<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 8, 1998
REGISTRATION NO. 333-47099
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
VERIO INC.
(Exact name of Registrant as specified in its charter)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 7375 84-1339720
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
---------------------
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:
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<S> <C> <C>
GAVIN B. GROVER, ESQ. CARLA HAMRE DONELSON, ESQ. JONATHAN A. SCHAFFZIN, ESQ.
MORRISON & FOERSTER LLP GENERAL COUNSEL CAHILL GORDON & REINDEL
425 MARKET STREET VERIO INC. 80 PINE STREET
SAN FRANCISCO, CALIFORNIA 94105 8005 SOUTH CHESTER STREET NEW YORK, NEW YORK 10005
(415) 268-7000 SUITE 200 (212) 701-3000
ENGLEWOOD, COLORADO 80112
(303) 645-1900
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (the "Securities Act"), please check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 8, 1998
PROSPECTUS
5,000,000 SHARES
[VERIO LOGO]
COMMON STOCK
------------------
All of the shares of Common Stock (the "Shares") offered hereby are being
sold by Verio Inc. (the "Company" or "Verio"). Prior to the Offering, there has
been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price will be between $18.00 and
$20.00 per share. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price. The Common Stock
has been approved for listing on the Nasdaq National Market under the symbol
"VRIO," subject to official notification of issuance.
Nippon Telegraph and Telephone Corporation ("NTT") has agreed to purchase
directly from the Company shares of Common Stock (the "NTT Shares") concurrently
with and conditioned upon the consummation of the Offering in an aggregate
amount of up to 12.5% of the Company's fully diluted Common Stock after giving
effect to the Offering and the sale of the NTT Shares, up to a maximum
investment of $100.0 million, at a 3.25% discount to the Price to Public. See
"Business -- NTT Strategic Relationship."
The Company has filed a registration statement on Form S-4 with the
Securities and Exchange Commission with respect to exchange offers for its 1997
Notes (as defined) and its 1998 Notes (as defined). See "Additional
Information."
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY MATTERS DISCUSSED UNDER
THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 9.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=========================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share $ $ $
- ---------------------------------------------------------------------------------------------------------
Total(3) $ $ $
=========================================================================================================
</TABLE>
(1) For information regarding indemnification of the Underwriters see
"Underwriting."
(2) Before deducting expenses payable by the Company, estimated at
$1,250,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase
up to an aggregate of 750,000 additional shares of Common Stock solely to
cover over-allotments, if any. See "Underwriting." If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively.
------------------
The Shares are being offered by the several Underwriters named herein,
subject to prior sale, when, as and if accepted by them and subject to certain
conditions. It is expected that certificates for the Shares offered hereby will
be available for delivery on or about , 1998 at the offices of Smith
Barney Inc., 333 West 34th Street, New York, New York 10001.
SALOMON SMITH BARNEY
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
, 1998.
<PAGE> 3
[NETWORK MAP]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES, INCLUDING
ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus. Reference is made to, and this Summary is qualified in its
entirety by, the more detailed information, including the Company's Consolidated
Financial Statements and notes thereto and the Unaudited Pro Forma Condensed
Combined Financial Statements and notes thereto, each as contained herein.
Unless otherwise indicated, the information in this Prospectus (i) assumes an
initial public offering price of $19.00 per share, (ii) assumes that the
Underwriters' over-allotment option will not be exercised, (iii) gives effect to
the conversion of the Company's Series A, Series B, Series C and Series D-1
Preferred Stock, (iv) gives effect to the filing of the Company's amended
Certificate of Incorporation, which will occur prior to the consummation of the
Offering, and (v) gives effect to the NTT Investment (as defined). Unless the
context otherwise requires, references herein to (i) "Verio" or the "Company"
are to Verio Inc., a Delaware corporation (formerly known as World-Net Access,
Inc.), and its subsidiaries, and (ii) the "Verio ISPs" are to those Internet
service providers in which Verio has a direct or indirect equity investment,
including subsidiaries and minority investments. Information concerning those
entities in which the Company does not have a majority interest has been
provided by those entities and is believed by the Company to be accurate. Verio
and the Verio logo are trademarks of the Company. This Prospectus may contain
trademarks, trade names and service marks of other parties. Capitalized terms
used in this Prospectus, which are not otherwise defined herein, have the
respective meanings ascribed to them in "Glossary of Terms." See "Risk
Factors -- Forward-Looking Statements" for certain information relating to
statements contained in this Prospectus that are not historical facts.
