmed to them, care of Salomon Smith
Barney Inc., at Seven World Trade Center, New York, New York 10048; if sent to
the Company, will be mailed, delivered or telegraphed and confirmed to it at
Verio Inc., 8005 South Chester Street, Suite 200, Englewood, Colorado 80112,
Attention: Carla Hamre Donelson, Esq.; with a copy to Morrison & Foerster LLP,
425 Market Street, San Francisco, CA 94105, Attention: Gavin Grover, Esq.
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<PAGE> 36
13. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 8 hereof, and,
except as expressly set forth in Section 5(f) hereof, no other person will have
any right or obligation hereunder.
14. Applicable Law. This Agreement will be governed by and construed in
accordance with the laws of the State of New York.
15. Business Day. For purposes of this Agreement, "business day" means
each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which
banking institutions in the City of New York, New York are authorized or
obligated by law, executive order or regulation to close.
16. Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original, but all such
counterparts will together constitute one and the same instrument. [Signature
Page Follows]
[Signature Page Follows]
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<PAGE> 37
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this Agreement and your acceptance shall represent a binding agreement between
the Company and the Initial Purchasers.
Very truly yours,
VERIO INC.
By: /s/ CARLA HAMRE DONELSON
--------------------------------------
Name: Carla Hamre Donelson
Title: Vice President, General
Counsel and Secretary
The foregoing Agreement is
hereby confirmed and accepted
as of the date first above
written.
Salomon Smith Barney Inc.
Credit Suisse First Boston Corporation
Donaldson, Lufkin & Jenrette Securities
Corporation
First Union Capital Markets,
a division of Wheat First Securities, Inc.
By: Salomon Smith Barney Inc.
By: /s/ SAMIR HUSSEIN
-------------------------
Name: Samir Hussein
Title: Attorney-in-fact
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<PAGE> 38
SCHEDULE I
<TABLE>
<CAPTION>
Principal Amount
of Notes
Initial Purchasers To Be Purchased
- ------------------ ---------------
<S> <C>
Salomon Smith Barney Inc..................................... $222,400,000
Credit Suisse First Boston Corporation....................... 80,000,000
Donaldson, Lufkin & Jenrette Securities Corporation.......... 80,000,000
First Union Capital Markets, a division of Wheat First
Securities, Inc......................................... 17,600,000
------------
Total $400,000,000
============
</TABLE>
<PAGE> 39
SCHEDULE II
Subsidiaries
<TABLE>
<CAPTION>
Percentage
Organized Ownership
Name of Entity Under Laws of of Company
- -------------- ------------- ----------
<S> <C> <C>
Verio-Northern California, Inc. Colorado 100%
Verio-Northeast, Inc. Colorado 100%
Verio-Southern California, Inc. Delaware 100%
Verio-Texas, Inc. Delaware 100%
NTX, Inc. d/b/a TABNet California 100%
</TABLE>
<PAGE> 40
SCHEDULE III
Material Contracts
1. Indenture, dated as of June 24, 1997, by and among Verio Inc. and
First Trust National Association (as trustee).
2. Warrant Agreement, dated as of June 24, 1997, by and between First
Trust National Association and Verio Inc.
3. Common Stock Registration Rights Agreement, dated as of June 17,
1997, by and among Verio Inc., Brooks Fiber Properties, Inc., Norwest Equity
Partners V, Providence Equity Partners, Centennial Fund V, L.P., Centennial Fund
IV, L.P. (as investors) and the Initial Purchasers.
4. Registration Rights Agreement, dated as of June 17, 1997, by and
among Verio Inc. and the Initial Purchasers.
5. Lease Agreement, dated as of June 20, 1997, by and between Verio
Inc. and Highland Park Ventures, LLC, with respect to the property in Englewood,
Colorado, including the First Amendment to Lease Agreement, dated as of December
16, 1997.
6. Lease Agreement, dated as of May 24, 1997, by and between Verio Inc.
and IM Joint Venture, with respect to the property in Dallas, Texas, as amended.
7. Form of Indemnification Agreement between Verio Inc. and each of its
officers and directors.
8. Amended and Restated Stockholders Agreement, dated as of May 20,
1997, by and between Verio Inc., the Series A Purchasers, the Series B
Purchasers, the Series C Purchasers and members of the management of Verio Inc.
9. The 1996 Stock Option Plan of Verio Inc.
10. The 1997 California Stock Option Plan of Verio Inc..
11. The 1998 Employee Stock Purchase Plan of Verio Inc..
<PAGE> 41
12. The 1998 Stock Incentive Plan of Verio Inc..
13. Form of Compensation Protection Agreement between Verio Inc. and
each of its officers.
14. Master Service Agreement, dated as of August 23, 1996, by and
between Verio Inc. and MFS Datanet, Inc.
15. Agreement for Terminal Facility Collocation Space, dated August 8,
1996, by and between MFS Telecom, Inc. and Verio Inc.
16. Bilateral Peering Agreement, dated May 19, 1997, between AT&T Corp.
and Verio Inc.
17. Master Lease Agreement, dated November 17, 1997, by and between
Insight Investments Corp. and Verio Inc.
18. Master Lease Agreement, dated October 27, 1997, by and between
Cisco Capital Systems Corporation and Verio Inc.
19. Lateral Exchange Networks Interconnection Agreement, dated February
3, 1997, by and between Sprint Communications Company L.P. and Verio Inc.
20. Cover Agreement, dated September 30, 1996, by and between Verio
Inc. and Sprint.
21. Amendment One to Cover Agreement, dated November 7, 1996, by and
between Verio Inc. and Sprint.
22. Amendment Two to Cover Agreement, dated March 2, 1998, by and
between Verio Inc. and Sprint.
23. Indenture, dated as of March 25, 1998, by and among Verio Inc. and
First Trust National Association (as trustee).
24. Registration Rights Agreement, dated as of March 25, 1998, by and
among Verio Inc. and the Initial March 1998 Notes Purchasers.
25. Capacity and Services Agreement, dated as of March 31, 1998, by and
among Verio Inc. and Qwest Communications Corporation.
<PAGE> 42
26. Credit Agreement, dated as of April 6, 1998, by and among Verio
Inc., The Chase Manhattan Bank (as administrative agent) and Fleet National Bank
(as documentation agent).
27. Stock Purchase and Master Strategic Relationship Agreement, dated
as of April 7, 1998, by and among Verio Inc. and Nippon Telegraph and Telephone
Corporation ("NTT"), a Japanese corporation.
28. Investment Agreement, dated as of April 7, 1998, by and among Verio
Inc. and NTT.
29. Outside Service Provider Agreement, dated as of April 7, 1998, by
and among Verio Inc. and NTT America, Inc.
30. Master Services Agreement, dated as of June 13, 1997, by and
between Verio Inc. and MCI Telecommunications Corporation ("MCI").
31. MCI Domestic (US) Public Interconnection Agreement dated as of June
12, 1997, by and between Verio Inc. and MCI, as amended.
32. Verio Inc.'s 1998 Non-Employee Director Stock Incentive Plan.
33. Interconnection Agreement, effective as of April 1, 1998 by and
between Verio Inc. and UUNET Technologies, Inc.
34. Strategic Partner Services Agreement, dated as of ________ , 1998,
by and among Verio Inc. and NTT.
<PAGE> 43
EXHIBIT A
Selling Restrictions for Offers and
Sales Outside the United States
(1) (a) The Securities have not been and will not be registered under
the Securities Act and may not be offered or sold within the United States or
to, or for the account or benefit of, U.S. persons except in accordance with
Regulation S under the Securities Act or pursuant to an exemption from the
registration requirements of the Securities Act. Each Initial Purchaser
represents and agrees that, except as otherwise permitted by Section 4(a)(i) or
(ii) of the Agreement to which this is an exhibit, it has offered and sold the
Securities, and will offer and sell the Securities, (i) as part of their
distribution at any time and (ii) otherwise until 40 days after the later of the
commencement of the offering and the Closing Date, only in accordance with Rule
903 of Regulation S under the Securities Act. Accordingly, each Initial
Purchaser represents and agrees that neither it, nor any of its affiliates nor
any person acting on its or their behalf has engaged or will engage in any
directed selling efforts with respect to the Securities, and that it and they
have complied and will comply with the offering restrictions requirement of
Regulation S. Each Initial Purchaser agrees that, at or prior to the
confirmation of sale of Securities (other than a sale of Securities pursuant to
Section 4(a)(i) or (ii) of the Agreement to which this is an exhibit), it shall
have sent to each distributor, dealer or person receiving a selling concession,
fee or other remuneration that purchases Securities from it during the
restricted period a confirmation or notice to substantially the following
effect:
"The Securities covered hereby have not been registered under
the U.S. Securities Act of 1933 (the "Securities Act") and may not be
offered or sold within the United States or to, or for the account or
benefit of, U.S. persons (i) as part of their distribution at any time
or (ii) otherwise until 40 days after the later of the commencement of
the offering and [specify closing date of the offering], except in
either case in accordance with Regulation S or Rule 144A under the
Securities Act. Terms used above have the meanings given to them by
Regulation S."
<PAGE> 44
(b) Each Initial Purchaser also represents and agrees that it has not
entered and will not enter into any contractual arrangement with any distributor
with respect to the distribution of the Securities, except with its affiliates
or with the prior written consent of the Company.
(c) Terms used in this section have the meanings given to them by
Regulation S.
(2) Each Initial Purchaser represents and agrees that (i) it has not
offered or sold and will not offer or sell, in the United Kingdom, by means of
any document, any Securities other than to persons whose ordinary business it is
to buy or sell shares or debentures, whether as principal or as agent (except in
circumstances which do not constitute an offer to the public within the meaning
of the Companies Act 1985 of Great Britain), (ii) it has complied and will
comply with all applicable provisions of the Financial Services Act 1986 of the
United Kingdom with respect to anything done by it in relation to the Securities
in, from or otherwise involving the United Kingdom, and (iii) 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 issue of the Securities to a person who is
of a kind described in Article 9(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1988 or is a person to whom the
document may otherwise lawfully be issued or passed on.
-2-
<PAGE> 1
EXHIBIT 10.34
================================================================================
VERIO INC., as Issuer
and
U.S. BANK TRUST NATIONAL ASSOCIATION, as Trustee
---------------------
INDENTURE
Dated as of November 25, 1998
--------------------
$400,000,000
11-1/4% Senior Notes Due 2008, Series A
11-1/4% Senior Notes Due 2008, Series B
================================================================================
<PAGE> 2
Reconciliation and tie between Trust Indenture Act of 1939,
as amended, and Indenture, dated as of November 25, 1998
<TABLE>
<CAPTION>
Trust Indenture Indenture
Act Section Section
- --------------------- ---------------------
<S> <C> <C>
Section 310 (a)(1)......................................... 6.05, 6.09
(a)(2)......................................... 6.05, 6.09
(a)(3)......................................... 6.05
(a)(4)......................................... 6.05
(b)............................................ 6.05, 6.08, 6.10
Section 311 (a)............................................ 6.07
(b)............................................ 6.07
(c)............................................ Not Applicable
Section 312 (a)............................................ 3.05, 7.01
(b)............................................ 7.02
(c)............................................ 7.02
Section 313 (a)............................................ 7.03
(b)............................................ 7.03
(c)............................................ 7.03
(d)............................................ 7.03
Section 314 (a)............................................ 7.04, 10.09
(b)............................................ Not Applicable
(c)(1)......................................... 1.04, 4.04, 12.01(c)
(c)(2)......................................... 1.04, 4.04, 12.01(c)
(c)(3).........................................
(d)............................................ Not Applicable
(e)............................................ 1.04
Section 315 (a)............................................ 6.01(a)
(b)............................................ 6.02
(c)............................................ 6.01(b)
(d)............................................ 6.01(c)
(e)............................................ 5.14
Section 316 (a) (last sentence) ........................... 3.14
(a)(1)(A)...................................... 5.12
(a)(1)(B)...................................... 5.13
(a)(2)......................................... Not Applicable
(b)............................................ 5.08
Section 317 (a)(1)......................................... 5.03
(a)(2)......................................... 5.04
(b)............................................ 10.03
Section 318 (a)............................................ 1.08
</TABLE>
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PARTIES..........................................................................................1
RECITALS.........................................................................................1
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.01. Definitions........................................................................1
Section 1.02. Other Definitions.................................................................31
Section 1.03. Rules of Construction.............................................................32
Section 1.04. Form of Documents Delivered
to Trustee.....................................................................33
Section 1.05. Acts of Holders...................................................................33
Section 1.06. Notices, etc., to the Trustee and
the Company....................................................................34
Section 1.07. Notice to Holders; Waiver.........................................................35
Section 1.08. Conflict with Trust Indenture Act.................................................35
Section 1.09. Effect of Headings and Table of
Contents.......................................................................36
Section 1.10. Successors and Assigns............................................................36
Section 1.11. Separability Clause...............................................................36
Section 1.12. Benefits of Indenture.............................................................36
Section 1.13. GOVERNING LAW.....................................................................36
Section 1.14. No Recourse Against Others........................................................36
Section 1.15. Independence of Covenants.........................................................37
Section 1.16. Exhibits..........................................................................37
Section 1.17. Counterparts......................................................................37
Section 1.18. Duplicate Originals...............................................................37
ARTICLE TWO
NOTE FORMS
Section 2.01. Form and Dating...................................................................37
ARTICLE THREE
THE NOTES
Section 3.01. Title and Terms...................................................................38
Section 3.02. Registrar and Paying Agent........................................................39
Section 3.03. Execution and Authentication......................................................39
Section 3.04. Temporary Notes...................................................................41
</TABLE>
-i-
<PAGE> 4
<TABLE>
<S> <C> <C> <C>
Section 3.05. Transfer and Exchange.............................................................42
Section 3.06. Mutilated, Destroyed, Lost and Stolen Notes.......................................43
Section 3.07. Payment of Interest; Interest Rights Preserved....................................44
Section 3.08. Persons Deemed Owners.............................................................45
Section 3.09. Cancellation......................................................................46
Section 3.10. Computation of Interest...........................................................46
Section 3.11. Legal Holidays....................................................................46
Section 3.12. CUSIP and CINS Numbers............................................................47
Section 3.13. Paying Agent To Hold Money in Trust...............................................47
Section 3.14. Treasury Notes....................................................................47
Section 3.15. Deposits of Monies................................................................48
Section 3.16. Book-Entry Provisions for Global
Notes..........................................................................48
Section 3.17. Special Transfer Provisions.......................................................49
ARTICLE FOUR
DEFEASANCE OR COVENANT DEFEASANCE
Section 4.01. Company's Option To Effect Defeasance or Covenant Defeasance......................54
Section 4.02. Defeasance and Discharge..........................................................54
Section 4.03. Covenant Defeasance...............................................................55
Section 4.04. Conditions to Defeasance or Covenant Defeasance...................................55
Section 4.05. Deposited Money and U.S. Government
Obligations To Be Held in Trust;
Other Miscellaneous Provisions.58
Section 4.06. Reinstatement.....................................................................58
ARTICLE FIVE
REMEDIES
Section 5.01. Events of Default.................................................................59
Section 5.02. Acceleration of Maturity; Rescission
and Annulment...................................................................61
Section 5.03. Collection of Indebtedness and Suits
for Enforcement by Trustee......................................................62
Section 5.04. Trustee May File Proofs of Claims.................................................63
Section 5.05. Trustee May Enforce Claims Without
Possession of Notes.............................................................64
Section 5.06. Application of Money Collected....................................................64
Section 5.07. Limitation on Suits...............................................................65
</TABLE>
-ii-
<PAGE> 5
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
Section 5.08. Unconditional Right of Holders To Re-
ceive Principal, Premium and Interest..........................................65
Section 5.09. Restoration of Rights and Remedies................................................66
Section 5.10. Rights and Remedies Cumulative....................................................66
Section 5.11. Delay or Omission Not Waiver......................................................66
Section 5.12. Control by Majority...............................................................66
Section 5.13. Waiver of Past Defaults...........................................................67
Section 5.14. Undertaking for Costs.............................................................67
Section 5.15. Waiver of Stay, Extension or Usury Laws...........................................68
Section 5.16. Unconditional Right of Holders To
Receive Payment................................................................68
ARTICLE SIX
THE TRUSTEE
Section 6.01. Certain Duties and Responsibilities...............................................68
Section 6.02. Notice of Defaults................................................................69
Section 6.03. Certain Rights of Trustee.........................................................70
Section 6.04. Trustee Not Responsible for Recitals, Dispositions of Notes or
Application of Proceeds Thereof................................................71
Section 6.05. Trustee and Agents May Hold
Notes; Collections; Etc........................................................72
Section 6.06. Money Held in Trust...............................................................72
Section 6.07. Compensation and Indemnification of Trustee and Its Prior Claim...................72
Section 6.08. Conflicting Interests.............................................................73
Section 6.09. Corporate Trustee Required;
Eligibility....................................................................73
Section 6.10. Resignation and Removal; Appointment of Successor Trustee.........................74
Section 6.11. Acceptance of Appointment by
Successor......................................................................76
Section 6.12. Merger, Conversion, Amalgamation, Consolidation or Succession to Business.........76
ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
Section 7.01. Preservation of Information; Company To Furnish Trustee Names and Addresses of
Holders........................................................................77
Section 7.02. Communications of Holders.........................................................78
</TABLE>
-iii-
<PAGE> 6
<TABLE>
<S> <C> <C>
Section 7.03. Reports by Trustee................................................................78
Section 7.04. Reports by Company................................................................78
ARTICLE EIGHT
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
Section 8.01. Company May Consolidate, etc., Only on Certain Terms..............................79
Section 8.02. Successor Substituted.............................................................80
ARTICLE NINE
SUPPLEMENTAL INDENTURES AND WAIVERS
Section 9.01. Supplemental Indentures, Agreements
and Waivers Without Consent of
Holders........................................................................81
Section 9.02. Supplemental Indentures, Agreements and Waivers with Consent of Holders...........82
Section 9.03. Execution of Supplemental Indentures, Agreements and Waivers......................83
Section 9.04. Effect of Supplemental Indentures.................................................84
Section 9.05. Conformity with Trust Indenture Act...............................................84
Section 9.06. Reference in Notes to
Supplemental Indentures........................................................84
Section 9.07. Record Date.......................................................................84
Section 9.08. Revocation and Effect of Consents.................................................85
ARTICLE TEN
COVENANTS
Section 10.01. Payment of Principal, Premium and Interest.......................................85
Section 10.02. Maintenance of Office or Agency..................................................85
Section 10.03. Money for Note Payments To Be Held in Trust......................................86
Section 10.04. Corporate Existence..............................................................88
Section 10.05. Payment of Taxes and Other Claims................................................88
Section 10.06. Maintenance of Properties........................................................88
Section 10.07. Insurance........................................................................89
Section 10.08. Books and Records................................................................89
Section 10.09. Provision of Financial Statements................................................89
Section 10.10. Change of Control................................................................89
Section 10.11. Limitation on Additional Indebtedness............................................92
</TABLE>
-iv-
<PAGE> 7
<TABLE>
<S> <C> <C>
Section 10.12. Statement by Officers as to Default...............................................93
Section 10.13. Limitation on Restricted Payments.................................................94
Section 10.14. Limitation on Transactions with
Affiliates.....................................................................98
Section 10.15. Disposition of Proceeds of Asset Sales...........................................100
Section 10.16. Limitation on Liens Securing Certain Indebtedness................................103
Section 10.17. Limitation on Business..........................................................104
Section 10.18. Limitation on Certain Guarantees
and Indebtedness of Restricted Subsidiaries...................................104
Section 10.19. Limitation on Issuances and Sales of Preferred Stock by Restricted
Subsidiaries..................................................................105
Section 10.20. Limitation on Dividends and Other Payment Restrictions Affecting
Restricted Subsidiaries.......................................................105
Section 10.21. Limitation on Designations of Unrestricted Subsidiaries..........................106
Section 10.22. Compliance Certificates and Opinions.............................................107
Section 10.23. Reports..........................................................................108
Section 10.24. Limitation on Status as Investment Company.......................................109
ARTICLE ELEVEN
SATISFACTION AND DISCHARGE
Section 11.01. Satisfaction and Discharge of
Indenture.....................................................................109
Section 11.02. Application of Trust Money.......................................................110
ARTICLE TWELVE
REDEMPTION
Section 12.01. Notices to the Trustee...........................................................110
Section 12.02. Selection of Notes To Be Redeemed................................................111
Section 12.03. Notice of Redemption.............................................................111
Section 12.04. Effect of Notice of Redemption...................................................112
Section 12.05. Deposit of Redemption Price......................................................112
Section 12.06. Notes Redeemed or Purchased in Part..............................................113
</TABLE>
-v-
<PAGE> 8
Exhibit A-1 - Form of Series A Note
Exhibit A-2 - Form of Series B Note
Exhibit B - Form of Legend for Book-Entry Securities
Exhibit C - Form of Certificate To Be Delivered in Connection with
Transfers to Non-QIB Accredited Investors
Exhibit D - Form of Certificate To Be Delivered in Connection with
Transfers Pursuant to Regulation S
-vi-
<PAGE> 9
INDENTURE, dated as of November 25, 1998, between VERIO INC., a
corporation incorporated under the laws of the State of Delaware (the
"Company"), as issuer, and U.S. BANK TRUST NATIONAL ASSOCIATION, as trustee (the
"Trustee").
RECITALS
The Company has duly authorized the creation of an issue of (i) 11-1/4%
Senior Notes Due 2008, Series A, and (ii) 11-1/4% Senior Notes Due 2008, Series
B, to be issued in exchange for the 11-1/4% Senior Notes Due 2008, Series A,
pursuant to the Registration Rights Agreement (the "Notes"; such term to include
the Initial Notes, the Private Exchange Notes, if any, and the Unrestricted
Notes, if any, treated as a single class of securities under this Indenture), of
substantially the tenor and amount hereinafter set forth, and to provide
therefor the Company has duly authorized the execution and delivery of this
Indenture.
All things necessary have been done to make the Notes, when executed by
the Company, and authenticated and delivered hereunder and duly issued by the
Company, the valid obligations of the Company and to make this Indenture a valid
agreement of each of the Company and the Trustee in accordance with the terms
hereof.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Notes
by the Holders (as hereinafter defined) thereof, it is mutually covenanted and
agreed, for the equal and proportionate benefit of all Holders of the Notes, as
follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.01. Definitions.
"1997 Notes" means the Company's 13-1/2% Senior Notes Due 2004.
"March 1998 Notes" means the Company's 10-3/8% Senior Notes Due 2005.
<PAGE> 10
-2-
"Acquired Indebtedness" means Indebtedness of a person existing at the
time such person becomes a Restricted Subsidiary or assumed in connection with
an Asset Acquisition by such person and not incurred in connection with, or in
anticipation of, such person becoming a Restricted Subsidiary or such Asset
Acquisition; provided that Indebtedness of such person which is redeemed,
defeased, retired or otherwise repaid at the time of or immediately upon
consummation of the transactions by which such person becomes a Restricted
Subsidiary or such Asset Acquisition shall not constitute Acquired
Indebtedness.
"Affiliate" of any specified person means any other person which,
directly or indirectly, controls, is controlled by or is under direct or
indirect common control with such specified person. For the purposes of this
definition, "control" when used with respect to any person means the power to
direct the management and policies of such person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "affiliated," "controlling" and "controlled" have meanings
correlative to the foregoing.
"Annualized ISP Operating Cash Flow" means, with respect to any ISP
which is not a Restricted Subsidiary, the product of (x) the net income of such
ISP and its consolidated Subsidiaries (determined on a basis consistent with the
calculation of Consolidated Net Income) for the most recent fiscal quarter for
which financial statements are available, increased, to the extent deducted in
calculating such net income for such fiscal quarter, by (i) the income tax
expense of such ISP and its consolidated Subsidiaries accrued according to GAAP
for such fiscal quarter (determined on a basis consistent with the calculation
of Consolidated Income Tax Expense and excluding taxes attributable to
extraordinary gains or losses and gains or losses from asset sales); (ii)
interest expense of such ISP and its consolidated Subsidiaries (determined on a
basis consistent with the calculation of Consolidated Interest Expense) for such
fiscal quarter; (iii) depreciation of such ISP and its consolidated Subsidiaries
for such fiscal quarter; (iv) amortization of such ISP and its consolidated
Subsidiaries for such fiscal quarter, including, without limitation,
amortization of capitalized debt issuance costs for such period, all determined
on a consolidated basis in accordance with GAAP; and (v) other non-cash charges
decreasing such net income; and (y) the number four.
"Annualized ISP Revenues" means, with respect to any ISP at any date of
determination, the consolidated net revenues
<PAGE> 11
-3-
of such ISP and its Subsidiaries for the most recent quarter for which financial
information concerning such ISP is available (and determined on a basis
consistent with the Company's accounting principle) multiplied by four.
"Asset Acquisition" means (i) any capital contribution (by means of
transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise) by the Company or any
Restricted Subsidiary in any other person, or any acquisition or purchase of
Capital Stock of any other person by the Company or any Restricted Subsidiary,
in either case pursuant to which such person shall (a) become a Restricted
Subsidiary or (b) shall be merged with or into the Company or any Restricted
Subsidiary or (ii) any acquisition by the Company or any Restricted Subsidiary
of the assets of any person which constitute substantially all of an operating
unit or line of business of such person or which is otherwise outside of the
ordinary course of business.
"Asset Sale" means any direct or indirect sale, conveyance, transfer or
lease (that has the effect of a disposition and is not for security purposes) or
other disposition (that is not for security purposes) to any person other than
the Company or a Restricted Subsidiary, in one transaction or a series of
related transactions, of (i) any Capital Stock of any Restricted Subsidiary
(other than customary stock option programs), (ii) any assets of the Company or
any Restricted Subsidiary which constitute substantially all of an operating
unit or line of business of the Company and the Restricted Subsidiaries or (iii)
any other property or asset of the Company or any Restricted Subsidiary outside
of the ordinary course of business. For the purposes of this definition, the
term "Asset Sale" shall not include (i) any disposition of properties and assets
of the Company that is governed under Article Eight, (ii) sales of property or
equipment that have become worn out, obsolete or damaged or otherwise unsuitable
for use in connection with the business of the Company or any Restricted
Subsidiary, as the case may be, and (iii) for purposes of Section 10.15 hereof,
any sale, conveyance, transfer, lease or other disposition of any property or
asset, whether in one transaction or a series of related transactions occurring
within one year, either (x) involving assets with a Fair Market Value not in
excess of $500,000 or (y) which constitutes the incurrence of a Capitalized
Lease Obligation.
"Average Life to Stated Maturity" means, with respect to any
Indebtedness, as at any date of determination, the quotient obtained by dividing
(i) the sum of the products of (a)
<PAGE> 12
-4-
the number of years from such date to the date or dates of each successive
scheduled principal payment (including, without limitation, any sinking fund
requirements) of such Indebtedness multiplied by (b) the amount of each such
principal payment by (ii) the sum of all such principal payments; provided that,
in the case of any Capitalized Lease Obligation, all calculations hereunder
shall give effect to any applicable options to renew in favor of the Company or
any Restricted Subsidiary.
"Bankruptcy Law" means Title 11, United States Code or any similar
federal or state law relating to bankruptcy, insolvency, receivership,
winding-up, liquidation, reorganization or relief of debtors or the law of any
other jurisdiction relating to bankruptcy, insolvency, receivership, winding-up,
liquidation, reorganization or relief of debtors or any amendment to, succession
to or change in any such law.
"Bankruptcy Order" means any court order made in a proceeding pursuant
to or within the meaning of any Bankruptcy Law, containing an adjudication of
bankruptcy or insolvency, or providing for liquidation, receivership,
winding-up, dissolution, "concordate" or reorganization, or appointing a
Custodian of a debtor or of all or any substantial part of a debtor's property,
or providing for the staying, arrangement, adjustment or composition of
indebtedness or other relief of a debtor.
"Board" means the Board of Directors of the Company.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board and to be in full force and effect on the date of such certification,
and delivered to the Trustee.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in The City of New York,
New York or St. Paul, Minnesota are authorized or obligated by law, regulation
or executive order to close.
"Capital Stock" means, with respect to any person, any and all shares,
interests, participations, rights in, or other equivalents (however designated
and whether voting and/or non-voting) of, such person's capital stock, whether
outstanding on the Issue Date or issued after the Issue Date, and any and all
rights (other than any evidence of Indebtedness), warrants or options
exchangeable for or convertible into such capital stock.
<PAGE> 13
-5-
"Capitalized Lease Obligation" means any obligation to pay rent or
other amounts under a lease of (or other agreement conveying the right to use)
any property (whether real, personal or mixed, immovable or movable) that is
required to be classified and accounted for as a capitalized lease obligation
under GAAP, and for the purpose of this Indenture, the amount of such obligation
at any date shall be the capitalized amount thereof at such date, determined in
accordance with GAAP.
"Cash Equivalents" means (i) any evidence of Indebtedness (with, for
purposes of Section 10.15 hereof only, a maturity of 365 days or less) issued or
directly and fully guaranteed or insured by the United States or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States is pledged in support thereof or such Indebtedness constitutes a general
obligation of such country); (ii) deposits, certificates of deposit or
acceptances (with, for purposes of Section 10.15 hereof only, a maturity of 365
days or less) of any financial institution that is a member of the Federal
Reserve System, in each case having combined capital and surplus and undivided
profits (or any similar capital concept) of not less than $500.0 million and
whose senior unsecured debt is rated at least "A-1" by S&P or "P-1" by Moody's;
(iii) commercial paper with a maturity of 365 days or less issued by a
corporation (other than an Affiliate of the Company) organized under the laws of
the United States or any State thereof and rated at least "A-1" by S&P or "P-1"
by Moody's; (iv) repurchase agreements and reverse repurchase agreements
relating to marketable direct obligations issued or unconditionally guaranteed
by the United States Government or issued by any agency thereof and backed by
the full faith and credit of the United States Government maturing within 365
days from the date of acquisition; (v) other debt obligations maturing in 365
days or less issued by a corporation (other than an Affiliate of the Company)
organized under the laws of the United States or any state thereof and rated at
least "A-" by S&P or "A3" by Moody's; and (vi) money market funds which invest
substantially all of their assets in securities of the type described in the
preceding clauses (i) through (v).
"Change of Control" means the occurrence of any of the following
events: (a) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act), excluding WorldCom, is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that a person shall be deemed to have "beneficial ownership" of all
securities that such person has the right to acquire, whether such right is
excercisable immediately or only
<PAGE> 14
-6-
after the passage of time), directly or indirectly, of more than 50% of the
total Voting Stock of the Company; or (b) the Company consolidates with, or
merges with or into, another person or sells, assigns, conveys, transfers,
leases or otherwise disposes of all or substantially all of its assets to any
person, or any person consolidates with, or merges with or into, the Company, in
any such event pursuant to a transaction in which the outstanding Voting Stock
of the Company is converted into or exchanged for cash, securities or other
property, other than any such transaction where (i) the outstanding Voting Stock
of the Company is converted into or exchanged for (1) Voting Stock (other than
Disqualified Stock) of the surviving or transferee corporation or its parent
corporation and/or (2) cash, securities and other property in an amount which
could be paid by the Company as a Restricted Payment under this Indenture and
(ii) immediately after such transaction no "person" or "group" (as such terms
are used in Section 13(d) and 14(d) of the Exchange Act), excluding WorldCom, is
the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act, except that a person shall be deemed to have "beneficial ownership" of all
securities that such person has the right to acquire, whether such right is
excercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total Voting Stock of the surviving or
transferee corporation or its parent corporation, as applicable; or (c) during
any consecutive two-year period, individuals who at the beginning of such period
constituted the Board (together with any new directors whose election by the
Board or whose nomination for election by the stockholders of the Company was
approved by a vote of a majority of the directors then still in office who were
either directors at the beginning of such period or whose election or nomination
for election was previously so approved) cease for any reason (other than by
action of WorldCom) to constitute a majority of the Board then in office. The
good faith determination by the Board, based upon advice of outside counsel, of
the beneficial ownership of securities of the Company within the meaning of
Rules 13d-3 and 13d-5 under the Exchange Act shall be conclusive, absent
contrary controlling judicial precedent or contrary written interpretation
published by the SEC.
"Common Stock" means, with respect to any person, any and all shares,
interests or other participations in, and other equivalents (however designated
and whether voting or non-voting) of such person's common stock whether
outstanding at the Issue Date, and includes, without limitation, all series and
classes of such common stock.
<PAGE> 15
-7-
"Company" means the person named as the "Company" in the first
paragraph of this Indenture, until a successor person shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor person.
"Company Request" or "Company Order" means a written request or order
signed in the name of the Company by any one of its Chairman of the Board, its
Vice-Chairman, its Chief Executive Officer, its President or a Vice President,
and by its Secretary or an Assistant Secretary or the Treasurer or an Assistant
Treasurer, and delivered to the Trustee.
"Consolidated Annualized Pro Forma Operating Cash Flow" means, at any
date of determination, Consolidated Operating Cash Flow for the latest fiscal
quarter for which consolidated financial statements of the Company are available
multiplied by four. For purposes of calculating "Consolidated Operating Cash
Flow" for any fiscal quarter for purposes of this definition, (i) any Subsidiary
of the Company that is a Restricted Subsidiary on the date of the transaction
(the "Transaction Date") giving rise to the need to calculate "Consolidated
Annualized Pro Forma Operating Cash Flow" shall be deemed to have been a
Restricted Subsidiary at all times during such fiscal quarter and (ii) any
Subsidiary of the Company that is not a Restricted Subsidiary on the Transaction
Date shall be deemed not to have been a Restricted Subsidiary at any time during
such fiscal quarter. In addition to and without limitation of the foregoing, for
purposes of this definition, "Consolidated Operating Cash Flow" shall be
calculated after giving effect on a pro forma basis for the applicable fiscal
quarter to, without duplication, any Asset Sales or Asset Acquisitions
(including, without limitation, any Asset Acquisition giving rise to the need to
make such calculation as a result of the Company or one of the Restricted
Subsidiaries (including any person who becomes a Restricted Subsidiary as a
result of the Asset Acquisition) incurring, assuming or otherwise being liable
for Acquired Indebtedness) occurring during the period commencing on the first
day of such fiscal quarter to and including the Transaction Date, as if such
Asset Sale or Asset Acquisition occurred on the first day of such fiscal
quarter.
"Consolidated Income Tax Expense" means, with respect to any period,
the provision for United States corporation, local, foreign and other income
taxes of the Company and the Restricted Subsidiaries for such period as
determined on a consolidated basis in accordance with GAAP.
<PAGE> 16
-8-
"Consolidated Interest Expense" means, with respect to any period,
without duplication, the sum of (i) the interest expense of the Company and the
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP, including, without limitation, (a) any amortization of
debt discount, (b) the net cost under Interest Rate Obligations (including any
amortization of discounts), (c) the interest portion of any deferred payment
obligation, (d) all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing and similar
transactions and (e) all accrued interest, (ii) the interest component of
Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or
accrued by the Company and the Restricted Subsidiaries during such period as
determined on a consolidated basis in accordance with GAAP and (iii) the amount
of dividends in respect of Disqualified Stock paid by the Company and the
Restricted Subsidiaries during such period; provided that Consolidated Interest
Expense shall exclude the amortization of fees related to the issuance of the
Notes and fees related to any Indebtedness under a Permitted Credit Facility.
"Consolidated Net Income" means, with respect to any period, the
consolidated net income of the Company and the Restricted Subsidiaries for such
period, adjusted, to the extent included in calculating such consolidated net
income, by excluding, without duplication, (i) all extraordinary, unusual or
nonrecurring gains or losses of such person (net of fees and expenses relating
to the transaction giving rise thereto) for such period, (ii) income of the
Company and the Restricted Subsidiaries derived from or in respect of all
Investments in persons other than Restricted Subsidiaries, except to the extent
of any dividends or distributions actually received by the Company or any
Restricted Subsidiary, (iii) the portion of net income (or loss) of such person
allocable to minority interests in Restricted Subsidiaries for such period, (iv)
net income (or loss) of any other person combined with such person on a "pooling
of interests" basis attributable to any period prior to the date of combination,
(v) any gain or loss, net of taxes, realized by such person upon the termination
of any employee pension benefit plan during such period, (vi) gains or losses in
respect of any Asset Sales (net of fees and expenses relating to the transaction
giving rise thereto) during such period and (vii) except in the case of any
restriction or encumbrance permitted under clause (viii) of Section 10.20
hereof, the net income of any Restricted Subsidiary for such period to the
extent that the declaration of dividends or similar distributions by that
Restricted Subsidiary of that income is not at the time
<PAGE> 17
-9-
permitted, directly or indirectly, by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulations applicable to that Restricted Subsidiary or its
stockholders.
"Consolidated Net Worth" means, with respect to any person, the
consolidated stockholders' or partners' equity of such person reflected on the
most recent financial statements of such person, determined in accordance with
GAAP, less any amounts attributable to redeemable capital stock (as determined
under applicable accounting standards by the SEC) of such person.
"Consolidated Operating Cash Flow" means, with respect to any period,
the Consolidated Net Income of the Company and the Restricted Subsidiaries for
such period increased, to the extent deducted in arriving at Consolidated Net
Income for such period, by the sum of (i) the Consolidated Income Tax Expense of
the Company and the Restricted Subsidiaries accrued according to GAAP for such
period (other than taxes attributable to extraordinary gains or losses and gains
and losses from Asset Sales); (ii) Consolidated Interest Expense for such
period; (iii) depreciation of the Company and the Restricted Subsidiaries for
such period; (iv) amortization of the Company and the Restricted Subsidiaries
for such period, including, without limitation, amortization of capitalized debt
issuance costs for such period, all determined on a consolidated basis in
accordance with GAAP; and (v) other non-cash charges decreasing Consolidated Net
Income.
"consolidation" means, with respect to the Company, the consolidation
of the accounts of the Restricted Subsidiaries with those of the Company, all in
accordance with GAAP; provided that "consolidation" will not include
consolidation of the accounts of any Unrestricted Subsidiary with the accounts
of the Company. The term "consolidated" has a correlative meaning to the
foregoing.
"Corporate Trust Office" means the office of the Trustee at which at
any particular time its corporate trust business shall be principally
administered, which office at the date of execution of this Indenture is located
at 180 East 5th Street, St. Paul, Minnesota 55101, Attention: Corporate Trust
Department, except for purposes of Sections 3.02 and 10.02 hereof. For purposes
of such sections, such office is located at 100 Wall Street, 20th Floor, New
York, New York 10005.
<PAGE> 18
-10-
"Custodian" means any receiver, interim receiver, receiver and manager,
receiver-manager, trustee, assignee, liquidator, sequestrator or similar
official under any Bankruptcy Law or any other law respecting secured creditors
and the enforcement of their security or any other person with like powers
whether appointed judicially or out of court and whether pursuant to an interim
or final appointment.
"Debt Securities" means any debt securities issued by the Company in a
public offering or a private placement.
"Default" means any event that is, or after notice or passage of time
or both would be, an Event of Default.
"Depository" means The Depository Trust Company, its nominees and
successors.
"Designation" has the meaning set forth under Section 10.21 hereof.
"Disinterested Director" means, with respect to any transaction or
series of related transactions, a member of the Board other than a director who
(i) has any material direct or indirect financial interest in or with respect to
such transaction or series of related transactions or (ii) is an employee or
officer of the Company or an Affiliate that is itself a party to such
transaction or series of transactions or an Affiliate of a party to such
transaction or series of related transactions.
"Disqualified Stock" means, with respect to any person, any Capital
Stock which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or becomes mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or becomes exchangeable for Indebtedness at the option
of the holder thereof, or becomes redeemable at the option of the holder
thereof, in whole or in part, on or prior to the final maturity date of the
Notes; provided such Capital Stock shall only constitute Disqualified Stock to
the extent it so matures or becomes so redeemable or exchangeable on or prior to
the final maturity date of the Notes; provided, further, that any Capital Stock
of the Company or any Restricted Subsidiary that would not constitute
Disqualified Stock but for provisions thereof giving holders thereof the right
to require such person to repurchase or redeem such Capital Stock upon the
occurrence of an "asset sale" or "change of control" occurring prior to the
final maturity date of the
<PAGE> 19
-11-
Notes shall not constitute Disqualified Stock if the "asset sale" or "change of
control" provisions applicable to such Capital Stock are no more favorable to
the holders of such Capital Stock than the provisions contained in Section 10.15
and Section 10.10 hereof described above and such Capital Stock specifically
provides that such person will not repurchase or redeem any such stock pursuant
to such provision prior to the Company's repurchase of such Notes as are
required to be repurchased pursuant to Section 10.15 and Section 10.10 hereof.
"Euroclear" means Morgan Guaranty Trust Company of New York, Brussels
Office, as operator of the Euroclear System.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated thereunder.
"Exchange Notes" means the 11-1/4% Senior Notes Due 2008, Series B, to
be issued in exchange for the Initial Notes pursuant to the Registration Rights
Agreement.
"Exchange Offer" shall have the meaning specified in the Registration
Rights Agreement.
"Existing ISP" means any ISP in which the Company or a Subsidiary of
the Company has an Investment on the Issue Date.
"Fair Market Value" means, with respect to any asset or property, the
price that could be negotiated in an arm's-length free market transaction, for
cash, between a willing seller and a willing buyer, neither of whom is under
pressure or compulsion to complete the transaction. Unless otherwise specified
in this Indenture, Fair Market Value shall be determined by the Board acting in
good faith and shall be evidenced by a Board Resolution.
"GAAP" means, at any date of determination, generally accepted
accounting principles in effect in the United States and which are applicable as
of the date of determination and which are consistently applied for all
applicable periods.
"Global Notes" means one or more Regulation S Global Notes and 144A
Global Notes.
"guarantee" means, as applied to any obligation, (i) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business),
<PAGE> 20
-12-
direct or indirect, in any manner, of any part or all of such obligation and
(ii) an agreement, direct or indirect, contingent or otherwise, the practical
effect of which is to assure in any way the payment or performance (or payment
of damages in the event of non-performance) of all or any part of such
obligation, including, without limiting the foregoing, the payment of amounts
drawn down by letters of credit.
"Guarantee" has the meaning provided in Section 10.18.
"Guarantor" has the meaning provided in Section 10.18.
"Hiway Technologies" means Best Internet Communications, Inc., a
California corporation, d/b/a Hiway Technologies.
"Holder" or "Noteholder" means a person in whose name a Note is
registered in the Note Register.
"incur" means, with respect to any Indebtedness or other obligation of
any person, to create, issue, incur (by conversion, exchange or otherwise),
assume, guarantee or otherwise become liable in respect of such Indebtedness or
other obligation including by acquisition of Subsidiaries or the recording, as
required pursuant to GAAP or otherwise, of any such Indebtedness or other
obligation on the balance sheet of such person (and "incurrence," "incurred,"
"incurrable" and "incurring" shall have meanings correlative to the foregoing);
provided that a change in GAAP that results in an obligation of such person that
exists at such time becoming Indebtedness shall not be deemed an incurrence of
such Indebtedness and that neither the accrual of interest nor the accretion of
original issue discount shall be deemed an incurrence of Indebtedness.
Indebtedness otherwise incurred by a person before it becomes a Subsidiary of
the Company (whether by merger, consolidation, acquisition or otherwise) shall
be deemed to have been incurred at the time at which such person becomes a
Subsidiary of the Company.
"Indebtedness" means, with respect to any person, without duplication,
(i) any liability, contingent or otherwise, of such person (A) for borrowed
money (whether or not the recourse of the lender is to the whole of the assets
of such person or only to a portion thereof) or (B) evidenced by a note,
debenture or similar instrument or letter of credit (including a purchase money
obligation) or (C) for the payment of
<PAGE> 21
-13-
money relating to a Capitalized Lease Obligation or other obligation relating to
the deferred purchase price of property (except to the extent representing funds
deposited in escrow to secure the deferred purchase price of an acquisition of,
or an Investment in, an ISP) or (D) in respect of an Interest Rate Obligation or
currency agreement; or (ii) any liability of others of the kind described in the
preceding clause (i) which the person has guaranteed or which is otherwise its
legal liability; or (iii) any obligation secured by a Lien (other than (x)
Permitted Liens of the types described in clauses (b), (d) or (e) of the
definition of Permitted Liens; provided that the obligations secured would not
constitute Indebtedness under clauses (i) or (ii) or (iii) of this definition,
and (y) Liens on Capital Stock or Indebtedness of any Unrestricted Subsidiary)
to which the property or assets of such person are subject, whether or not the
obligations secured thereby shall have been assumed by or shall otherwise be
such person's legal liability (the amount of such obligation being deemed to be
the lesser of the value of such property or asset or the amount of the
obligation so secured); (iv) all Disqualified Stock valued at the greater of its
voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid
dividends; and (v) any and all deferrals, renewals, extensions and refundings
of, or amendments, modifications or supplements to, any liability of the kind
described in any of the preceding clauses (i), (ii), (iii) or (iv). In no event
shall "Indebtedness" include trade payables and accrued liabilities that are
current liabilities incurred in the ordinary course of business, excluding the
current maturity of any obligation which would otherwise constitute
Indebtedness. For purposes of Section 10.11 and Section 10.13 hereof and the
definition of "Events of Default," in determining the principal amount of any
Indebtedness to be incurred by the Company or a Restricted Subsidiary or which
is outstanding at any date, (x) the principal amount of any Indebtedness issued
with original issue discount shall be the face amount of such Indebtedness less
the remaining unamortized portion of the original issue discount of such
Indebtedness at such date as determined in conformity with GAAP and (y) the
principal amount of any Indebtedness shall be reduced by any amount of cash or
Cash Equivalent collateral securing on a perfected basis, and dedicated for
disbursement exclusively to the payment of principal of and interest on, such
Indebtedness.
"Indenture" means this instrument as originally executed (including all
exhibits and schedules hereto) and as it may from time to time be supplemented
or amended by one or more indentures supplemental hereto entered into pursuant
to the applicable provisions hereof.
<PAGE> 22
-14-
"Indenture Obligations" means the obligations of the Company and any
other obligor under this Indenture or under the Notes, to pay principal of,
premium, if any, and interest on the Notes when due and payable, whether at
maturity, by acceleration, call for redemption or repurchase or otherwise, and
all other amounts due or to become due under or in connection with this
Indenture or the Notes and the performance of all other obligations to the
Trustee (including, but not limited to, payment of all amounts due the Trustee
under Section 6.07 hereof) and the Holders of the Notes under this Indenture and
the Notes, according to the terms thereof.
"Independent Financial Advisor" means a United States investment
banking firm of national or regional standing in the United States (i) which
does not, and whose directors, officers and employees or Affiliates do not have,
a direct or indirect financial interest in the Company and (ii) which, in the
judgment of the Board, is otherwise independent and qualified to perform the
task for which it is to be engaged.
"Initial Notes" means the 11-1/4% Senior Notes Due 2008, Series A, of
the Company.
"Initial Purchasers" means Salomon Smith Barney Inc., Credit Suisse
First Boston Corporation, Donaldson, Lufkin & Jenrette Securities Corporation
and First Union Capital Markets, a division of Wheat First Securities, Inc.
"Institutional Accredited Investor" means an institution that is an
"accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7)
under the Securities Act.
"interest", when used with respect to any Note, means the amount of all
interest accruing on such Note, including all additional interest payable on the
Notes pursuant to the Registration Rights Agreement and all interest accruing
subsequent to the occurrence of any events specified in Sections 5.01(viii),
(ix) and (x) hereof or which would have accrued but for any such event, whether
or not such claims are allowable under applicable law.
"Interest Payment Date" means, when used with respect to any Note, the
Stated Maturity of an installment of interest on such Note, as set forth in such
Note.
"Interest Rate Obligations" means the obligations of any person
pursuant to any arrangement with any other person whereby, directly or
indirectly, such person is entitled to
<PAGE> 23
-15-
receive from time to time periodic payments calculated by applying either a
floating or a fixed rate of interest on a stated notional amount and shall
include without limitation, interest rate swaps, caps, floors, collars, forward
interest rate agreements and similar agreements.
"Internet Service Business" means any business operating an internet
connectivity or internet enhancement service as it exists from time to time,
including, without limitation, dial up or dedicated internet service, web
hosting or collocation services, security solutions, the provision and
development of software in connection therewith, configuration services,
electronic commerce, intranet solutions, data backup and restoral, business
content and collaboration, communications tools or network equipment products or
services (including, without limitation, any business conducted by the Company
or any Restricted Subsidiary on the Issue Date), and any business reasonably
related to the foregoing. A good faith determination by a majority of the Board
as to whether a business meets the requirements of this definition shall be
conclusive, absent manifest error.
"Investment" means, with respect to any person, any advance, loan,
account receivable (other than an account receivable arising in the ordinary
course of business), or other extension of credit (including, without
limitation, by means of any guarantee) or any capital contribution to (by means
of transfers of property to others, payments for property or services for the
account or use of others, or otherwise), or any purchase or ownership of any
stocks, bonds, notes, debentures or other securities of, any other person.
Notwithstanding the foregoing, in no event shall any issuance of Capital Stock
(other than Disqualified Stock) of the Company in exchange for Capital Stock,
property or assets of another person constitute an Investment by the Company in
such other person.
"ISP" means any person (a) engaged principally in an Internet Service
Business, (b) of which the Company or Wholly Owned Restricted Subsidiaries own
either (x) Qualifying Preferred Stock representing in aggregate from 20% to 50%
of such person's outstanding Capital Stock (on an economic basis) or (y) Common
Stock or Qualifying Preferred Stock representing in aggregate in excess of 50%
of such person's voting Capital Stock, (c) as to which the Company or a Wholly
Owned Restricted Subsidiary (x) has an option to acquire a majority of such
person's outstanding Capital Stock and (y) upon exercise of the option referred
to in the preceding clause (x), will have sufficient voting power with respect
to the outstanding Capital
<PAGE> 24
-16-
Stock of such person to effect the acquisition of such person by the Company or
any such Wholly Owned Restricted Subsidiary, as the case may be, (d) as to which
the Company or a Wholly Owned Restricted Subsidiary has the right to appoint and
has appointed at least one member of such person's board of directors, in the
case where such person would not be a Subsidiary of the Company, or a majority
of such person's board of directors, in the case where such person would be a
Subsidiary of the Company and (e) which has no outstanding Indebtedness or
Disqualified Stock other than Indebtedness or Disqualified Stock of such person
having an aggregate outstanding principal balance and liquidation preference,
respectively, that (x) in the case of a person that is a Restricted Subsidiary,
is permitted to be incurred under Section 10.11 hereof and (y) in the case of a
person that is not a Restricted Subsidiary, does not at any time exceed the
greater of (I) 50% of Annualized ISP Revenues or (II) 6.0x Annualized ISP
Operating Cash Flow.
"Issue Date" means the original date of issuance of the Notes.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or preference
or priority or other encumbrance upon or with respect to any property of any
kind. A person shall be deemed to own subject to a Lien any property which such
person has acquired or holds subject to the interest of a vendor or lessor under
any conditional sale agreement, capital lease or other title retention
agreement.
"Market Capitalization" of any person means, as of any day of
determination, the average Closing Price of such person's Common Stock over the
20 consecutive trading days immediately preceding such day. "Closing Price" on
any trading day with respect to the per share price of any shares of Common
Stock means the last reported sale price regular way or, in case no such
reported sale takes place on such day, the average of the reported closing bid
and asked prices regular way, in either case on the New York Stock Exchange or,
if such shares of Common Stock are not listed or admitted to trading on such
exchange, on the principal national securities exchange on which such shares are
listed or admitted to trading or, if not listed or admitted to trading on any
national securities exchange, on the National Association of Securities Dealers
Automated Quotations National Market System or, if such shares are not listed or
admitted to trading on any national securities exchange or quoted on such
automated quotation system but the issuer is a Foreign Company (as defined in
Rule 3b-4(b) under
<PAGE> 25
-17-
the Exchange Act) and the principal securities exchange on which such shares are
listed or admitted to trading is a Designated Offshore Securities Market (as
defined in Rule 902(a) under the Securities Act), the average of the reported
closing bid and asked prices regular way on such principal exchange, or, if such
shares are not listed or admitted to trading on any national securities exchange
or quoted on such automated quotation system and the issuer and principal
securities exchange do not meet such requirements, the average of the closing
bid and asked prices in the over-the-counter marked as furnished by any New York
Stock Exchange member firm that is selected from time to time by the Company for
that purpose and is reasonably acceptable to the Trustee.
"Material Restricted Subsidiary" means any Restricted Subsidiary of the
Company, which, at any date of determination, is a "Significant Subsidiary" (as
that term is defined in Regulation S-X issued under the Securities Act), but
shall, in any event, include (x) any Guarantor or (y) any Restricted Subsidiary
of the Company which, at any date of determination, is an obligor under any
Indebtedness in an aggregate principal amount equal to or exceeding $7.5
million.
"Maturity Date" means, with respect to any Note, the date specified in
such Note as the fixed date on which the principal of such Note is due and
payable.
"Moody's" means Moody's Investors Service.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash (including assumed liabilities and other items
deemed to be cash under the proviso to the first sentence of Section 10.15
hereof) or Cash Equivalents including payments in respect of deferred payment
obligations when received in the form of cash or Cash Equivalents (except to the
extent that such obligations are financed or sold with recourse to the Company
or any Restricted Subsidiary) net of (i) brokerage commissions and other fees
and expenses (including fees and expenses of legal counsel and investment
bankers) related to such Asset Sale, (ii) provisions for all taxes payable as a
result of such Asset Sale, (iii) amounts required to be paid to any person
(other than the Company or any Restricted Subsidiary) owning a beneficial
interest in or having a Permitted Lien on the assets subject to the Asset Sale
and (iv) appropriate amounts to be provided by the
<PAGE> 26
-18-
Company or any Restricted Subsidiary, as the case may be, as a reserve required
in accordance with GAAP against any liabilities associated with such Asset Sale
and retained by the Company or any Restricted Subsidiary, as the case may be,
after such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as reflected in an Officers' Certificate delivered to the
Trustee.
"New ISP" means any ISP in which the Company or a Subsidiary of the
Company makes its first Investment after the Prior Issue Date.
"Newly Acquired Assets" means any assets (other than cash) of the
Company or any Restricted Subsidiary which did not constitute assets of the
Company, any Restricted Subsidiary or any ISP on or prior to the Issue Date;
provided that Newly Acquired Assets shall not include (a) Capital Stock of Hiway
Technologies, (b) assets (other than cash) acquired by Hiway Technologies or any
of its Subsidiaries on or prior to the Issue Date, or (c) any assets (other than
cash) of any person which would be an ISP if Hiway Technologies were a Wholly
Owned Restricted Subsidiary, to the extent that such assets were acquired by
such person on or prior to the Issue Date.
"Non-U.S. Person" has the meaning assigned to such term in
Regulation S.
"Notes" shall have the meaning specified in the recitals of this
Indenture.
"Offering Memorandum" means the Offering Memorandum dated November 17,
1998 pursuant to which the Notes were offered, and any supplement thereto.
"Officer" means, with respect to the Company, the Chairman of the
Board, a Vice Chairman, the President, a Vice President, the Secretary, an
Assistant Secretary, the Treasurer or an Assistant Treasurer.
"Officers' Certificate" means a certificate signed by the Chairman of
the Board, a Vice Chairman, the President or a Vice President, and by the
Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer, of
the Company and delivered to the Trustee.
"144A Global Note" means a permanent global note in registered form
representing the aggregate principal amount of Notes sold in reliance on Rule
144A under the Securities Act.
<PAGE> 27
-19-
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Company or the Trustee, and who shall be reasonably acceptable
to the Trustee.
"Other Senior Debt Pro Rata Share" means the amount of the applicable
Excess Proceeds obtained by multiplying the amount of such Excess Proceeds by a
fraction, (i) the numerator of which is the aggregate accreted value and/or
principal amount, as the case may be, of all Indebtedness (other than (x) the
Notes and (y) Subordinated Indebtedness) of the Company outstanding at the time
of the applicable Asset Sale with respect to which the Company is required to
use Excess Proceeds to repay or make an offer to purchase or repay and (ii) the
denominator of which is the sum of (a) the aggregate principal amount of all
Notes Outstanding at the time of the applicable Asset Sale and (b) the aggregate
principal amount or the aggregate accreted value, as the case may be, of all
other Indebtedness (other than Subordinated Indebtedness) of the Company
outstanding at the time of the applicable Asset Sale Offer with respect to which
the Company is required to use the applicable Excess Proceeds to offer to repay
or make an offer to purchase or repay.
"Outstanding" means, as of the date of determination, all Notes
theretofore authenticated and delivered under this Indenture, except:
(i) Notes theretofore canceled by the Trustee or delivered to the
Trustee for cancellation;
(ii) Notes, or portions thereof, for whose payment or redemption money
in the necessary amount has been theretofore deposited with the Trustee or
any Paying Agent (other than the Company or any Affiliate thereof) in trust
or set aside and segregated in trust by the Company or any Affiliate thereof
(if the Company or such Affiliate shall act as Paying Agent) for the Holders
of such Notes; provided, however, that if such Notes are to be redeemed,
notice of such redemption has been duly given pursuant to this Indenture or
provision therefor satisfactory to the Trustee has been made;
(iii) Notes with respect to which the Company has effected defeasance
or covenant defeasance as provided in Article Four, to the extent provided
in Sections 4.02 and 4.03 hereof; and
<PAGE> 28
-20-
(iv) Notes in exchange for or in lieu of which other Notes have been
authenticated and delivered pursuant to this Indenture, other than any such
Notes in respect of which there shall have been presented to the Trustee
proof satisfactory to it that such Notes are held by a bona fide purchaser
in whose hands the Notes are valid obligations of the Company;
provided, however, that in determining whether the Holders of the requisite
principal amount of Outstanding Notes have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Notes owned by
the Company or any other obligor upon the Notes or any Affiliate of the Company
or such other obligor shall be disregarded and deemed not to be Outstanding,
except that, in determining whether the Trustee shall be protected in relying
upon any such request, demand, authorization, direction, notice, consent or
waiver, only Notes that a Responsible Officer of the Trustee knows to be so
owned shall be so disregarded. The Company shall notify the Trustee, in writing,
when it repurchases or otherwise acquires Notes, of the aggregate principal
amount of such Notes so repurchased or otherwise acquired. Notes so owned which
have been pledged in good faith may be regarded as Outstanding if the pledgee
establishes to the satisfaction of the Trustee the pledgee's right so to act
with respect to such Notes and that the pledgee is not the Company or any other
obligor upon the Notes or any Affiliate of the Company or such other obligor. If
the Paying Agent holds, in its capacity as such, on any Maturity Date or on any
optional redemption date money sufficient to pay all accrued interest and
principal with respect to such Notes payable on that date and is not prohibited
from paying such money to the Holders thereof pursuant to the terms of this
Indenture, then on and after that date such Notes cease to be Outstanding and
interest on them ceases to accrue. Notes may also cease to be Outstanding to the
extent expressly provided in Article Four.
"Permitted Affiliate Agreement" means each of the Series A Purchase
Agreement, the Series B Purchase Agreement, the Series C Purchase Agreement and
the Stockholders Agreement, each as in effect on the Issue Date.
"Permitted Credit Facility" means any senior commercial term loan
and/or revolving credit facility (including any letter of credit subfacility)
entered into principally with commercial banks and/or other financial
institutions typically party to commercial loan agreements.
<PAGE> 29
-21-
"Permitted Equipment Financing" means any credit facility or other
financing arrangement (including in the form of Capitalized Lease Obligations
and guarantees of Indebtedness of ISPs) entered into with any vendor or supplier
(or any financial institution acting on behalf of or for the purpose of directly
financing purchases from such vendor or supplier) to the extent the Indebtedness
thereunder is incurred for the purpose of financing the cost (including the cost
of design, development, site acquisition, construction, integration, manufacture
or acquisition) of real or personal property (tangible or intangible) used, or
to be used, in an Internet Service Business.
"Permitted Indebtedness" means the following Indebtedness (each of
which shall be given independent effect):
(a) Indebtedness under the Notes and this Indenture;
(b) Indebtedness of the Company and/or any Restricted Subsidiary
outstandi ng on the Issue Date, including, without limitation, the 1997
Notes and the March 1998 Notes;
(c) (i) Indebtedness of any Restricted Subsidiary owed to and held by
the Company or a Restricted Subsidiary and (ii) Indebtedness of the Company,
not secured by any Lien, owed to and held by any Restricted Subsidiary;
provided that an incurrence of Indebtedness shall be deemed to have occurred
upon (x) any sale or other disposition (excluding assignments as security to
financial institutions) of any Indebtedness of the Company or a Restricted
Subsidiary referred to in this clause (c) to a person (other than the
Company or a Restricted Subsidiary) or (y) any sale or other disposition of
Capital Stock of a Restricted Subsidiary, or Designation of a Restricted
Subsidiary, which holds Indebtedness of the Company or another Restricted
Subsidiary such that such Restricted Subsidiary, in any such case, ceases to
be a Restricted Subsidiary;
(d) Interest Rate Obligations of the Company and/or any Restricted
Subsidiary relating to Indebtedness of the Company and/or such Restricted
Subsidiary, as the case may be (which Indebtedness (x) bears interest at
fluctuating interest rates and (y) is otherwise permitted to be incurred
under Section 10.11 hereof), but only to the extent that the notional
principal amount of such Interest Rate Obligations does not exceed the
principal amount of the
<PAGE> 30
-22-
Indebtedness (and/or Indebtedness subject to commitments) to which such
Interest Rate Obligations relate;
(e) Indebtedness of the Company and/or any Restricted Subsidiary in
respect of performance bonds of the Company or any Restricted Subsidiary or
surety bonds provided by the Company or any Restricted Subsidiary incurred
in the ordinary course of business;
(f) Indebtedness of the Company and/or any Restricted Subsidiary to the
extent it represents a replacement, renewal, refinancing or extension (a
"Refinancing") of outstanding Indebtedness of the Company and/or of any
Restricted Subsidiary incurred or outstanding pursuant to clause (a), (b),
(g), (h) or (i) of this definition or the proviso of Section 10.11 hereof;
provided that (1) Indebtedness of the Company may not be Refinanced to such
extent under this clause (f) with Indebtedness of any Restricted Subsidiary
and (2) any such Refinancing shall only be permitted under this clause (f)
to the extent that (x) it does not result in a lower Average Life to Stated
Maturity of such Indebtedness as compared with the Indebtedness being
Refinanced and (y) it does not exceed the sum of the principal amount (or,
if such Indebtedness provides for a lesser amount to be due and payable upon
a declaration of acceleration thereof, an amount no greater than such lesser
amount) of the Indebtedness being Refinanced plus the amount of accrued
interest thereon and the amount of any reasonably determined prepayment
premium necessary to accomplish such Refinancing and such reasonable fees
and expenses incurred in connection therewith;
(g) Indebtedness of the Company such that, after giving effect to the
incurrence thereof, the total aggregate principal amount of Indebtedness
incurred under this clause (g) and any Refinancings thereof otherwise
incurred in compliance with this Indenture plus the aggregate principal
amount of the Notes outstanding would not exceed 200% of Total Incremental
Equity;
(h) Indebtedness of the Company and/or any Restricted Subsidiary
incurred under any Permitted Credit Facility and/or Indebtedness of the
Company represented by Debt Securities of the Company, and any Refinancings
of the foregoing otherwise incurred in compliance with this Indenture, in an
aggregate principal amount not to exceed $150.0 million at any time
outstanding;
<PAGE> 31
-23-
(i) Indebtedness of the Company and/or any Restricted Subsidiary
incurred under any Permitted Equipment Financing in an aggregate principal
amount not to exceed the Fair Market Value of the assets acquired with the
proceeds thereof;
(j) Indebtedness of the Company and/or any Restricted Subsidiary
incurred as a result of any Rollup of any ISP, and any Refinancings thereof
otherwise incurred in compliance with this Indenture, provided the aggregate
principal amount of all such Indebtedness does not exceed $50.0 million at
any time outstanding;
(k) Indebtedness of the Company and/or any Restricted Subsidiary
incurred in connection with the acquisition of, or an Investment in, a New
ISP, including any obligations in respect of the deferred purchase price
(whether or not subject to a contingency) of any such acquisition or
Investment, in an aggregate principal amount not to exceed $50.0 million at
any time outstanding; and
(l) in addition to the items referred to in clauses (a) through (j)
above, Indebtedness of the Company and/or the Restricted Subsidiaries having
an aggregate principal amount not to exceed $50.0 million at any time
outstanding.
"Permitted Investments" means (a) Cash Equivalents; (b) Investments in
prepaid expenses, negotiable instruments held for collection and lease, utility
and workers' compensation, performance and other similar deposits; (c) Interest
Rate Obligations incurred in compliance with Section 10.11 hereof; and (d) the
extension by the Company and the Restricted Subsidiaries of (i) trade credit to
Subsidiaries of the Company and the ISPs, represented by accounts receivable,
extended on usual and customary terms in the ordinary course of business or (ii)
guarantees of commitments for the purchase of goods or services by any ISP
incurred in the ordinary course of business so long as such guarantees to the
extent constituting Indebtedness are permitted to be incurred under Section
10.11 hereof.
"Permitted Liens" means (a) Liens on property of a person existing at
the time such person is merged into or consolidated with the Company or any
Restricted Subsidiary or becomes a Restricted Subsidiary; provided that such
Liens were in existence prior to the contemplation of such merger, consolidation
or acquisition and do not secure any property or assets of the Company or any
Restricted Subsidiary other than the property
<PAGE> 32
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or assets subject to the Liens prior to such merger or consolidation or
acquisition; (b) Liens imposed by law, such as carriers', warehousemen's and
mechanics' Liens and other similar Liens arising in the ordinary course of
business that secure payment of obligations not more than 60 days past due or
that are being contested in good faith and by appropriate proceedings; (c) Liens
existing on the Issue Date; (d) Liens for taxes, assessments or governmental
charges or claims that are not yet delinquent or that are being contested in
good faith by appropriate proceedings promptly instituted and diligently
conducted; provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor; (e) easements,
rights of way, restrictions and other similar easements, licenses, restrictions
on the use of properties, or minor imperfections of title that, in the
aggregate, are not material in amount and do not in any case materially detract
from the properties subject thereto or interfere with the ordinary conduct of
the business of the Company or the Restricted Subsidiaries; (f) Liens to secure
the performance of statutory obligations, surety or appeal bonds, performance
bonds or other obligations of a like nature incurred in the ordinary course of
business; (g) Liens securing any Permitted Credit Facility or Permitted
Equipment Financing; (h) Liens to secure Indebtedness incurred in compliance
with clause (k) of the definition of "Permitted Indebtedness" to the extent
relating to the asset subject of the particular Asset Acquisition or Investment;
(i) Liens to secure any Refinancing of any Indebtedness secured by Liens
referred to in the foregoing clauses (a) or (c), but only to the extent that
such Liens do not extend to any other property or assets and the principal
amount of the Indebtedness secured by such Liens is not increased; (j) Liens to
secure the Notes; and (k) Liens on real property incurred in connection with the
financing of the purchase of such real property (or incurred within 60 days of
purchase) by the Company or any Restricted Subsidiary.
"person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Predecessor Note" means, with respect to any particular Note, every
previous Note evidencing all or a portion of the same debt as that evidenced by
such particular Note; and, for the purposes of this definition, any Note
authenticated and delivered under Section 3.06 hereof in exchange for a
mutilated Note or in lieu of a lost, destroyed or stolen Note
<PAGE> 33
-25-
shall be deemed to evidence the same debt as the mutilated, lost, destroyed or
stolen Note.
"Preferred Stock" means, with respect to any person, any and all
shares, interests, participations or other equivalents (however designated) of
such person's preferred or preference stock whether now outstanding, or issued
after the Issue Date, and including, without limitation, all classes and series
of preferred or preference stock of such person.
"Prior Issue Date" means the original date of issuance of the March
1998 Notes.
"Private Exchange Notes" shall have the meaning specified in the
Registration Rights Agreement.
"Private Placement Legend" shall mean the first paragraph of the legend
initially set forth in the Notes in the form set forth on Exhibit A-1.
"Public Capital Stock" means any class of Capital Stock which is traded
on the New York Stock Exchange, the American Stock Exchange or the Nasdaq
National Market.
"Public Equity Offering" means an underwritten public offering of
Common Stock (other than Disqualified Stock) made pursuant to a registration
statement filed with the Commission under the Securities Act.
"Qualified Consideration" means assets that will be used in an Internet
Service Business (or Capital Stock or securities of any person that will become
a Restricted Subsidiary as a result of the receipt of such Qualified
Consideration to the extent that such person owns properties or assets that will
be used in an Internet Service Business) of the Company or any Restricted
Subsidiary.
"Qualified Institutional Buyer" or "QIB" shall have the meaning
specified in Rule 144A under the Securities Act.
"Qualifying Preferred Stock" means preferred stock of an ISP (i) having
a liquidation and dividend preference at least equal to the amount of the
Investment made by the Company or a Restricted Subsidiary in such ISP and (ii)
that is convertible into shares of Common Stock of such ISP at the option of the
holder.
<PAGE> 34
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"Redemption Date" means, with respect to any Note to be redeemed, the
date fixed by the Company for such redemption pursuant to this Indenture and the
Notes.
"Redemption Price" means, with respect to any Note to be redeemed, the
price fixed for such redemption pursuant to the terms of this Indenture and the
Notes.
"Refinancing" has the meaning set forth in clause (f) of the definition
of "Permitted Indebtedness. "
"Registrable Securities" shall have the meaning specified in the
Registration Rights Agreement.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of November 25, 1998 by and among the Company and the Initial
Purchasers, as the same may be amended, supplemented or otherwise modified from
time to time in accordance with the terms thereof.
"Regular Record Date" means the Regular Record Date specified in the
Notes.
"Regulation S" means Regulation S under the Securities Act.
"Regulation S Global Note" means a permanent global note in registered
form representing the aggregate principal amount of Notes sold in reliance on
Regulation S under the Securities Act.
"Responsible Officer" means, with respect to the Trustee, the chairman
or vice chairman of the board of directors, the chairman or vice chairman of the
executive committee of the board of directors, the president, any vice
president, the secretary, any assistant secretary, the treasurer, any assistant
treasurer, the cashier, any assistant cashier, any trust officer or assistant
trust officer, the controller and any assistant controller or any other officer
of the Trustee customarily performing functions similar to those performed by
any of the above designated officers and also means, with respect to a
particular corporate trust matter, any other officer of the Trustee to whom any
corporate trust matter is referred because of his or her knowledge of and
familiarity with the particular subject.
"Restricted Note" means a Note that constitutes a "restricted security"
within the meaning of Rule 144(a)(3)
<PAGE> 35
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under the Securities Act; provided, however, that the Trustee shall be entitled
to request and conclusively rely on an Opinion of Counsel with respect to
whether any Note constitutes a Restricted Note.
"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution on Capital Stock of the
Company or any payment made to the direct or indirect holders (in their
capacities as such) of Capital Stock of the Company (other than dividends or
distributions payable solely in Capital Stock (other than Disqualified Stock) of
the Company or in options, warrants or other rights to purchase Capital Stock
(other than Disqualified Stock) of the Company; (ii) the purchase, redemption or
other acquisition or retirement for value of any Capital Stock of the Company
(other than such Capital Stock owned by the Company or a Wholly Owned Restricted
Subsidiary); (iii) the purchase, redemption, defeasance or other acquisition or
retirement for value prior to any scheduled repayment, sinking fund or maturity
of any Subordinated Indebtedness (other than any Subordinated Indebtedness held
by a Wholly Owned Restricted Subsidiary); or (iv) the making by the Company or
any Restricted Subsidiary of any Investment (other than a Permitted Investment)
in any person (other than an Investment by a Restricted Subsidiary in the
Company or an Investment by the Company or a Restricted Subsidiary in (a) a
Wholly Owned Restricted Subsidiary engaged principally in an Internet Service
Business; (b) a New ISP that is a Restricted Subsidiary; (c) a person (other
than an existing ISP) engaged principally in an Internet Service Business that
becomes a Wholly Owned Restricted Subsidiary as a result of such Investment; (d)
a New ISP that becomes a Restricted Subsidiary as a result of such Investment;
or (e) a Restricted Subsidiary (other than an Existing ISP) or a person (other
than an Existing ISP) that becomes a Restricted Subsidiary as a result of such
Investment, provided that, in either case, such Restricted Subsidiary would, but
for failing to meet the requirements of clause (c) of the definition of "ISP,"
be a New ISP).
"Restricted Subsidiary" means any Subsidiary of the Company that has
not been designated by the Board, by a Board Resolution delivered to the
Trustee, as an Unrestricted Subsidiary pursuant to and in compliance with
Section 10.21 hereof. Any such designation may be revoked by a Board Resolution
delivered to the Trustee, subject to the provisions of such covenant.
<PAGE> 36
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"Restricted Subsidiary Indebtedness" means Indebtedness of any
Restricted Subsidiary (i) which is not subordinated to any other Indebtedness of
such Restricted Subsidiary and (ii) in respect of which the Company is not also
obligated (by means of a guarantee or otherwise) other than, in the case of this
clause (ii), Indebtedness under any Permitted Credit Facilities.
"Revocation" has the meaning set forth under Section 10.21 hereof.
"Rollup" means (i) an Investment in an Existing ISP or transaction or
series of related transactions as a result of which such Existing ISP becomes a
Wholly Owned Restricted Subsidiary or (ii) an Investment in a New ISP or
transaction or series of related transactions as a result of which such New ISP
becomes a Restricted Subsidiary or (iii) a merger or consolidation of any ISP
with the Company.
"Rule 144A" means Rule 144A under the Securities Act.
"S&P" means Standard & Poor's Corporation.
"SEC" means the Securities and Exchange Commission, as from time to
time constituted, or if at any time after the execution of this Indenture such
Commission is not existing and performing the applicable duties now assigned to
it, then the body or bodies performing such duties at such time.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated by the SEC thereunder.
"Series A Preferred Stock" has the meaning provided in the Offering
Memorandum.
"Series A Purchase Agreement" has the meaning provided in the Offering
Memorandum.
"Series B Preferred Stock" has the meaning provided in the Offering
Memorandum.
"Series B Purchase Agreement" has the meaning provided in the Offering
Memorandum.
"Series C Preferred Stock" has the meaning provided in the Offering
Memorandum.
<PAGE> 37
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"Series C Purchase Agreement" has the meaning provided in the Offering
Memorandum.
"Series D Preferred Stock" has the meaning provided in the Offering
Memorandum.
"Special Record Date" means, with respect to the payment of any
Defaulted Interest, a date fixed by the Trustee pursuant to Section 3.07 hereof.
"Stated Maturity" means, with respect to any Note or any installment of
interest thereon, the dates specified in such Note as the fixed date on which
the principal of such Note or such installment of interest is due and payable
and, when used with respect to any other Indebtedness, means the date specified
in the instrument governing such Indebtedness as the fixed date on which the
principal of such Indebtedness, or any installment of interest, is due and
payable.
"Stockholders Agreement" has the meaning provided in the Offering
Memorandum.
"Strategic Equity Investor" means any person engaged principally in one
or more communications businesses with a Market Capitalization or Consolidated
Net Worth of at least $1.0 billion.
"Subordinated Indebtedness" means any Indebtedness of the Company or
any Guarantor which is expressly subordinated in right of payment to any other
Indebtedness of the Company or such Guarantor.
"Subsidiary" means, with respect to any person, (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors shall at the time be owned,
directly or indirectly, by such person, or (ii) any other person of which at
least a majority of voting interest is at the time, directly or indirectly,
owned by such person.
"Total Consolidated Indebtedness" means, at any date of determination,
an amount equal to the aggregate amount of all Indebtedness of the Company and
the Restricted Subsidiaries outstanding as of the date of determination.
"Total Incremental Equity" means, at any time of determination, the sum
of, without duplication, (i) the aggregate cash proceeds received by the Company
from capital contributions
<PAGE> 38
-30-
in respect of existing Capital Stock (other than Disqualified Stock) or the
issuance or sale of Capital Stock (other than Disqualified Stock but including
Capital Stock issued upon the conversion of convertible Indebtedness or from the
exercise of options, warrants or rights to purchase Capital Stock (other than
Disqualified Stock)) subsequent to the Prior Issue Date, other than to a
Subsidiary of the Company, plus (ii) the Fair Market Value (determined at the
time of issuance) of any Capital Stock (other than Disqualified Stock) of the
Company issued as consideration for the acquisition of Capital Stock of an ISP
(other than the acquisition of Capital Stock of an Existing ISP), plus (iii) the
Fair Market Value (determined at the time of issuance) of any Capital Stock
(other than Disqualified Stock) of the Company issued as consideration for the
acquisition of Capital Stock of an Existing ISP in a transaction as a result of
which the Existing ISP becomes a Wholly Owned Restricted Subsidiary, plus (iv)
the aggregate cash proceeds received by the Company or any Restricted Subsidiary
from the sale, disposition or repayment (in whole or in part) of any Investment
that is or was made after the Prior Issue Date and that constitutes a Restricted
Payment (or which would have constituted a Restricted Payment if this Indenture
had been in effect as of the Prior Issue Date) that has been deducted from Total
Incremental Equity pursuant to clause (v) below in an amount equal to the lesser
of (a) the return of capital with respect to the applicable portion of such
Investment and (b) the cost of the applicable portion of such Investment, in
either case, less the cost of the disposition of such Investment, minus (v) the
aggregate amount of all Restricted Payments declared or made on and after the
Prior Issue Date (assuming that this Indenture had been in effect as of the
Prior Issue Date) (other than (1) a Restricted Payment constituting an
Investment in an ISP (other than the acquisition of Capital Stock of an Existing
ISP in a transaction as a result of which the Existing ISP becomes a Wholly
Owned Restricted Subsidiary) and (2) a Restricted Payment made pursuant to
clauses (iii), (viii) or (ix) (solely, in the case of clause (ix), to the extent
the Investment is made in a Restricted Subsidiary) of the third paragraph of
Section 10.13 hereof, in each case assuming that this Indenture had been in
effect as of the Prior Issue Date).
"Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939,
as amended.
"Trustee" means the person named as the "Trustee" in the first
paragraph of this Indenture, until a successor Trustee shall have become such
pursuant to the applicable provisions
<PAGE> 39
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of this Indenture, and thereafter "Trustee" shall mean such successor Trustee.
"Unrestricted Notes" means one or more Notes that do not and are not required to
bear the Private Placement Legend in the form set forth in Exhibit A, including,
without limitation, the Exchange Notes.
"Unrestricted Subsidiary" means any Subsidiary of the Company
designated as such pursuant to and in compliance with Section 10.21 hereof. Any
such designation may be revoked by a Board Resolution delivered to the Trustee,
subject to the provisions of such covenant.
"Voting Stock" means, with respect to any person, the Capital Stock of
any class or kind ordinarily having the power to vote for the election of
directors or other members of the governing body of such person.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of
which 99% or more of the outstanding Capital Stock is owned by the Company or
another Wholly Owned Restricted Subsidiary; provided NorthWestNet shall be
deemed a Wholly Owned Restricted Subsidiary notwithstanding its existing stock
option plan and any stock options issued thereunder. For the purposes of this
definition, any directors' qualifying shares or investments by foreign nationals
mandated by applicable law shall be disregarded in determining the ownership of
a Restricted Subsidiary.