THE COMPANY
Verio is a leading national provider of Internet connectivity and enhanced
Internet services to small and medium sized businesses. Since its inception in
March 1996, the Company has rapidly established a national 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 rates, and the expanding Internet needs of these businesses.
Because of their limited internal technical resources, small and medium sized
businesses also typically require hands-on local support and highly reliable
turnkey solutions for mission critical applications. Verio further believes that
these needs currently are underserved by both the national and local ISPs. While
national ISPs lack the local presence to provide customized, hands-on service,
local ISPs typically lack the scale and resources required to provide dedicated,
high-capacity Internet access, around-the-clock support and tailored product
offerings at competitive prices.
The Company believes it has a unique competitive advantage in serving small
and medium sized business customers through the combination of the technical
competency, hands-on support and entrepreneurial culture of locally based ISPs
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 35 ISPs that provide a comprehensive range of Internet
connectivity and enhanced products and services to over 100,000 customer
accounts in 36 of the top 50 Metropolitan Statistical Areas ("MSAs") in the
country, with combined revenues of approximately $25.0 million for the three
months ended December 31, 1997. The Company integrates and optimizes the
operations of its ISPs by consolidating their operations into regional operating
units with centralized regional management, connecting their local networks to
Verio's high-speed, highly reliable national backbone, and providing them with
Verio's integrated national support services.
Total ISP revenues in the United States are projected to grow from $3.3
billion in 1996 to $18.3 billion in 2000, according to International Data
Corporation ("IDC"). Industry analysts have reported that small and medium sized
businesses represent a potential market of over seven million customers in the
United States, 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 90,000 in 1996 to just under 800,000 in
2000, representing a 73% compounded annual growth rate. 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
3
<PAGE> 5
long-term relationship. In addition, they are increasingly reliant on enhanced
product offerings that address their specific business needs on a cost-effective
basis, allowing them to compete with larger companies. For example, IDC
estimates Web hosting revenues from small and medium sized businesses will grow
from $84 million in 1996 to over $3.4 billion in 2000, representing 95% of the
total Web hosting market.
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.
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 have made it more difficult for the small ISP to meet its customer's
demands on a cost-effective basis. Facing these competitive pressures, Verio
believes that independent regional and local ISPs will continue to be attracted
to and benefit from the consolidation opportunity provided by Verio.
The goal of the Company is to be the premier, full-service national
provider of Internet connectivity and enhanced Internet services to small and
medium sized businesses. Key elements of the Company's strategy in accomplishing
this goal are to: (a) continue its role as the leading consolidator of
independent ISPs by acquiring additional local and regional ISPs focused on the
Company's target market; (b) integrate the operations of its ISPs and capture
operational economies of scale by leveraging its national infrastructure and
support services; (c) develop and offer additional high-margin enhanced services
to increase revenues from existing and future customers; and (d) build customer
loyalty and gain market share by expanding the Company's local technical,
distribution and service capabilities and establishing national Verio brand name
recognition.
Verio owns and operates a national network, providing a high bandwidth,
highly reliable data transmission path connecting Verio's customers to the
Internet. The Company's national network architecture is based on a combination
of Asynchronous Transfer Mode ("ATM") and clear channel circuits operating at
DS-3 and OC-3 speeds. The network interconnects more than 15 national nodes and
over 180 local points of presence ("POPs") across the United States. The Company
believes that aggregating the bandwidth and capacity requirements of each Verio
ISP 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. 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.
Verio's national infrastructure incorporates several other elements critical to
maintaining the highest quality Internet service, such as peering relationships
with other national ISPs, sophisticated network management tools, and a
comprehensive range of national services to support its regional operations.
These services include 7-day X 24-hour customer technical support, financial
information management through a central, standardized accounting system, a
sophisticated billing and collections system, and national marketing and product
development programs. The Company continues to rollout its national
infrastructure and support services to its ISPs. Of the over 35 ISPs acquired to
date, 16 now invoice their customers through Verio's national billing service,
23 take advantage of Verio's customer technical support, 27 are linked to
Verio's national backbone, 19 utilize Verio's national accounting system, and
the network operations of 18 of these ISPs are monitored by Verio's national
Network Operations Center ("NOC").