"WorldCom" means WorldCom, Inc. (and its successors by merger or
consolidation) and its controlled Affiliates.
Section 1.02. Other Definitions.
<TABLE>
<CAPTION>
Defined in
Term Section
---- ----------
<S> <C>
"Act" 1.05
"Affiliate Transaction" 10.14
"Agent Member" 3.16
"Asset Sale Offer" 10.15
"Asset Sale Offer Purchase Date" 10.15
"assumed liabilities" 10.15
"Change of Control Date" 10.10
"Change of Control Offer" 10.10
"Change of Control Payment Date" 10.10
"covenant defeasance" 4.03
</TABLE>
<PAGE> 40
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<TABLE>
<S> <C>
"Defaulted Interest" 3.07
"defeasance" 4.02
"Defeased Notes" 4.01
"Designation" 10.21
"Designation Amount" 10.21
"Event of Default" 5.01
"Excess Proceeds" 10.15
"Guarantee" 10.18
"Guarantor" 10.18
"incur" 10.11
"insolvent person" 4.04
"Note Register" 3.05
"Offer Excess Proceeds" 10.15
"Paying Agent" or "Agent" 3.02
"Physical Notes" 3.03
"Registrar" 3.02
"Replacement Assets" 10.15
"Restricted Period" 3.17
"Revocation" 10.21
"surviving entity" 8.01
</TABLE>
Section 1.03. Rules of Construction.
For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to them
in this Article, and include the plural as well as the singular;
(b) all other terms used herein which are defined in the Trust Indenture
Act, either directly or by reference therein, have the meanings assigned to
them therein;
(c) all accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with GAAP;
(d) the words "herein" "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision;
(e) all references to "$" or "dollars" refer to the lawful currency of
the United States of America; and
<PAGE> 41
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(f) the words "include", "included" and "including" as used herein are
deemed in each case to be followed by the phrase "without limitation".
Section 1.04. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
person, or that they be so certified or covered by only one document, but one
such person may certify or give an opinion with respect to some matters and one
or more other persons as to other matters, and any such person may certify or
give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or opinion may be based, insofar as it relates
to factual matters, upon a certificate or opinion of, or representations by, an
officer or officers of the Company stating that the information with respect to
such factual matters is in the possession of the Company, unless such counsel
knows, or in the exercise of reasonable care should know, that the certificate
or opinion or representations with respect to such matters are erroneous.
Where any person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated, with
proper identification of each matter covered therein, and form one instrument.
Section 1.05. Acts of Holders.
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by an agent duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it
<PAGE> 42
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is hereby expressly required, to the Company. Such instrument or instruments
(and the action embodied therein and evidenced thereby) are herein sometimes
referred to as the "Act" of the Holders signing such instrument or instruments.
Proof of execution (as provided below in subsection (b) of this Section 1.05) of
any such instrument or of a writing appointing any such agent shall be
sufficient for any purpose of this Indenture and (subject to Section 6.01
hereof) conclusive in favor of the Trustee and the Company, if made in the
manner provided in this Section.
(b) The fact and date of the execution by any person of any such
instrument or writing may be proved in any reasonable manner which the Trustee
deems sufficient.
(c) The ownership of Notes shall be proved by the Note Register.
(d) Any request, demand, authorization, direction, notice, consent,
waiver or other action by the Holder of any Note shall bind every future Holder
of the same Note or the Holder of every Note issued upon the transfer thereof or
in exchange therefor or in lieu thereof to the same extent as the original
Holder, in respect of anything done, suffered or omitted to be done by the
Trustee, any Paying Agent or the Company in reliance thereon, whether or not
notation of such action is made upon such Note.
Section 1.06. Notices, etc., to the Trustee and the Company.
Any request, demand, authorization, direction, notice, consent, waiver
or Act of Holders or other document provided or permitted by this Indenture to
be made upon, given or furnished to, or filed with:
(a) the Trustee by any Holder or by the Company shall be sufficient for
every purpose hereunder if made, given, furnished or filed, in writing, to
or with the Trustee at the Corporate Trust Office, Attention: Corporate
Trust Department or at any other address previously furnished in writing to
the Holders and the Company by the Trustee; or
(b) the Company by the Trustee or by any Holder shall be sufficient for
every purpose (except as otherwise expressly provided herein) hereunder if
in writing and mailed, first-class postage prepaid, to the Company addressed
<PAGE> 43
-35-
to it at Verio Inc., 8005 South Chester Street, Suite 200, Englewood,
Colorado 80112, Attention: Chief Executive Officer, or at any other address
previously furnished in writing to the Trustee by the Company.
Section 1.07. Notice to Holders; Waiver.
Where this Indenture provides for notice to Holders of any event, such
notice shall be sufficiently given (unless otherwise expressly provided herein)
if in writing and mailed, first-class postage prepaid, to each Holder affected
by such event, at the address of such Holder as it appears in the Note Register,
not later than the latest date, and not earlier than the earliest date,
prescribed for the giving of such notice. In any case where notice to Holders is
given by mail, neither the failure to mail such notice, nor any defect in any
notice so mailed, to any particular Holder shall affect the sufficiency of such
notice with respect to other Holders. Any notice when mailed to a Holder in the
aforesaid manner shall be conclusively deemed to have been received by such
Holder whether or not actually received by such Holder. Where this Indenture
provides for notice in any manner, such notice may be waived in writing by the
person entitled to receive such notice, either before or after the event, and
such waiver shall be the equivalent of such notice. Waivers of notice by Holders
shall be filed with the Trustee, but such filing shall not be a condition
precedent to the validity of any action taken in reliance upon such waiver.
In case by reason of the suspension of regular mail service or by
reason of any other cause, it shall be impracticable to mail notice of any event
as required by any provision of this Indenture, then any method of giving such
notice as shall be satisfactory to the Trustee shall be deemed to be a
sufficient giving of such notice.
Section 1.08. Conflict with Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with any
provision of the Trust Indenture Act or another provision which is required or
deemed to
<PAGE> 44
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be included in this Indenture by any of the provisions of the Trust Indenture
Act, such provision or requirement of the Trust Indenture Act shall control.
If any provision of this Indenture modifies or excludes any provision
of the Trust Indenture Act that may be so modified or excluded, the latter
provision shall be deemed to apply to this Indenture as so modified or excluded,
as the case may be.
Section 1.09. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
Section 1.10. Successors and Assigns.
All covenants and agreements in this Indenture by the Company shall
bind its successors and assigns, whether so expressed or not.
Section 1.11. Separability Clause.
In case any provision in this Indenture or in the Notes issued pursuant
hereto shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
Section 1.12. Benefits of Indenture.
Nothing in this Indenture or in the Notes issued pursuant hereto,
express or implied, shall give to any person (other than the parties hereto and
their successors hereunder, any Paying Agent and the Holders) any benefit or any
legal or equitable right, remedy or claim under this Indenture.
Section 1.13. GOVERNING LAW.
THIS INDENTURE, THE NOTES AND ANY GUARANTEE SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING
EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
Section 1.14. No Recourse Against Others.
A director, officer, employee or stockholder, as such, of the Company
shall not have any liability for any obligations of the Company under the Notes
or this Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation.
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Section 1.15. Independence of Covenants.
All covenants and agreements in this Indenture shall be given
independent effect so that if a particular action or condition is not permitted
by any of such covenants, the fact that it would be permitted by an exception
to, or be otherwise within the limitations of, another covenant shall not avoid
the occurrence of a Default if such action is taken or condition exists.
Section 1.16. Exhibits.
All exhibits attached hereto are by this reference made a part hereof
with the same effect as if herein set forth in full.
Section 1.17. Counterparts.
This Indenture may be executed in any number of counterparts and by
telecopier, each of which shall be an original; but such counterparts shall
together constitute but one and the same instrument.
Section 1.18. Duplicate Originals.
The parties may sign any number of copies of this Indenture. Each
signed copy shall be an original, but all of them together represent the same
agreement.
ARTICLE TWO
NOTE FORMS
Section 2.01. Form and Dating.
The Notes and the Trustee's certificate of authentication with respect
thereto shall be in substantially the forms set forth, or referenced, in Exhibit
A-1 and Exhibit A-2, respectively, annexed hereto, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Indenture and may have such letters, numbers or other marks of
identification and such legends or endorsements placed thereon as may be
required to comply with any applicable law or with the rules of the Depository,
any clearing agency or any securities exchange or as may, consistently
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herewith, be determined by the officers executing such Notes, as evidenced by
their execution thereof.
The definitive Notes shall be printed, typewritten, lithographed or
engraved or produced by any combination of these methods or may be produced in
any other manner permitted by the rules of any securities exchange on which the
Notes may be listed, all as determined by the officers executing such Notes, as
evidenced by their execution of such Notes.
Each Note shall be dated the date of its issuance and shall show the
date of its authentication. The terms and provisions contained in the Notes
shall constitute, and are expressly made, a part of this Indenture.
ARTICLE THREE
THE NOTES
Section 3.01. Title and Terms.
The aggregate principal amount of Notes which may be authenticated and
delivered under this Indenture is limited to $400,000,000 in aggregate principal
amount of Notes, except for Notes authenticated and delivered upon registration
of transfer of, or in exchange for, or in lieu of, other Notes pursuant to
Section 3.03, 3.04, 3.05, 3.06, 9.06, 10.10 or 10.15 hereof.
The final Stated Maturity of the Notes shall be December 1, 2008, and
the Notes shall bear interest at the rate of 11-1/4% per annum from the Issue
Date or from the most recent Interest Payment Date to which interest has been
paid, as the case may be, payable semi-annually thereafter on June 1 and
December 1, in each year, commencing on June 1, 1999, to the Holders of record
at the close of business on the May 15 and November 15, respectively,
immediately preceding such Interest Payment Dates, until the principal thereof
is paid or duly provided for. Interest on any overdue principal, interest (to
the extent lawful) or premium, if any, shall be payable on demand.
At the election of the Company, the entire Indebtedness on the Notes or
certain of the Company's obligations and covenants and certain Events of Default
thereunder may be defeased as provided in Article Four.
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Section 3.02. Registrar and Paying Agent.
The Company shall maintain an office or agency (which shall be located
in the Borough of Manhattan in The City of New York, State of New York) where
Notes may be presented for registration of transfer or for exchange (the
"Registrar"), an office or agency (which shall be located in the Borough of
Manhattan in The City of New York, State of New York) where Notes may be
presented for payment (the "Paying Agent" or "Agent") and an office or agency
where notices and demands to or upon the Company in respect of the Notes and
this Indenture may be served. The Registrar shall keep a register of the Notes
and of their transfer and exchange. The Company may have one or more
co-registrars and one or more additional paying agents. The term "Paying Agent"
or "Agent" includes any additional paying agent. The Company may act as its own
Paying Agent, except for the purposes of payments on account of principal on the
Notes pursuant to Sections 10.10 and 10.15 hereof.
The Company shall enter into an appropriate agency agreement with any
Agent not a party to this Indenture, which shall incorporate the provisions of
the Trust Indenture Act. The agreement shall implement the provisions of this
Indenture that relate to such Agent. The Company shall notify the Trustee of the
name and address of any such Agent. If the Company fails to maintain a Registrar
or Paying Agent, or fails to give the foregoing notice, the Trustee shall act as
such and shall be entitled to appropriate compensation in accordance with
Section 6.07 hereof.
The Company initially appoints the Trustee as the Registrar and Paying
Agent and agent for service of notices and demands in connection with the Notes.
Section 3.03. Execution and Authentication.
The Initial Notes and the Trustee's certificate of authentication shall
be substantially in the form of Exhibit A-1 hereto. The Exchange Notes and the
Trustee's certificate of authentication relating thereto shall be substantially
in the form of Exhibit A-2 hereto. The Notes may have notations, legends or
endorsements required by law, stock exchange rule or usage. The Company shall
approve the form of the Notes and any notation, legend or endorsement thereon.
Each Note shall be dated the date of issuance and shall show the date of its
authentication.
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The terms and provisions contained in the Notes annexed hereto as
Exhibits A-1 and A-2 shall constitute, and are hereby expressly made, a part of
this Indenture and, to the extent applicable, the Company and the Trustee, by
their execution and delivery of this Indenture, expressly agree to such terms
and provisions and to be bound thereby.
Notes offered and sold in reliance on Rule 144A and Notes offered and
sold in reliance on Regulation S shall be issued initially in the form of one or
more Global Notes, substantially in the form set forth in Exhibit A-1, deposited
with the Trustee, as custodian for the Depository, duly executed by the Company
and authenticated by the Trustee as hereinafter provided and shall bear the
legend set forth in Exhibit B. The aggregate principal amount of the Global
Notes may from time to time be increased or decreased by adjustments made on the
records of the Trustee, as custodian for the Depository, as hereinafter
provided.
Notes (i) offered and sold to institutional "accredited investors" (as
defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) and (ii)
issued in exchange for interests in a Global Note pursuant to Section 3.17
hereof may be issued in the form of permanent certificated Notes in registered
form in substantially the form set forth in Exhibit A-1 (the "Physical Notes").
All Notes offered and sold in reliance on Regulation S shall remain in
the form of a Global Note until the consummation of the Exchange Offer pursuant
to the Registration Rights Agreement; provided, however, that all of the time
periods specified in the Registration Rights Agreement to be complied with by
the Company have been so complied with.
Two Officers, or an Officer and an Assistant Secretary, shall sign, or
one Officer shall sign, and one Officer or an Assistant Secretary (each of whom
shall, in each case, have been duly authorized by all requisite corporate
actions) shall attest to, the Notes for the Company by manual or facsimile
signature.
If an Officer or Assistant Secretary whose signature is on a Note was
an Officer or Assistant Secretary at the time of such execution but no longer
holds that office or position at the time the Trustee authenticates the Note,
the Note shall nevertheless be valid.
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The Trustee shall authenticate (i) Initial Notes for original issue in
an aggregate principal amount not to exceed $400,000,000, (ii) Private Exchange
Notes from time to time only in exchange for a like principal amount of Initial
Notes and (iii) Unrestricted Notes from time to time only in exchange for (A) a
like principal amount of Initial Notes or (B) a like principal amount of Private
Exchange Notes, in each case upon a written order of the Company in the form of
an Officers' Certificate of the Company. Each such written order shall specify
the amount of Notes to be authenticated and the date on which the Notes are to
be authenticated, whether the Notes are to be Initial Notes, Private Exchange
Notes or Unrestricted Notes and whether (subject to this Section 3.03) the Notes
are to be issued as Physical Notes or Global Notes and such other information as
the Trustee may reasonably request. The aggregate principal amount of Notes
Outstanding at any time may not exceed $400,000,000, except as provided in
Section 3.06 hereof.
Notwithstanding the foregoing, all Notes issued under this Indenture
shall vote and consent together on all matters (as to which any of such Notes
may vote or consent) as one class and no series of Notes will have the right to
vote or consent as a separate class on any matter.
The Trustee may appoint an authenticating agent reasonably acceptable
to the Company to authenticate Notes. Unless otherwise provided in the
appointment, an authenticating agent may authenticate Notes whenever the Trustee
may do so. Each reference in this Indenture to authentication by the Trustee
includes authentication by such agent. An authenticating agent has the same
rights as an Agent to deal with the Company and Affiliates of the Company.
The Notes shall be issuable in fully registered form only, without
coupons, in denominations of $1,000 and any integral multiple thereof.
Section 3.04. Temporary Notes.
Until definitive Notes are prepared and ready for delivery, the Company
may execute and upon a Company Order the Trustee shall authenticate and deliver
temporary Notes. Temporary Notes shall be substantially in the form of
definitive Notes, in any authorized denominations, but may have variations that
the Company reasonably considers appropriate for temporary Notes as conclusively
evidenced by the Company's execution of such temporary Notes.
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If temporary Notes are issued, the Company will cause definitive Notes
to be prepared without unreasonable delay but in no event later than the date
that the Exchange Offer is consummated. After the preparation of definitive
Notes, the temporary Notes shall be exchangeable for definitive Notes upon
surrender of the temporary Notes at the office or agency of the Company
designated for such purpose pursuant to Section 10.02 hereof, without charge to
the Holder. Upon surrender for cancellation of any one or more temporary Notes,
the Company shall execute and the Trustee shall authenticate and deliver in
exchange therefor a like principal amount of definitive Notes of like tenor and
of authorized denominations. Until so exchanged the temporary Notes shall in all
respects be entitled to the same benefits under this Indenture as definitive
Notes.
Section 3.05. Transfer and Exchange.
The Company shall cause to be kept at the Corporate Trust Office of the
Trustee a register (the register maintained in such office and in any other
office or agency designated pursuant to Section 10.02 hereof being sometimes
referred to herein as the "Note Register") in which, subject to such reasonable
regulations as the Registrar may prescribe, the Company shall provide for the
registration of Notes and of transfers and exchanges of Notes. The Trustee is
hereby initially appointed Registrar for the purpose of registering Notes and
transfers of Notes as herein provided.
When Notes are presented to the Registrar or a co-Registrar with a
request from the Holder of such Notes to register the transfer or exchange for
an equal principal amount of Notes of other authorized denominations, the
Registrar shall register the transfer or make the exchange as requested;
provided, however, that every Note presented or surrendered for registration of
transfer or exchange shall be duly endorsed or be accompanied by a written
instrument of transfer or exchange in form satisfactory to the Company and the
Registrar, duly executed by the Holder thereof or his attorney duly authorized
in writing. Whenever any Notes are so presented for exchange, the Company shall
execute, and the Trustee shall authenticate and deliver, the Notes which the
Holder making the exchange is entitled to receive. No service charge shall be
made to the Noteholder for any registration of transfer or exchange. The Company
may require from the Noteholder payment of a sum sufficient to cover any
transfer taxes or other governmental charge that may be imposed in relation to a
transfer or exchange, but this provision shall not apply to any exchange
pursuant to Section 10.10, 10.15 or 9.06 hereof (in which events the Company
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will be responsible for the payment of all such taxes which arise solely as a
result of the transfer or exchange and do not depend on the tax status of the
Holder). The Trustee shall not be required to exchange or register the transfer
of any Note for a period of 15 days immediately preceding the first mailing of
notice of redemption of Notes to be redeemed or of any Note selected, called or
being called for redemption except, in the case of any Note where public notice
has been given that such Note is to be redeemed in part, the portion thereof not
to be redeemed.
All Notes issued upon any registration of transfer or exchange of Notes
shall be the valid obligations of the Company, evidencing the same Indebtedness,
and entitled to the same benefits under this Indenture, as the Notes surrendered
upon such registration of transfer or exchange.
Any Holder of a beneficial interest in a Global Note shall, by
acceptance of such Global Note, agree that transfers of beneficial interests in
such Global Notes may be effected only through a book-entry system maintained by
the Holder of such Global Note (or its agent), and that ownership of a
beneficial interest in the Note shall be required to be reflected in a
book-entry system.
Section 3.06. Mutilated, Destroyed, Lost and Stolen Notes.
If a mutilated Note is surrendered to the Trustee or if the Holder of a
Note of any series claims that the Note has been lost, destroyed or wrongfully
taken, the Company shall execute and upon a Company Order, the Trustee shall
authenticate and deliver a replacement Note of like tenor and principal amount,
bearing a number not contemporaneously outstanding if the Holder of such Note
furnishes to the Company and to the Trustee evidence reasonably acceptable to
them of the ownership and the destruction, loss or theft of such Note and an
indemnity bond shall be posted by such Holder, sufficient in the judgment of the
Company or the Trustee, as the case may be, to protect the Company, the Trustee
or any Agent from any loss that any of them may suffer if such Note is replaced.
The Company may charge such Holder for the Company's expenses in replacing such
Note (including (i) expenses of the Trustee charged to the Company and (ii) any
tax or other governmental charge that may be imposed) and the Trustee may charge
the Company for the Trustee's expenses in replacing such Note.
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Every replacement Note issued pursuant to this Section in lieu of any
destroyed, lost or stolen Note shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Note shall be at any time enforceable by anyone, and shall be entitled to
all benefits of this Indenture equally and proportionately with any and all
other Notes duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Notes.
Section 3.07. Payment of Interest; Interest Rights Preserved.
Interest on any Note which is payable, and is punctually paid or duly
provided for, on any Interest Payment Date shall be paid to the person in whose
name that Note (or one or more Predecessor Notes) is registered at the close of
business on the Regular Record Date for such interest.
Any interest on any Note which is payable, but is not punctually paid
or duly provided for, on any Interest Payment Date and interest on such
defaulted interest at the then applicable interest rate borne by the Notes, to
the extent lawful (such defaulted interest and interest thereon herein
collectively called "Defaulted Interest") shall forthwith cease to be payable to
the Holder on the Regular Record Date; and such Defaulted Interest may be paid
by the Company, at its election in each case, as provided in subsection (a) or
(b) below:
(a) The Company may elect to make payment of any Defaulted Interest to
the persons in whose names the Notes (or their respective Predecessor Notes)
are registered at the close of business on a Special Record Date for the
payment of such Defaulted Interest, which shall be fixed in the following
manner. The Company shall notify the Trustee in writing of the amount of
Defaulted Interest proposed to be paid on each Note and the date of the
proposed payment, and at the same time the Company shall deposit with the
Trustee an amount of money equal to the aggregate amount proposed to be paid
in respect of such Defaulted Interest or shall make arrangements
satisfactory to the Trustee for such deposit prior to the date of the
proposed payment, such money when deposited to be held in trust for the
benefit of the persons entitled to such Defaulted Interest as provided in
this subsection (a).
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Thereupon the Trustee shall fix a Special Record Date for the payment of
such Defaulted Interest which shall be not more than 15 days and not less
than 10 days prior to the date of the proposed payment and not less than 10
days after the receipt by the Trustee of the notice of the proposed payment.
The Trustee shall promptly notify the Company in writing of such Special
Record Date. In the name and at the expense of the Company, the Trustee
shall cause notice of the proposed payment of such Defaulted Interest and
the Special Record Date therefor to be mailed, first-class postage prepaid,
to each Holder at its address as it appears in the Note Register, not less
than 10 days prior to such Special Record Date. Notice of the proposed
payment of such Defaulted Interest and the Special Record Date therefor
having been so mailed, such Defaulted Interest shall be paid to the persons
in whose names the Notes (or their respective Predecessor Notes) are
registered on such Special Record Date and shall no longer be payable
pursuant to the following subsection (b).
(b) The Company may make payment of any Defaulted Interest in any other
lawful manner not inconsistent with the requirements of any securities
exchange on which the Notes may be listed, and upon such notice as may be
required by such exchange, if, after written notice given by the Company to
the Trustee of the proposed payment pursuant to this subsection (b), such
payment shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Note
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Note shall carry the rights to interest accrued and
unpaid, and to accrue, which were carried by such other Note.
Section 3.08. Persons Deemed Owners.
Prior to and at the time of due presentment for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the person in whose name any Note is registered in the Note Register
as the owner of such Note for the purpose of receiving payment of principal of,
premium, if any, and (subject to Section 3.07 hereof) interest on such Note and
for all other purposes whatsoever, whether or not such Note shall be overdue,
and neither the Company, the Trustee nor any agent of the Company or the Trustee
shall be affected by notice to the contrary.
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Section 3.09. Cancellation.
All Notes surrendered for payment, redemption, registration of transfer
or exchange shall be delivered to the Trustee and, if not already canceled,
shall be promptly canceled by it. The Company may at any time deliver to the
Trustee for cancellation any Notes previously authenticated and delivered
hereunder which the Company may have acquired in any manner whatsoever, and all
Notes so delivered shall be promptly canceled by the Trustee. The Registrar and
the Paying Agent shall forward to the Trustee any Notes surrendered to them for
registration of transfer or exchange, redemption or payment. The Trustee and no
one else shall cancel all Notes surrendered for registration of transfer,
exchange, payment, replacement or cancellation. No Notes shall be authenticated
in lieu of or in exchange for any Notes canceled as provided in this Section
3.09 hereof, except as expressly permitted by this Indenture. All canceled Notes
held by the Trustee shall be destroyed and certification of their destruction
delivered to the Company unless by a Company Order the Company shall direct that
the canceled Notes be returned to it. The Trustee shall provide the Company a
list of all Notes that have been canceled from time to time as requested by the
Company.
Section 3.10. Computation of Interest.
Interest on the Notes shall be computed on the basis of a 360-day year
of twelve 30-day months and, in the case of a partial month, the actual number
of days elapsed.
Section 3.11. Legal Holidays.
In any case where any Interest Payment Date, Redemption Date, date
established for the payment of Defaulted Interest or Stated Maturity of any Note
shall not be a Business Day, then (notwithstanding any other provision of this
Indenture or of the Notes) payment of principal, premium, if any, or interest
need not be made on such date, but may be made on the next succeeding Business
Day with the same force and effect as if made on the Interest Payment Date,
Redemption Date, date established for the payment of Defaulted Interest or at
the Stated Maturity, as the case may be. In such event, no interest shall accrue
with respect to such payment for the period from and after such Interest Payment
Date, Redemption Date, date established for the payment of Defaulted Interest or
Stated Maturity, as the case may be, to the next succeeding Business Day and,
with respect to any Interest Payment Date, interest for
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the period from and after such Interest Payment Date shall accrue with respect
to the next succeeding Interest Payment Date.
Section 3.12. CUSIP and CINS Numbers.
The Company in issuing the Notes may use "CUSIP" and "CINS" numbers (if
then generally in use), and if so, the Trustee shall use the CUSIP or CINS
numbers, as the case may be, in notices of redemption or exchange as a
convenience to Holders; provided, however, that any such notice may state that
no representation is made as to the correctness or accuracy of the CUSIP or CINS
number, as the case may be, printed in the notice or on the Notes, and that
reliance may be placed only on the other identification numbers printed on the
Notes. The Company shall promptly notify the Trustee in writing of any change in
the CUSIP or CINS number of any type of Notes.
Section 3.13. Paying Agent To Hold Money in Trust.
Each Paying Agent shall hold in trust for the benefit of the
Noteholders or the Trustee all money held by the Paying Agent for the payment of
principal of, premium, if any, or interest on the Notes, and shall notify the
Trustee of any default by the Company in making any such payment. Money held in
trust by the Paying Agent need not be segregated except as required by law and
in no event shall the Paying Agent be liable for any interest on any money
received by it hereunder. The Company at any time may require the Paying Agent
to pay all money held by it to the Trustee and account for any funds disbursed
and the Trustee may at any time during the continuance of any Event of Default,
upon a Company Order to the Paying Agent, require such Paying Agent to pay
forthwith all money so held by it to the Trustee and to account for any funds
disbursed. Upon making such payment, the Paying Agent shall have no further
liability for the money delivered to the Trustee.
Section 3.14. Treasury Notes.
In determining whether the Holders of the required aggregate principal
amount of Notes have concurred in any direction, waiver, consent or notice,
Notes owned by the Company or an Affiliate of the Company shall be considered as
though they are not Outstanding, except that for the purposes of determining
whether the Trustee shall be protected in relying on any such direction, waiver
or consent, only Notes which the Trustee actually knows are so owned shall be so
considered. The Company shall notify the Trustee, in writing, when it or any of
its Affiliates repurchases or otherwise acquires Notes,
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of the aggregate principal amount of such Notes so repurchased or otherwise
acquired.
Section 3.15. Deposits of Monies.
Prior to 12:00 p.m. noon New York City time on each Interest Payment
Date, maturity date, Change of Control Payment Date and Asset Sale Offer
Purchase Date, the Company shall have deposited with the Paying Agent in
immediately available funds money sufficient to make cash payments, if any, due
on such Interest Payment Date, maturity date, Change of Control Payment Date and
Asset Sale Offer Purchase Date, as the case may be, in a timely manner which
permits the Paying Agent to remit payment to the Holders on such Interest
Payment Date, maturity date, Change of Control Payment Date and Asset Sale Offer
Purchase Date, as the case may be.
Section 3.16. Book-Entry Provisions for Global Notes.
(a) The Global Notes initially shall (i) be registered in the name of
the Depository or the nominee of such Depository, (ii) be delivered to the
Trustee as custodian for such Depository and (iii) bear legends as set forth in
Exhibit B.
Members of, or participants in, the Depository ("Agent Members") shall
have no rights under this Indenture with respect to any Global Note held on
their behalf by the Depository, or the Trustee as its custodian, or under the
Global Note, and the Depository may be treated by the Company, the Trustee and
any agent of the Company or the Trustee as the absolute owner of the Global Note
for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall
prevent the Company, the Trustee or any agent of the Company or the Trustee from
giving effect to any written certification, proxy or other authorization
furnished by the Depository or impair, as between the Depository and its Agent
Members, the operation of customary practices governing the exercise of the
rights of a Holder of any Note.
(b) Transfers of Global Notes shall be limited to transfers in whole,
but not in part, to the Depository, its successors or their respective nominees.
Interests of beneficial owners in the Global Notes may be transferred or
exchanged for Physical Notes in accordance with the rules and procedures of the
Depository and the provisions of Sections 3.03 and 3.17 hereof. In addition,
Physical Notes shall be transferred to
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all beneficial owners in exchange for their beneficial interests in Global Notes
if (i) the Depository notifies the Company that it is unwilling or unable to
continue as Depository for any Global Note, or that it will cease to be a
"Clearing Agency" under the Exchange Act, and in either case a successor
Depository is not appointed by the Company within 90 days of such notice or (ii)
an Event of Default has occurred and is continuing and the Registrar has
received a written request from the Depository to issue Physical Notes.
(c) In connection with any transfer or exchange of a portion of the
beneficial interest in any Global Note to beneficial owners pursuant to
paragraph (b), the Registrar shall (if one or more Physical Notes are to be
issued) reflect on its books and records the date and a decrease in the
principal amount of the Global Note in an amount equal to the principal amount
of the beneficial interest in the Global Note to be transferred, and the
Company shall execute, and the Trustee shall authenticate and deliver, one or
more Physical Notes of like tenor and principal amount of authorized
denominations.
(d) In connection with the transfer of Global Notes as an entirety to
beneficial owners pursuant to paragraph (b), the Global Notes shall be deemed to
be surrendered to the Trustee for cancellation, and the Company shall execute,
and the Trustee shall authenticate and deliver, to each beneficial owner
identified by the Depository in exchange for its beneficial interest in the
Global Notes, an equal aggregate principal amount at maturity of Physical Notes
of like tenor of authorized denominations.
(e) Any Physical Note constituting a Restricted Note delivered in
exchange for an interest in a Global Note pursuant to subparagraph (b), (c) or
(d) of this Section 3.16 shall, except as otherwise provided by Section 3.17
hereof, bear the Private Placement Legend.
(f) The Holder of any Global Note may grant proxies and otherwise
authorize any person, including Agent Members and persons that may hold
interests through Agent Members, to take any action which a Holder is entitled
to take under this Indenture or the Notes.
Section 3.17. Special Transfer Provisions.
(a) Transfers to Non-QIB Institutional Accredited Investors. The
following additional provisions shall apply with respect to the registration of
any proposed transfer of an
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Initial Note to any Institutional Accredited Investor which is not a QIB:
(i) the Registrar shall register the transfer of any Initial Note,
whether or not such Note bears the Private Placement Legend, if (x) the
requested transfer is after the second anniversary of the Issue Date;
provided, however, that neither the Company nor any Affiliate of the Company
has held any beneficial interest in such Note, or portion thereof, at any
time on or prior to the second anniversary of the Issue Date and such
transfer can otherwise be lawfully made under the Securities Act without
registering such Initial Notes thereunder or (y) the proposed transferee has
delivered to the Registrar a certificate substantially in the form of
Exhibit C hereto and any legal opinions and certifications required thereby;
(ii) if the proposed transferor is an Agent Member seeking to transfer
an interest in a Global Note, upon receipt by the Registrar of (x) written
instructions given in accordance with the Depository's and the Registrar's
procedures and (y) the appropriate certificate, if any, required by clause
(y) of paragraph (i) above, together with any required legal opinions and
certifications, the Registrar shall register the transfer and reflect on its
books and records the date and a decrease in the principal amount of the
Global Note from which such interests are to be transferred in an amount
equal to the principal amount of the Notes to be transferred and the Company
shall execute and upon a Company Order, the Trustee shall authenticate
Physical Notes in a principal amount equal to the principal amount of the
Global Note to be transferred.
(b) Transfers to Non-U.S. Persons. The following additional provisions
shall apply with respect to the registration of any proposed transfer of an
Initial Note to any Non-U.S. Person:
(i) the Registrar shall register the transfer of any Initial Note,
whether or not such Note bears the Private Placement Legend, if (x) the
requested transfer is after the second anniversary of the Issue Date;
provided, however, that neither the Company nor any Affiliate of the Company
has held any beneficial interest in such Note, or portion thereof, at any
time on or prior to the second anniversary of the Issue Date and such
transfer can otherwise be lawfully made under the Securities Act without
registering such Initial Notes thereunder or (y) the
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proposed transferor has delivered to the Registrar a certificate
substantially in the form of Exhibit D hereto;
(ii) if the proposed transferee is an Agent Member and the Notes to be
transferred consist of Physical Notes which after transfer are to be
evidenced by an interest in the Regulation S Global Note upon receipt by the
Registrar of (x) written instructions given in accordance with the
Depository's and the Registrar's procedures and (y) the appropriate
certificate, if any, required by clause (y) of paragraph (i) above, together
with any required legal opinions and certifications, the Registrar shall
register the transfer and reflect on its books and records the date and an
increase in the principal amount of the Regulation S Global Note in an
amount equal to the principal amount of Physical Notes to be transferred,
and the Trustee shall cancel the Physical Notes so transferred;
(iii) if the proposed transferor is an Agent Member seeking to transfer
an interest in a Global Note, upon receipt by the Registrar of (x) written
instructions given in accordance with the Depository's and the Registrar's
procedures and (y) the appropriate certificate, if any, required by clause
(y) of paragraph (i) above, together with any required legal opinions and
certifications, the Registrar shall register the transfer and reflect on its
books and records the date and (A) a decrease in the principal amount of the
Global Note from which such interests are to be transferred in an amount
equal to the principal amount of the Notes to be transferred and (B) an
increase in the principal amount of the Regulation S Global Note in an
amount equal to the principal amount of the Global Note to be transferred;
and
(iv) until the 41st day after the Issue Date (the "Restricted Period"),
an owner of a beneficial interest in the Regulation S Global Note may not
transfer such interest to a transferee that is a U.S. person or for the
account or benefit of a U.S. person within the meaning of Rule 902(o) of the
Securities Act. During the Restricted Period, all beneficial interests in
the Regulation S Global Note shall be transferred only through Cedel or
Euroclear, either directly if the transferor and transferee are participants
in such systems, or indirectly through organizations that are participants.
(c) Transfers to QIBs. The following provisions shall apply with
respect to the registration of any proposed
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transfer of an Initial Note to a QIB (excluding Non-U.S. Persons):
(i) the Registrar shall register the transfer of any Initial Note,
whether or not such Note bears the Private Placement Legend, if (x) the
requested transfer is after the second anniversary of the Issue Date;
provided, however, that neither the Company nor any Affiliate of the Company
has held any beneficial interest in such Note, or portion thereof, at any
time on or prior to the second anniversary of the Issue Date and such
transfer can otherwise be lawfully made under the Securities Act without
registering such Initial Note thereunder or (y) such transfer is being made
by a proposed transferor who has checked the box provided for on the form of
Note stating, or has otherwise advised the Company and the Registrar in
writing, that the sale has been made in compliance with the provisions of
Rule 144A to a transferee who has signed the certification provided for on
the form of Note stating, or has otherwise advised the Company and the
Registrar in writing, that it is purchasing the Note for its own account or
an account with respect to which it exercises sole investment discretion and
that it and any such account is a QIB within the meaning of Rule 144A, and
is aware that the sale to it is being made in reliance on Rule 144A and
acknowledges that it has received such information regarding the Company as
it has requested pursuant to Rule 144A or has determined not to request such
information and that it is aware that the transferor is relying upon its
foregoing representations in order to claim the exemption from registration
provided by Rule 144A;
(ii) if the proposed transferee is an Agent Member and the Notes to be
transferred consist of Physical Notes which after transfer are to be
evidenced by an interest in the 144A Global Note, upon receipt by the
Registrar of written instructions given in accordance with the Depository's
and the Registrar's procedures, the Registrar shall register the transfer
and reflect on its book and records the date and an increase in the
principal amount of the 144A Global Note in an amount equal to the principal
amount of Physical Notes to be transferred, and the Trustee shall cancel the
Physical Note so transferred; and
(iii) if the proposed transferor is an Agent Member seeking to transfer
an interest in a Global Note, upon receipt by the Registrar of written
instructions given in accordance with the Depository's and the Registrar's
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procedures, the Registrar shall register the transfer and reflect on its
books and records the date and (A) a decrease in the principal amount of the
Global Note from which interests are to be transferred in an amount equal to
the principal amount of the Notes to be transferred and (B) an increase in
the principal amount of the 144A Global Note in an amount equal to the
principal amount of the Global Note to be transferred.
(d) Private Placement Legend. Upon the registration of transfer,
exchange or replacement of Notes not bearing the Private Placement Legend, the
Registrar shall deliver Notes that do not bear the Private Placement Legend.
Upon the registration of transfer, exchange or replacement of Notes bearing the
Private Placement Legend, the Registrar shall deliver only Notes that bear the
Private Placement Legend unless (i) the circumstances contemplated by paragraph
(a)(i)(x) of this Section 3.1 exist, (ii) there is delivered to the Registrar an
Opinion of Counsel reasonably satisfactory to the Company and the Trustee to the
effect that neither such legend nor the related restrictions on transfer are
required in order to maintain compliance with the provisions of the Securities
Act or (iii) such Note has been sold pursuant to an effective registration
statement under the Securities Act.
(e) Other Transfers. If a Holder proposes to transfer a Note
constituting a Restricted Note pursuant to any exemption from the registration
requirements of the Securities Act other than as provided for by Section
3.17(a), (b) and (c) hereof, the Registrar shall only register such transfer or
exchange if such transferor delivers an Opinion of Counsel satisfactory to the
Company and the Registrar that such transfer is in compliance with the
Securities Act and the terms of this Indenture; provided, however, that the
Company may, based upon the opinion of its counsel, instruct the Registrar by a
Company Order not to register such transfer in any case where the proposed
transferee is not a QIB, Non-U.S. person or Institutional Accredited Investor.
(f) General. By its acceptance of any Note bearing the Private
Placement Legend, each Holder of such a Note acknowledges the restrictions on
transfer of such Note set forth in this Indenture and in the Private Placement
Legend and agrees that it will transfer such Note only as provided in this
Indenture.
The Registrar shall retain copies of all letters, notices and other
written communications received pursuant to
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Section 3.16 hereof or this Section 3.17. The Company shall have the right to
inspect and make copies of all such letters, notices or other written
communications at any reasonable time upon the giving of reasonable prior
written notice to the Registrar.
ARTICLE FOUR
DEFEASANCE OR COVENANT DEFEASANCE
Section 4.01. Company's Option To Effect Defeasance or Covenant
Defeasance.
The Company may, at its option by Board Resolution, at any time, with
respect to the Notes, elect to have either Section 4.02 or Section 4.03 hereof
be applied to all of the Outstanding Notes (the "Defeased Notes"), upon
compliance with the conditions set forth below in this Article Four.
Section 4.02. Defeasance and Discharge.
Upon the Company's exercise under Section 4.01 hereof of the option
applicable to this Section 4.02, the Company shall be deemed to have been
discharged from their obligations with respect to the Defeased Notes on the date
the conditions set forth below are satisfied (hereinafter, "defeasance"). For
this purpose, such defeasance means that the Company shall be deemed to have
paid and discharged the entire indebtedness represented by the Defeased Notes,
which shall thereafter be deemed to be "Outstanding" only for the purposes of
Section 4.05 and the other Sections of this Indenture referred to in (a) and (b)
below, and to have satisfied all its other obligations under such Notes and this
Indenture insofar as such Notes are concerned (and the Trustee, at the expense
of the Company, and, upon Company Request, shall execute proper instruments
acknowledging the same), except for the following, which shall survive until
otherwise terminated or discharged hereunder: (a) the rights of Holders of
Defeased Notes to receive, solely from the trust fund described in Section 4.04
hereof and as more fully set forth in such Section, payments in respect of the
principal of, premium, if any, and interest on such Notes when such payments are
due, (b) the Company's obligations with respect to such Defeased Notes under
Sections 3.04, 3.05, 3.06, 10.02 and 10.03 hereof, (c) the rights, powers,
trusts, duties and immunities of the Trustee hereunder, including, without
limitation, the Trustee's rights under Section 6.07 hereof, and
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(d) this Article Four. Subject to compliance with this Article Four, the Company
may exercise its option under this Section 4.02 notwithstanding the prior
exercise of its option under Section 4.03 hereof with respect to the Notes.
Section 4.03. Covenant Defeasance.
Upon the Company's exercise under Section 4.01 hereof of the option
applicable to this Section 4.03, the Company shall be released from its
obligations under any covenant or provision contained in Sections 10.06 through
10.23 hereof and the provisions of Articles Eight shall not apply, with respect
to the Defeased Notes, on and after the date the conditions set forth below are
satisfied (hereinafter, "covenant defeasance"), and the Defeased Notes shall
thereafter be deemed not to be "Outstanding" for the purposes of any direction,
waiver, consent or declaration or Act of Holders (and the consequences of any
thereof) in connection with such covenants, but shall continue to be deemed
"Outstanding" for all other purposes hereunder. For this purpose, such covenant
defeasance means that, with respect to the Defeased Notes, the Company may omit
to comply with and shall have no liability in respect of any term, condition or
limitation set forth in any such Section or Article, whether directly or
indirectly, by reason of any reference elsewhere herein to any such Section or
Article or by reason of any reference in any such Section or Article to any
other provision herein or in any other document and such omission to comply
shall not constitute a Default or an Event of Default under Section 5.01(iii) or
(iv) hereof, but, except as specified above, the remainder of this Indenture and
such Defeased Notes shall be unaffected thereby.
Section 4.04. Conditions to Defeasance or Covenant Defeasance.
The following shall be the conditions to application of either Section
4.02 or Section 4.03 hereof to the Defeased Notes:
(1) The Company shall irrevocably have deposited or caused to be
deposited with the Trustee (or another trustee satisfying the requirements
of Section 6.09 hereof who shall agree to comply with the provisions of this
Article Four applicable to it) as trust funds in trust for the purpose of
making the following payments, specifically pledged as security for, and
dedicated solely to, the benefit of the Holders of such Notes, (a) cash in
an amount, or (b) U.S. Government Obligations which through
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the scheduled payment of principal, premium, if any, and interest in respect
thereof in accordance with their terms will provide, not later than one day
before the due date of any payment, money in an amount, or (c) a combination
thereof, in any such case, sufficient, in the opinion of a nationally
recognized firm of independent public accountants expressed in a written
certification thereof delivered to the Trustee, to pay and discharge, and
which shall be applied by the Trustee (or other qualifying trustee) to pay
and discharge, the principal of, premium, if any, and interest on the
Defeased Notes at the Stated Maturity of such principal or installment of
principal, premium, if any, or interest; provided, however, that the Trustee
shall have been irrevocably instructed to apply such cash or the proceeds of
such U.S. Government Obligations to said payments with respect to the Notes;
(2) No Default shall have occurred and be continuing on the date of such
deposit or, insofar as Section 5.01(viii) hereof is concerned, at any time
during the period ending on the ninety-first day after the date of such
deposit (it being understood that this condition shall not be deemed
satisfied until the expiration of such period);
(3) Neither the Company nor any Subsidiary of the Company is an
"insolvent person" within the meaning of any applicable Bankruptcy Law on
the date of such deposit or at any time during the period ending on the
ninety-first day after the date of such deposit (it being understood that
this condition shall not be deemed satisfied until the expiration of such
period);
(4) Such defeasance or covenant defeasance shall not cause the Trustee
for the Notes to have a conflicting interest in violation of Section 6.08
hereof and for purposes of the Trust Indenture Act with respect to any
securities of the Company;
(5) Such defeasance or covenant defeasance shall not result in a breach
or violation of, or constitute a default under, this Indenture or any other
material agreement or instrument to which the Company is a party or by which
it is bound;
(6) In the case of an election under Section 4.02 hereof, the Company
shall have delivered to the Trustee an Opinion of Counsel stating that (x)
the Company has received from, or there has been published by, the Internal
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Revenue Service a ruling or (y) since the date hereof, there has been a
change in the applicable Federal income tax law, in either case to the
effect that, and based thereon such opinion shall confirm that, the Holders
of the Outstanding Notes will not recognize income, gain or loss for Federal
income tax purposes as a result of such defeasance and will be subject to
Federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such defeasance had not occurred;
(7) In the case of an election under Section 4.03 hereof, the Company
shall have delivered to the Trustee an Opinion of Counsel to the effect that
the Holders of the Outstanding Notes will not recognize income, gain or loss
for Federal income tax purposes as a result of such covenant defeasance and
will be subject to Federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such covenant
defeasance had not occurred;
(8) The Company shall have delivered to the Trustee, an Opinion of
Counsel to the effect that, immediately following the ninety-first day after
the deposit, the trust funds established pursuant to this Article will not
be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally under
any applicable U.S. Federal or state law;
(9) The Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit made by the Company pursuant to its
election under Section 4.02 or 4.03 hereof was not made by the Company with
the intent of preferring the Holders over the other creditors of the Company
or with the intent of defeating, hindering, delaying or defrauding creditors
of the Company or others; and
(10) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that (i) all conditions
precedent (other than conditions requiring the passage of time) provided for
relating to either the defeasance under Section 4.02 or the covenant
defeasance under Section 4.03 (as the case may be) have been complied with
as contemplated by this Section 4.04 and (ii) if any other Indebtedness of
the Company shall then be outstanding or committed, such defeasance or
covenant defeasance will not violate the
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provisions of the agreements or instruments evidencing such
Indebtedness.
Opinions required to be delivered under this Section may have such
qualifications as are customary for opinions of the type required and reasonably
acceptable to the Trustee.
Section 4.05. Deposited Money and U.S. Government Obligations To Be
Held in Trust; Other Miscellaneous Provisions.
Subject to the proviso of the last paragraph of Section 10.03, all
money and U.S. Government Obligations (including the proceeds thereof) deposited
with the Trustee (or other qualifying trustee, collectively for purposes of this
Section 4.05, the "Trustee") pursuant to Section 4.04 in respect of the Defeased
Notes shall be held in trust and applied by the Trustee, in accordance with the
provisions of such Notes and this Indenture, to the payment, either directly or
through any Paying Agent (other than the Company) as the Trustee may determine,
to the Holders of such Notes of all sums due and to become due thereon in
respect of principal, premium, if any, and interest, but such money need not be
segregated from other funds except to the extent required by law.
The Company shall pay and indemnify the Trustee and hold it harmless
against any tax, fee or other charge imposed on or assessed against the U.S.
Government Obligations deposited pursuant to Section 4.04 or the principal,
premium, if any, and interest received in respect thereof other than any such
tax, fee or other charge which by law is for the account of the Holders of the
Defeased Notes.
Anything in this Article Four to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon Company
Request any money or U.S. Government Obligations held by it as provided in
Section 4.04 which, in the opinion of an internationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee, are in excess of the amount thereof which would then
be required to be deposited to effect an equivalent defeasance or covenant
defeasance.
Section 4.06. Reinstatement.
If the Trustee or Paying Agent is unable to apply any money or U.S.
Government Obligations in accordance with Section 4.02 or 4.03 hereof, as the
case may be, by reason of any order
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or judgment of any court or governmental authority enjoining, restraining or
otherwise prohibiting such application, then the obligations of the Company
under this Indenture and the Notes shall be revived and reinstated as though no
deposit had occurred pursuant to Section 4.02 or 4.03 hereof, as the case may
be, until such time as the Trustee or Paying Agent is permitted to apply all
such money and U.S. Government Obligations in accordance with Section 4.02 or
4.03 hereof, as the case may be; provided, however, that if the Company makes
any payment of principal, premium, if any, or interest on any Note following the
reinstatement of its obligations, the Company shall be subrogated to the rights
of the Holders of such Notes to receive such payment from the money and U.S.
Government Obligations held by the Trustee or Paying Agent.
ARTICLE FIVE
REMEDIES
Section 5.01. Events of Default.
"Event of Default", wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be voluntary or involuntary or be effected by operation of law or pursuant
to any judgment, decree or order of any court or any order, rule or regulation
of any administrative or governmental body):
(i) default in the payment of interest on the Notes when it becomes due
and payable and continuance of such default for a period of 30-days or more;
or
(ii) default in the payment of the principal of, or premium, if any, on
the Notes when due; or
(iii) default in the performance, or breach, of any covenant described
under Section 10.10, Section 10.15 or Article Eight; or
(iv) default in the performance, or breach, of any term, covenant or
agreement in the Notes, this Indenture (other than defaults specified in
clause (i), (ii) or (iii) above) and continuance of such default or breach
for a period of 30 days or more after written notice to the Company by the
Trustee or to the Company and the Trustee by the holders of at least 25% in
aggregate principal
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amount of the Outstanding Notes (in each case, when such notice is deemed
received in accordance with this Indenture); or
(v) failure to perform any term, covenant, condition or provision of one
or more classes or issues of Indebtedness in an aggregate principal amount
of $7.5 million or more under which the Company or a Material Restricted
Subsidiary is obligated, and either (a) such Indebtedness is already due and
payable in full or (b) such failure results in the acceleration of the
maturity of such Indebtedness; or
(vi) any holder of at least $7.5 million in aggregate principal amount
of Indebtedness of the Company or any Material Restricted Subsidiary shall
commence judicial proceedings or take any other action to foreclose upon or
dispose of assets of the Company or any Material Restricted Subsidiary
having an aggregate Fair Market Value, individually or in the aggregate, of
$7.5 million or more or shall have exercised any right under applicable law
or applicable security documents to take ownership of any such assets in
lieu of foreclosure; provided that, in any such case, the Company or any
Material Restricted Subsidiary shall not have obtained, prior to any such
foreclosure or disposition of assets, a stay of all such actions that
remains in effect; or
(vii) one or more judgments, orders or decrees for the payment of money
of $7.5 million or more, either individually or in the aggregate, shall be
entered into against the Company or any Material Restricted Subsidiary or
any of their respective properties and shall not be discharged and there
shall have been a period of 60 days or more during which a stay of
enforcement of such judgment or order, by reason of pending appeal or
otherwise, shall not be in effect; or
(viii) the Company or any Material Restricted Subsidiary of the Company
pursuant to or under or within the meaning of any Bankruptcy Law; or
(A) commences a voluntary case or proceeding;
(B) consents to the making of a Bankruptcy Order in an
involuntary case or proceeding or the commencement of any case
against it;
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(C) consents to the appointment of a Custodian of it or for any
substantial part of its property;
(D) makes a general assignment for the benefit of its creditors;
(E) files an answer or consent seeking reorganization or relief;
(F) shall admit in writing its inability to pay its debts
generally; or
(G) consents to the filing of a petition in bankruptcy; or
(ix) a court of competent jurisdiction in any involuntary case or
proceeding enters a Bankruptcy Order against the Company or any Material
Restricted Subsidiary, and such Bankruptcy Order remains unstayed and in
effect for 60 consecutive days; or
(x) a Custodian shall be appointed out of court with respect to the
Company or any Material Restricted Subsidiary or with respect to all or any
substantial part of the assets or properties of the Company or any Material
Restricted Subsidiary.
Section 5.02. Acceleration of Maturity; Rescission and Annulment.
If an Event of Default (other than an Event of Default specified in
clause (viii), (ix) or (x) of Section 5.01 hereof with respect to the Company)
occurs and is continuing, then the Trustee or the holders of at least 25% in
principal amount of the Outstanding Notes may, by written notice, and the
Trustee upon the request of the holders of not less than 25% in principal amount
of the Outstanding Notes shall, declare the principal amount of, premium (if
any) on, and any accrued and unpaid interest on, all outstanding Notes to be
immediately due and payable and upon any such declaration such amounts shall
become immediately due and payable. If an Event of Default specified in clause
(viii), (ix) or (x) above with respect to the Company occurs and is continuing,
then the principal amount of, premium (if any) on, and any accrued and unpaid
interest on, all Outstanding Notes shall ipso facto become and be immediately
due and payable without any declaration or other act on the part of the Trustee
or any holder.
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After a declaration of acceleration, the holders of a majority
in aggregate principal amount of Outstanding Notes may, by notice to the
Trustee, rescind such declaration of acceleration if all existing Events of
Default, other than nonpayment of the principal of, premium (if any) on, and any
accrued and unpaid interest on, the Notes that has become due solely as a result
of such acceleration, have been cured or waived and if the rescission of
acceleration would not conflict with any judgment or decree.
Section 5.03. Collection of Indebtedness and Suits for Enforcement by
Trustee.
The Company covenants that if an Event of Default specified in Section
5.01(i) or 5.01(ii) shall have occurred and be continuing, the Company will,
upon demand of the Trustee, pay to the Trustee, for the benefit of the Holders
of such Notes, the whole amount then due and payable on such Notes for
principal, premium, if any, and interest, with interest upon the overdue
principal, premium, if any, and, to the extent that payment of such interest
shall be legally enforceable, upon overdue installments of interest, at the rate
then borne by the Notes; and, in addition thereto, such further amount as shall
be sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel.
If the Company fails to pay such amounts forthwith upon such demand,
the Trustee, in its own name and as trustee of an express trust, may, but is not
obligated under this paragraph to, institute a judicial proceeding for the
collection of the sums so due and unpaid and may, but is not obligated under
this paragraph to, prosecute such proceeding to judgment or final decree, and
may, but is not obligated under this paragraph to, enforce the same against the
Company or any other obligor upon the Notes and collect the moneys adjudged or
decreed to be payable in the manner provided by law out of the property of the
Company or any other obligor upon the Notes, wherever situated.
If an Event of Default occurs and is continuing, the Trustee may in its
discretion, but is not obligated under this paragraph to, (i) proceed to protect
and enforce its rights and the rights of the Holders under this Indenture by
such appropriate private or judicial proceedings as the Trustee shall deem most
effectual to protect and enforce such rights, whether for the specific
enforcement of any covenant or agreement contained in this Indenture or in aid
of the exercise of any power
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granted herein or (ii) proceed to protect and enforce any other proper remedy.
No recovery of any such judgment upon any property of the Company shall affect
or impair any rights, powers or remedies of the Trustee or the Holders.
Section 5.04. Trustee May File Proofs of Claims.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the Notes
or the property of the Company or of such other obligor or their creditors, the
Trustee (irrespective of whether the principal of the Notes shall then be due
and payable as therein expressed or by declaration or otherwise and irrespective
of whether the Trustee shall have made any demand on the Company for the payment
of overdue principal or interest) shall be entitled and empowered, by
intervention in such proceeding or otherwise,
(a) to file and prove a claim for the whole amount of principal,
premium, if any, and interest owing and unpaid in respect of the Notes and
to file such other papers or documents as may be necessary or advisable in
order to have the claims of the Trustee (including any claim for the
reasonable compensation, fees, expenses, disbursements and advances of the
Trustee, its agents and counsel) and of the Holders allowed in such judicial
proceeding, and
(b) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same;
and any Custodian, in any such judicial proceeding is hereby authorized by each
Holder to make such payments to the Trustee and, in the event that the Trustee
shall consent to the making of such payments directly to the Holders, to pay the
Trustee any amount due it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any other
amounts due the Trustee under Section 6.07 hereof.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Notes or
the rights of any Holder thereof, or to authorize the Trustee to vote in respect
of the claim of any Holder in any such proceeding.
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Section 5.05. Trustee May Enforce Claims Without Possession of Notes.
All rights of action and claims under this Indenture or the Notes may
be prosecuted and enforced by the Trustee without the possession of any of the
Notes or the production thereof in any proceeding relating thereto, and any such
proceeding instituted by the Trustee shall be brought in its own name and as
trustee of an express trust, and any recovery of judgment shall, after provision
for the payment of the reasonable compensation, fees, expenses, disbursements
and advances of the Trustee, its agents and counsel, be for the ratable benefit
of the Holders of the Notes in respect of which such judgment has been
recovered.
Section 5.06. Application of Money Collected.
Any money collected by the Trustee pursuant to this Article shall be
applied in the following order, at the date or dates fixed by the Trustee and,
in case of the distribution of such money on account of principal, premium, if
any, or interest, upon presentation of the Notes and the notation thereon of the
payment if only partially paid and upon surrender thereof if fully paid:
First: to the Trustee for amounts due under Section 6.07;
Second: to Holders for interest accrued on the Notes, ratably, without
preference or priority of any kind, according to the amounts due and payable
on the Notes for interest;
Third: to Holders for principal and premium, if any, amounts owing under
the Notes, ratably, without preference or priority of any kind, according to
the amounts due and payable on the Notes for principal and premium, if any;
and
Fourth: the balance, if any, to the Company.
The Trustee, upon prior written notice to the Company, may fix a record
date and payment date for any payment to Noteholders pursuant to this Section
5.06.
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Section 5.07. Limitation on Suits.
No Holder of any Notes shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder, unless
(a) such Holder has previously given written notice to the Trustee of a
continuing Event of Default;
(b) the Holders of not less than 25% in principal amount of the
Outstanding Notes shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own name as
Trustee hereunder;
(c) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request;
(d) the Trustee for 60 days after its receipt of such notice, request
and offer of indemnity has failed to institute any such proceeding; and
(e) no direction inconsistent with such written request has been given
to the Trustee during such 60-day period by the Holders of a majority in
aggregate principal amount of the Outstanding Notes;
it being understood and intended that no one or more Holders shall have any
right in any manner whatever by virtue of, or by availing of, any provision of
this Indenture, any Note or any Guarantee to affect, disturb or prejudice the
rights of any other Holders, or to obtain or to seek to obtain priority or
preference over any other Holders or to enforce any right under this Indenture,
any Note or any Guarantee, except in the manner provided in this Indenture and
for the equal and ratable benefit of all the Holders.
Section 5.08. Unconditional Right of Holders To Re- ceive Principal,
Premium and Interest.
Notwithstanding any other provision in this Indenture, the Holder of
any Note shall have the right, which is absolute and unconditional, to receive
cash payment of the principal of, premium, if any, and (subject to Section 3.07
hereof) interest on such Note on the respective Stated Maturities
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expressed in such Note (or, in the case of redemption, on the respective
Redemption Date) and to institute suit for the enforcement of any such payment,
and such rights shall not be impaired without the consent of such Holder.
Section 5.09. Restoration of Rights and Remedies.
If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture or any Note and such proceeding has
been discontinued or abandoned for any reason, or has been determined adversely
to the Trustee or to such Holder, then and in every such case the Company, the
Trustee and the Holders shall, subject to any determination in such proceeding,
be restored severally and respectively to their former positions hereunder, and
thereafter all rights and remedies of the Trustee and the Holders shall continue
as though no such proceeding had been instituted.
Section 5.10. Rights and Remedies Cumulative.
Except as provided in Section 3.06, no right or remedy herein conferred
upon or reserved to the Trustee or to the Holders is intended to be exclusive of
any other right or remedy, and every right and remedy shall, to the extent
permitted by law, be cumulative and in addition to every other right and remedy
given hereunder or now or hereafter existing at law or in equity or otherwise.
The assertion or employment of any right or remedy hereunder, or otherwise,
shall not prevent the concurrent assertion or employment of any other
appropriate right or remedy.
Section 5.11. Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of any Note to
exercise any right or remedy accruing upon any Event of Default shall impair any
such right or remedy or constitute a waiver of any such Event of Default or an
acquiescence therein. Every right and remedy given by this Article Five or by
law to the Trustee or to the Holders may be exercised from time to time, and as
often as may be deemed expedient, by the Trustee or by the Holders, as the case
may be.
Section 5.12. Control by Majority.
The Holders of a majority in aggregate principal amount of the
Outstanding Notes shall have the right to direct the time, method and place of
conducting any proceeding for any
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remedy available to the Trustee, or exercising any trust or power conferred on
the Trustee, provided, however, that:
(a) such direction shall not be in conflict with any rule of law or with
this Indenture or any Note or expose the Trustee to personal liability; and
(b) the Trustee may take any other action deemed proper by the Trustee
which is not inconsistent with such direction.
Section 5.13. Waiver of Past Defaults.
The Holders of not less than a majority in aggregate principal amount of
the Outstanding Notes may on behalf of the Holders of all the Notes waive any
past Default hereunder and its consequences, except a Default
(a) in the payment of the principal of, premium, if any, or interest on
any Note or
(b) in respect of a covenant or provision hereof which under Article
Nine cannot be modified or amended without the consent of the Holder of each
Outstanding Note affected thereby.
Upon any such waiver, such Default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other Default or Event of Default or impair any right consequent thereon.
Section 5.14. Undertaking for Costs.
All parties to this Indenture agree, and each Holder of any Note by his
acceptance thereof shall be deemed to have agreed, that any court may in its
discretion require, in any suit for the enforcement of any right or remedy under
this Indenture, or in any suit against the Trustee for any action taken,
suffered or omitted by it as Trustee, the filing by any party litigant in such
suit of an undertaking to pay the costs of such suit, and that such court may in
its discretion assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in such suit, having due regard to the merits and
good faith of the claims or defenses made by such party litigant; but the
provisions of this Section 5.14 shall not apply to any suit instituted by the
Trustee, to any suit instituted by any Holder, or group of Holders, holding in
the aggregate
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more than 10% in principal amount of the Outstanding Notes, or to
any suit instituted by any Holder for the enforcement of the payment of the
principal of, premium, if any, or interest on any Note on or after the
respective Stated Maturities expressed in such Note (or, in the case of
redemption, on or after the respective Redemption Dates).
Section 5.15. Waiver of Stay, Extension or Usury Laws.
The Company covenants (to the extent that it may lawfully do so) that it
will not at any time insist upon, or plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay or extension law or any usury or
other law wherever enacted, now or at any time hereafter in force, which would
prohibit or forgive the Company from paying all or any portion of the principal
of, premium, if any, or interest on the Notes contemplated herein or in the
Notes or which may affect the covenants or the performance of this Indenture;
and the Company (to the extent that it may lawfully do so) hereby expressly
waives all benefit or advantage of any such law, and covenants that it will not
hinder, delay or impede the execution of any power herein granted to the
Trustee, but will suffer and permit the execution of every such power as though
no such law had been enacted.
Section 5.16. Unconditional Right of Holders To Receive Payment.
Notwithstanding any other provision in this Indenture and any other
provision of any Note, the right of any Holder of any Note to receive payment of
the principal of, premium, if any, and interest on such Note on or after the
respective Stated Maturities (or the respective Redemption Dates, in the case of
redemption) expressed in such Note, or after such respective dates, shall not be
impaired or affected without the consent of such Holder.
ARTICLE SIX
THE TRUSTEE
Section 6.01. Certain Duties and Responsibilities.
(a) Except during the continuance of an Event of Default,
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(1) the Trustee undertakes to perform such duties and only such duties
as are specifically set forth in this Indenture, and no implied covenants or
obligations shall be read into this Indenture against the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to
the Trustee and conforming to the requirements of this Indenture; but in the
case of any such certificates or opinions which by provision hereof are
specifically required to be furnished to the Trustee, the Trustee shall be
under a duty to examine the same to determine whether or not they conform to
the requirements of this Indenture.
(b) During the existence of an Event of Default, the Trustee is required
to exercise such rights and powers vested in it under this Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
(c) No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act, or its own willful misconduct, except that no provision of this
Indenture shall require the Trustee to expend or risk its own funds or otherwise
incur any financial liability in the performance of any of its duties hereunder,
or in the exercise of any of its rights or powers, if it shall have reasonable
grounds for believing that repayment of such funds or adequate indemnity against
such risk or liability is not reasonably assured to it.
(d) Whether or not therein expressly so provided, every provision of
this Indenture relating to the conduct or affecting the liability of or
affording protection to the Trustee shall be subject to the provisions of this
Section 6.01.
Section 6.02. Notice of Defaults.
Within 45 days after the occurrence of any Default, the Trustee shall
transmit by mail to all Holders, as their names and addresses appear in the Note
Register, notice of such Default hereunder known to the Trustee, unless such
Default shall have been cured or waived; provided, however, that, except in the
case of a Default in the payment of the principal of, premium, if any, or
interest on any Note, the Trustee shall
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be protected in withholding such notice if and so long as a trust committee of
Responsible Officers of the Trustee in good faith determines that the
withholding of such notice is in the interest of the Holders.
Section 6.03. Certain Rights of Trustee.
Subject to Section 6.01 hereof and the provisions of Section 315 of the
Trust Indenture Act:
(a) the Trustee may rely and shall be protected in acting or refraining
from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond,
debenture, note, other evidence of indebtedness or other paper or document
believed by it to be genuine and to have been signed or presented by the
proper party or parties;
(b) any request or direction of the Company mentioned herein shall be
sufficiently evidenced by a Company Request or Company Order and any
resolution of the Board may be sufficiently evidenced by a Board Resolution
thereof;
(c) the Trustee may consult with counsel and any written advice of such
counsel or any Opinion of Counsel shall be full and complete authorization
and protection in respect of any action taken, suffered or omitted by it
hereunder in good faith and in reliance thereon in accordance with such
advice or Opinion of Counsel;
(d) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction
of any of the Holders pursuant to this Indenture, unless such Holders shall
have offered to the Trustee reasonable security or indemnity against the
costs, expenses and liabilities which might be incurred by the Trustee in
compliance with such request or direction;
(e) the Trustee shall not be liable for any action taken or omitted by
it in good faith and believed by it to be authorized or within the
discretion, rights or powers conferred upon it by this Indenture other than
any liabilities arising out of its own negligence;
(f) the Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution,
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certificate, statement, instrument, opinion, report, notice, request,
direction, consent, order, approval, appraisal, bond, debenture, note,
coupon, security, other evidence of indebtedness or other paper or document
unless requested in writing so to do by the Holders of not less than a
majority in aggregate principal amount of the Notes then Outstanding;
provided, however, that, if the payment within a reasonable time to the
Trustee of the costs, expenses or liabilities likely to be incurred by it in
the making of such investigation is, in the opinion of the Trustee, not
reasonably assured to the Trustee by the security afforded to it by the
terms of this Indenture, the Trustee may require reasonable indemnity
against such expenses or liabilities as a condition to proceeding; the
reasonable expenses of every such investigation shall be paid by the Company
or, if paid by the Trustee or any predecessor Trustee, shall be repaid by
the Company upon demand; provided, further, the Trustee in its discretion
may make such further inquiry or investigation into such facts or matters as
it may deem fit, and, if the Trustee shall determine to make such further
inquiry or investigation, it shall be entitled to examine the books, records
and premises of the Company, personally or by agent or attorney; and
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by
it hereunder.
(h) Except with respect to Section 10.01, the Trustee shall have no duty
to inquire as to the performance of the Company's covenants in Article Ten.
In addition, the Trustee shall not be deemed to have knowledge of any
Default or Event of Default except (i) any Event of Default occurring
pursuant to Sections 5.01(i), 5.01(ii) and 10.01 or (ii) any Default or
Event of Default of which the Trustee shall have received written
notification or obtained actual knowledge.
Section 6.04. Trustee Not Responsible for Recitals, Dispositions of
Notes or Application of Proceeds Thereof.
The recitals contained herein and in the Notes, except the Trustee's
certificates of authentication, shall be
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taken as the statements of the Company, and the Trustee assumes no
responsibility for their correctness. The Trustee makes no representations as to
the validity or sufficiency of this Indenture or of the Notes except that the
Trustee represents that it is duly authorized to execute and deliver this
Indenture, authenticate the Notes and perform its obligations hereunder and that
the statements made by it in a Statement of Eligibility and Qualification on
Form T-1, if any, to be supplied to the Company are true and accurate subject to
the qualifications set forth therein. The Trustee shall not be accountable for
the use or application by the Company of Notes or the proceeds thereof.
Section 6.05. Trustee and Agents May Hold Notes; Collections; Etc.
The Trustee, any Paying Agent, Registrar or any other agent of the
Company, in its individual or any other capacity, may become the owner or
pledgee of Notes, with the same rights it would have if it were not the Trustee,
Paying Agent, Registrar or such other agent and, subject to Section 6.08 hereof
and Sections 310 and 311 of the Trust Indenture Act, may otherwise deal with the
Company and receive, collect, hold and retain collections from the Company with
the same rights it would have if it were not the Trustee, Paying Agent,
Registrar or such other agent.
Section 6.06. Money Held in Trust.
All moneys received by the Trustee shall, until used or applied as
herein provided, be held in trust for the purposes for which they were received,
but need not be segregated from other funds except to the extent required herein
or by law. The Trustee shall not be under any liability for interest on any
moneys received by it hereunder.
Section 6.07. Compensation and Indemnification of Trustee and Its Prior
Claim.
The Company covenants and agrees: (a) to pay to the Trustee from time to
time, and the Trustee shall be entitled to, reasonable compensation for all
services rendered by it hereunder (which shall not be limited by any provision
of law in regard to the compensation of a trustee of an express trust); (b) to
reimburse the Trustee and each predecessor Trustee upon its request for all
reasonable expenses, fees, disbursements and advances incurred or made by or on
behalf of it in accordance with any of the provisions of this Indenture
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(including the reasonable compensation, fees, and the expenses and disbursements
of its counsel and of all agents and other persons not regularly in its employ),
except any such expense, disbursement or advance as may arise from its
negligence or bad faith; and (c) to indemnify the Trustee and each predecessor
Trustee for, and to hold it harmless against, any loss, liability or expense
incurred without negligence or bad faith on its part, arising out of or in
connection with the acceptance or administration of this Indenture or in respect
of the trusts hereunder and its duties hereunder, including enforcement of this
Section 6.07. The obligations of the Company under this Section to compensate
and indemnify the Trustee and each predecessor Trustee and to pay or reimburse
the Trustee and each predecessor Trustee for expenses, fees, disbursements and
advances shall constitute an additional obligation hereunder and shall survive
the satisfaction and discharge of this Indenture. To secure the obligations of
the Company to the Trustee under this Section 6.07, the Trustee shall have a
prior Lien upon all property and funds held or collected by the Trustee as such,
except funds and property paid by the Company and held in trust for the benefit
of the Holders of particular Notes.
Section 6.08. Conflicting Interests.
The Trustee shall be subject to and comply with the provisions of
Section 310(b) of the Trust Indenture Act.
Section 6.09. Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder which shall be eligible
to act as Trustee under Trust Indenture Act Sections 310(a)(1) and (2) and which
shall have a combined capital and surplus of at least $25,000,000, and have a
Corporate Trust Office in the Borough of Manhattan in The City of New York,
State of New York. If such corporation publishes reports of condition at least
annually, pursuant to law or to the requirements of any Federal, state,
territorial or District of Columbia supervising or examining authority, then for
the purposes of this Section, the combined capital and surplus of such
corporation shall be deemed to be its combined capital and surplus as set forth
in its most recent report of condition so published. If at any time the Trustee
shall cease to be eligible in accordance with the provisions of this Section,
the Trustee shall resign immediately in the manner and with the effect
hereinafter specified in this Article.
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Section 6.10. Resignation and Removal; Appointment of Successor Trustee.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee under Section 6.11.
(b) The Trustee, or any trustee or trustees hereinafter appointed, may
at any time resign by giving written notice thereof to the Company at least 20
Business Days prior to the date of such proposed resignation. Upon receiving
such notice of resignation, the Company shall promptly appoint a successor
trustee by written instrument executed by authority of the Board, a copy of
which shall be delivered to the resigning Trustee and a copy to the successor
Trustee. If an instrument of acceptance by a successor Trustee shall not have
been delivered to the Trustee within 20 Business Days after the giving of such
notice of resignation, the resigning Trustee may, or (if an instrument of
acceptance by a successor Trustee shall not have been delivered to the Trustee
within 30 Business Days after the giving of such notice of resignation) any
Holder who has been a bona fide Holder of a Note for at least six months may, on
behalf of himself and all others similarly situated, petition any court of
competent jurisdiction for the appointment of a successor Trustee. Such court
may thereupon, after such notice, if any, as it may deem proper, appoint a
successor Trustee.
(c) The Trustee may be removed at any time by an Act of the Holders of a
majority in principal amount of the Outstanding Notes, delivered to the Trustee
and to the Company.
(d) If at any time:
(1) the Trustee shall fail to comply with the provisions of Section
310(b) of the Trust Indenture Act in accordance with Section 6.08 hereof
after written request therefor by the Company or by any Holder who has been
a bona fide Holder of a Note for at least six months, or
(2) the Trustee shall cease to be eligible under Section 6.09 hereof and
shall fail to resign after written request therefor by the Company or by any
Holder who has been a bona fide Holder of a Note for at least six months, or
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(3) the Trustee shall become incapable of acting or shall be adjudged a
bankrupt or insolvent, or a receiver of the Trustee or of its property shall
be appointed or any public officer shall take charge or control of the
Trustee or of its property or affairs for the purpose or rehabilitation,
conservation or liquidation,
then, in any case, (i) the Company by a Board Resolution may remove the Trustee,
or (ii) subject to Section 5.14, the Holder of any Note who has been a bona fide
Holder of a Note for at least six months may, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor Trustee. Such court
may thereupon, after such notice, if any, as it may deem proper and prescribe,
remove the Trustee and appoint a successor Trustee.
(e) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause, the
Company, by a Board Resolution, shall promptly appoint a successor Trustee. If,
within one year after such resignation, removal or incapability, or the
occurrence of such vacancy, a successor Trustee shall be appointed by Act of the
Holders of a majority in principal amount of the Outstanding Notes delivered to
the Company and the retiring Trustee, the successor Trustee so appointed shall,
forthwith upon its acceptance of such appointment, become the successor Trustee
and supersede the successor Trustee appointed by the Company. If no successor
Trustee shall have been so appointed by the Company or the Holders of the Notes
and accepted appointment in the manner hereinafter provided, the Holder of any
Note who has been a bona fide Holder for at least six months may, subject to
Section 5.14, on behalf of himself and all others similarly situated, petition
any court of competent jurisdiction for the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each removal
of the Trustee and each appointment of a successor Trustee by mailing written
notice of such event by first-class mail, postage prepaid, to the Holders of
Notes as their names and addresses appear in the Note Register. Each notice
shall include the name of the successor Trustee and the address of its Corporate
Trust Office.
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Section 6.11. Acceptance of Appointment by Successor.
Every successor Trustee appointed hereunder shall execute, acknowledge
and deliver to the Company and to the retiring Trustee an instrument accepting
such appointment, and thereupon the resignation or removal of the retiring
Trustee shall become effective and such successor Trustee, without any further
act, deed or conveyance, shall become vested with all the rights, powers, trusts
and duties of the retiring Trustee as if originally named as Trustee hereunder;
but, nevertheless, on the written request of the Company or the successor
Trustee, upon payment of amounts due it pursuant to Section 6.07, such retiring
Trustee shall duly assign, transfer and deliver to the successor Trustee all
moneys and property at the time held by it hereunder and shall execute and
deliver an instrument transferring to such successor Trustee all the rights,
powers, duties and obligations of the retiring Trustee. Upon request of any such
successor Trustee, the Company shall execute any and all instruments for more
fully and certainly vesting in and confirming to such successor Trustee all such
rights and powers. Any Trustee ceasing to act shall, nevertheless, retain a
prior claim upon all property or funds held or collected by such Trustee to
secure any amounts then due it pursuant to the provisions of Section 6.07.
No successor Trustee with respect to the Notes shall accept appointment
as provided in this Section 6.11 unless at the time of such acceptance such
successor Trustee shall be eligible to act as Trustee under this Article.
Upon acceptance of appointment by any successor Trustee as provided in
this Section 6.11, the successor shall give notice thereof to the Holders of the
Notes, by mailing such notice to such Holders at their addresses as they shall
appear on the Note Register. If the acceptance of appointment is substantially
contemporaneous with the resignation, then the notice called for by the
preceding sentence may be combined with the notice called for by Section 6.10.
If the Company fails to give such notice within 10 days after acceptance of
appointment by the successor Trustee, the successor Trustee shall cause such
notice to be given at the expense of the Company.
Section 6.12. Merger, Conversion, Amalgamation, Consolidation or
Succession to Business.
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated or amalgamated,
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or any corporation resulting from any merger, conversion, amalgamation or
consolidation to which the Trustee shall be a party, or any corporation
succeeding to all or substantially all of the corporate trust business of the
Trustee, shall be the successor of the Trustee hereunder without the execution
or filing of any paper or any further act on the part of any of the parties
hereto, provided such corporation shall be eligible under this Article Six to
serve as Trustee hereunder.
In case at the time such successor to the Trustee under this Section
6.12 shall succeed to the trusts created by this Indenture any of the Notes
shall have been authenticated but not delivered, any such successor to the
Trustee may adopt the certificate of authentication of any predecessor Trustee
and deliver such Notes so authenticated; and, in case at that time any of the
Notes shall not have been authenticated, any successor to the Trustee under this
Section 6.12 may authenticate such Notes either in the name of any predecessor
hereunder or in the name of the successor Trustee; and in all such cases such
certificate shall have the full force which it is anywhere in the Notes or in
this Indenture provided that the certificate of the Trustee shall have been
authenticated.
ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
Section 7.01. Preservation of Information; Company To Furnish Trustee
Names and Addresses of Holders.
(a) The Trustee shall preserve the names and addresses of the
Noteholders and otherwise comply with TIA Section 312(a). If the Trustee is not
the Registrar, the Company shall furnish or cause the Registrar to furnish to
the Trustee before each Interest Payment Date, and at such other times as the
Trustee may request in writing, a list in such form and as of such date as the
Trustee may reasonably require of the names and addresses of the Noteholders.
Neither the Company nor the Trustee shall be under any responsibility with
regard to the accuracy of such list.
(b) The Company will furnish or cause to be furnished to the Trustee
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(i) semi-annually, not more than 15 days after each Regular Record Date,
a list, in such form as the Trustee may reasonably require, of the names and
addresses of the Holders as of such Regular Record Date; and
(ii) at such other times as the Trustee may reasonably request in
writing, within 30 days after receipt by the Company of any such request, a
list of similar form and content as of a date not more than 15 days prior to
the time such list is furnished;
provided, however, that if and so long as the Trustee shall be the Registrar, no
such list need be furnished pursuant to this Subsection 7.01(b).
Section 7.02. Communications of Holders.
Holders may communicate with other Holders with respect to their rights
under this Indenture or under the Notes pursuant to Section 312(b) of the Trust
Indenture Act. The Company and the Trustee and any and all other persons
benefited by this Indenture shall have the protection afforded by Section 312(c)
of the Trust Indenture Act.
Section 7.03. Reports by Trustee.