Verio believes that a critical factor in the successful implementation of
its business strategy is the quality of its management team and Board of
Directors. The Company's senior management team and Board of Directors have
previously successfully executed similar consolidation strategies and have
considerable experience in the management and growth of recurring revenue-based
telecommunications businesses. Management believes that its experience in the
deployment of similar systems and services in other emerging telecommunications
industries can be leveraged to significantly improve the quality of services
currently available in the Internet service industry.
4
<PAGE> 6
RECENT DEVELOPMENTS
Since December 31, 1997, the Company has completed the acquisition of all
of the remaining equity (each, a "Buyout") of 10 of the ISPs in which Verio did
not initially acquire 100% ownership. Verio is in the process of integrating the
ISPs it has acquired in each region into regional operating units to capture and
promote operational and management efficiencies and economies of scale. On March
12, 1998, the Company announced the consolidation of the Verio ISPs' operations
and marketing efforts under the Verio brand name.
The Company continues to evaluate additional ISPs for investment or
acquisition. Since December 31, 1997, the Company has acquired six ISPs, of
which two expand the Company's Midwest presence, one joined the Northern
California region, two joined the Northeast operations, and one is located in
Florida and is the Company's first acquisition in the Southeast region. As a
result of these further acquisitions, the Company now serves 36 of the top 50
MSAs in the U.S. In addition, the Company has executed non-binding letters of
intent to acquire three additional ISPs which, if acquired, would further
enhance the Company's market presence in the Midwest, Northeast and Southeast
regions.
Mark D. Johnson, who served as the Company's President, Chief Operating
Officer and a director of the Company, died on March 9, 1998. While Mr. Johnson
played an important role in overseeing the Company's operations, the Company
does not expect that his death will adversely affect the Company's operations,
growth or financial prospects because of the strength of the Company's core
management team. Justin Jaschke, Verio's Chief Executive Officer, has been
appointed to serve as President of the Company and has assumed Mr. Johnson's
responsibilities on behalf of the Company while Verio conducts an executive
search to fill the positions that were held by Mr. Johnson.
On March 25, 1998, the Company consummated the sale of $175.0 million
principal amount of 10 3/8% Senior Notes due 2005 (the "1998 Notes"). In
connection with the sale of the 1998 Notes, the Company repurchased the $50.0
million principal amount of the Company's 13 1/2% Senior Notes due 2004 (the
"1997 Notes") held by Brooks Fiber Properties, Inc. ("Brooks") (the
"Refinancing") for an aggregate net purchase price of approximately $54.5
million, plus accrued interest. See "Certain Transactions."
On March 31, 1998, the Company signed a long-term agreement with Qwest
Communications Corporation ("Qwest") to purchase long haul capacity and
ancillary services on Qwest's planned 16,285 mile MacroCapacity(SM) Fiber
Network. Over the first seven years of the agreement, Verio has committed to
purchase, and Qwest has committed to provide, not less than $100.0 million of
capacity and services at agreed upon prices. See "Management's Discussion and
Analysis of Financial Condition and Result of Operations -- Costs and Expenses"
and "Business -- Verio National Network." The Company will have the right to
prepay its commitment under the agreement. The Company also may order capacity
and services in excess of the commitment level, and after the seven-year
commitment term, at the agreed upon prices.
On April 6, 1998, Verio signed a credit agreement providing for a $57.5
million revolving credit facility (the "Bank Facility"). The Chase Manhattan
Bank serves as agent for the lenders in the Bank Facility. The Company has drawn
no funds to date under the Bank Facility.
On April 7, 1998, the Company executed agreements establishing a strategic
relationship with NTT. These agreements provide for an investment by NTT or one
of its affiliates in the Company (the "NTT Investment"), concurrent with and
conditioned upon the consummation of the Offering, for up to 12.5% of the
Company's fully diluted Common Stock (up to a maximum investment of $100.0
million) at a 3.25% discount to the Price to Public. Verio also executed a
commercial services agreement with NTT's U.S. affiliate, NTT America, Inc. ("NTT
America"), under which Verio will be designated as the preferred provider of
Internet access and related services to customers of NTT America on a reseller
basis. Verio and NTT will connect their backbones and establish a peering and
transit relationship. In conjunction with its equity investment, NTT will be
entitled to designate one member to serve on the Company's Board of Directors.