Within 60 days after May 15 of each year commencing with the first May
15 following the date of this Indenture, the Trustee shall mail to all Holders,
as their names and addresses appear in the Note Register, a brief report dated
as of such May 15, in accordance with, and to the extent required under Section
313 of the Trust Indenture Act. At the time of its mailing to Holders, a copy of
each such report shall be filed by the Trustee with the Company, the SEC and
with each stock exchange on which the Notes are listed. The Company shall notify
the Trustee when the Notes are listed on any stock exchange.
Section 7.04. Reports by Company.
The Company shall:
(a) file with the SEC the copies of annual reports and of the
information, documents and other reports (or copies of such portions of any
of the foregoing as the SEC may from time to time by rules and regulations
prescribe) required to be filed with the SEC pursuant to Section 13 or
Section 15 of the Exchange Act, whether or not the Company
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has a class of securities registered under the Exchange Act;
(b) file with the Trustee within 15 days after it files or would be
required to file the information specified in subsection (a) of this Section
7.04 reports and documents with the SEC copies of such information;
(c) file with the Trustee and the SEC in accordance with rules and
regulations prescribed from time to time by the SEC, such additional
information, documents and reports with respect to compliance by the Company
with the conditions and covenants of this Indenture as may be required from
time to time by such rules and regulations; and
(d) transmit by mail to all Holders, as their names and addresses appear
in the Note Register, within 30 days after the filing thereof with the
Trustee, such summaries of any information, documents and reports required
to be filed by the Company pursuant to subsections (a) and (c) of this
Section as may be required by rules and regulations prescribed from time to
time by the SEC.
Notwithstanding anything to the contrary herein, the Trustee shall have
no duty to review information provided pursuant to subsection (b) of this
Section 7.04 for purposes of determining compliance with any provisions of this
Indenture.
ARTICLE EIGHT
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
Section 8.01. Company May Consolidate, etc., Only on Certain Terms.
The Company will not (i) consolidate or combine with or merge with or
into or, directly or indirectly, sell, assign, convey, lease, transfer or
otherwise dispose of all or substantially all of its properties and assets to
any person or persons in a single transaction or through a series of
transactions, or (ii) permit any of the Restricted Subsidiaries to enter into
any such transaction or series of transactions if it would result in the
disposition of all or substantially all of the properties or assets of the
Company and the Restricted Subsidiaries on a consolidated basis, unless, in the
case of
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either (i) or (ii), (a) the Company shall be the continuing person or, if the
Company is not the continuing person, the resulting, surviving or transferee
person (the "surviving entity") shall be a company organized and existing under
the laws of the United States or any State or territory thereof; (b) the
surviving entity shall expressly assume all of the obligations of the Company
under the Notes, and this Indenture, and shall, if required by law to effectuate
such assumption, execute a supplemental indenture to effect such assumption,
which supplemental indenture shall be delivered to the Trustee and shall be in
form and substance reasonably satisfactory to the Trustee; (c) immediately after
giving effect to such transaction or series of transactions on a pro forma basis
(including, without limitation, any Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction or series of
transactions), the Company or the surviving entity (assuming such surviving
entity's assumption of the Company's obligations under the Notes and this
Indenture), as the case may be, would be able to incur $1.00 of Indebtedness
under the proviso of Section 10.11; provided that, in the case of any
transaction or series of transactions comprised solely of one or more Rollups,
this clause (c) shall be deemed satisfied if the Company or the surviving entity
and the Restricted Subsidiaries would have been able to incur all of their
outstanding Indebtedness as Permitted Indebtedness; (d) immediately after giving
effect to such transaction or series of transactions on a pro forma basis
(including, without limitation, any Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction or series of
transactions), no Default shall have occurred and be continuing; and (e) the
Company or the surviving entity, as the case may be, shall have delivered to the
Trustee an Officers' Certificate stating that such transaction or series of
transactions, and, if a supplemental indenture is required in connection with
such transaction or series of transactions to effectuate such assumption, such
supplemental indenture, complies with this covenant and that all conditions
precedent in this Indenture relating to the transaction or series of
transactions have been satisfied.
Section 8.02. Successor Substituted.
Upon any consolidation or merger or any sale, assignment, conveyance,
lease, transfer or other disposition of all or substantially all of the assets
of the Company in accordance with the foregoing in which the Company or the
Restricted Subsidiary, as the case may be, is not the continuing corporation,
the successor corporation formed by such a consolidation or into which the
Company or such Restricted Subsidiary is merged
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or to which such transfer is made will succeed to, and be substituted for, and
may exercise every right and power of, the Company or such Restricted
Subsidiary, as the case may be, under this Indenture, and the Notes with the
same effect as if such successor corporation had been named as the Company or
such Restricted Subsidiary therein; and thereafter, except in the case of (i)
any lease or (ii) any sale, assignment, conveyance, transfer, lease or other
disposition to a Restricted Subsidiary of the Company, the Company shall be
discharged from all obligations and covenants under this Indenture and the
Notes.
For all purposes of this Indenture and the Notes (including the
provision of this Article Eight and Sections 10.11, Section 10.13 and Section
10.16), Subsidiaries of any surviving entity will, upon such transaction or
series of related transactions, become Restricted Subsidiaries or Unrestricted
Subsidiaries as provided pursuant to Section 10.21 and all Indebtedness, and all
Liens on property or assets, of the Company and the Restricted Subsidiaries in
existence immediately prior to such transaction or series of related
transactions will be deemed to have been incurred upon such transaction or
series of related transactions.
ARTICLE NINE
SUPPLEMENTAL INDENTURES AND WAIVERS
Section 9.01. Supplemental Indentures, Agreements and Waivers Without
Consent of Holders.
Without the consent of any Holders, the Company, and when authorized by
a Board Resolution of the Board, and the Trustee, at any time and from time to
time, may amend, waive, modify or supplement this Indenture or the Notes for any
of the following purposes:
(a) to evidence the succession of another person to the Company, and the
assumption by any such successor of the covenants of the Company in the
Notes;
(b) to add to the covenants of the Company for the benefit of the
Holders, or to surrender any right or power herein conferred upon the
Company, herein, in the Notes;
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(c) to cure any ambiguity, to correct or supplement any provision
herein, in the Notes which may be defective or inconsistent with any other
provision herein or to make any other provisions with respect to matters or
questions arising under this Indenture or the Notes; provided, however,
that, in each case, such provisions shall not materially adversely affect
the legal rights of any Holder;
(d) to comply with the requirements of the SEC in order to effect or
maintain the qualification of this Indenture under the Trust Indenture Act,
as contemplated by Section 9.05 hereof or otherwise;
(e) to evidence and provide the acceptance of the appointment of a
successor Trustee hereunder;
(f) to mortgage, pledge, hypothecate or grant a security interest in any
property or assets in favor of the Trustee for the benefit of the Holders as
security for the payment and performance of Indenture Obligations; or
(g) to make any other change that does not materially adversely affect
the legal rights of any Holder;
provided, however, that the Company has delivered to the Trustee an Opinion of
Counsel stating that such change, agreement or waiver does not materially
adversely affect the legal rights of any Holder.
Section 9.02. Supplemental Indentures, Agreements and Waivers with
Consent of Holders.
With the written consent of the Holders of not less than a majority in
aggregate principal amount of the Outstanding Notes delivered to the Company and
the Trustee, the Company when authorized by a Board Resolution, together with
the Trustee, may amend, waive, modify or supplement any other provision of this
Indenture or the Notes; provided, however, that no such amendment, waiver,
modification or supplement may, without the written consent of the Holder of
each Outstanding Note affected thereby:
(i) reduce the principal amount of, change the fixed maturity of, or
alter the redemption provisions of, the Notes,
(ii) change the currency in which any Notes or amounts owing thereon is
payable,
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(iii) reduce the percentage of the aggregate principal amount
Outstanding of Notes which must consent to an amendment, supplement or
waiver or consent to take any action under this Indenture or the Notes,
(iv) impair the right to institute suit for the enforcement of any
payment on or with respect to the Notes,
(v) waive a default in payment with respect to the Notes,
(vi) reduce the rate or change the time for payment of interest on the
Notes,
(vii) following the occurrence of a Change of Control or an Asset Sale,
alter the Company's obligation to purchase the Notes in accordance with this
Indenture or waive any default in the performance thereof,
(viii) affect the ranking of the Notes in a manner adverse to the holder
of the Notes, or
(ix) release any Guarantee except in compliance with the terms of the
Indenture.
Upon the written request of the Company accompanied by a copy of a Board
Resolution of the Board authorizing the execution of any such supplemental
indenture or other agreement, instrument or waiver, and upon the filing with the
Trustee of evidence of the consent of Holders as aforesaid, the Trustee shall
join with the Company in the execution of such supplemental indenture or other
agreement, instrument or waiver.
It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture or other
agreement, instrument or waiver, but it shall be sufficient if such Act shall
approve the substance thereof.
Section 9.03. Execution of Supplemental Indentures, Agreements and
Waivers.
In executing, or accepting the additional trusts created by, any
supplemental indenture, agreement, instrument or waiver permitted by this
Article Nine or the modifications thereby of the trusts created by this
Indenture, the Trustee shall be entitled to receive, and (subject to Section
6.01
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hereof) shall be fully protected in relying upon, an Opinion of Counsel and an
Officers' Certificate from each obligor under the Notes entering into such
supplemental indenture, agreement, instrument or waiver, each stating that the
execution of such supplemental indenture, agreement, instrument or waiver (a) is
authorized or permitted by this Indenture and (b) does not violate the
provisions of any agreement or instrument evidencing any other Indebtedness of
the Company or any other Subsidiary of the Company. The Trustee may, but shall
not be obligated to, enter into any such supplemental indenture, agreement,
instrument or waiver which affects the Trustee's own rights, duties or
immunities under this Indenture, the Notes or otherwise.
Section 9.04. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article
Nine, this Indenture and/or the Notes, if applicable, shall be modified in
accordance therewith, and such supplemental indenture shall form a part of this
Indenture and/or the Notes, if applicable, as the case may be, for all purposes;
and every Holder of Notes theretofore or thereafter authenticated and delivered
hereunder shall be bound thereby.
Section 9.05. Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article Nine
shall conform to the requirements of the Trust Indenture Act as then in effect.
Section 9.06. Reference in Notes to Supplemental Indentures.
Notes authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Company shall so determine,
new Notes so modified as to conform, in the opinion of the Trustee and the
Board, to any such supplemental indenture may be prepared and executed by the
Company and authenticated and delivered by the Trustee upon a Company Order in
exchange for Outstanding Notes.
Section 9.07. Record Date.
The Company may, but shall not be obligated to, fix, a record date for
the purpose of determining the Holders
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entitled to consent to any supplemental indenture, agreement or instrument or
any waiver, and shall promptly notify the Trustee of any such record date. If a
record date is fixed, those persons who were Holders at such record date (or
their duly designated proxies), and only those persons, shall be entitled to
consent to such supplemental indenture, agreement or instrument or waiver or to
revoke any consent previously given, whether or not such persons continue to be
Holders after such record date. No such consent shall be valid or effective for
more than 90 days after such record date.
Section 9.08. Revocation and Effect of Consents.
Until an amendment or waiver becomes effective, a consent to it by a
Holder of a Note is a continuing consent by the Holder and every subsequent
Holder of a Note or portion of a Note that evidences the same debt as the
consenting Holder's Note, even if a notation of the consent is not made on any
Note. However, any such Holder, or subsequent Holder, may revoke the consent as
to his Note or portion of a Note if the Trustee receives the notice of
revocation before the date the amendment or waiver becomes effective. An
amendment or waiver shall become effective in accordance with its terms and
thereafter bind every Holder.
ARTICLE TEN
COVENANTS
Section 10.01. Payment of Principal, Premium and Interest.
The Company will duly and punctually pay the principal of, premium, if
any, and interest on the Notes in accordance with the terms of the Notes and
this Indenture.
Section 10.02. Maintenance of Office or Agency.
The Company will maintain in the Borough of Manhattan in The City of New
York, State of New York, an office or agency where Notes may be presented or
surrendered for payment, where Notes may be surrendered for registration of
transfer or exchange and where notices and demands to or upon the Company in
respect of the Notes and this Indenture may be served. The office of the Trustee
at its Corporate Trust Office will be such office or agency of the Company,
unless the Company shall
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designate and maintain some other office or agency for one or more of such
purposes. The Company will give prompt written notice to the Trustee of any
change in the location of any such office or agency. If at any time the Company
shall fail to maintain any such required office or agency or shall fail to
furnish the Trustee with the address thereof, such presentations, surrenders,
notices and demands may be made or served at the Corporate Trust Office of the
Trustee, and the Company hereby appoints the Trustee as its agent to receive all
such presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other
offices or agencies (in or outside of The City of New York, State of New York)
where the Notes may be presented or surrendered for any or all such purposes,
and may from time to time rescind such designation; provided, however, that no
such designation or rescission shall in any manner relieve the Company of its
obligation to maintain an office or agency in The City of New York, State of New
York for such purposes. The Company will give prompt written notice to the
Trustee of any such designation or rescission and any change in the location of
any such other office or agency.
Section 10.03. Money for Note Payments To Be Held in Trust.
If the Company shall at any time act as its own Paying Agent, it will,
on or before each due date of the principal of, premium, if any, or interest on
any of the Notes, segregate and hold in trust for the benefit of the Holders
entitled thereto a sum sufficient to pay the principal, premium, if any, or
interest so becoming due until such sums shall be paid to such persons or
otherwise disposed of as herein provided, and will promptly notify the Trustee
of its action or failure so to act.
If the Company is not acting as Paying Agent, the Company will, on or
before each due date of the principal of, premium, if any, or interest on, any
Notes, deposit with a Paying Agent a sum in same day funds sufficient to pay the
principal, premium, if any, or interest so becoming due, such sum to be held in
trust for the benefit of the Holders entitled to such principal, premium or
interest, and (unless such Paying Agent is the Trustee) the Company will
promptly notify the Trustee of such action or any failure so to act.
If the Company is not acting as Paying Agent, the Company will cause
each Paying Agent other than the Trustee to
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execute and deliver to the Trustee an instrument in which such Paying Agent will
agree with the Trustee, subject to the provisions of this Section 10.03, that
such Paying Agent will:
(a) hold all sums held by it for the payment of the principal of,
premium, if any, or interest on Notes in trust for the benefit of the
Holders entitled thereto until such sums shall be paid to such Holders or
otherwise disposed of as herein provided;
(b) give the Trustee notice of any Default by the Company (or any other
obligor upon the Notes) in the making of any payment of principal of,
premium, if any, or interest on the Notes;
(c) at any time during the continuance of any such Default, upon the
written request of the Trustee, forthwith pay to the Trustee all sums so
held in trust by such Paying Agent; and
(d) acknowledge, accept and agree to comply in all aspects with the
provisions of this Indenture relating to the duties, rights and liabilities
of such Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by the Company or
such Paying Agent; and, upon such payment by any Paying Agent to the Trustee,
such Paying Agent will be released from all further liability with respect to
such money.
Any money deposited with the Trustee or any Paying Agent, or then held
by the Company, in trust for the payment of the principal of, premium, if any,
or interest on any Note and remaining unclaimed for two years after such
principal, premium, if any, or interest has become due and payable shall be paid
to the Company upon receipt of a Company Request therefor, or (if then held by
the Company) will be discharged from such trust; and the Holder of such Note
will thereafter, as an unsecured general creditor, look only to the Company for
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Company as trustee
thereof, will thereupon cease; provided, however, that the Trustee or such
Paying Agent, before being required to make any such repayment, may at the
expense of the
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Company cause to be published once, at the option of the Company in the New York
Times or the Wall Street Journal (national edition), notice that such money
remains unclaimed and that, after a date specified therein, which shall not be
less than 30 days from the date of such publication, any unclaimed balance of
such money then remaining shall be repaid to the Company.
Section 10.04. Corporate Existence.
Subject to Article Eight, the Company will do or cause to be done all
things necessary to preserve and keep in full force and effect the corporate
existence, rights (charter and statutory), licenses and franchises of the
Company and each of the Restricted Subsidiaries; provided, however, that the
Company will not be required to preserve any such right, license or franchise if
the Board shall determine that the preservation thereof is no longer desirable
in the conduct of the business of the Company and the Restricted Subsidiaries as
a whole and that the loss thereof is not adverse in any material respect to the
Holders; provided, further, that the foregoing will not prohibit a sale,
transfer or conveyance of a Subsidiary of the Company or any of its assets in
compliance with the terms of this Indenture.
Section 10.05. Payment of Taxes and Other Claims.
The Company will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (a) all material taxes, assessments and
governmental charges levied or imposed (i) upon the Company or any of its
Restricted Subsidiaries or (ii) upon the income, profits or property of the
Company or any of the Restricted Subsidiaries and (b) all material lawful claims
for labor, materials and supplies, which, if unpaid, could reasonably be
expected to become a Lien upon the property of the Company or any of the
Restricted Subsidiaries; provided, however, that the Company will not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim (x) whose amount, applicability or validity is being
contested in good faith by appropriate proceedings properly instituted and
diligently conducted or (y) if the failure to so pay, discharge or cause to be
paid or discharged could not reasonably be expected to have a Material Adverse
Effect (as defined in the Purchase Agreement).
Section 10.06. Maintenance of Properties.
The Company will cause all material properties owned by the Company or
any of the Restricted Subsidiaries or used or
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held for use in the conduct of their respective businesses to be maintained and
kept in good condition, repair and working order and supplied with all necessary
equipment and will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
the Company may be necessary so that the business carried on in connection
therewith may be properly and advantageously conducted at all times; provided,
however, that nothing in this Section 10.06 will prevent the Company from
discontinuing the maintenance of any of such properties if such discontinuance
is, in the judgment of the Company, desirable in the conduct of its business or
the business of any of the Restricted Subsidiaries and is not adverse in any
material respect to the Holders.
Section 10.07. Insurance.
The Company will at all times keep all of its and the Restricted
Subsidiaries' properties which are of an insurable nature insured with insurers,
believed by the Company in good faith to be financially sound and responsible,
against loss or damage to the extent that property of similar character is
usually and customarily so insured by corporations similarly situated and owning
like properties.
Section 10.08. Books and Records.
The Company will keep proper books of record and account, in which full
and correct entries will be made of all financial transactions and the assets
and business of the Company and each Restricted Subsidiary of the Company in
material compliance with GAAP.
Section 10.09. Provision of Financial Statements.
Subject to Section 10.23, the Company will file with the SEC (so long as
the SEC will accept any such filings) the Trustee and the Initial Purchasers the
annual reports, quarterly reports and other documents required to be filed with
the SEC pursuant to Sections 13 and 15 of the Exchange Act, whether or not the
Company has a class of securities registered under the Exchange Act. The Company
will also comply with the other provisions of Section 314(a) of the Trust
Indenture Act.
Section 10.10. Change of Control.
Upon the occurrence of a Change of Control (the date of such occurrence
being the "Change of Control Date"), the
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Company shall make an offer to purchase (the "Change of Control Offer"), on a
Business Day (the "Change of Control Payment Date") not later than 60 days
following the Change of Control Date, all Notes then Outstanding at a purchase
price equal to 101% of the principal amount thereof on any Change of Control
Payment Date, plus accrued and unpaid interest, if any, to such Change of
Control Payment Date. Notice of a Change of Control Offer shall be given to
holders of Notes not less than 25 days nor more than 45 days before the Change
of Control Payment Date. The Change of Control Offer is required to remain open
for at least 20 Business Days. Failure to mail the notice of a Change of Control
Offer on the date specified below or to have satisfied the foregoing condition
precedent by the date that such notice is required to be mailed will constitute
a covenant Default under Section 5.01(iii).
Notice of a Change of Control Offer shall be mailed by the Company not
more than 20 Business Days after the Change of Control Date to the Holders of
Notes at their last registered addresses with a copy to the Trustee and the
Paying Agent. The Change of Control Offer shall remain open from the time of
mailing for at least 20 Business Days and until 5:00 p.m., New York City time,
on the Change of Control Payment Date. The notice, which shall govern the terms
of the Change of Control Offer, shall include such disclosures as are required
by law and shall state:
(a) that the Change of Control Offer is being made pursuant to this
Section 10.10 and that all Notes tendered into the Change of Control Offer
will be accepted for payment;
(b) the purchase price (including the amount of accrued interest, if
any) for each Note, the Change of Control Payment Date and the date on which
the Change of Control Offer expires;
(c) that any Note not tendered for payment will continue to accrue
interest in accordance with the terms thereof;
(d) that, unless the Company shall default in the payment of the
purchase price, any Note accepted for payment pursuant to the Change of
Control Offer shall cease to accrue interest after the Change of Control
Payment Date;
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(e) that Holders electing to have Notes purchased pursuant to a Change
of Control Offer will be required to surrender their Notes to the Paying
Agent at the address specified in the notice prior to 5:00 p.m., New York
City time, on the Change of Control Payment Date and must complete any form
letter of transmittal proposed by the Company and acceptable to the Trustee
and the Paying Agent;
(f) that Holders of Notes will be entitled to withdraw their election if
the Paying Agent receives, not later than 5:00 p.m., New York City time, on
the Change of Control Payment Date, a facsimile transmission or letter
setting forth the name of the Holders, the principal amount of Notes the
Holders delivered for purchase, the Note certificate number (if any) and a
statement that such Holder is withdrawing his election to have such Notes
purchased;
(g) that Holders whose Notes are purchased only in part will be issued
Notes of like tenor equal in principal amount to the unpurchased portion of
the Notes surrendered;
(h) the instructions that Holders must follow in order to tender their
Notes; and
(i) information concerning the business of the Company, the most recent
annual and quarterly reports of the Company filed with the SEC pursuant to
the Exchange Act (or, if the Company is not required to file any such
reports with the SEC, the comparable reports prepared pursuant to Section
10.09), a description of material developments in the Company's business,
information with respect to pro forma historical financial information after
giving effect to such Change of Control and such other information
concerning the circumstances and relevant facts regarding such Change of
Control and Change of Control Offer as would, in the good faith judgment of
the Company, be material to a Holder of Notes in connection with the
decision of such Holder as to whether or not it should tender Notes pursuant
to the Change of Control Offer.
On the Change of Control Payment Date, the Company will (i) accept for
payment Notes or portions thereof tendered pursuant to the Change of Control
Offer, (ii) deposit with the Paying Agent money, in immediately available funds,
sufficient to pay the purchase price of all Notes or portions thereof so
tendered and accepted and (iii) deliver to the Trustee the
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Notes so accepted together with an Officers' Certificate setting forth the Notes
or portions thereof tendered to and accepted for payment by the Company. The
Paying Agent will promptly mail or deliver to the Holders of Notes so accepted
payment in an amount equal to the purchase price, and the Trustee shall promptly
authenticate and mail or deliver to such Holders a new Note of like tenor equal
in principal amount to any unpurchased portion of the Note surrendered. Any
Notes not so accepted shall be promptly mailed or delivered by the Company to
the Holder thereof. The Company will publicly announce the results of the Change
of Control Offer not later than the first Business Day following the Change of
Control Payment Date. Except as described above with respect to a Change of
Control, this Indenture does not contain provisions that permit the holders of
the Notes to require that the Company repurchase or redeem the Notes in the
event of a takeover, recapitalization or similar transaction which may be highly
leveraged. If a Change of Control Offer is made, there can be no assurance that
the Company will have available funds sufficient to pay for all of the Notes
that might be delivered by holders of Notes seeking to accept the Change of
Control Offer. The Company shall not be required to make a Change of Control
Offer following a Change of Control if a third party makes the Change of Control
Offer in the manner, at the times and otherwise in compliance with the
requirements applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
If the Company is required to make a Change of Control Offer, the
Company will comply with all applicable tender offer laws and regulations,
including, to the extent applicable, Section 14(e) and Rule 14e-1 under the
Exchange Act, and any other applicable securities laws and regulations. To the
extent that the provisions of any securities laws or regulations conflict with
the provisions of this Section 10.10, the Company will comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under this Section 10.10 by virtue thereof.
Section 10.11. Limitation on Additional Indebtedness.
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, incur, any Indebtedness (including any Acquired
Indebtedness), except for Permitted Indebtedness (including Acquired
Indebtedness to the extent it would constitute Permitted Indebtedness);
provided, however, that (i) the Company will be permitted to incur Indebtedness
(including Acquired Indebtedness) and (ii) a Restricted Subsidiary will be
permitted to incur Acquired
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Indebtedness, if, in either case, immediately after giving pro forma effect to
such incurrence (including the application of the net proceeds therefrom), the
ratio of Total Consolidated Indebtedness to Consolidated Annualized Pro Forma
Operating Cash Flow would be less than 6.0 to 1.0.
For purposes of determining compliance with this Section 10.11, in the
event that an item of Indebtedness meets the criteria of more than one of the
types of Indebtedness permitted by this covenant, the Company in its sole
discretion shall classify such item of Indebtedness and only be required to
include the amount of such Indebtedness as one of such types.
Section 10.12. Statement by Officers as to Default.
The Company will deliver to the Trustee, within 120 days after the end
of each fiscal year of the Company ending after the date hereof, a written
statement signed by the chairman or a chief executive officer, the principal
financial officer or principal accounting officer of the Company, stating (i)
that a review of the activities of the Company during the preceding fiscal year
has been made under the supervision of the signing officers with a view to
determining whether the Company has kept, observed, performed and fulfilled its
obligations under this Indenture, and (ii) that, to the knowledge of each
officer signing such certificate, the Company has kept, observed, performed and
fulfilled each and every covenant and condition contained in this Indenture and
is not in default in the performance or observance of any of the terms,
provisions, conditions and covenants hereof (or, if a Default shall have
occurred, describing all such Defaults of which such officers may have
knowledge, their status and what action the Company is taking or proposes to
take with respect thereto). When any Default under this Indenture has occurred
and is continuing, or if the Trustee or any Holder or the trustee for or the
holder of any other evidence of Indebtedness of the Company or any Restricted
Subsidiary gives any notice or takes any other action with respect to a claimed
default (other than with respect to Indebtedness (other than Indebtedness
evidenced by the Notes) in the principal amount of less than $7,500,000), the
Company will promptly notify the Trustee of such Default, notice or action and
will deliver to the Trustee by registered or certified mail or by telegram, or
facsimile transmission followed by hard copy by registered or certified mail an
Officers' Certificate specifying such event, notice or other action within five
Business Days after the Company becomes aware of such occurrence
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and what action the Company is taking or proposes to take with respect thereto.
Section 10.13. Limitation on Restricted Payments.
The Company will not, and will not permit any of the Restricted
Subsidiaries to, make, directly or indirectly, any Restricted Payment unless:
(i) no Default shall have occurred and be continuing at the time of or
upon giving effect to such Restricted Payment;
(ii) immediately after giving effect to such Restricted Payment, the
Company would be able to incur $1.00 of Indebtedness under (x) the proviso
of Section 10.11 hereof or (y) solely in the case of a Restricted Payment
constituting an Investment of cash or Newly Acquired Assets, clause (g) of
the definition of Permitted Indebtedness; and
(iii) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments declared or made on or after the
Prior Issue Date (assuming that this Indenture had been in effect as of the
Prior Issue Date) and all Designation Amounts made on or after the Prior
Issue Date (assuming that this Indenture had been in effect as of the Prior
Issue Date) does not exceed an amount equal to the sum of, without
duplication, (a) 50% of the Consolidated Net Income of the Company accrued
on a cumulative basis during the period beginning on January 1, 1998 and
ending on the last day of the fiscal quarter of the Company immediately
preceding the date of such proposed Restricted Payment (or, if such
cumulative Consolidated Net Income of the Company for such period is a
deficit, minus 100% of such deficit), plus (b) the aggregate net cash
proceeds received by the Company either (x) as capital contributions to the
Company after the Prior Issue Date or (y) from the issue and sale (other
than to a Restricted Subsidiary of the Company) of its Capital Stock (other
than Disqualified Stock) on or after the Prior Issue Date (including upon
exercise of warrants, options or rights), plus (c) the aggregate net
proceeds received by the Company from the issuance (other than to a
Restricted Subsidiary of the Company) on or after the Prior Issue Date of
its Capital Stock (other than Disqualified Stock) upon the conversion of, or
in exchange for, Indebtedness of the Company, plus (d) in the case of
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the disposition or repayment (in whole or in part) of any Investment
constituting a Restricted Payment made after the Prior Issue Date (assuming
that this Indenture had been in effect as of the Prior Issue Date) (except
for Investments made (1) pursuant to clause (vii) of the second following
paragraph that are not subject to clause (e) or (f) of this paragraph below,
and (2) pursuant to clauses (viii) or (ix) of the second following
paragraph), an amount equal to the lesser of the return of capital with
respect to the applicable portion of such Investment and the cost of the
applicable portion of such Investment, in either case, less the cost of the
disposition of such Investment, plus (e) in the case of any Revocation with
respect to a Subsidiary of the Company that was made subject to a
Designation after the Prior Issue Date (assuming that this Indenture had
been in effect as of the Prior Issue Date), an amount equal to the lesser of
the Designation Amount with respect to such Subsidiary or the Fair Market
Value of the Investment of the Company and the Restricted Subsidiaries in
such Subsidiary at the time of Revocation, plus (f) an amount equal to the
amount of any Investment constituting a Restricted Payment made after the
Prior Issue Date (assuming that this Indenture had been in effect as of the
Prior Issue Date) in an ISP which has been (or which is deemed to be because
of the assumption set forth in the previous parenthetical clause) included
as a Restricted Payment under this clause (iii) pursuant to the last
paragraph of this Section 10.13 to the extent such ISP thereafter (1)
becomes or has become a Wholly Owned Restricted Subsidiary or is merged with
the Company or (2) is a New ISP that becomes or has become a Restricted
Subsidiary or is merged with the Company, less, in either such case, any
amounts credited pursuant to the preceding clause (d) in respect of any such
Investment. For purposes of the preceding clauses (b)(y) and (c), as
applicable, the value of the aggregate net proceeds received by the Company
upon the issuance of Capital Stock either upon the conversion of convertible
Indebtedness or in exchange for outstanding Indebtedness or upon the
exercise of options, warrants or rights will be the net cash proceeds
received upon the issuance of such Indebtedness, options, warrants or rights
plus the incremental amount received, if any, by the Company upon the
conversion, exchange or exercise thereof.
For purposes of determining the amount expended for Restricted Payments,
cash distributed shall be valued at the
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face amount thereof and property other than cash shall be valued at its Fair
Market Value.
The provisions of this Section 10.13 shall not prohibit the following
(each of which shall be given independent effect):
(i) the payment of any dividend or other distribution within 60 days
after the date of declaration thereof if at such date of declaration such
payment would be permitted by the provisions of the Indenture;
(ii) the purchase, redemption, retirement or other acquisition of any
shares of Capital Stock of the Company in exchange for, or out of the net
cash proceeds of the substantially concurrent issue and sale (other than to
a Restricted Subsidiary of the Company) of, shares of Capital Stock of the
Company (other than Disqualified Stock); provided that any such net cash
proceeds are excluded from clause (iii)(b) of the second preceding
paragraph;
(iii) so long as no Default shall have occurred and be continuing, the
purchase, redemption, retirement, defeasance or other acquisition of
Subordinated Indebtedness made by exchange for, or out of the net cash
proceeds of, a substantially concurrent issue and sale (other than to a
Restricted Subsidiary of the Company) of (x) Capital Stock (other than
Disqualified Stock) of the Company or (y) other Subordinated Indebtedness to
the extent that its stated maturity for the payment of principal thereof is
not prior to the 180th day after the final stated maturity of the Notes;
provided that any such net cash proceeds are excluded from clause (iii)(b)
of the second preceding paragraph;
(iv) (a) so long as no Default shall have occurred and be continuing,
Investments constituting Restricted Payments by the Company or any
Restricted Subsidiary in a New ISP or a person that becomes or since the
Prior Issue Date has become a New ISP as a result of such Investment and (b)
so long as no Default shall have occurred and be continuing, Investments
constituting Restricted Payments by the Company or any Restricted Subsidiary
in an Existing ISP (x) made out of the net cash proceeds of a substantially
concurrent sale of Capital Stock (other than Disqualified Stock) of the
Company (provided that any such proceeds are excluded from clause (iii)(b)
of the second preceding paragraph) or (y) such that the aggregate amount
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of all Investments in Existing ISPs that are made after the Prior Issue Date
pursuant to this subclause (b)(y) would not exceed $25.0 million in
aggregate;
(v) bonds, notes, debentures or other securities received as a result of
Asset Sales pursuant to and in compliance with Section 10.15 hereof;
(vi) so long as no Default shall have occurred and be continuing,
purchases or redemptions of Capital Stock (including cash settlements of
stock options) held by employees, officers or directors upon or following
termination of their employment with the Company or one of its Subsidiaries;
provided that payments shall not exceed $2.0 million in any fiscal year in
the aggregate or $4.0 million in the aggregate during the term of the Notes;
(vii) so long as no Default shall have occurred and be continuing,
Investments in Unrestricted Subsidiaries to the extent reasonably promptly
made with the proceeds of a substantially concurrent (1) capital
contribution to the Company or (2) issue or sale of Capital Stock (other
than Disqualified Stock) of the Company (other than to a Restricted
Subsidiary of the Company); provided that any such proceeds are excluded
from clause (iii)(b) of the second preceding paragraph;
(viii) loans or advances to employees of the Company or any Restricted
Subsidiary made in the ordinary course of business, including to fund the
purchase of Capital Stock of the Company (provided that any proceeds from
such purchase are excluded from clause (iii)(b) of the second preceding
paragraph to the extent such loan or advance is not reimbursed) in an amount
not to exceed $2.0 million at any time outstanding;
(ix) so long as no Default shall have occurred and be continuing,
Investments constituting Restricted Payments in joint ventures formed to
provide services in furtherance of an Internet Service Business of the
Company and the ISPs or other persons engaged principally in an Internet
Service Business in an aggregate amount not to exceed $50.0 million
outstanding at any time; and
(x) cash payments in lieu of fractional shares pursuant to any warrant,
option or other similar agreement.
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In determining whether the receipt of net cash proceeds of a sale of
Capital Stock is "substantially concurrent" for purposes of clause (iv)(b)(x) of
the preceding paragraph, if such net cash proceeds are deposited in escrow with
a third party, free and clear of any Lien (other than the Lien of the escrow
agent), to be applied for purposes directed by the Company and such net cash
proceeds are excluded from clause (iii)(b) of the first paragraph above, then
the application of such net cash proceeds as set forth in such clause (iv)(b)(x)
shall be deemed "substantially concurrent" if they are subsequently released for
immediate application as contemplated by such clause (iv)(b)(x). In no event
shall a Restricted Payment made on the basis of consolidated financial
statements prepared in good faith in accordance with GAAP be subject to
rescission or constitute a Default by reason of any requisite subsequent
restatement of such financial statements which would have made such Restricted
Payment prohibited at the time that it was made.
In determining the amount of Restricted Payments permissible under
clause (iii) of the first paragraph of this Section 10.13, amounts expended
since the Prior Issue Date (assuming that this Indenture had been in effect on
the Prior Issue Date) pursuant to clauses (i), (iv)(a), (iv)(b)(y), (v), (vi)
and (ix) (to the extent remaining outstanding) of the second preceding paragraph
above shall be included, without duplication, as Restricted Payments.
Section 10.14. Limitation on Transactions with Affiliates.
The Company will not, and will not permit, cause or suffer any
Restricted Subsidiary to, conduct any business or enter into any transaction (or
series of related transactions which are similar or part of a common plan) with
or for the benefit of any of their respective Affiliates (other than Affiliates
that are not also Affiliates of the Company or any Wholly Owned Restricted
Subsidiary) or any beneficial holder of 10% or more of the Common Stock of the
Company or any officer or director of the Company (each, an "Affiliate
Transaction"), unless the terms of the Affiliate Transaction are set forth in
writing, and are fair and reasonable to the Company or such Restricted
Subsidiary, as the case may be. Each Affiliate Transaction involving aggregate
payments or other Fair Market Value in excess of $1.0 million shall be approved
by a majority of the Board, such approval to be evidenced by a Board Resolution
stating that the Board has determined that such transaction or transactions
comply with the foregoing provisions. In addition
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to the foregoing, each Affiliate Transaction involving aggregate consideration
of $5.0 million or more shall be approved by a majority of the Disinterested
Directors; provided that, in lieu of such approval by the Disinterested
Directors, the Company may obtain a written opinion from an Independent
Financial Advisor stating that the terms of such Affiliate Transaction to the
Company or the Restricted Subsidiary, as the case may be, are fair from a
financial point of view. For purposes of this Section 10.14, any Affiliate
Transaction approved by a majority of the Disinterested Directors or as to which
a written opinion has been obtained from an Independent Financial Advisor, on
the basis set forth in the preceding sentence, shall be deemed to be on terms
that are fair and reasonable to the Company or the Restricted Subsidiaries, as
the case may be, and, therefore, shall be permitted under this Section 10.14.
Notwithstanding the foregoing, the restrictions set forth in this
Section 10.14 shall not apply to (i) transactions with or among, or solely for
the benefit of, the Company and/or any of the Restricted Subsidiaries, (ii)
transactions pursuant to agreements and arrangements existing on the Issue Date,
(iii) transactions related to the provision of internet services in the ordinary
course of business; provided that (x) such transactions are entered into on an
arm's length basis and are fair and reasonable to the Company or such Restricted
Subsidiary, as the case may be, and (y) in the good faith judgment of the
Company or the applicable Restricted Subsidiary, the Fair Market Value of the
consideration received by the Company or such Restricted Subsidiary, as the case
may be, reasonably approximates the Fair Market Value of the services provided,
(iv) dividends paid by the Company pursuant to and in compliance with Section
10.13 hereof, (v) customary directors' fees, indemnification and similar
arrangements, consulting fees, employee salaries, bonuses, employment agreements
and arrangements, compensation or employee benefit arrangements or legal fees,
(vi) transactions contemplated by any of the Permitted Affiliate Agreements as
in effect on the Issue Date and (vii) grants of customary registration rights
with respect to securities of the Company.
The Company shall use, and shall cause each Restricted Subsidiary to
use, its commercially reasonable best efforts to ensure that each person in
which the Company or a Restricted Subsidiary makes an Investment that is an ISP
at the time of the Investment continues to meet the conditions and requirements
of the definition of "ISP" in all material respects until such time as a Rollup
shall have occurred with respect to such ISP.
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Section 10.15. Disposition of Proceeds of Asset Sales
The Company will not, and will not permit any Restricted Subsidiary to,
make any Asset Sale unless (a) the Company or such Restricted Subsidiary, as the
case may be, receives consideration at the time of such Asset Sale at least
equal to the Fair Market Value of the shares or assets sold or otherwise
disposed of and (b) at least 75% of such consideration consists of cash, Cash
Equivalents or Qualified Consideration; provided that the following shall be
treated as cash for purposes of this Section 10.15: (x) the amount of any
liabilities (other than Subordinated Indebtedness or Indebtedness of a
Restricted Subsidiary that would not constitute Restricted Subsidiary
Indebtedness) that are assumed by the transferee of any such assets pursuant to
an agreement that unconditionally releases the Company or such Restricted
Subsidiary from further liability ("assumed liabilities") and (y) the amount of
any notes or other obligations that within 30 days of receipt, are converted
into cash (to the extent of the cash received). The Company or the applicable
Restricted Subsidiary, as the case may be, may (i) apply the Net Cash Proceeds
from such Asset Sale within 365 days of the receipt thereof to repay an amount
of Indebtedness (other than Subordinated Indebtedness) of the Company in an
amount not exceeding the Other Senior Debt Pro Rata Share and elect to
permanently reduce the amount of the commitments thereunder by the amount of the
Indebtedness so repaid, (ii) apply the Net Cash Proceeds from such Asset Sale to
repay any Restricted Subsidiary Indebtedness and elect to permanently reduce the
commitments thereunder by the amount of the Indebtedness so repaid or (iii)
apply such Net Cash Proceeds within 365 days thereof, to an investment in
properties and assets that will be used in an Internet Service Business (or in
Capital Stock and other securities of any person that will become a Restricted
Subsidiary as a result of such investment to the extent such person owns
properties and assets that will be used in an Internet Service Business) of the
Company or any Restricted Subsidiary ("Replacement Assets"). Any Net Cash
Proceeds from any Asset Sale that are neither used to repay, and permanently
reduce the commitments under, any Restricted Subsidiary Indebtedness as set
forth in clause (ii) of the preceding sentence or invested in Replacement Assets
within the 365-day period as set forth in clause (iii) shall constitute "Excess
Proceeds." Any Excess Proceeds not used as set forth in clause (i) of the second
preceding sentence shall constitute "Offer Excess Proceeds" subject to
disposition as provided below.
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When the aggregate amount of Offer Excess Proceeds equals or exceeds
$10.0 million, the Company shall make an offer to purchase (an "Asset Sale
Offer"), from all holders of the Notes, that aggregate principal amount of Notes
as can be purchased by application of such Offer Excess Proceeds at a price in
cash equal to 100% of the principal amount thereof on any purchase date, plus
accrued and unpaid interest, if any, to any purchase date. Each Asset Sale Offer
shall remain open for a period of 20 Business Days or such longer period as may
be required by law. To the extent that the principal amount of Notes tendered
pursuant to an Asset Sale Offer is less than the Offer Excess Proceeds, the
Company or any Restricted Subsidiary may use such deficiency for general
corporate purposes. If the principal amount of Notes validly tendered and not
withdrawn by holders thereof exceeds the amount of Notes which can be purchased
with the Offer Excess Proceeds, Notes to be purchased will be selected on a pro
rata basis. Upon completion of such Asset Sale Offer, the amount of Offer Excess
Proceeds shall be reset to zero.
Notice of an Asset Sale Offer shall be mailed by the Company not more
than 20 Business Days after the obligation to make such Asset Sale Offer arises
to the Holders of Notes at their last registered addresses with a copy to the
Trustee and the Paying Agent. The Asset Sale Offer shall remain open from the
time of mailing for at least 20 Business Days and until 5:00 p.m., New York City
time, on the date fixed for Purchase of Notes validly tendered and not
withdrawn, which date shall be not later than the 30th Business Day following
the mailing of such Asset Sale Offer (the "Asset Sale Offer Purchase Date"). The
notice, which shall govern the terms of the Asset Sale Offer, shall include such
disclosures as are required by law and shall state:
(a) that the Asset Sale Offer is being made pursuant to this Section
10.15 and that all Notes tendered into the Asset Sale Offer will be accepted
for payment; provided, however, that if the aggregate principal amount of
Notes tendered in an Asset Sale Offer plus accrued interest at the
expiration of such offer exceeds the aggregate amount of the Offer Excess
Proceeds, the Company shall select the Notes to be purchased on a pro rata
basis (with such adjustments as may be deemed appropriate by the Company so
that only Notes in denominations of $1,000 or multiples thereof shall be
purchased) and that the Asset Sale Offer shall remain open for a period of
20 Business Days or such longer period as may be required by law;
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(b) the purchase price (including the amount of accrued interest, if
any) for each Note, the Asset Sale Offer Purchase Date and the date on which
the Asset Sale Offer expires;
(c) that any Note not tendered for payment will continue to accrue
interest in accordance with the terms thereof;
(d) that, unless the Company shall default in the payment of the
purchase price, any Note accepted for payment pursuant to the Asset Sale
Offer shall cease to accrue interest after the Asset Sale Offer Purchase
Date;
(e) that Holders electing to have Notes purchased pursuant to an Asset
Sale Offer will be required to surrender their Notes to the Paying Agent at
the address specified in the notice prior to 5:00 p.m., New York City time,
on the Asset Sale Offer Purchase Date and must complete any form letter of
transmittal proposed by the Company and acceptable to the Trustee and the
Paying Agent;
(f) that Holders of Notes will be entitled to withdraw their election if
the Paying Agent receives, not later than 5:00 p.m., New York City time, on
the Asset Sale Offer Purchase Date, a facsimile transmission or letter
setting forth the name of the Holders, the principal amount of Notes the
Holders delivered for purchase, the Note certificate number (if any) and a
statement that such Holder is withdrawing his election to have such Notes
purchased;
(g) that Holders whose Notes are purchased only in part will be issued
Notes of like tenor equal in principal amount to the unpurchased portion of
the Notes surrendered;
(h) the instructions that Holders must follow in order to tender their
Notes; and
(i) information concerning the business of the Company, the most recent
annual and quarterly reports of the Company filed with the Commission
pursuant to the Exchange Act (or, if the Company is not required to file any
such reports with the SEC, the comparable reports prepared pursuant to
Section 10.09), a description of material developments in the Company's
business, information with respect to pro forma historical financial
information after
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giving effect to such Asset Sale and such other information concerning the
circumstances and relevant facts regarding such Asset Sale and Asset Sale
Offer as would, in the good faith judgment of the Company, be material to a
Holder of Notes in connection with the decision of such Holder as to whether
or not it should tender Notes pursuant to the Asset Sale Offer.
On the Asset Sale Offer Purchase Date, the Company will (i) accept for
payment Notes or portions thereof tendered pursuant to the Asset Sale Offer,
(ii) deposit with the Paying Agent money, in immediately available funds,
sufficient to pay the purchase price of all Notes or portions thereof so
tendered and accepted and (iii) deliver to the Trustee the Notes so accepted
together with an Officers' Certificate setting forth the Notes or portions
thereof tendered to and accepted for payment by the Company. The Paying Agent
will promptly mail or deliver to the Holders of Notes so accepted payment in an
amount equal to the purchase price, and the Trustee shall promptly authenticate
and mail or deliver to such Holders a new Note of like tenor equal in principal
amount to any unpurchased portion of the Note surrendered. Any Notes not so
accepted shall be promptly mailed or delivered by the Company to the Holder
thereof. The Company will publicly announce the results of the Asset Sale Offer
not later than the first Business Day following the Asset Sale Offer Purchase
Date.
If the Company is required to make an Asset Sale Offer, the Company
shall comply with all applicable tender offer rules, including to the extent
applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any other
applicable securities laws or regulations.
Section 10.16. Limitation on Liens Securing Certain Indebtedness.
The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Liens of any kind against or upon
any property or assets of the Company or any Restricted Subsidiary, whether now
owned or hereafter acquired, or any proceeds therefrom, which secure either (x)
Subordinated Indebtedness, unless the Notes are secured by a Lien on such
property, assets or proceeds that is senior in priority to the Liens securing
such Subordinated Indebtedness or (y) Indebtedness of the Company that is not
Subordinated Indebtedness, unless the Notes are equally and ratably secured with
the Liens securing such other Indebtedness, except, in the case of this clause
(y), Permitted Liens.
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Section 10.17. Limitation on Business.
The Company will not, and will not permit any of the Restricted
Subsidiaries to, engage in a business which is not substantially an Internet
Service Business.
Section 10.18. Limitation on Certain Guarantees and Indebtedness of
Restricted Subsidiaries.
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to assume, guarantee or in any other manner become liable with
respect to (i) any Subordinated Indebtedness or (ii) any Indebtedness of the
Company that is not Subordinated Indebtedness (other than, in the case of this
clause (ii), Indebtedness under any Permitted Credit Facility to the extent
constituting Permitted Indebtedness), unless, in each case, such Restricted
Subsidiary simultaneously executes and delivers a supplemental indenture
providing for the guarantee of payment of the Notes by such Restricted
Subsidiary on a basis senior to any such Subordinated Indebtedness or pari passu
with any such other Indebtedness referred to in clause (ii), as the case may be.
Each guarantee created pursuant to such provisions is referred to as a
"Guarantee" and the issuer of each such Guarantee, so long as the Guarantee
remains outstanding, is referred to as a "Guarantor".
Notwithstanding the foregoing, in the event of the unconditional release
of any Guarantor from its obligations in respect of the Indebtedness which gave
rise to the requirement that a Guarantee be given, such Guarantor shall be
released from all obligations under its Guarantee. In addition, upon any sale or
disposition (by merger or otherwise) of any Guarantor by the Company or a
Restricted Subsidiary of the Company to any person that is not an Affiliate of
the Company or any of its Restricted Subsidiaries which is otherwise in
compliance with the terms of this Indenture and as a result of which such
Guarantor ceases to be a Restricted Subsidiary of the Company, such Guarantor
will be deemed to be automatically and unconditionally released from all
obligations under its Guarantee; provided that each such Guarantor is sold or
disposed of in accordance with Section 10.15 hereof.
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Section 10.19. Limitation on Issuances and Sales of Preferred Stock by
Restricted Subsidiaries.
The Company will not permit any Restricted Subsidiary to issue any
Preferred Stock (other than to the Company or a Restricted Subsidiary).
Section 10.20. Limitation on Dividends and Other Payment Restrictions
Affecting Restricted Subsidiaries.
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise enter into or cause to become
effective any consensual encumbrance or consensual restriction of any kind on
the ability of any Restricted Subsidiary to (a) pay dividends, in cash or
otherwise, or make any other distributions on its Capital Stock or any other
interest or participation in, or measured by, its profits to the extent owned by
the Company or any Restricted Subsidiary, (b) pay any Indebtedness owed to the
Company or any Restricted Subsidiary, (c) make any Investment in the Company or
any other Restricted Subsidiary or (d) transfer any of its properties or assets
to the Company or to any Restricted Subsidiary, except for (in each case except
as otherwise noted in the following clause (ii)) (i) any encumbrance or
restriction in existence on the Issue Date, (ii) any encumbrance or restriction
existing under agreements relating to an Investment in an ISP (which in the case
of clauses (a) and (b) shall not be permitted in the case of ISPs that are
Restricted Subsidiaries) to the extent consistent with past practice, (iii)
customary non-assignment provisions, (iv) any encumbrances or restrictions
pertaining to an asset subject to a Lien to the extent set forth in the security
documentation governing such Lien, (v) any encumbrance or restriction applicable
to a Restricted Subsidiary at the time that it becomes a Restricted Subsidiary
that is not created in contemplation thereof, (vi) any encumbrance or
restriction existing under any agreement that refinances or replaces an
agreement containing a restriction permitted by clause (v) above; provided that
the terms and conditions of any such encumbrance or restriction are not
materially less favorable to the holders of Notes than those under or pursuant
to the agreement being replaced or the agreement evidencing the Indebtedness
refinanced, (vii) any encumbrance or restriction imposed upon a Restricted
Subsidiary pursuant to an agreement which has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of such
Restricted Subsidiary or any Asset Sale
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to the extent limited to the Capital Stock or assets in question and (viii) any
customary encumbrance or restriction applicable to a Restricted Subsidiary that
is contained in an agreement or instrument governing or relating to Indebtedness
contained in any Permitted Credit Facility; provided that the provisions of such
agreement permit the payment of interest and principal and mandatory repurchases
pursuant to the terms of this Indenture and the Notes and other Indebtedness
that is solely an obligation of the Company, but, provided, further, that such
agreement may nevertheless contain customary net worth, leverage, invested
capital and other financial covenants, customary covenants regarding the merger
of or sale of all or any substantial part of the assets of the Company or any
Restricted Subsidiary, customary restrictions on transactions with affiliates,
and customary subordination provisions governing Indebtedness owed to the
Company or any Restricted Subsidiary.
Section 10.21. Limitation on Designations of Unrestricted Subsidiaries.
The Company will not designate any Subsidiary of the Company (other than
a newly created Subsidiary in which no Investment has previously been made) as
an "Unrestricted Subsidiary" under this Indenture (a "Designation") unless:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation;
(b) except in the case of a Permitted Investment or an Investment made
pursuant to clause (vii) or (ix) of the third paragraph of Section 10.13
hereof, immediately after giving effect to such Designation, the Company
would be able to incur $1.00 of Indebtedness under (x) the proviso of
Section 10.11 hereof or (y) solely in the case of a Designation with respect
to a Subsidiary having assets which are substantially comprised of cash, or
Newly Acquired Assets, clause (g) of the definition of Permitted
Indebtedness; and
(c) the Company would not be prohibited under this Indenture (assuming
that this Indenture had been in effect on the Prior Issue Date) from making
an Investment at the time of Designation (assuming the effectiveness of such
Designation) in an amount (the "Designation Amount") equal to the Fair
Market Value of the net Investment of the Company or any other Restricted
Subsidiary in such Restricted Subsidiary on such date.
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In the event of any such Designation made on or after the Prior Issue
Date, the Company shall be deemed to have made an Investment constituting a
Restricted Payment pursuant to Section 10.13 hereof for all purposes of this
Indenture in the Designation Amount. Neither the Company nor any Restricted
Subsidiary shall at any time (x) provide a guarantee of, or similar credit
support to, any Indebtedness of any Unrestricted Subsidiary (including of any
undertaking, agreement or instrument evidencing such Indebtedness); provided
that the Company may pledge Capital Stock or Indebtedness of any Unrestricted
Subsidiary on a nonrecourse basis such that the pledgee has no claim whatsoever
against the Company other than to obtain such pledged property, (y) be directly
or indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z)
be directly or indirectly liable for any other Indebtedness which provides that
the holder thereof may (upon notice, lapse of time or both) declare a default
thereon (or cause the payment thereof to be accelerated or payable prior to its
final scheduled maturity) upon the occurrence of a default with respect to any
other Indebtedness that is Indebtedness of an Unrestricted Subsidiary (including
any corresponding right to take enforcement action against such Unrestricted
Subsidiary), except in the case of clause (x) or (y) to the extent permitted
under Section 10.13 and Section 10.14 hereof.
The Company will not revoke any Designation of a Subsidiary as an
Unrestricted Subsidiary (a "Revocation") unless:
(a) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at such
time, have been permitted to be incurred for all purposes of this Indenture.
All Designations and Revocations must be evidenced by Board Resolutions
delivered to the Trustee certifying compliance with the foregoing provisions.
Section 10.22. Compliance Certificates and Opinions.
Upon any application or request by the Company to the Trustee to take
any action under any provision of this Indenture, the Company and any other
obligor on the Notes will furnish to the Trustee an Officers' Certificate
stating that all conditions precedent, if any, provided for in this Indenture
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(including any covenants compliance with which constitutes a condition
precedent) relating to the proposed action have been complied with, and an
Opinion of Counsel stating that in the opinion of such counsel all such
conditions precedent, if any, have been complied with, except that, in the case
of any such application or request as to which the furnishing of such documents,
certificates and/or opinions is specifically required by any provision of this
Indenture relating to such particular application or request, no additional
certificate or opinion need be furnished.
Every certificate or opinion with respect to compliance with a condition
or covenant provided for in this Indenture will include:
(i) a statement that each individual signing such certificate or opinion
has read such covenant or condition and the definitions herein relating
thereto;
(ii) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(iii) a statement that, in the opinion of each such individual, he has
made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether such covenant or condition has
been complied with; and
(iv) a statement as to whether, in the opinion of each such individual,
such condition or covenant has been complied with.
Section 10.23. Reports.
Whether or not the Company has a class of securities registered under
the Exchange Act, the Company shall furnish without cost to each holder of Notes
and file with the Trustee and file with the SEC, (i) within the applicable time
period required under the Exchange Act, after the end of each fiscal year of the
Company, the information required by Form 10-K (or any successor form thereto)
under the Exchange Act with respect to such period, (ii) within the applicable
time period required under the Exchange Act after the end of each of the first
three fiscal quarters of each fiscal year of the Company, the information
required by Form 10-Q (or any successor form thereto) under the Exchange Act
with respect to such period and
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(iii) any current reports on Form 8-K (or any successor forms) required to be
filed under the Exchange Act.
Section 10.24. Limitation on Status as Investment Company
The Company will not and will not permit any of its Subsidiaries or
controlled Affiliates to, conduct its business in a fashion that would cause the
Company to be required to register as an "investment company" (as that term is
defined in the Investment Company Act of 1940, as amended (the "Investment
Company Act")), or otherwise become subject to regulation under the Investment
Company Act. For purposes of establishing the Company's compliance with this
provision, any exemption which is or would become available under Section
3(c)(1) or Section 3(c)(7) of the Investment Company Act will be disregarded.
ARTICLE ELEVEN
SATISFACTION AND DISCHARGE
Section 11.01. Satisfaction and Discharge of Indenture.
This Indenture shall cease to be of further effect (except as to
surviving rights or registration of transfer or exchange of Notes herein
expressly provided for) and the Trustee, on written demand of and at the expense
of the Company, shall execute proper instruments acknowledging satisfaction and
discharge of this Indenture, when either
(a) all Notes theretofore authenticated and delivered (other than (A)
Notes which have been destroyed, lost or stolen and which have been replaced
or paid as provided in Section 3.06 hereof and (B) Notes for whose payment
money has theretofore been deposited in trust or segregated and held in
trust by the Company and thereafter repaid to the Company or discharged from
such trust, as provided in Section 10.03) have been delivered to the Trustee
for cancellation; or
(b) (i) all such Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee in trust an amount of
money in dollars sufficient to pay and discharge the entire
<PAGE> 118
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Indebtedness on such Notes not theretofore delivered to the Trustee for
cancellation, for the principal of, premium, if any, and interest to the
date of such deposit;
(ii) the Company has paid or caused to be paid all other sums payable
hereunder by the Company; and
(iii) the Company has delivered to the Trustee (i) irrevocable
instructions to apply the deposited money toward payment of the Notes at the
Stated Maturities and the Redemption Dates thereof, and (ii) an Officers'
Certificate and an Opinion of Counsel each stating that all conditions
precedent herein provided for relating to the satisfaction and discharge of
this Indenture have been complied with; provided, that such Opinion of
Counsel may rely, as to matters of fact, upon an Officers' Certificate.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 6.07 and, if money shall
have been deposited with the Trustee pursuant to subclause (a)(ii) of this
Section 11.01, the obligations of the Trustee under Section 11.02 and the last
paragraph of Section 10.03 shall survive.
Section 11.02. Application of Trust Money.
Subject to the provisions of the last paragraph of Section 10.03, all
money deposited with the Trustee pursuant to Section 11.01 shall be held in
trust and applied by it, in accordance with the provisions of the Notes and this
Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the persons entitled thereto, of the principal of, premium, if
any, and interest on the Notes for whose payment such money has been deposited
with the Trustee.
ARTICLE TWELVE
REDEMPTION
Section 12.01. Notices to the Trustee.
If the Company elects to redeem Notes pursuant to Paragraph 3 of the
Initial Notes or Paragraph 2 of the Exchange
<PAGE> 119
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Notes, it shall notify the Trustee of the Redemption Date and principal amount
of Notes to be redeemed.
The Company shall notify the Trustee of any redemption at least 45 days
before the Redemption Date by an Officers' Certificate, stating that such
redemption will comply with the provisions hereof and of the Notes.
Section 12.02. Selection of Notes To Be Redeemed.
In the event that less than all of the Notes are to be redeemed at any
time, selection of such Notes for redemption will be made by the Trustee in
compliance with any applicable requirements of the principal national securities
exchange, if any, on which the Notes are listed or, if the Notes are not then
listed on a national securities exchange (or if the Notes are so listed but the
exchange does not impose requirements with respect to the selection of debt
securities for redemption), on a pro rata basis, by lot or by such method as the
Trustee in its sole discretion shall deem fair and appropriate; provided,
however, that no Notes of a principal amount of $1,000 or less shall be redeemed
in part.
The Trustee shall promptly notify the Company and the Registrar in
writing of the Notes selected for redemption and, in the case of any Notes
selected for partial redemption, the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to redemption of Notes shall relate, in the
case of any Note redeemed or to be redeemed only in part, to the portion of the
principal amount of such Note which has been or is to be redeemed.
Section 12.03. Notice of Redemption.
Notice of redemption shall be given by first-class mail, postage
prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption
Date, to each Holder of Notes to be redeemed, at the address of such Holder
appearing in the Note register maintained by the Registrar.
All notices of redemption shall identify the Notes to be redeemed and
shall state:
(a) the Redemption Date;
<PAGE> 120
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(b) the Redemption Price and the amount of accrued interest, if any, to
be paid;
(c) that, unless the Company defaults in making the redemption payment,
interest on Notes called for redemption ceases to accrue on and after the
Redemption Date, and the only remaining right of the Holders of such Notes
is to receive payment of the Redemption Price plus unpaid interest on the
Notes through the Redemption Date, upon surrender to the Paying Agent of the
Notes redeemed;
(d) if any Note is to be redeemed in part, the portion of the principal
amount (equal to $1,000 or any integral multiple thereof) of such Note to be
redeemed and that on and after the Redemption Date, upon surrender for
cancellation of such Note to the Paying Agent, a new Note or Notes in the
aggregate principal amount equal to the unredeemed portion thereof will be
issued without charge to the Noteholder;
(e) that Notes called for redemption must be surrendered to the Paying
Agent to collect the Redemption Price and the name and address of the Paying
Agent; and
(f) the CUSIP number, if any, relating to such Notes.
Notice of redemption of Notes to be redeemed at the election of the
Company shall be given by the Company or, at the Company's written request, by
the Trustee in the name and at the expense of the Company.
Section 12.04. Effect of Notice of Redemption.
Once notice of redemption is mailed, Notes called for redemption become
due and payable on the Redemption Date and at the Redemption Price. Upon
surrender to the Paying Agent, such Notes called for redemption shall be paid at
the Redemption Price plus accrued interest, if any, to the Redemption Date, but
interest installments whose maturity is on or prior to such Redemption Date will
be payable on the relevant Interest Payment Dates to the Holders of record at
the close of business on the relevant record dates referred to in the Notes.
Section 12.05. Deposit of Redemption Price.
On or prior to any Redemption Date, the Company shall deposit with the
Paying Agent an amount of money in same day
<PAGE> 121
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funds sufficient to pay the Redemption Price of, and any accrued interest on,
all the Notes or portions thereof which are to be redeemed on that date, other
than Notes or portions thereof called for redemption on that date which have
been delivered by the Company to the Trustee for cancellation.
If the Company complies with the preceding paragraph, then, unless the
Company defaults in the payment of such Redemption Price, interest on the Notes
to be redeemed will cease to accrue on and after the applicable Redemption Date,
whether or not such Notes are presented for payment, and the Holders of such
Notes shall have no further rights with respect to such Notes except for the
right to receive the Redemption Price plus unpaid interest on the Notes through
the Redemption Date, upon surrender of such Notes. If any Note called for
redemption shall not be so paid upon surrender thereof for redemption, the
principal, premium, if any, and, to the extent lawful, accrued interest thereon
shall, until paid, bear interest from the Redemption Date at the rate provided
in the Notes.
Section 12.06. Notes Redeemed or Purchased in Part.
Upon surrender to the Paying Agent of a Note which is to be redeemed in
part, the Company shall execute and the Trustee shall authenticate and deliver
to the Holder of such Note without service charge, a new Note or Notes, of any
authorized denomination as requested by such Holder in aggregate principal
amount equal to, and in exchange for, the unredeemed portion of the principal of
the Note so surrendered that is not redeemed.
[Signature Page Follows]
<PAGE> 122
S-1
IN WITNESS WHEREOF, the parties hereto have caused this
Indenture to be duly executed as of the day and year first above written.
VERIO INC.
By: /s/ CARLA HAMRE DONELSON
------------------------------------
Name: Carla Hamre Donelson
Title: Vice President, General
Counsel and Secretary
U.S. BANK TRUST NATIONAL
ASSOCIATION, as Trustee
By: /s/ RICHARD H. PROKOSCH
------------------------------------
Name: Richard H. Prokosch
Title: Assistant Vice President
<PAGE> 123
EXHIBIT A-1
[FORM OF NOTE]
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR OTHER
SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN
MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS
EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT
(A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED
IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT) (AN "ACCREDITED
INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN
"OFFSHORE TRANSACTION" PURSUANT TO RULE 903 OR 904 OF REGULATION S, (2) AGREES
THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO YEARS (OR SUCH SHORTER
PERIOD OF TIME AS PERMITTED BY RULE 144 UNDER THE SECURITIES ACT OR ANY
SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE DATE
HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DATE ON WHICH THE
COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY OR ANY
PREDECESSOR OF THIS SECURITY AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED
BY APPLICABLE LAWS (THE "RESALE RESTRICTION TERMINATION DATE"), OFFER, SELL OR
OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY
THEREOF, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED
EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE
ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS
A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES
ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN
RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT
OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE
SECURITIES ACT, PURSUANT TO RULE 904 OF REGULATION S, (E) TO AN ACCREDITED
INVESTOR THAT IS ACQUIRING THE SECURITIES FOR ITS OWN ACCOUNT, OR FOR THE
ACCOUNT OF SUCH AN ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A
VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION
OF THE SECURITIES ACT (AND IF ACQUIRING THE SECURITIES FROM SUCH AN ACCREDITED
INVESTOR, IS ACQUIRING SECURITIES
A-1-1
<PAGE> 124
HAVING AN AGGREGATE PRINCIPAL AMOUNT OF NOT LESS THAN $250,000), OR (F) PURSUANT
TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS
SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND;
PROVIDED THAT THE COMPANY, THE TRUSTEE, THE TRANSFER AGENT AND THE REGISTRAR
SHALL HAVE THE RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (I) PURSUANT TO
CLAUSE (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL,
CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (II) IN
EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATION OF TRANSFER IN THE
FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY
THE TRANSFEROR TO THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF
THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE
TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE
RESPECTIVE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
A-1-2
<PAGE> 125
VERIO INC.
-----------------
11-1/4% SENIOR NOTES DUE 2008, SERIES A
CUSIP No. __________
No. ___________ $[ ]
VERIO INC., a corporation incorporated under the laws of the State of
Delaware (herein called the "Company," which term includes any successor
corporation under this Indenture hereinafter referred to), for value received,
hereby promises to pay to _______________ or registered assigns, the principal
sum of _______________ Dollars on December 1, 2008, at the office or agency of
the Company referred to below, and to pay interest thereon on June 1 and
December 1 (each, an "Interest Payment Date"), of each year, commencing on June
1, 1999, accruing from the Issue Date or from the most recent Interest Payment
Date to which interest has been paid or duly provided for, at the rate of
11-1/4% per annum, until the principal hereof is paid or duly provided for.
Interest shall be computed on the basis of a 360-day year of twelve 30-day
months.
The interest so payable, and punctually paid or duly provided for, on
any Interest Payment Date will, as provided in the Indenture referred to on the
reverse hereof, be paid to the person in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on May 15 and November
15 (each, a "Regular Record Date"), whether or not a Business Day, as the case
may be, next preceding such Interest Payment Date. Any such interest not so
punctually paid, or duly provided for, and interest on such defaulted interest
at the then applicable interest rate borne by the Notes, to the extent lawful,
shall forthwith cease to be payable to the Holder on such Regular Record Date,
and may be paid to the person in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on a Special Record
Date for the payment of such defaulted interest to be fixed by the Trustee,
notice of which shall be given to Holders of Notes not less than 10 days prior
to such Special Record Date, or may be paid at any time in any other lawful
manner not inconsistent with the requirements of any securities exchange on
which the Notes may be listed, and upon such notice as may be required by such
exchange, all as more fully provided in such Indenture.
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<PAGE> 126
Payment of the principal of, premium, if any, and interest on this Note
will be made at the office or agency of the Company maintained for that purpose
in the Borough of Manhattan in The City of New York, State of New York, or at
such other office or agency of the Company as may be maintained for such
purpose, in such coin or currency of the United States of America as at the time
of payment is legal tender for payment of public and private debts; provided,
however, that payment of interest may be made at the option of the Company by
check mailed to the address of the person entitled thereto as such address shall
appear on the Note Register.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof.
Unless the certificate of authentication hereon has been duly executed
by the Trustee referred to on the reverse hereof by manual signature, this Note
shall not be entitled to any benefit under the Indenture, or be valid or
obligatory for any purpose.
[Remainder of Page Intentionally Left Blank]
A-1-4
<PAGE> 127
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.
Dated: VERIO INC.
By:
-----------------------------------
Name:
Title:
By:
-----------------------------------
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 11-1/4% Senior Notes Due 2008, Series A, referred to
in the within-mentioned Indenture.
U.S. BANK TRUST NATIONAL
ASSOCIATION, as Trustee
By:
-----------------------------------
Authorized Signatory
A-1-5
<PAGE> 128
[REVERSE OF NOTE]
1. Indenture. This Note is one of a duly authorized issue of Notes of
the Company designated as its 11-1/4% Senior Notes Due 2008, Series A (herein
called the "Initial Notes"). The Notes are limited (except as otherwise provided
in the Indenture referred to below) in aggregate principal amount to
$400,000,000, which may be issued under an indenture (herein called the
"Indenture") dated as of November 25, 1998, by and between the Company and U.S.
Bank Trust National Association, as trustee (herein called the "Trustee," which
term includes any successor Trustee under the Indenture), to which Indenture and
all indentures supplemental thereto reference is hereby made for a statement of
the respective rights, limitations of rights, duties, obligations and immunities
thereunder of the Company, the Trustee and the Holders of the Notes, and of the
terms upon which the Notes are, and are to be, authenticated and delivered. The
Notes include the Initial Notes, the Private Exchange Notes and the Unrestricted
Notes (including the Exchange Notes referred to below), issued in exchange for
the Initial Notes pursuant to the Registration Rights Agreement. The Initial
Notes and the Unrestricted Notes are treated as a single class of securities
under the Indenture.
All capitalized terms used in this Note which are defined in the
Indenture and not otherwise defined herein shall have the meanings assigned to
them in the Indenture.
The terms of the Notes include those stated in the Indenture and those
made part of the Indenture by reference to the Trust Indenture Act of 1939 (15
U.S.C. Section Section 77aaa-77bbbb) (the "TIA"), as in effect on the date of
the Indenture. Notwithstanding anything to the contrary herein, the Notes are
subject to all such terms, and Holders of Notes are referred to the Indenture
and the TIA for a statement of such terms.
No reference herein to the Indenture and no provisions of this Note or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, premium, if any, and
interest on this Note at the times, place, and rate, and in the coin or
currency, herein prescribed.
2. Registration Rights. Pursuant to the Registration Rights Agreement by
and among the Company and the Initial Purchasers, the Company will be obligated
to consummate an exchange offer pursuant to which the Holder of this Note shall
have the right to exchange this Note for 11-1/4% Senior Notes Due 2008, Series
B, of the Company (herein called the "Exchange Notes"), which have been
registered under the Securities Act, in like principal amount and having
identical terms as the Notes (other than as set forth in this paragraph). The
Holders of Notes shall
A-1-6
<PAGE> 129
be entitled to receive certain additional interest payments in the event such
exchange offer is not consummated and upon certain other conditions, all
pursuant to and in accordance with the terms of the Registration Rights
Agreement.
3. Redemption. The Notes will be redeemable, at the option of the
Company, in whole or in part, on or after December 1, 2003 upon not less than 30
nor more than 60 days' written notice at the redemption prices (expressed as
percentages of principal amount) set forth below, plus accrued and unpaid
interest thereon, if any, to the applicable redemption date, if redeemed during
the twelve-month period beginning on December 1, of each of the years indicated
below:
<TABLE>
<CAPTION>
Year Percentage
---- -----------
<S> <C> <C>
2003....................................... 105.625%
2004....................................... 103.750%
2005....................................... 101.875%
2006....................................... 100.000%
</TABLE>
Notwithstanding the foregoing, in the event that after the Issue Date
and prior to December 1, 2001 the Company issues, in one or more transactions,
Capital Stock (other than Disqualified Stock) of the Company to one or more
Strategic Equity Investors or in any Public Equity Offering for aggregate gross
cash proceeds of $50.0 million or more (an "Equity Sale"), the Company may
redeem, at its option, up to a maximum of 35% of the initially Outstanding
aggregate principal amount of Notes from the net proceeds thereof at a
redemption price equal to 111.250% of the principal amount of the Notes,
together with accrued and unpaid interest to the date of redemption; provided
that not less than $260 million aggregate principal amount of Notes is
Outstanding following such redemption. Any such redemption may only be effected
once and must be effected upon not less than 30 nor more than 60 days' notice
given within 180 days after such Equity Sale.
4. Offers to Purchase. Sections 10.10 and 10.15 of the Indenture provide
that upon the occurrence of a Change of Control and following certain Asset
Sales, and subject to certain conditions and limitations contained therein, the
Company
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<PAGE> 130
shall make an offer to purchase all or a portion of the Notes in accordance with
the procedures set forth in the Indenture.
5. Defaults and Remedies. If an Event of Default occurs and is
continuing, the principal of all of the Outstanding Notes, plus all accrued and
unpaid interest, if any, to and including the date the Notes are paid, may be
declared due and payable in the manner and with the effect provided in this
Indenture.
6. Defeasance. The Indenture contains provisions (which provisions apply
to this Note) for defeasance at any time of (a) the entire indebtedness of the
Company on this Note and (b) certain restrictive covenants and related Defaults
and Events of Default, in each case upon compliance by the Company with certain
conditions set forth therein.
7. Amendments and Waivers. The Indenture permits, with certain
exceptions as provided therein, the amendment thereof and the modification of
the rights and obligations of the Company and the rights of the Holders under
the Indenture at any time by the Company and the Trustee with the consent of the
Holders of not less than a majority in aggregate principal amount of the Notes
at the time Outstanding. The Indenture also contains provisions permitting the
Holders of specified percentages in aggregate principal amount of the Notes at
the time Outstanding, on behalf of the Holders of all the Notes, to waive
compliance by the Company with certain provisions of the Indenture and certain
past Defaults under the Indenture and this Note and their consequences. Any such
consent or waiver by or on behalf of the Holder of this Note shall be conclusive
and binding upon such Holder and upon all future Holders of this Note and of any
Note issued upon the registration of transfer hereof or in exchange herefor or
in lieu hereof whether or not notation of such consent or waiver is made upon
this Note.
8. Denominations, Transfer and Exchange. The Notes are issuable only in
registered form without coupons in denominations of $1,000 and any integral
multiple thereof. As provided in the Indenture and subject to certain
limitations therein set forth, the Notes are exchangeable for a like aggregate
principal amount of Notes of a different authorized denomination, as requested
by the Holder surrendering the same.
As provided in the Indenture and subject to certain limitations therein
set forth, the transfer of this Note is registrable on the Note Register of the
Company, upon surrender
A-1-8
<PAGE> 131
of this Note for registration of transfer at the office or agency of the Company
maintained for such purpose in the Borough of Manhattan in The City of New York,
State of New York, or at such other office or agency of the Company as may be
maintained for such purpose, duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Company and the Registrar
duly executed by, the Holder hereof or his attorney duly authorized in writing,
and thereupon one or more new Notes, of authorized denominations and for the
same aggregate principal amount, will be issued to the designated transferee or
transferees.
No service charge shall be made for any registration of transfer or
exchange or redemption of Notes, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith.
9. Persons Deemed Owners. Prior to and at the time of due presentment of
this Note for registration of transfer, the Company, the Trustee and any agent
of the Company or the Trustee may treat the person in whose name this Note is
registered as the owner hereof for all purposes, whether or not this Note shall
be overdue, and neither the Company, the Trustee nor any agent shall be affected
by notice to the contrary.
10. GOVERNING LAW. THE INDENTURE, THIS NOTE AND ANY GUARANTEE SET FORTH
BELOW SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
The Company will furnish to any Holder of a Note upon written request
and without charge a copy of the Indenture. Requests may be made to: Verio Inc.,
8005 South Chester Street, Suite 200, Englewood, Colorado 80112.
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<PAGE> 132
ASSIGNMENT FORM
If you the holder want to assign this Note, fill in the form below and have your
signature guaranteed:
I or we assign and transfer this Note to
- --------------------------------------------------------------------------------
(Insert assignee's social security or tax ID number)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code) and irrevocably appoint
- --------------------------------------------------------------------------------
agent to transfer this Note on the books of the Company. The agent may
substitute another to act for such agent.
In connection with any transfer of this Note occurring prior to the date
which is the earlier of (i) the date of the declaration by the SEC of the
effectiveness of a registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), covering resales of this Note (which
effectiveness shall not have been suspended or terminated at the date of the
transfer) and (ii) the date two years (or such shorter period of time as
permitted by Rule 144 under the Securities Act or any successor provision
thereunder) after the later of the original issuance date appearing on the face
of this Note (or any Predecessor Note) or the last date on which the Company or
any Affiliate of the Company was the owner of this Note (or any Predecessor
Note), the undersigned confirms that it has not utilized any general
solicitation or general advertising in connection with the transfer and that:
[Check One]
[ ] (a) this Note is being transferred in compliance with the exemption
from registration under the Securities Act provided by Rule 144A
thereunder.
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<PAGE> 133
or
[ ] (b) this Note is being transferred other than in accordance with (a)
above and documents, including (i) a transferee certificate
substantially in the form of Exhibit C to the Indenture in the case of a
transfer to non-QIB Accredited Investors or (ii) a transferor
certificate substantially in the form of Exhibit D to the Indenture in
the case of a transfer pursuant to Regulation S, are being furnished
which comply with the conditions of transfer set forth in this Note and
the Indenture.
If none of the foregoing boxes is checked and, in the case of (b) above, if the
appropriate document is not attached or otherwise furnished to the Trustee, the
Trustee or Registrar shall not be obligated to register this Note in the name of
any person other than the Holder hereof unless and until the conditions to any
such transfer of registration set forth herein and in Section 3.17 of the
Indenture shall have been satisfied.
- --------------------------------------------------------------------------------
Date: Your signature:
--------------------- ---------------------------------
(Sign exactly as your name
appears on the other side of
this Note)
By:
------------------------------
NOTICE: To be executed
by an executive officer
Signature Guarantee:
----------------------------------
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED
The undersigned represents and warrants that it is purchasing this Note
for its own account or an account with respect to which it exercises sole
investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act
and is aware that the sale to it is being made in reliance on Rule 144A and
acknowledges that it has received such information regarding the Company as the
undersigned has requested pursuant to Rule 144A (including the information
specified in Rule 144A(d)(4)) or has determined not to request such information
and that it is aware that the transferor is relying upon
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<PAGE> 134
the undersigned's foregoing representations in order to claim the exemption from
registration provided by Rule 144A.
Dated: ------------------------------
NOTICE: To be executed
by an executive officer
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<PAGE> 135
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company
pursuant to Section 10.10 or 10.15 of the Indenture, check the appropriate box:
Section 10.10 [ ] Section 10.15 [ ]
If you wish to have a portion of this Note purchased by the
Company pursuant to Section 10.10 or 10.15 of the Indenture, state the amount:
$_____________
Date: Your signature:
--------------------- ---------------------------------
(Sign exactly as your name
appears on the other side of
this Note)
By:
------------------------------
NOTICE: To be executed
by an executive officer
Signature Guarantee:
----------------------------------
A-1-13
<PAGE> 136
EXHIBIT A-2
VERIO INC.
-----------------
11-1/4% SENIOR NOTES DUE 2008, SERIES B
CUSIP No. __________
No. ___________ $
VERIO INC., a corporation incorporated under the laws of the State of
Delaware (herein called the "Company," which term includes any successor
corporation under this Indenture hereinafter referred to), for value received,
hereby promises to pay to _______________ or registered assigns, the principal
sum of _______________ Dollars on December 1, 2008, at the office or agency of
the Company referred to below, and to pay interest thereon on June 1 and
December 1, (each, an "Interest Payment Date"), of each year, commencing on June
1, 1999, accruing from the Issue Date or from the most recent Interest Payment
Date to which interest has been paid or duly provided for, at the rate of
11-1/4% per annum, until the principal hereof is paid or duly provided for.