See "Business -- NTT Strategic Relationship" and "Principal Stockholders -- NTT
Investment."
5
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RECENT QUARTERLY RESULTS
The Company had revenue of approximately $21.2 million, loss from
operations of approximately $14.7 million, and a net loss attributable to Common
Stock of approximately $28.4 million for the quarter ended March 31, 1998,
compared to total revenue of $13.4 million, loss from operations of $15.1
million, and a net loss attributable to Common Stock of $20.8 million for the
quarter ended December 31, 1997. The Company's revenue growth of approximately
$7.8 million during the first quarter of 1998 is attributable primarily to
acquisitions completed at the end of 1997, Buyouts and acquisitions completed
during the first quarter of 1998, and internal growth. The Company's net loss
attributable to Common Stock for the quarter ended March 31, 1998, includes an
extraordinary charge of approximately $10.1 million incurred in connection with
the Refinancing, as well as depreciation and amortization expenses of
approximately $6.4 million (an increase of approximately $2.5 million over the
quarter ended December 31, 1997), as a result of the Company's additional
acquisitions and investments in capital assets.
The Company's headquarters is located at 8005 South Chester Street, Suite
200, Englewood, Colorado 80112. The Company's phone number is (303) 645-1900.
THE OFFERING
Common Stock offered by the
Company............................. 5,000,000 shares.
Common Stock to be outstanding after
the Offering........................ 31,819,913 shares(1).
Use of Proceeds..................... The Company will receive approximately
$87.6 million of net proceeds (after
deducting the Underwriters' discounts
and commissions and estimated expenses
related to the Offering) from the
Offering. The Company also will receive
approximately $87.3 million in cash
from the sale of the NTT Shares (based
upon an assumed initial public offering
of 5,000,000 shares of Common Stock at
an assumed Price to Public of $19.00
per share). The net combined proceeds
received by the Company are expected to
be used to further the Company's
acquisition and investment strategy, to
continue the development and
implementation of the national
backbone, customer care center, network
operations center and billing and
accounting services, and to fund the
Company's general working capital
requirements. See "Use of Proceeds."
Proposed Nasdaq National Market
Symbol.............................. VRIO
- ---------------
(1) Includes: (i) 1,294,266 shares of Common Stock outstanding at April 24,
1998; (ii) 18,561,667 shares of Common Stock issuable upon conversion of the
Series A, B and C Preferred Stock outstanding at April 24, 1998; (iii)
2,214,513 shares of Common Stock issuable upon conversion of the Series D-1
Preferred Stock issued in connection with acquisitions and Buyouts completed
as of April 24, 1998; and (iv) 4,749,467 shares of Common Stock to be sold
by the Company to NTT for approximately $87.3 million, (based upon an
assumed initial public offering of 5,000,000 shares of Common Stock at an
assumed Price to Public of $19.00 per share), concurrently with the
Offering. Excludes (i) up to 9,200,000 shares of Common Stock that,
effective upon the consummation of the Offering, will be reserved for
issuance under the Company's employee stock option plans, of which 4,063,340
shares were issuable upon exercise of outstanding options as of April 24,
1998 at a weighted average exercise price of $10.05 per share, (ii)
2,112,480 shares of Common Stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $.01 per share, (iii)
3,000,000 shares of Common Stock reserved for issuance under the Company's
1998 Employee Stock Purchase Plan and (iv) 300,000 shares of Common Stock
reserved for issuance under the Company's 1998 Non-Employee Director Stock
Incentive Plan. See Notes to Consolidated Financial Statements.
6
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SUMMARY CONSOLIDATED FINANCIAL DATA
(dollars in thousands, except per share amounts)
The summary historical consolidated financial data as of and for the period
from inception (March 1, 1996) to December 31, 1996 and as of and for the year
ended December 31, 1997 have been derived from the audited Consolidated
Financial Statements of the Company included elsewhere in this Prospectus.
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 the Company and the notes thereto included
elsewhere in this Prospectus. Results of operations for the year ended December
31, 1997 are not necessarily indicative of results of operations for future
periods. The Company'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."
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)(2)
----------------------------------- ---------------
PERIOD FROM
INCEPTION YEAR ENDED YEAR ENDED
(MARCH 1, 1996) TO DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1996 1997 1997
------------------ ------------ ---------------
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STATEMENT OF OPERATIONS DATA:
Total revenue............................... $ 2,365 $ 35,692 $ 88,265
Total costs and expenses.................... 8,645 75,981 146,126
-------- ---------- -----------
Loss from operations........................ $ (6,280) $ (40,289) $ (57,861)
======== ========== ===========
Net loss attributable to common
stockholders.............................. $ (5,145) $ (46,329) $ (64,131)
======== ========== ===========
Loss per common share -- basic and
diluted................................... $ (5.29) $ (40.47) $ (2.90)
======== ========== ===========
Weighted average common shares outstanding--
basic and diluted......................... 971,748 1,144,685 22,090,352
OTHER DATA:
EBITDA(3)................................... $ (5,611) $ (29,665) $ (31,950)
Capital expenditures(4)..................... 3,430 14,547 14,547
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
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QUARTERLY STATEMENT OF OPERATIONS DATA:
Total revenue........................................... $ 4,414 $ 8,249 $ 9,624 $ 13,405
Total costs and expenses................................ 10,006 17,103 20,365 28,507
------- ------- -------- ----------
Loss from operations.................................... $(5,592) $(8,854) $(10,741) $ (15,102)
======= ======= ======== ==========
Net loss attributable to common stockholders............ $(4,677) $(8,120) $(12,762) $ (20,770)
======= ======= ======== ==========
OTHER DATA:
EBITDA(3)............................................... $(4,346) $(6,306) $ (7,798) $ (11,215)
======= ======= ======== ==========
</TABLE>
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<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
------------------------------------------
PRO FORMA
HISTORICAL PRO FORMA(1) AS ADJUSTED(5)
---------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 72,586 $155,304 $330,186
Restricted cash and securities.......................... 40,554 27,822 27,822
Goodwill, net........................................... 83,216 152,241 152,241
Total assets............................................ 246,471 394,997 569,879
Long-term debt and capital lease obligations, net of
current portions...................................... 142,321 272,694 272,694
Redeemable preferred stock.............................. 97,249 -- --
Stockholders' equity (deficit).......................... (27,001) 85,704 260,586
</TABLE>
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(1) Pro forma for the Completed Acquisitions (as defined in the Company's
Unaudited Pro Forma Condensed Combined Financial Statements) as if they had
occurred on December 31, 1997 for balance sheet purposes and on January 1,
1997 for statement of operations data purposes, for the conversion of the
Preferred Stock into Common Stock upon completion of the Offering, and for
the proceeds from the sale of the 1998 Notes and the application of the
proceeds therefrom to effect the Refinancing and to reflect the
extraordinary charge of approximately $10.1 million for the loss on early
extinguishment of $50.0 million of the 1997 Notes. See "Unaudited Pro Forma
Condensed Combined Financial Statements."
(2) Pro forma interest expense, including amortization of debt issuance costs,
assuming that the 1998 Notes had been issued on January 1, 1997 and after
giving effect to the Refinancing, totaled $27.3 million for the year ended
December 31, 1997.
(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. The primary measure of operating
performance is net earnings (loss). Although EBITDA is a measure commonly
used in the Company'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
the Company may not be comparable to other similarly titled measures of
other companies.
(4) Excludes equipment and leasehold improvements acquired in business
acquisitions.
(5) As adjusted to give effect to (i) the Offering after deducting the
Underwriters' discounts and commissions and estimated expenses, and (ii) the
sale of 4,749,467 shares of Common Stock to NTT for approximately $87.3
million (based upon an assumed initial public offering of 5,000,000 shares
of Common Stock at an assumed Price to Public of $19.00 per share),
concurrently with the Offering.
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RISK FACTORS
Prospective purchasers of the Shares should carefully consider the
following risk factors, as well as the other information contained in this
Prospectus before making an investment in the Shares. This Prospectus contains
statements which constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The safe
harbor provisions provided in Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act") do not apply to forward-looking
statements made in connection with an initial public offering. These statements
appear in a number of places in this Prospectus and include statements regarding
the intent, belief or current expectations of the Company, its directors or its
officers primarily with respect to the future operating performance of the
Company. Prospective purchasers of the Shares are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those in the forward-looking statements as a result of various factors. The
accompanying information contained in this Prospectus, including the information
set forth below, identifies important factors that could cause such differences.