Interest shall be computed on the basis of a 360-day year of twelve 30-day
months.
The interest so payable, and punctually paid or duly provided for, on
any Interest Payment Date will, as provided in the Indenture referred to on the
reverse hereof, be paid to the person in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on May 15 and November
15 (each, a "Regular Record Date"), whether or not a Business Day, as the case
may be, next preceding such Interest Payment Date. Any such interest not so
punctually paid, or duly provided for, and interest on such defaulted interest
at the then applicable interest rate borne by the Notes, to the extent lawful,
shall forthwith cease to be payable to the Holder on such Regular Record Date,
and may be paid to the person in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on a Special Record
Date for the payment of such defaulted interest to be fixed by the Trustee,
notice of which shall be given to Holders of Notes not less than 10 days prior
to such Special Record Date, or may be paid at any time in any other lawful
manner not inconsistent with the requirements of any securities exchange on
which the Notes may be listed, and upon such notice as may be required by such
exchange, all as more fully provided in such Indenture.
A-2-1
<PAGE> 137
Payment of the principal of, premium, if any, and interest on this Note
will be made at the office or agency of the Company maintained for that purpose
in the Borough of Manhattan in The City of New York, State of New York, or at
such other office or agency of the Company as may be maintained for such
purpose, in such coin or currency of the United States of America as at the time
of payment is legal tender for payment of public and private debts; provided,
however, that payment of interest may be made at the option of the Company by
check mailed to the address of the person entitled thereto as such address shall
appear on the Note Register.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof.
Unless the certificate of authentication hereon has been duly executed
by the Trustee referred to on the reverse hereof by manual signature, this Note
shall not be entitled to any benefit under the Indenture, or be valid or
obligatory for any purpose.
[Remainder of Page Intentionally Left Blank]
A-2-2
<PAGE> 138
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.
Dated: VERIO INC.
By:
--------------------------------------
Name:
Title:
By:
--------------------------------------
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 11-1/4% Senior Notes Due 2008, Series B,
referred to in the within-mentioned Indenture.
U.S. BANK TRUST NATIONAL
ASSOCIATION, as Trustee
By:
--------------------------------------
Authorized Signatory
A-2-3
<PAGE> 139
[REVERSE OF NOTE]
1. Indenture. This Note is one of a duly authorized issue of Notes of
the Company designated as its 11-1/4% Senior Notes Due 2008, Series B (herein
called the "Initial Notes"). The Notes are limited (except as otherwise provided
in the Indenture referred to below) in aggregate principal amount to
$400,000,000, which may be issued under an indenture (herein called the
"Indenture") dated as of November 25, 1998, by and between the Company and U.S.
Bank Trust National Association, as trustee (herein called the "Trustee," which
term includes any successor Trustee under the Indenture), to which Indenture and
all indentures supplemental thereto reference is hereby made for a statement of
the respective rights, limitations of rights, duties, obligations and immunities
thereunder of the Company, the Trustee and the Holders of the Notes, and of the
terms upon which the Notes are, and are to be, authenticated and delivered. The
Notes include the Initial Notes, the Private Exchange Notes and the Unrestricted
Notes (including the Exchange Notes referred to below), issued in exchange for
the Initial Notes pursuant to the Registration Rights Agreement. The Initial
Notes and the Unrestricted Notes are treated as a single class of securities
under the Indenture.
All capitalized terms used in this Note which are defined in the
Indenture and not otherwise defined herein shall have the meanings assigned to
them in the Indenture.
The terms of the Notes include those stated in the Indenture and those
made part of the Indenture by reference to the Trust Indenture Act of 1939 (15
U.S.C. Section Section 77aaa-77bbbb) (the "TIA"), as in effect on the date of
the Indenture. Notwithstanding anything to the contrary herein, the Notes are
subject to all such terms, and Holders of Notes are referred to the Indenture
and the TIA for a statement of such terms.
No reference herein to the Indenture and no provisions of this Note or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, premium, if any, and
interest on this Note at the times, place, and rate, and in the coin or
currency, herein prescribed.
2. Redemption. The Notes will be redeemable, at the option of the
Company, in whole or in part, on or after [ ], 2003 upon not less than 30 nor
more than 60 days' written notice at the redemption prices (expressed as
percentages of principal amount) set forth below, plus accrued and unpaid
interest thereon, if any, to the applicable redemption
A-2-4
<PAGE> 140
date, if redeemed during the twelve-month period beginning on December 1 of each
of the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<C> <C>
2003......................... 105.625%
2004......................... 103.750%
2005......................... 101.875%
2006......................... 100.000%
</TABLE>
Notwithstanding the foregoing, in the event that after the Issue Date
and prior to December 1, 2001 the Company issues, in one or more transactions,
Capital Stock (other than Disqualified Stock) of the Company to one or more
Strategic Equity Investors or in any Public Equity Offering for aggregate gross
cash proceeds of $50.0 million or more (an "Equity Sale"), the Company may
redeem, at its option, up to a maximum of 35% of the initially Outstanding
aggregate principal amount of Notes from the net proceeds thereof at a
redemption price equal to 111.250% of the principal amount of the Notes,
together with accrued and unpaid interest to the date of redemption; provided
that not less than $260 million aggregate principal amount of Notes is
Outstanding following such redemption. Any such redemption may only be effected
once and must be effected upon not less than 30 nor more than 60 days' notice
given within 180 days after such Equity Sale.
3. Offers to Purchase. Sections 10.10 and 10.15 of the Indenture provide
that upon the occurrence of a Change of Control and following certain Asset
Sales, and subject to certain conditions and limitations contained therein, the
Company shall make an offer to purchase all or a portion of the Notes in
accordance with the procedures set forth in the Indenture.
4. Defaults and Remedies. If an Event of Default occurs and is
continuing, the principal of all of the Outstanding Notes, plus all accrued and
unpaid interest, if any, to and including the date the Notes are paid, may be
declared due and payable in the manner and with the effect provided in this
Indenture.
5. Defeasance. The Indenture contains provisions (which provisions apply
to this Note) for defeasance at any time of (a) the entire indebtedness of the
Company on this Note and (b) certain restrictive covenants and related Defaults
and Events of Default, in each case upon compliance by the Company with certain
conditions set forth therein.
6. Amendments and Waivers. The Indenture permits, with certain
exceptions as provided therein, the amendment thereof and the modification of
the rights and obligations of
A-2-5
<PAGE> 141
the Company and the rights of the Holders under the Indenture at any time by the
Company and the Trustee with the consent of the Holders of not less than a
majority in aggregate principal amount of the Notes at the time Outstanding. The
Indenture also contains provisions permitting the Holders of specified
percentages in aggregate principal amount of the Notes at the time Outstanding,
on behalf of the Holders of all the Notes, to waive compliance by the Company
with certain provisions of the Indenture and certain past Defaults under the
Indenture and this Note and their consequences. Any such consent or waiver by or
on behalf of the Holder of this Note shall be conclusive and binding upon such
Holder and upon all future Holders of this Note and of any Note issued upon the
registration of transfer hereof or in exchange herefor or in lieu hereof whether
or not notation of such consent or waiver is made upon this Note.
7. Denominations, Transfer and Exchange. The Notes are issuable only in
registered form without coupons in denominations of $1,000 and any integral
multiple thereof. As provided in this Indenture and subject to certain
limitations therein set forth, the Notes are exchangeable for a like aggregate
principal amount of Notes of a different authorized denomination, as requested
by the Holder surrendering the same.
As provided in the Indenture and subject to certain limitations therein
set forth, the transfer of this Note is registrable on the Note Register of the
Company, upon surrender of this Note for registration of transfer at the office
or agency of the Company maintained for such purpose in the Borough of Manhattan
in The City of New York, State of New York, or at such other office or agency of
the Company as may be maintained for such purpose, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Registrar duly executed by, the Holder hereof or his attorney
duly authorized in writing, and thereupon one or more new Notes, of authorized
denominations and for the same aggregate principal amount, will be issued to the
designated transferee or transferees.
No service charge shall be made for any registration of transfer or
exchange or redemption of Notes, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith.
8. Persons Deemed Owners. Prior to and at the time of due presentment of
this Note for registration of transfer, the Company, the Trustee and any agent
of the Company or the Trustee may treat the person in whose name this Note is
registered as the owner hereof for all purposes, whether or not this
A-2-6
<PAGE> 142
Note shall be overdue, and neither the Company, the Trustee nor any agent shall
be affected by notice to the contrary.
9. GOVERNING LAW. THE INDENTURE, THIS NOTE AND ANY GUARANTEE SET FORTH
BELOW SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
The Company will furnish to any Holder of a Note upon written request
and without charge a copy of this Indenture. Requests may be made to: Verio
Inc., 8005 South Chester Street, Suite 200, Englewood, Colorado 80112.
A-2-7
<PAGE> 143
ASSIGNMENT FORM
If you the holder want to assign this Note, fill in the form below and have your
signature guaranteed:
I or we assign and transfer this Note to
- --------------------------------------------------------------------------------
(Insert assignee's social security or tax ID number)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code) and irrevocably appoint
- --------------------------------------------------------------------------------
agent to transfer this Note on the books of the Company. The agent may
substitute another to act for such agent.
Date: Your signature:
--------------------- ---------------------------------
(Sign exactly as your name
appears on the other side of
this Note)
By:
------------------------------
NOTICE: To be executed
by an executive officer
Signature Guarantee:
----------------------------------
A-2-8
<PAGE> 144
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company pursuant to
Section 10.10 or 10.15 of this Indenture, check the appropriate box:
Section 10.10 [ ] Section 10.15 [ ]
If you wish to have a portion of this Note purchased by the Company
pursuant to Section 10.10 or 10.15 of this Indenture, state the amount:
$_________
Date: Your signature:
--------------------- ---------------------------------
(Sign exactly as your name
appears on the other side of
this Note)
By:
------------------------------
NOTICE: To be executed
by an executive officer
Signature Guarantee:
----------------------------------
A-2-9
<PAGE> 145
EXHIBIT B
FORM OF LEGEND FOR BOOK-ENTRY SECURITIES
Any Global Note authenticated and delivered hereunder shall bear a
legend (which would be in addition to any other legends required in the case of
a Restricted Note) in substantially the following form:
THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THIS INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A
NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS NOTE IS NOT
EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN
THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED
IN THIS INDENTURE, AND NO TRANSFER OF THIS NOTE (OTHER THAN A TRANSFER OF
THIS NOTE AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY
A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE
DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED
IN THIS INDENTURE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY
OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY
CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER
NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT
IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF
FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
B-1
<PAGE> 146
EXHIBIT C
Form of Certificate To Be
Delivered in Connection with
Transfers to Non-QIB Accredited Investors
Verio Inc.
8005 South Chester Street
Suite 200
Englewood, Colorado 80112
Ladies and Gentlemen:
In connection with our proposed purchase of $ aggregate principal amount
of the 11-1/4% Senior Notes Due 2008 (the "Notes" of Verio Inc. (the "Company"),
we confirm that:
1. We understand that the Notes have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and, unless so
registered, may not be sold except as permitted in the following sentence.
We agree on our own behalf and on behalf of any investor account for which
we are purchasing Notes to offer, sell or otherwise transfer such Notes
prior to (x) the date which is two years (or such shorter period of time as
permitted by Rule 144 under the Securities Act) after the later of the date
of original issue of the Notes and (y) such later date, if any, as may be
required by any subsequent change in applicable law (the "Resale Restriction
Termination Date") only (a) to the Company, (b) pursuant to a registration
statement which has been declared effective under the Securities Act, (c) so
long as the Notes are eligible for resale pursuant to Rule 144A under the
Securities Act, to a person we reasonably believe is a "qualified
institutional buyer" under Rule 144A (a "QIB") that purchases for its own
account or for the account of a QIB and to whom notice is given that the
transfer is being made in reliance on Rule 144A, (d) pursuant to offers and
sales that occur outside the United States to "foreign purchasers" (as
defined below) in offshore transactions meeting the requirements of Rule 904
of Regulation S under the Securities Act, (e) to an institutional
"accredited investor" within the meaning of subparagraph (a)(1), (2), (3) or
(7) of Rule 501 under the Securities Act (an "Accredited Investor") that is
purchasing for its own account or for the
C-2
<PAGE> 147
account of such an institutional "accredited investor," or (f) pursuant to
any other available exemption from the registration requirements of the
Securities Act, subject, in each of the foregoing cases, to any requirement
of law that the disposition of our property or the property of such investor
account or accounts be at all times within our or their control and to
compliance with any applicable state securities laws. The foregoing
restrictions on resale will not apply subsequent to the Resale Restriction
Termination Date. If any resale or other transfer of the Notes is proposed
to be made pursuant to clause (c) above prior to the Resale Restriction
Termination Date, the transferor shall deliver a letter from the transferee
substantially in the form of this letter to the Trustee, which shall
provide, among other things, that the transferee is an Accredited Investor
within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501 under
the Securities Act and that it is acquiring such Notes for investment
purposes and not for distribution in violation of the Securities Act. Each
purchaser acknowledges that the Company, the Trustee and the Transfer Agent
and Registrar reserve the right prior to any offer, sale or other transfer
prior to the Resale Restriction Termination Date of the Notes pursuant to
clause (d), (e) or (f) above to require the delivery of an opinion of
counsel, certification and/or other information satisfactory to the Company
and the Trustee.
2. We are an Accredited Investor or a QIB purchasing Notes for our own
account or for the account of one or more Accredited Investors, and we are
acquiring the Notes for investment purposes and not with a view to, or for
offer or sale in connection with, any distribution in violation of the
Securities Act or the securities laws of any state of the United States and
we have such knowledge and experience in financial and business matters as
to be capable of evaluating the merits and risks of our investment in the
Notes, and we and any accounts for which we are acting are each able to bear
the economic risk of our or its investment in the Notes for an indefinite
period.
3. We are acquiring the Notes purchased by us for our own account or for
one or more accounts as to each of which we exercise sole investment
discretion and we and any such account are (a) a QIB, aware that the sale is
being made in reliance on Rule 144A under the Securities Act, (b) an
Accredited Investor, or (c) a person other than a U.S. person ("foreign
purchasers"), which term
C-3
<PAGE> 148
shall include dealers or other professional fiduciaries in the United States
acting on a discretionary basis for foreign beneficial owners (other than an
estate or trust) in offshore transactions meeting the requirements of Rules
903 and 904 of Regulation S under the Securities Act.
4. We have received a copy of the Offering Memorandum and acknowledge
that we have had access to such financial and other information, and have
been afforded the opportunity to ask such questions of representatives of
the Company and receive answers thereto, as we deem necessary in order to
verify the information contained in the Offering Memorandum.
5. We are not purchasing the Notes for or on behalf of, and will not
transfer the Notes to, any pension or welfare plan (as defined in Section 3
of ERISA, except as may be permitted under ERISA and as described under
"Notice to Investors" in the Offering Memorandum.
6. In the event that we purchase any Notes, we will acquire Notes having
an outstanding principal amount of at least $250,000 for our own account and
$250,000 for each account for which we are acting.
We understand that the Trustee and the Transfer Agent will not be
required to accept for registration of transfer any Notes acquired by us, except
upon presentation of evidence satisfactory to the Company and the Trustee that
the foregoing restrictions on transfer have been complied with. We further
understand that the Notes purchased by us will be in the form of definitive
physical certificates and that such certificates will bear a legend reflecting
the substance of this paragraph. We further agree to provide to any person
acquiring any of the Notes from us a notice advising such person that transfers
of such Notes are restricted as stated herein and that certificates representing
such Notes will bear a legend to that effect.
We represent that you, the Company, the Trustee and others are entitled
to rely upon the truth and accuracy of our acknowledgments, representations and
agreements set forth herein, and we agree to notify you promptly in writing if
any of our acknowledgments, representations or agreements herein cease to be
accurate and complete. You are also irrevocably authorized to produce this
letter or a copy hereof to any interested party in any administrative or legal
proceeding or official inquiry with respect to the matters covered hereby.
C-4
<PAGE> 149
We represent to you that we have full power to make the foregoing
acknowledgments, representations and agreements on our own behalf and on behalf
of any investor account for which we are acting as fiduciary agent.
As used herein, the terms "offshore transaction," "United States" and
"U.S. person" have the respective meanings given to them in Regulation S under
the Securities Act.
THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK.
Very truly yours,
(Name of Purchaser)
By:
-----------------------------------
Date:
---------------------------------
Upon transfer, the Notes would be registered in the name of the new
beneficial owner as follows:
Name:
------------------------------
Address:
---------------------------
C-4
<PAGE> 150
EXHIBIT D
Form of Certificate To Be Delivered
in Connection with Transfers
Pursuant to Regulation S
_______________ , ____
U.S. Bank Trust National Association
180 East 5th Street
St. Paul, Minnesota 55101
Attention: Corporate Trust Department
Re: Verio Inc.
(the "Company") 11-1/4% Senior Notes Due 2008
(the "Securities")
Ladies and Gentlemen:
In connection with our proposed sale of $ aggregate principal
amount of the Securities, we confirm that such sale has been effected pursuant
to and in accordance with Regulation S under the U.S. Securities Act of 1933, as
amended (the "Securities Act"), and, accordingly, we represent that:
(1) the offer of the Securities was not made to a person in the United
States;
(2) either (a) at the time the buy offer was originated, the transferee
was outside the United States or we and any person acting on our behalf
reasonably believed that the transferee was outside the United States, or
(b) the transaction was executed in, on or through the facilities of a
designated off-shore securities market and neither we nor any person acting
on our behalf knows that the transaction has been pre-arranged with a buyer
in the United States;
(3) no directed selling efforts have been made in the United States in
contravention of the requirements of Rule 903(b) or Rule 904(b) of
Regulation S, as applicable;
D-1
<PAGE> 151
(4) the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act;
(5) we have advised the transferee of the transfer restrictions
applicable to the Securities;
(6) if the circumstances set forth in Rule 904(c) under the Securities
Act are applicable, we have complied with the additional conditions therein,
including (if applicable) sending a confirmation or other notice stating
that the Securities may be offered and sold during the restricted period
specified in Rule 903(c)(2) or (3), as applicable, in accordance with the
provisions of Regulation S; pursuant to registration of the Securities under
the Securities Act; or pursuant to an available exemption from the
registration requirements under the Securities Act; and
(7) if the sale is made during a restricted period and the provisions of
Rule 903(c)(3) are applicable thereto, we confirm that such sale has been
made in accordance with such provisions.
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby. Terms used in this certificate have the
meanings set forth in Regulation S.
Very truly yours,
[Name of Transferor]
By:
--------------------------------
Authorized Signature
D-2
<PAGE> 1
EXHIBIT 10.35
===============================================================================
REGISTRATION RIGHTS AGREEMENT
Dated as of November 25, 1998
by and among
VERIO INC.
and
SALOMON SMITH BARNEY INC.,
CREDIT SUISSE FIRST BOSTON CORPORATION,
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
and
FIRST UNION CAPITAL MARKETS, a division of
Wheat First Securities, Inc.
as Initial Purchasers
===============================================================================
<PAGE> 2
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made
and entered into as of November 25, 1998 by and among VERIO INC., a Delaware
corporation (the "Company"), and SALOMON SMITH BARNEY INC. ("Salomon"), CREDIT
SUISSE FIRST BOSTON CORPORATION ("CSFB"), DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION ("DLJ") and FIRST UNION CAPITAL MARKETS, a division of
Wheat First Securities, Inc. ("First Union" and, together with Salomon, CSFB and
DLJ, the "Initial Purchasers").
This Agreement is made pursuant to the Purchase Agreement
dated as of November 20, 1998 by and among the Company and the Initial
Purchasers (the "Purchase Agreement"), which provides for, among other things,
the sale by the Company to the Initial Purchasers of an aggregate of
$400,000,000 principal amount of the Company's 11-1/4% Senior Notes Due 2008
(the "Notes"). In order to induce the Initial Purchasers to enter into the
Purchase Agreement, the Company has agreed to provide to the Initial Purchasers
and their direct and indirect transferees the registration rights set forth in
this Agreement. The execution and delivery of this Agreement is a condition to
the closing under the Purchase Agreement.
In consideration of the foregoing, the parties hereto agree as
follows:
1. Definitions. As used in this Agreement, the following
capitalized defined terms shall have the following meanings:
"Additional Interest" see Section 2(e) hereof.
"Advice" see the last paragraph Section 3 hereof.
"Agreement" shall have the meaning set forth in the preamble
to this Agreement.
"Applicable Period" see Section 3(s) hereof.
"Business Day" shall mean a day that is not a Saturday, a
Sunday, or a day on which banking institutions in New York, New York
are required to be closed.
"Closing Time" shall mean the Closing Time as defined in the
Purchase Agreement.
<PAGE> 3
-2-
"Company" shall have the meaning set forth in the preamble to
this Agreement and also includes the Company's successors and permitted
assigns.
"Depositary" shall mean The Depository Trust Company, or any
other depositary appointed by the Company; provided, however, that such
depositary must have an address in the Borough of Manhattan, in The
City of New York.
"Effectiveness Period" see Section 2(b) hereof.
"Effectiveness Target Date" see Section 2(e) hereof.
"Event Date" see Section 2(e) hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
"Exchange Notes" shall mean the 11-1/4% Senior Notes Due 2008,
Series B issued by the Company under the Indenture containing terms
identical to the Notes (except that (i) interest thereon shall accrue
from the last date on which interest was paid on the Notes or, if no
such interest has been paid, from November 25, 1998, (ii) the transfer
restrictions with respect to the Notes and all registration rights in
respect thereof shall be eliminated and (iii) the provisions relating
to Additional Interest shall be eliminated) to be offered to Holders of
Notes in exchange for Notes pursuant to the Exchange Offer.
"Exchange Offer" shall mean the exchange offer by the Company
of Exchange Notes for Notes pursuant to Section 2(a) hereof.
"Exchange Offer Registration" shall mean a registration under
the Securities Act effected pursuant to Section 2(a) hereof.
"Exchange Offer Registration Statement" shall mean an exchange
offer registration statement on Form S-1, S-3 or S-4 (or, if
applicable, on another appropriate form), and all amendments and
supplements to such registration statement, in each case including the
Prospectus contained therein, all exhibits thereto and all material
incorporated by reference therein.
"Exchange Period" see Section 2(a) hereof.
<PAGE> 4
-3-
"Holders" shall mean the Initial Purchasers, for so long as
they own any Transfer Restricted Notes, each of their direct and
indirect successors, assigns and transferees who become registered
owners of Transfer Restricted Notes under the Indenture and each
Participating Broker-Dealer that holds Exchange Notes for so long as
such Participating Broker-Dealer is required to deliver a prospectus
meeting the requirements of the Securities Act in connection with any
resale of such Exchange Notes.
"Indenture" shall mean the Indenture relating to the Notes
dated as of November 25, 1998 between the Company, and U.S. Bank Trust
National Association, as trustee, as the same may be amended from time
to time in accordance with the terms thereof.
"Initial Purchasers" shall have the meaning set forth in the
preamble to this Agreement.
"Inspectors" see Section 3(m) hereof.
"Issue Date" shall mean the date on which the Notes are
originally issued.
"Majority Holders" shall mean the Holders of a majority of the
aggregate principal amount of outstanding Transfer Restricted Notes.
"Notes" shall have the meaning set forth in the preamble to
this Agreement.
"Participating Broker-Dealer" shall have the meaning set forth
in Section 3(s) hereof.
"Person" shall mean an individual, partnership, corporation,
trust or unincorporated organization, or a government or agency or
political subdivision thereof.
"Private Exchange" see Section 2(a) hereof.
"Private Exchange Notes" see Section 2(a) hereof.
"Prospectus" shall mean the prospectus included in a
Registration Statement, including any preliminary prospectus, and any
such prospectus as amended or supplemented by any prospectus
supplement, including a prospectus supplement with respect to the terms
of the offering of any portion of the Transfer Restricted Notes covered
by a Shelf
<PAGE> 5
-4-
Registration Statement, and by all other amendments and supplements to
a prospectus, including post-effective amendments, and in each case
including all material incorporated by reference therein.
"Purchase Agreement" shall have the meaning set forth in the
preamble to this Agreement.
"Records" see Section 3(m) hereof.
"Registration Expenses" shall mean any and all expenses
incident to performance of or compliance by the Company with this
Agreement, including without limitation: (i) all applicable SEC, stock
exchange or National Association of Securities Dealers, Inc. (the
"NASD") registration and filing fees, (ii) all fees and expenses
incurred in connection with compliance with state securities or blue
sky laws (including reasonable fees and disbursements of one counsel
for Holders that are Initial Purchasers in connection with blue sky
qualification of any of the Exchange Notes or Transfer Restricted
Notes) and compliance with the rules of the NASD, (iii) all applicable
expenses incurred by the Company in preparing or assisting in
preparing, word processing, printing and distributing any Registration
Statement, any Prospectus and any amendments or supplements thereto,
and in preparing or assisting in preparing any other documents relating
to the performance of and compliance with this Agreement, (iv) all
rating agency fees, if any, (v) the fees and disbursements of counsel
for the Company, (vii) all fees and expenses incurred in connection
with the listing, if any, of any of the Transfer Restricted Notes on
any securities exchange or exchanges, if the Company, in its
discretion, elects to make any such listing; but excluding fees of
counsel to the Holders and underwriting discounts and commissions and
transfer taxes, if any, relating to the sale or disposition of Transfer
Restricted Notes by a Holder.
"Registration Statement" shall mean any registration statement
(including, without limitation, the Exchange Offer Registration
Statement and the Shelf Registration Statement) of the Company which
covers any of the Exchange Notes or Transfer Restricted Notes pursuant
to the provisions of this Agreement, and all amendments and supplements
to any such Registration Statement, including post-effective
amendments, in each case including the Prospectus contained therein,
all exhibits thereto and all material incorporated by reference
therein.
<PAGE> 6
-5-
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"Shelf Registration" shall mean a registration effected
pursuant to Section 2(b) hereof.
"Shelf Registration Event Date" see Section 2(b).
"Shelf Registration Statement" shall mean a "shelf"
registration statement of the Company pursuant to the provisions of
Section 2(b) hereof which covers all of the Transfer Restricted Notes
or all of the Private Exchange Notes, as the case may be, on an
appropriate form under Rule 415 under the Securities Act, or any
similar rule that may be adopted by the SEC, and all amendments and
supplements to such registration statement, including post-effective
amendments, in each case including the Prospectus contained therein,
all exhibits thereto and all material incorporated by reference
therein.
"Target Consummation Date" see Section 2(a).
"Target Effectiveness Date" see Section 2(a).
"TIA" shall have the meaning set forth in Section 3(k) hereof.
"Transfer Restricted Notes" means each Note until (i) the date
on which such has been exchanged by a person other than a broker-dealer
for an Exchange Note in the Exchange Offer, (ii) following the exchange
by a broker-dealer in the Exchange Offer of a Note for an Exchange
Note, the date on which such Exchange Note is sold to a purchaser who
receives from such broker-dealer on or prior to the date of such sale a
copy of the prospectus contained in the Exchange Offer Registration
Statement, (iii) the date on which such Note has been effectively
registered under the Securities Act and disposed of in accordance with
the Shelf Registration Statement, (iv) the date on which such Note is
distributed to the public pursuant to Rule 144(k) under the Securities
Act (or any similar provision then in force, but not Rule 144A under
the Securities Act), (v) such Note shall have been otherwise
transferred by the holder thereof and a new Note not bearing a legend
restricting further transfer shall have been delivered by the Company
and subsequent disposition of such Note shall not require registration
or qualification under the Securities Act or any similar state law then
in force or (vi) such Note ceases to be outstanding.
<PAGE> 7
-6-
"Trustee" shall mean the trustee with respect to the Notes
under the Indenture.
2. Registration Under the Securities Act.
(a) Exchange Offer. The Company shall, for the benefit of the
Holders, at the Company's cost, (i) unless the Exchange Offer would not be
permitted by applicable law or SEC policy, file with the SEC within 90 days
after the Closing Time an Exchange Offer Registration Statement on an
appropriate form under the Securities Act covering the offer by the Company to
the Holders to exchange all of the Transfer Restricted Notes (other than Private
Exchange Notes (as defined below)) for a like principal amount of Exchange
Notes, (ii) unless the Exchange Offer would not be permitted by applicable law
or SEC policy, use its best efforts to have such Exchange Offer Registration
Statement declared effective under the Securities Act by the SEC not later than
the date which is 150 days after the Closing Time (the "Target Effectiveness
Date"), (iii) have such Registration Statement remain effective until the
closing of the Exchange Offer and (iv) unless the Exchange Offer would not be
permitted by applicable law or SEC policy, commence the Exchange Offer and use
its best efforts to issue, on or prior to the date which is 30 days after the
date on which the Exchange Offer Registration Statement was declared effective
by the SEC (the "Target Consummation Date"), Exchange Notes in exchange for all
Notes tendered prior thereto in the Exchange Offer. Upon the effectiveness of
the Exchange Offer Registration Statement, the Company shall promptly commence
the Exchange Offer, it being the objective of such Exchange Offer to enable each
Holder eligible and electing to exchange Transfer Restricted Notes for Exchange
Notes (assuming that such Holder is not an affiliate of the Company within the
meaning of Rule 405 under the Securities Act and is not a broker-dealer
tendering Transfer Restricted Notes acquired directly from the Company for its
own account, acquires the Exchange Notes in the ordinary course of such Holder's
business and has no arrangements or understandings with any Person to
participate in the Exchange Offer for the purpose of distributing (within the
meaning of the Securities Act) the Exchange Notes) and to transfer such Exchange
Notes from and after their receipt without any limitations or restrictions under
the Securities Act and under state securities or blue sky laws.
<PAGE> 8
-7-
In connection with the Exchange Offer, the Company shall:
(i) mail to each Holder a copy of the Prospectus forming part
of the Exchange Offer Registration Statement, together with an
appropriate letter of transmittal and related documents;
(ii) keep the Exchange Offer open for acceptance for a period
of not less than 20 Business Days after the date notice thereof is
mailed to the Holders (or longer if required by applicable law) (such
period referred to herein as the "Exchange Period");
(iii) utilize the services of the Depositary for the Exchange
Offer;
(iv) permit Holders to withdraw tendered Notes at any time
prior to the close of business, New York time, on the last Business Day
of the Exchange Period, by sending to the institution specified in the
notice, a telegram, telex, facsimile transmission or letter setting
forth the name of such Holder, the principal amount of Notes delivered
for exchange, and a statement that such Holder is withdrawing his
election to have such Notes exchanged; and
(v) otherwise comply in all material respects with all
applicable laws relating to the Exchange Offer.
If, prior to consummation of the Exchange Offer the Initial
Purchasers hold any Notes acquired by them and having the status of an unsold
allotment in the initial distribution, the Company upon the request of any
Initial Purchaser shall, simultaneously with the delivery of the Exchange Notes
in the Exchange Offer, issue and deliver to such Initial Purchaser in exchange
(the "Private Exchange") for the Notes held by such Initial Purchaser, a like
principal amount of debt securities of the Company that are identical (except
that such securities shall bear appropriate transfer restrictions) to the
Exchange Notes (the "Private Exchange Notes").
The Exchange Notes and the Private Exchange Notes shall be
issued under (i) the Indenture or (ii) an indenture identical to all material
respects to the Indenture and which, in either case, has been qualified under
the TIA or is exempt from such qualification and shall provide that the Exchange
Notes shall not be subject to the transfer restrictions set forth in the
Indenture. The Indenture or such indenture shall
<PAGE> 9
-8-
provide that the Exchange Notes, the Private Exchange Notes and the Notes shall
vote and consent together on all matters as one class and that none of the
Exchange Notes, the Private Exchange Notes or the Notes will have the right to
vote or consent as a separate class on any matter. The Private Exchange Notes
shall be of the same series as and the Company shall use all commercially
reasonable efforts to have the Private Exchange Notes bear the same CUSIP
number as the Exchange Notes. The Company shall not have any liability under
this Agreement solely as a result of such Private Exchange Notes not bearing
the same CUSIP number as the Exchange Notes.
The Exchange Offer and the Private Exchange shall not be
subject to any conditions, other than that (i) the Exchange Offer or Private
Exchange, as the case may be, does not violate applicable law or any applicable
interpretation of the staff of the SEC (ii) no action or proceeding shall have
been instituted or threatened in any court or by any governmental agency which
might materially impair the ability of the Company to proceed with the Exchange
Offer or the Private Exchange, and no material adverse development shall have
occurred in any existing action or proceeding with respect to the Company and
(iii) all governmental approvals shall have been obtained, which approvals the
Company deems necessary for the consummation of the Exchange Offer or Private
Exchange. As soon as practicable after the close of the Exchange Offer and/or
the Private Exchange, as the case may be, the Company shall:
(i) accept for exchange all Transfer Restricted Notes or
portions thereof properly tendered and not validly withdrawn pursuant
to the Exchange Offer in accordance with the terms of the Exchange
Offer Registration Statement and the letter of transmittal which is an
exhibit thereto;
(ii) accept for exchange all Notes properly tendered pursuant
to the Private Exchange; and
(iii) deliver, or cause to be delivered, to the Trustee for
cancellation all Transfer Restricted Notes or portions thereof so
accepted for exchange by the Company, and issue, and cause the Trustee
under the Indenture to promptly authenticate and deliver to each
Holder, a new Exchange Note or Private Exchange Note, as the case may
be, equal in principal amount to the principal amount of the Transfer
Restricted Notes surrendered by such Holder and accepted for exchange.
<PAGE> 10
-9-
To the extent not prohibited by any law or applicable
interpretation of the staff of the SEC, the Company shall use its best efforts
to complete the Exchange Offer as provided above, and shall comply with the
applicable requirements of the Securities Act, the Exchange Act and other
applicable laws in connection with the Exchange Offer. The Exchange Offer shall
not be subject to any conditions, other than those set forth in the immediately
preceding paragraph. Each Holder of Transfer Restricted Notes who wishes to
exchange such Transfer Restricted Notes for Exchange Notes in the Exchange Offer
will be required to make certain customary representations in connection
therewith, including representations that such Holder is not an affiliate of the
Company within the meaning of Rule 405 under the Securities Act, that any
Exchange Notes to be received by it will be acquired in the ordinary course of
business and that at the time of the commencement of the Exchange Offer it has
no arrangement with any Person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes. The Company shall inform
the Initial Purchasers of the names and addresses of the Holders to whom the
Exchange Offer is made, and the Initial Purchasers shall have the right to
contact such Holders and otherwise facilitate the tender of Transfer Restricted
Notes in the Exchange Offer.
Upon consummation of the Exchange Offer in accordance with
this Section 2(a), the provisions of this Agreement shall continue to apply,
mutatis mutandis, solely with respect to Transfer Restricted Notes that are
Private Exchange Notes and Exchange Notes held by Participating Broker-Dealers,
and the Company shall have no further obligation to register Transfer Restricted
Notes (other than Private Exchange Notes) pursuant to Section 2(b) hereof.
(b) Shelf Registration. If (i) the Company is not permitted to
file the Exchange Offer Registration Statement or to consummate the Exchange
Offer because the Exchange Offer is not permitted by applicable law or SEC
policy, (ii) the Exchange Offer is not for any other reason consummated by the
Target Consummation Date, (iii) any holder of Notes notifies the Company within
a specified time period that (a) due to a change in law or policy, in the
opinion of counsel, it is not entitled to participate in the Exchange Offer, (b)
due to a change in law or policy, in the opinion of counsel, it may not resell
the Exchange Notes acquired by it in the Exchange Offer to the public without
delivering a prospectus and (x) the prospectus contained in the Exchange Offer
Registration Statement is not appropriate or available for such resales by such
holder
<PAGE> 11
-10-
and (y) such prospectus is not promptly amended or modified in order to be
suitable for use in connection with such resales for such holder and all
similarly situated holders or (c) it is a broker-dealer and owns Notes acquired
directly from the Company or an affiliate of the Company, (iv) the holders of a
majority of the Notes may not resell the Exchange Notes acquired by them in the
Exchange Offer to the public without restriction under the Securities Act and
without restriction under applicable blue sky or state securities laws or (v)
the Exchange Offer shall not have been consummated within 150 days after the
Issue Date (the date of any of (i)-(v), the "Shelf Registration Event Date"),
then the Company shall, at its cost, use its best efforts to cause to be filed a
Shelf Registration Statement prior to the later of (A) 30 days after the Shelf
Registration Event Date or (B) 150 days after the Issue Date and use its best
efforts to cause the Shelf Registration Statement to be declared effective by
the SEC on or prior to 90 days after such obligation arises. Each Holder as to
which any Shelf Registration is being effected agrees to furnish to the Company
all information with respect to such Holder necessary to make any information
previously furnished to the Company by such Holder not materially misleading.
The Company agrees to use its best efforts to keep the Shelf
Registration Statement continuously effective for a period of two years from the
Issue Date (subject to extension pursuant to the last paragraph of Section 3
hereof) (or such shorter period that will terminate when all of the Transfer
Restricted Notes covered by such Shelf Registration Statement have been sold
pursuant thereto) or cease to be outstanding (the "Effectiveness Period");
provided, however, that the Effectiveness Period in respect of the Shelf
Registration Statement shall be extended to the extent required to permit
dealers to comply with the applicable prospectus delivery requirements of Rule
174 under the Securities Act and as otherwise provided herein. The Company shall
not permit any securities other than Transfer Restricted Notes to be included in
the Shelf Registration. The Company further agrees, if necessary, to supplement
or amend the Shelf Registration Statement, if required by the rules, regulations
or instructions applicable to the registration form used by the Company for such
Shelf Registration Statement or by the Securities Act or by any other rules and
regulations thereunder for shelf registrations, and the Company agrees to
furnish to the Holders of Transfer Restricted Notes copies of any such
supplement or amendment promptly after its being used or filed with the SEC.
<PAGE> 12
-11-
(c) Expenses. The Company shall pay all Registration Expenses
in connection with the registration pursuant to Section 2(a) or 2(b) hereof and
the reasonable fees and expenses of one counsel, if any, designated in writing
by the Majority Holders to act as counsel for the Holders of the Transfer
Restricted Notes in connection with a Shelf Registration Statement. Except as
provided in the preceding sentence, each Holder shall pay all expenses of its
counsel, underwriting discounts and commissions and transfer taxes, if any,
relating to the sale or disposition of such Holder's Transfer Restricted Notes
pursuant to the Shelf Registration Statement.
(d) Effective Registration Statement. An Exchange Offer
Registration Statement pursuant to Section 2(a) hereof or a Shelf Registration
Statement pursuant to Section 2(b) hereof will not be deemed to have become
effective unless it has been declared effective by the SEC; provided, however,
that if, after it has been declared effective, the offering of Transfer
Restricted Notes pursuant to a Shelf Registration Statement is interfered with
by any stop order, injunction or other order or requirement of the SEC or any
other governmental agency or court, such Registration Statement will be deemed
not to have been effective during the period of such interference, until the
offering of Transfer Restricted Notes may legally resume. The Company will be
deemed not to have used its best efforts to cause the Exchange Offer
Registration Statement or the Shelf Registration Statement, as the case may be,
to become, or to remain, effective during the requisite period if it voluntarily
takes any action that would result in any such Registration Statement not being
declared effective or in the Holders of Transfer Restricted Notes covered
thereby not being able to exchange or offer and sell such Transfer Restricted
Notes during that period, unless such action is required by applicable law and
except as otherwise provided in the second paragraph of Section 2(e) below.
(e) Additional Interest. In the event that (i) the applicable
Registration Statement is not filed with the SEC on or prior to the date
specified herein for such filing, (ii) the applicable Registration Statement is
not declared effective on or prior to the date specified herein for such
effectiveness after such obligation arises (the "Effectiveness Target Date"),
(iii) if the Exchange Offer is required to be consummated hereunder, the Company
fails to consummate the Exchange Offer within 30 days of the date on which the
Exchange Offer Registration Statement is declared effective or (iv) the
applicable Registration Statement is filed and declared effective during the
period effectiveness is required by Section 2(e) and 3(a)
<PAGE> 13
-12-
but shall thereafter cease to be effective or usable without being succeeded
immediately by an additional Registration Statement covering the Transfer
Restricted Notes which has been filed and declared effective (each such event
referred to in clauses (i) through (iv), a "Registration Default"), then the
interest rate on the Transfer Restricted Notes as to which such Registration
Default relates will increase ("Additional Interest"), with respect to the first
90-day period (or portion thereof) while a Registration Default is continuing
immediately following the occurrence of such Registration Default in an amount
equal to 0.50% per annum of the principal amount of the Notes. The rate of
additional Interest will increase by an additional 0.50% per annum of the
principal amount of the Notes for each subsequent 90-day period (or portion
thereof) while a Registration Default is continuing until all Registration
Defaults have been cured, up to a maximum amount of 1.50% of the principal
amount of the Notes. Additional Interest shall be computed based on the actual
number of days elapsed during which any such Registration Defaults exist.
Following the cure of a Registration Default, the accrual of Additional Interest
with respect to such Registration Default will cease.
If the Company issues a notice that the Shelf Registration
Statement is unusable due to the pendency of an announcement of a material
corporate transaction, or such notice is required under applicable securities
laws to be issued by the Company, and the aggregate number of days in any
consecutive twelve-month period for which the Shelf Registration Statement shall
not be usable due to all such notices issued or required to be issued exceeds 30
days in the aggregate, then the interest rate borne by the Notes will be
increased by 0.50% per annum of the principal amount of the Notes for the first
90-day period (or portion thereof) beginning on the 31st such date that such
Shelf Registration Statement ceases to be usable, which rate shall be increased
by an additional 0.50% per annum of the principal amount of the Notes at the
beginning of each subsequent 90-day period, up to a maximum amount of 1.50% of
the principal amount of the Notes. Upon the Shelf Registration Statement once
again becoming usable, the interest rate borne by the Notes will be reduced to
the original interest rate if the Company is otherwise in compliance with this
Agreement at such time. Additional Interest shall be computed based on the
actual number of days elapsed in each 90-day period in which the Shelf
Registration Statement is unusable.
The Company shall notify the Trustee within three Business
Days after each and every date on which an event occurs in respect of which
Additional Interest is required to be
<PAGE> 14
-13-
paid (an "Event Date"). Additional Interest shall be paid by depositing with the
Trustee, in trust, for the benefit of the Holders of Transfer Restricted Notes,
on or before the applicable semiannual interest payment date, immediately
available funds in sums sufficient to pay the Additional Interest then due. The
Additional Interest due shall be payable on each interest payment date to the
record Holder of Notes entitled to receive the interest payment to be paid on
such date as set forth in the Indenture. Each obligation to pay Additional
Interest shall be deemed to accrue from and including the day following the
applicable Event Date.
3. Registration Procedures. In connection with the obligations
of the Company with respect to the Registration Statements pursuant to Sections
2(a) and 2(b) hereof, the Company shall:
(a) prepare and file with the SEC a Registration Statement or
Registration Statements as prescribed by Sections 2(a) and 2(b) hereof
within the relevant time period specified in Section 2 hereof on the
appropriate form under the Securities Act, which form (i) shall be
selected by the Company, (ii) shall, in the case of a Shelf
Registration, be available for the sale of the Transfer Restricted
Notes by the selling Holders thereof and (iii) shall comply as to form
in all material respects with the requirements of the applicable form
and include all financial statements required by the SEC to be filed
therewith; and use their best efforts to cause such Registration
Statement to become effective and remain effective in accordance with
Section 2 hereof. The Company shall not file any Registration Statement
or Prospectus or any amendments or supplements thereto in respect of
which the Holders must provide information for inclusion therein
without the Holders being afforded an opportunity to review such
documentation a reasonable time prior to the filing of such document if
the Majority Holders or such Participating Broker-Dealer, as the case
may be, their counsel or the managing underwriters, if any, shall
reasonably object;
(b) prepare and file with the SEC such amendments and
post-effective amendments to each Registration Statement as may be
necessary to keep such Registration Statement effective for the
Effectiveness Period or the Applicable Period, as the case may be; and
cause each Prospectus to be supplemented by any required prospectus
supplement and as so supplemented to be filed pursuant to Rule
<PAGE> 15
-14-
424 (or any similar provision then in force) under the Securities Act,
and comply with the provisions of the Securities Act, the Exchange Act
and the rules and regulations promulgated thereunder applicable to it
with respect to the disposition of all securities covered by each
Registration Statement during the Effectiveness Period or the
Applicable Period, as the case may be, in accordance with the intended
method or methods of distribution by the selling Holders thereof
described in this Agreement (including sales by any Participating
Broker-Dealer);
(c) in the case of a Shelf Registration, (i) notify each
Holder of Transfer Restricted Notes, at least three Business Days prior
to filing, that a Shelf Registration Statement with respect to the
Transfer Restricted Notes is being filed and advising such Holder that
the distribution of Transfer Restricted Notes will be made in
accordance with the method selected by the Majority Holders; and (ii)
furnish to each Holder of Transfer Restricted Notes, without charge, as
many copies of each Prospectus, and any amendment or supplement thereto
and such other documents as such Holder may reasonably request, in
order to facilitate the disposition of the Transfer Restricted Notes;
and (iii) subject to the last paragraph of Section 3 hereof, hereby
consent to the use of the Prospectus or any amendment or supplement
thereto by each of the selling Holders of Transfer Restricted Notes in
connection with the offering and sale of the Transfer Restricted Notes
covered by such Prospectus or any amendment or supplement thereto
subject to the limitations on the use thereof provided in Sections 2(b)
and 2(c);
(d) in the case of a Shelf Registration, use its best efforts
to register or qualify, as may be required by applicable law, the
Transfer Restricted Notes under all applicable state securities or
"blue sky" laws of such jurisdictions by the time the applicable
Registration Statement is declared effective by the SEC as any Holder
of Transfer Restricted Notes covered by a Registration Statement shall
reasonably request in advance of such date of effectiveness, and do any
and all other acts and things which may be reasonably necessary or
advisable to enable such Holder to consummate the disposition in each
such jurisdiction of such Transfer Restricted Notes owned by such
Holder; provided, however, that the Company shall not be required to
(i) qualify as a foreign corporation or as a broker or dealer in
securities in any jurisdiction where it would not otherwise be required
to qualify but for this Section 3(d), (ii) file any general consent to
service of process or (iii) subject itself to taxation in any such
jurisdiction if it is not so subject;
<PAGE> 16
-15-
(e) in the case of (1) a Shelf Registration or (2)
Participating Broker-Dealers who have notified the Company that they
will be utilizing the Prospectus contained in the Exchange Offer
Registration Statement as provided in Section 3(t) hereof, notify each
Holder of Transfer Restricted Notes, or such Participating
Broker-Dealers, as the case may be, their counsel, if any, promptly and
confirm such notice in writing (i) when a Registration Statement has
become effective and when any post-effective amendments and supplements
thereto become effective, (ii) of any request by the SEC or any state
securities authority for amendments and supplements to a Registration
Statement or Prospectus or for additional information after the
Registration Statement has become effective, (iii) of the issuance by
the SEC or any state securities authority of any stop order suspending
the effectiveness of a Registration Statement or the initiation of any
proceedings for that purpose, (iv) if the Company receives any
notification with respect to the suspension of the qualification of the
Transfer Restricted Notes or the Exchange Notes to be sold by any
Participating Broker-Dealer for offer or sale in any jurisdiction or
the initiation of any proceeding for such purpose, (v) of the happening
of any event or the failure of any event to occur or the discovery of
any facts or otherwise, during the period a Shelf Registration
Statement is effective which makes any statement made in such
Registration Statement or the related Prospectus untrue in any material
respect or which causes such Registration Statement or Prospectus to
omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading and (vi) the Company's reasonable determination that a
post-effective amendment to the Registration Statement would be
appropriate;
(f) make every reasonable effort to obtain the withdrawal of
any order suspending the effectiveness of a Registration Statement as
soon as practicable;
(g) in the case of a Shelf Registration, furnish to each
Holder of Transfer Restricted Notes, without charge, at least one
conformed copy of each Registration Statement relating to such Shelf
Registration and any post-effective amendment thereto (without
documents incorporated therein by reference or exhibits thereto, unless
requested);
<PAGE> 17
-16-
(h) in the case of a Shelf Registration, cooperate with the
selling Holders of Transfer Restricted Notes to facilitate the timely
preparation and delivery of certificates not bearing any restrictive
legends representing Notes covered by such Shelf Registration to be
sold and relating to the subsequent transfer of such Notes; and cause
such Transfer Restricted Notes to be in such denominations (consistent
with the provisions of the Indenture) and registered in such names as
the selling Holders may reasonably request at least two Business Days
prior to the closing of any sale of Transfer Restricted Notes;
(i) in the case of a Shelf Registration or an Exchange Offer
Registration, upon the occurrence of any circumstance contemplated by
Section 3(e)(ii), 3(e)(iii), 3(e)(iv), 3(e)(v) or 3(e)(vi) hereof, use
their best efforts to prepare a supplement or post-effective amendment
to a Registration Statement or the related Prospectus or any document
incorporated therein by reference or file any other required document
so that, as thereafter delivered to the purchasers of the Transfer
Restricted Notes, such Prospectus will not contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which
they were made, not misleading; and to notify each Holder to suspend
use of the Prospectus as promptly as practicable after the occurrence
of such an event, and each Holder hereby agrees to suspend use of the
Prospectus until the Company has amended or supplemented the Prospectus
to correct such misstatement or omission;
(j) obtain a CUSIP number for all Exchange Notes or Transfer
Restricted Notes, as the case may be, not later than the effective date
of a Registration Statement, and provide the Trustee with certificates
for the Exchange Notes or the Transfer Restricted Notes, as the case
may be, in a form eligible for deposit with the Depositary;
(k) cause the Indenture to be qualified under the Trust
Indenture Act of 1939, as amended, (the "TIA") in connection with the
registration of the Exchange Notes or Transfer Restricted Notes, as the
case may be, cooperate with the Trustee and the Holders to effect such
changes to the Indenture as may be required for the Indenture to be so
qualified in accordance with the terms of the TIA and
<PAGE> 18
-17-
execute, and use its best efforts to cause the Trustee to execute, all
documents as may be required to effect such changes, and all other
forms and documents required to be filed with the SEC to enable the
Indenture to be so qualified in a timely manner;
(l) in the case of a Shelf Registration, enter into such
agreements (including underwriting agreements) and take all such other
appropriate actions as are reasonably requested in order to expedite or
facilitate the registration or the disposition of such Transfer
Restricted Notes, and in such connection, (i) make such representations
and warranties to Holders of such Transfer Restricted Notes with
respect to the business of the Company and its subsidiaries as then
conducted and the Registration Statement, Prospectus and documents, if
any, incorporated or deemed to be incorporated by reference therein, in
each case, as are customarily made by issuers to underwriters in
underwritten offerings, and confirm the same if and when requested;
(ii) obtain opinions of counsel to the Company and updates thereof in
form and substance reasonably satisfactory to the Holders of a majority
in principal amount of the Transfer Restricted Notes being sold,
addressed to each selling Holder covering the matters customarily
covered in opinions requested in underwritten offerings and such other
matters as may be reasonably requested by such Holders; (iii) obtain
"cold comfort" letters and updates thereof from the independent
certified public accountants of the Company (and, if necessary, any
other independent certified public accountants of any subsidiary of the
Company or of any business acquired by the Company for which financial
statements and financial data are, or are required to be, included in
the Registration Statement, addressed to the selling Holders of
Transfer Restricted Notes, such letters to be in customary form and
covering matters of the type customarily covered in "cold comfort"
letters in connection with underwritten offerings and such other
matters as reasonably requested by such selling Holders; and (iv) if an
underwriting agreement is entered into, the same shall contain
indemnification provisions and procedures no less favorable than those
set forth in Section 4 hereof (or such other provisions and procedures
acceptable to the Company and the Holders of a majority in aggregate
principal amount of Transfer Restricted Notes covered by such
Registration with respect to all parties to be indemnified pursuant to
said Section (including, without limitation, such selling Holders). The
above shall be done at each closing in respect of the sale of Transfer
Restricted Notes, or as and to the extent required thereunder;
<PAGE> 19
-18-
(m) if (1) a Shelf Registration is filed pursuant to Section
2(b) or (2) a Prospectus contained in an Exchange Offer Registration
Statement filed pursuant to Section 2(a) is required to be delivered
under the Securities Act by any Participating Broker-Dealer who seeks
to sell Exchange Notes during the Applicable Period, make available for
inspection by each such person who would be an "underwriter" as a
result of either (i) the sale by such person of Notes covered by such
Shelf Registration Statement or (ii) the sale during the Applicable
Period by a Participating Broker-Dealer of Exchange Notes (provided
that a Participating Broker-Dealer shall not be deemed to be an
underwriter solely as a result of it being required to deliver a
prospectus in connection with any resale of Exchange Notes) and any
attorney, accountant or other agent retained by any such person
(collectively, the "Inspectors"), at the offices where normally kept,
during reasonable business hours, all financial and other records,
pertinent corporate documents and properties of the Company and its
subsidiaries (collectively, the "Records") as shall be reasonably
necessary to enable them to exercise any applicable due diligence
responsibilities, and cause the officers, directors and employees of
the Company and its subsidiaries to supply all information in each case
reasonably requested by any such Inspector in connection with such
Registration Statement. Records which the Company determines, in good
faith, to be confidential and any Records which it notifies the
Inspectors are confidential shall not be disclosed by the Inspectors
unless (i) the disclosure of such Records is necessary to avoid or
correct a material misstatement or omission in such Registration
Statement, (ii) the release of such Records is ordered pursuant to a
subpoena or other order from a court of competent jurisdiction or (iii)
the information in such Records has been made generally available to
the public. Each selling Holder of such Transfer Restricted Notes and
each such Participating Broker-Dealer will be required to agree that
information obtained by it as a result of such inspections shall be
deemed confidential and shall not be used by it as the basis for any
market transactions in the securities of the Company unless and until
such is made generally available to the public. Each selling Holder of
such Transfer Restricted Notes and each such Participating
Broker-Dealer will be required to further agree that it will, upon
learning that disclosure of such Records is sought in a court of
competent jurisdiction, give notice to the Company and allow the
Company at its expense to undertake appropriate action to prevent
disclosure of the Records deemed confidential;
<PAGE> 20
-19-
(n) comply with all applicable rules and regulations of the
SEC and make generally available to its securityholders earnings
statements satisfying the provisions of Section 11(a) of the Securities
Act and Rule 158 thereunder (or any similar rule promulgated under the
Securities Act) no later than 60 days after the end of any 12-month
period (or 135 days after the end of any 12-month period if such period
is a fiscal year) (i) commencing at the end of any fiscal quarter in
which Transfer Restricted Notes are sold to underwriters in a firm
commitment or best efforts underwritten offering and (ii) if not sold
to underwriters in such an offering, commencing on the first day of the
first fiscal quarter of the Company after the effective date of a
Registration Statement, which statements shall cover said 12-month
periods;
(o) upon consummation of an Exchange Offer or a Private
Exchange, obtain an opinion of counsel to the Company addressed to the
Trustee for the benefit of all Holders of Transfer Restricted Notes
participating in the Exchange Offer or the Private Exchange, as the
case may be, and which includes an opinion that (i) the Company has
duly authorized, executed and delivered the Exchange Notes and Private
Exchange Notes, and (ii) each of the Exchange Notes or the Private
Exchange Notes, as the case may be, constitute a legal, valid and
binding obligation of the Company, enforceable against the Company in
accordance with its respective terms (in each case, with customary
exceptions);
(p) if an Exchange Offer or a Private Exchange is to be
consummated, upon proper delivery of the Transfer Restricted Notes by
Holders to the Company (or to such other Person as directed by the
Company) in exchange for the Exchange Notes or the Private Exchange
Notes, as the case may be, the Company shall mark, or cause to be
marked, on such Transfer Restricted Notes and on the books of the
Trustee, the Transfer Agent, the Registrar and the Depositary delivered
by such Holders that such Transfer Restricted Notes are being canceled
in exchange for the Exchange Notes or the Private Exchange Notes, as
the case may be; but in no event shall such Transfer Restricted Notes
be marked as paid or otherwise satisfied solely as a result of being
exchanged for Exchange Notes or Private Exchange Notes in the Exchange
Offer or the Private Exchange, as the case may be;
<PAGE> 21
-20-
(q) cooperate with each seller of Transfer Restricted Notes
covered by any Registration Statement participating in the disposition
of such Transfer Restricted Notes and one counsel acting on behalf of
all such sellers in connection with the filings, if any, required to be
made with the NASD;
(r) use its best efforts to take all other steps necessary to
effect the registration of the Transfer Restricted Notes covered by a
Registration Statement contemplated hereby; and
(s) (A) in the case of the Exchange Offer Registration
Statement (i) include in the Exchange Offer Registration Statement a
section entitled "Plan of Distribution," which section shall be
reasonably acceptable to Salomon, as representative of the Initial
Purchasers, and which shall contain a summary statement of the
positions taken or policies made by the staff of the SEC with respect
to the potential "underwriter" status of any broker-dealer (a
"Participating Broker-Dealer") that holds Transfer Restricted Notes
acquired for its own account as a result of market-making activities or
other trading activities and that will be the beneficial owner (as
defined in Rule 13d-3 under the Exchange Act) of Exchange Notes to be
received by such broker-dealer in the Exchange Offer, whether such
positions or policies have been publicly disseminated by the staff of
the SEC or such positions or policies, in the reasonable judgment of
Salomon, as representative of the Initial Purchasers or such other
representative, represent the prevailing views of the staff of the SEC,
including a statement that any such broker-dealer who receives Exchange
Notes for Transfer Restricted Notes pursuant to the Exchange Offer may
be deemed a statutory underwriter and must deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of
such Exchange Notes, (ii) furnish to each Participating Broker-Dealer
who has delivered to the Company the notice referred to in Section
3(e), without charge, as many copies of each Prospectus included in the
Exchange Offer Registration Statement, and any amendment or supplement
thereto, as such Participating Broker-Dealer may reasonably request;
(iii) hereby consent to the use of the Prospectus forming part of the
Exchange Offer Registration
<PAGE> 22
-21-
Statement or any amendment or supplement thereto, by any Person
subject to the prospectus delivery requirements of the SEC, including
all Participating Broker-Dealers, in connection with the sale or
transfer of the Exchange Notes covered by the Prospectus or any
amendment or supplement thereto, (iv) use their best efforts to keep
the Exchange Offer Registration Statement effective and to amend and
supplement the Prospectus contained therein in order to permit such
Prospectus to be lawfully delivered by all Persons subject to the
prospectus delivery requirements of the Securities Act for such period
of time as such Persons must comply with such requirements in order to
resell the Exchange Notes; provided, however, that such period shall
not be required to exceed 90 days (or such longer period if extended
pursuant to the last sentence of Section 3 hereof) (the "Applicable
Period"), and (iv) include in the transmittal letter or similar
documentation to be executed by an exchange offeree in order to
participate in the Exchange Offer (x) the following provision:
"If the exchange offeree is a broker-dealer holding
Transfer Restricted Notes acquired for its own
account as a result of market-making activities or
other trading activities, it will deliver a
prospectus meeting the requirements of the
Securities Act in connection with any resale of
Exchange Notes received in respect of such Transfer
Restricted Notes pursuant to the Exchange Offer";
and (y) a statement to the effect that by a broker-dealer making the
acknowledgment described in clause (x) and by delivering a Prospectus
in connection with the exchange of Transfer Restricted Notes, such
broker-dealer will not be deemed to admit that it is an underwriter
within the meaning of the Securities Act; and
(B) in the case of any Exchange Offer Registration Statement,
the Company agrees to deliver, upon request, to the Trustee or to
Participating Broker-Dealers upon consummation of the Exchange Offer
(i) an opinion of counsel substantially in the form attached hereto as
Exhibit A, and (ii) an officers' certificate containing certifications
substantially similar to those set forth in Section 6(c) of the
Purchase Agreement.
The Company may require each seller of Transfer Restricted
Notes as to which any registration is being effected
<PAGE> 23
-22-
to furnish to the Company such information regarding such seller and the
proposed distribution of such Transfer Restricted Notes, as the Company may
from time to time reasonably request in writing. The Company may exclude from
such registration the Transfer Restricted Notes of any seller who fails to
furnish such information within a reasonable time (not to exceed 10 Business
Days) after receiving such request and shall be under no obligation to
compensate any such seller for any lost income, interest or other opportunity
forgone, or any liability incurred, as a result of the Company's decision to
exclude such seller.
In the case of (1) a Shelf Registration Statement or (2)
Participating Broker-Dealers who have notified the Company that they will be
utilizing the Prospectus contained in the Exchange Offer Registration Statement
as provided in Section 3(t) hereof, that are seeking to sell Exchange Notes and
are required to deliver Prospectuses, each Holder agrees that, upon receipt of
any notice from the Company of the happening of any event of the kind described
in Section 3(e)(ii), 3(e)(iii), 3(e)(v), 3(e)(vi) or 3(e)(vii) hereof, such
Holder will forthwith discontinue disposition of Transfer Restricted Notes
pursuant to a Registration Statement until such Holder's receipt of the copies
of the supplemented or amended Prospectus contemplated by Section 3(i) hereof
or until it is advised in writing (the "Advice") by the Company that the use of
the applicable Prospectus may be resumed, and, if so directed by the Company,
such Holder will deliver to the Company (at the Company's expense) all copies
in such Holder's possession, other than permanent file copies then in such
Holder's possession, of the Prospectus covering such Transfer Restricted Notes
or Exchange Notes, as the case may be, current at the time of receipt of such
notice. If the Company shall give any such notice to suspend the disposition of
Transfer Restricted Notes or Exchange Notes, as the case may be, pursuant to a
Registration Statement, the Company shall use its best efforts to file and have
declared effective (if an amendment) as soon as practicable an amendment or
supplement to the Registration Statement and, in the case of an amendment, have
such amendment declared effective as soon as practicable and shall extend the
period during which such Registration Statement shall be maintained effective
pursuant to this Agreement by the number of days in the period from and
including the date of the giving of such notice to and including the date when
the Company shall have made available to the Holders (x) copies of the
supplemented or amended Prospectus necessary to resume such dispositions or (y)
the Advice.
<PAGE> 24
-23-
4. Indemnification and Contribution. (a) The Company shall
indemnify and hold harmless each Initial Purchaser, each Holder, each
Participating Broker-Dealer, each underwriter who participates in an offering
of Transfer Restricted Notes, their respective affiliates, each Person, if any,
who controls any of such parties within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, joint or several, as incurred, arising out of any
untrue statement or alleged untrue statement of a material fact
contained in any Registration Statement (or any amendment or
supplement thereto), covering Transfer Restricted Notes or Exchange
Notes, including all documents incorporated therein by reference, or
the omission or alleged omission therefrom of a material fact required
to be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact contained in any Prospectus (or any
amendment or supplement thereto) or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, joint or several, as incurred, to the extent of
the aggregate amount paid in settlement of any litigation, or any
investigation or proceeding by any court or governmental agency or
body, commenced or threatened, or of any claim whatsoever based upon
any such untrue statement or omission, or any such alleged untrue
statement or omission; provided that (subject to Sections 4(c) and
4(d) below) any such settlement is effected with the prior written
consent of the Company; and
(iii) against any and all expenses whatsoever, as incurred
(including reasonable fees and disbursements of one counsel (in
addition to any local counsel) chosen by Salomon, such Holder, such
Participating Broker-Dealer or any underwriter (except to the extent
otherwise expressly provided in Section 4(c) hereof)), reasonably
incurred in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any court or
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission, to the extent that any such
expense is not paid under subparagraph (i) or (ii) of this Section
4(a);
<PAGE> 25
-24-
provided, however, that this indemnity does not apply to any loss, liability,
claim, damage or expense to the extent arising out of an untrue statement or
omission or alleged untrue statement or omission (i) made in reliance upon and
in conformity with written information furnished in writing to the Company by
or on behalf of such Initial Purchaser, such Holder, such Participating
Broker-Dealer or any underwriter with respect to such Initial Purchaser,
Holder, Participating Broker-Dealer or underwriter, as the case may be,
expressly for use in the Registration Statement (or any amendment or supplement
thereto) or any Prospectus (or any amendment or supplement thereto) or (ii)
contained in any preliminary prospectus if such Initial Purchaser, such Holder,
such Participating Broker-Dealer or such underwriter failed to send or deliver
a copy of the Prospectus (in the form it was first provided to such parties for
confirmation of sales) to the Person asserting such losses, claims, damages or
liabilities on or prior to the delivery of written confirmation of any sale of
securities covered thereby to such Person in any case where the Company shall
have previously furnished copies thereof to such Initial Purchaser, such
Holder, such Participating Broker-Dealer or such underwriter, as the case may
be, in accordance with this Agreement, at or prior to the written confirmation
of the sale of such Notes to such Person and the untrue statement contained in
or the omission from the preliminary prospectus was corrected in the Final
Prospectus (or any amendment or supplement thereto). Any amounts advanced by
the Company to an indemnified party pursuant to this Section 4 as a result of
such losses shall be returned to the Company if it shall be finally determined
by a court of competent jurisdiction in a judgment not subject to appeal or
final review that such indemnified party was not entitled to indemnification by
the Company.
(b) Each Holder agrees, severally and not jointly, to
indemnify and hold harmless the Company, each Initial Purchaser, each
underwriter who participates in an offering of Transfer Restricted Notes and
the other selling Holders and each of their respective directors and each
Person, if any, who controls any of the Company, any Initial Purchaser, any
underwriter or any other selling Holder within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act, against any and all loss, liability,
claim, damage and expense whatsoever described in the indemnity contained in
Section 4(a) hereof, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made
<PAGE> 26
-25-
in the Registration Statement (or any amendment or supplement thereto) or any
Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
such selling Holder with respect to such Holder expressly for use in the
Registration Statement (or any supplement thereto), or any such Prospectus (or
any amendment thereto); provided, however, that, in the case of the Shelf
Registration Statement, no such Holder shall be liable for any claims hereunder
in excess of the amount of net proceeds received by such Holder from the sale
of Transfer Restricted Notes pursuant to the Shelf Registration Statement;
provided, further, however, that for purposes of Section 4(a)(iii), such
counsel shall (subject to Section 4(c) hereof) be chosen by the Company.
(c) Each indemnified party shall give notice as promptly as
reasonably practicable to each indemnifying party of any action commenced
against it in respect of which indemnity may be sought hereunder, but failure
to so notify an indemnifying party shall not relieve such indemnifying party
from any liability hereunder to the extent it is not materially prejudiced as a
result thereof and in any event shall not relieve it from any liability which
it may have otherwise than on account of this indemnity agreement. In the case
of parties indemnified pursuant to Section 4(a) above, one counsel to all the
indemnified parties shall be selected by Salomon, and, in the case of parties
indemnified pursuant to Section 4(b) above, counsel to all the indemnified
parties shall be selected by the Company. An indemnifying party may participate
at its own expense in the defense of any such action; provided, however, that
counsel to the indemnifying party shall not (except with the consent of the
indemnified party) also be counsel to the indemnified party. Notwithstanding
the foregoing, if it so elects within a reasonable time after receipt of such
notice, an indemnifying party, jointly with any other indemnifying parties
receiving such notice, may assume the defense of such action with counsel
chosen by it and approved by the indemnified parties defendant in such action
(which approval shall not be unreasonably withheld), unless such indemnified
parties reasonably object to such assumption on the ground that there may be
legal defenses available to them which are different from or in addition to
those available to such indemnifying party. If an indemnifying party assumes
the defense of such action, the indemnifying parties shall not be liable for
any fees and expenses of counsel for the indemnified parties incurred
thereafter in connection with such action. In no event shall the indemnifying
parties be liable for fees and expenses of more than one counsel (in addition
to any local counsel) separate from
<PAGE> 27
-26-
their own counsel for all indemnified parties in connection with any one action
or separate but similar or related actions arising out of the same general
allegations or circumstances. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever in respect of which indemnification or contribution could
be sought under this Section 4 (whether or not the indemnified parties are
actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes a full and unconditional release of each indemnified party
from all liability arising out of such litigation, investigation, proceeding or
claim and the offer and sale of any Notes and (ii) does not include a statement
as to or an admission of fault, culpability or a failure to act by or on behalf
of any indemnified party.
(d) If at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for reasonable fees
and expenses of counsel pursuant to Section 4(a)(iii) above, then such
indemnifying party agrees that it shall be liable for any settlement of the
nature contemplated by Section 4(a)(ii) effected without its written consent if
(i) such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement.
(e) In order to provide for just and equitable contribution
in circumstances under which any of the indemnity provisions set forth in this
Section 4 is for any reason held to be unavailable to the indemnified parties
although applicable in accordance with its terms, the Company, the Initial
Purchasers and the Holders, as applicable, shall contribute to the aggregate
losses, liabilities, claims, damages and expenses of the nature contemplated by
such indemnity agreement incurred by the Company, the Initial Purchasers and
the Holders; provided, however, that no Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person that was not guilty of such
fraudulent misrepresentation. As between the Company and the Initial Purchasers
and the Holders, such parties shall contribute to such aggregate losses,
liabilities, claims, damages and expenses of the nature contemplated by such
<PAGE> 28
-27-
indemnity agreement in such proportion as shall be appropriate to reflect the
relative fault of the Company on the one hand and of the Holder of Transfer
Restricted Notes, the Participating Broker-Dealer or Initial Purchaser, as the
case may be, on the other hand in connection with the statements or omissions
which resulted in such losses, liabilities, claims, damages or expenses, as
well as any other relevant equitable considerations.
The relative fault of the Company on the one hand and the
Holder of Transfer Restricted Notes, the Participating Broker-Dealer or the
Initial Purchasers, as the case may be, on the other hand shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company, or by the Holder
of Transfer Restricted Notes, the Participating Broker-Dealer or the Initial
Purchasers, as the case may be, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The Company and the Holders of the Transfer Restricted Notes
and the Initial Purchasers agree that it would not be just and equitable if
contribution pursuant to this Section 4 were determined by pro rata allocation
or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 4.
For purposes of this Section 4, each affiliate of any Person,
if any, who controls a Holder of Transfer Restricted Notes, an Initial
Purchaser or a Participating Broker-Dealer within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act shall have the same rights
to contribution as such other Person, and each director of the Company, each
affiliate of the Company, each executive officer of the Company who signed the
Registration Statement, and each Person, if any, who controls the Company
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act shall have the same rights to contribution as the Company.
5. [Intentionally Omitted]
6. [Intentionally Omitted]
<PAGE> 29
-28-
7. Miscellaneous.
(a) Rule 144 and Rule 144A. The Company shall provide to each
Holder such reports as are required under Section 10.23 of the Indenture and,
upon the request of any Holder of Transfer Restricted Notes (a) make publicly
available such information as is necessary to permit sales pursuant to Rule 144
under the Securities Act, (b) deliver such information to a prospective
purchaser as is necessary to permit sales pursuant to Rule 144A under the
Securities Act and it will take such further action as any Holder of Transfer
Restricted Notes may reasonably request, and (c) take such further action, if
any, that is reasonable in the circumstances, in each case, to the extent
required from time to time to enable such Holder to sell its Transfer
Restricted Notes without registration under the Securities Act within the
limitation of the exemptions provided by (i) Rule 144 under the Securities Act,
as such rule may be amended from time to time, (ii) Rule 144A under the
Securities Act, as such rule may be amended from time to time, or (iii) any
similar rules or regulations hereafter adopted by the SEC. Upon the reasonable
request of any Holder of Transfer Restricted Notes, the Company will deliver to
such Holder a written statement as to whether they have complied with such
requirements.
(b) No Inconsistent Agreements. The rights granted to the
Holders hereunder do not, and will not for the term of this Agreement in any
way conflict with and are not, and will not during the term of this Agreement
be inconsistent with the rights granted to the holders of the Company's other
issued and outstanding securities under any other agreements entered into by
the Company.
(c) Amendments and Waivers. The provisions of this Agreement,
including provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, otherwise than with the prior written consent of the Company
and the Majority Holders; provided, however, that no amendment, modification,
or supplement or waiver or consent to the departure with respect to the
provisions of Section 4 hereof shall be effective as against any Holder of
Transfer Restricted Notes or the Company unless consented to in writing by such
Holder of Transfer Restricted Notes or the Company, as the case may be.
(d) Notices. All notices and other communications provided
for or permitted hereunder shall be made in writing by hand-delivery,
registered first-class mail, telex, telecopier,
<PAGE> 30
-29-
or any courier guaranteeing overnight delivery (i) if to a Holder, at the most
current address given by such Holder to the Company by means of a notice given
in accordance with the provisions of this Section 7(d), which address initially
is, with respect to the Initial Purchasers, the address set forth in the
Purchase Agreement; and (ii) if to the Company, initially at the Company's
address set forth in the Purchase Agreement and thereafter at such other
address, notice of which is given in accordance with the provisions of this
Section 7(d).
All such notices and communications shall be deemed to have
been duly given: at the time delivered by hand, if personally delivered; five
Business Days after being deposited in the mail, postage prepaid, if mailed;
when answered back, if telexed; when receipt is acknowledged, if telecopied;
and on the next Business Day, if timely delivered to an air courier
guaranteeing overnight delivery.
Copies of all such notices, demands, or other communications
shall be concurrently delivered by the Person giving the same to the Trustee,
at the address specified in the Indenture.
(e) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors, assigns and transferees of the
Initial Purchasers, including, without limitation and without the need for an
express assignment, subsequent Holders; provided, however, that nothing herein
shall be deemed to permit any assignment, transfer or other disposition of
Transfer Restricted Notes in violation of the terms of the Purchase Agreement
or the Indenture. If any transferee of any Holder shall acquire Transfer
Restricted Notes, in any manner, whether by operation of law or otherwise, such
Transfer Restricted Notes shall be held subject to all of the terms of this
Agreement, and by taking and holding such Transfer Restricted Notes, such
Person shall be conclusively deemed to have agreed to be bound by and to
perform all of the terms and provisions of this Agreement and such Person shall
be entitled to receive the benefits hereof.
(f) Third Party Beneficiary. Each of the Initial Purchasers
and each Holder shall be a third party beneficiary of the agreements made
hereunder between the Company, on the one hand, and the Initial Purchasers, on
the other hand, and shall have the right to enforce such agreements directly to
the extent it deems such enforcement necessary or advisable to protect its
rights or the rights of Holders hereunder.
<PAGE> 31
-30-
(g) Counterparts. This Agreement may be executed in any
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING
EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS. SPECIFIED TIMES OF DAY
REFER TO NEW YORK CITY TIME.
(j) Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the
remaining provisions contained herein shall not be affected or impaired
thereby.
(k) Notes Held by the Company or any of its Affiliates.
Whenever the consent or approval of Holders of a specified percentage of
Transfer Restricted Notes is required hereunder, Transfer Restricted Notes held
by the Company or any of their affiliates (as such term is defined in Rule 405
under the Securities Act) shall not be counted in determining whether such
consent or approval was given by the Holders of such required percentage.
[Signature Page Follows]
<PAGE> 32
S-1
IN WITNESS WHEREOF, the parties have executed this
Registration Rights Agreement as of the date first written above.
VERIO INC.
By: /s/ CARLA HAMRE DONELSON
------------------------------------------
Name: Carla Hamre Donelson
Title: Vice President, General Counsel
and Secretary
Confirmed and accepted as of
the date first above written:
SALOMON SMITH BARNEY INC.
CREDIT SUISSE FIRST BOSTON CORPORATION
DONALDSON, LUFKIN, & JENRETTE SECURITIES
CORPORATION
FIRST UNION CAPITAL MARKETS, a division of
Wheat First Securities, Inc.
By: SALOMON SMITH BARNEY INC.
By: /s/ SAMIR HUSSEIN
---------------------------
Name: Samir Hussein
Title: Attorney-in-fact
<PAGE> 33
Exhibit A
Form of Opinion of Counsel
1. Each of the Exchange Offer Registration Statement and the
Prospectus (other than the financial statements, notes or schedules thereto and
other financial and statistical information and supplemental schedules included
or referred to therein or omitted therefrom and the Form T-1, as to which such
counsel need express no opinion), complies as to form in all material respects
with the applicable requirements of the Securities Act and the applicable rules
and regulations promulgated under the Securities Act.
2. In the course of such counsel's review and discussion of
the contents of the Exchange Offer Registration Statement and the Prospectus
with certain officers and other representatives of the Company and
representatives of the independent certified public accountants of the Company,
but without independent check or verification or responsibility for the
accuracy, completeness or fairness of the statements contained therein, on the
basis of the foregoing (relying as to materiality to a large extent upon
representations and opinions of officers and other representatives of the
Company), no facts have come to such counsel's attention which cause such
counsel to believe that the Exchange Offer Registration Statement (other than
the financial statements, notes and schedules thereto and other financial and
statistical information contained or referred to therein and the Form T-1, as
to which such counsel need express no belief), at the time the Exchange Offer
Registration Statement became effective and at the time of the consummation of
the Exchange Offer, contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make the
statements contained therein not misleading, or that the Prospectus (other than
the financial statements, notes and schedules thereto and other financial and
statistical information contained or referred to therein, as to which such
counsel need express no belief) contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements
contained therein, in the light of the circumstances under which they were
made, not misleading.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Verio Inc.:
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" in the Prospectus.
/s/ KPMG PEAT MARWICK LLP
------------------------------------
KPMG Peat Marwick LLP
Denver, Colorado
December 10, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
NorthWestNet, Inc.:
We consent to the use of our report relating to the financial statements of
NorthWestNet, Inc. as of June 30, 1996 and for the six months ended June 30,
1996 and the eight months ended February 28, 1997, and the financial statements
of NorthWest Academic Computing Consortium, Inc. as of June 30, 1995 and for the
year ended June 30, 1995 and the six months ended December 31, 1995, included
herein and to the reference to our firm under the heading "Experts" in the
Prospectus.
/s/ KPMG PEAT MARWICK LLP
------------------------------------
KPMG Peat Marwick LLP
Seattle, Washington
December 10, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 1 to the Registration
Statement on Form S-4, as filed by Verio Inc., of our report dated May 27, 1998
on our audits of the consolidated financial statements of Best Internet
Communications, Inc. included in this Form S-4. We also consent to the reference
to our firm under the caption "Experts."
/s/ PRICEWATERHOUSECOOPERS LLP
------------------------------------
Pricewaterhousecoopers LLP
December 11, 1998
San Jose, California
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in Amendment No. 1 to the Form-S-4 for Verio
Inc. which is dated November 23, 1998 and which is expected to be filed with the
Securities and Exchange Commission November 23, 1998 our report dated September
17, 1997 on our audits of the financial statements of Hiway Technologies, Inc.
as of December 31, 1996 and for the period from April 6, 1995 (date of
inception) to December 31, 1995 and the year ended December 31, 1996.
/s/ DEMEO, YOUNG, MCGRATH & COMPANY, P.A.
--------------------------------------------
DeMeo, Young, McGrath & Company, P.A.
December 11, 1998