See "-- Forward-Looking Statements" below.
HISTORY OF LOSSES; NO ASSURANCE OF PROFITABILITY
The Company was formed in March 1996. The Company has incurred net losses
since its inception, and management expects to incur significant additional
losses as the Company continues its investment and acquisition program as well
as the building of its national network operations. Prospective investors have
limited operating and financial data about the Company upon which to base an
evaluation of the Company's performance and an investment in the Shares offered
hereby. For the period from inception to December 31, 1996 and the year ended
December 31, 1997, the Company reported net losses of $5.1 million and $46.3
million, respectively. From inception through December 31, 1997, the Company
reported cumulative cash used by operating activities of $37.6 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company expects to generate negative operating cash flow for at
least the next several years while it continues to acquire and invest in ISPs.
The extent to which the Company experiences negative cash flow will depend upon
a number of factors including the number and size of its acquisitions and
investments, 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. The Company will be dependent on
various financing sources to fund its growth as well as continued losses from
operations. There can be no assurance that the Company will achieve or sustain
positive operating cash flow or generate net income in the future. To achieve
profitability, the Company must, among other things, develop and market products
and services which are accepted on a broad commercial basis. Given the Company's
limited operating history, there can be no assurance that the Company will ever
achieve broad commercial acceptance or profitability. See "-- Competition;
Pricing Fluctuation," "-- Dependence on the Internet; Uncertain Adoption of
Internet as Medium of Commerce and Communications" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
SUBSTANTIAL INDEBTEDNESS; EFFECT OF FINANCIAL LEVERAGE
The Company has indebtedness that is substantial in relation to its
stockholders' equity and cash flow. As of December 31, 1997, the Company had an
aggregate of approximately $142.3 million of long-term indebtedness outstanding,
representing 67% of total capitalization. After giving effect to the recent sale
of $175.0 million of the Company's 1998 Notes, the Offering and the NTT
Investment, long term indebtedness would represent 51% of total capitalization.
In addition, the Company recently signed the Bank Facility providing for $57.5
million of revolving credit. See "-- Requirements for Additional Capital." As a
result of the substantial indebtedness of the Company, fixed charges of the
Company are expected to exceed its earnings for the foreseeable future.
Substantial leverage poses the risk that the Company may not be able to generate
sufficient cash flow to service its indebtedness, or to adequately fund its
operations. The Company has experienced a substantial decrease in EBITDA, from
negative $5.6 million in the 1996 Period (as defined) to
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negative $29.7 million in 1997. EBITDA as a percentage of revenue improved from
negative 237% to negative 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 the Company will be able to increase its revenue and leverage the
investments it has made in national services and systems, the national network,
and the operating overhead of the Verio ISPs, to achieve sufficient cash flow to
meet its debt service obligations. In particular, there can be no assurance that
the Company's operating cash flow will be sufficient to pay 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 outstanding after the Refinancing, to pay the $18.2 million
in annual interest on the 1998 Notes, or to meet its debt service obligations
under the Bank Facility, if drawn upon. The leveraged nature of the Company also
could limit the ability of the Company to effect future financings or may
otherwise restrict the Company's operations and growth.
REQUIREMENTS FOR ADDITIONAL CAPITAL
The Company's operations have required and will continue to require
substantial capital for investments in ISP operations, including the acquisition
of or investments in additional ISPs, the deployment of the Company's national
network and infrastructure and the funding of capital expenditures for expansion
of services and operating losses. The Company may need additional amounts to
fund its operating losses and those of the Verio ISPs, which amounts cannot be
determined. Over the longer term, it is likely that the Company will require
substantial additional funds to continue to fund the Company'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 -- Liquidity and Capital
Resources."
The Company 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 the Company to delay
or abandon some of its planned future expansion or expenditures, which could
have a material adverse effect on the Company's growth and its ability to
compete in the Internet industry. No assurance can be given that the Company
will have sufficient cash flow available to maintain its current or future
growth plans or operations.
FLUCTUATIONS IN OPERATING RESULTS
The Company'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 the Company. Additional factors that may contribute
to variability of operating results include: the pricing and mix of services
offered by the Company; the Company's customer retention rate; changes in
pricing policies and product offerings by the Company'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. The Company has also experienced
seasonal variation in Internet use and, therefore, revenue streams may fluctuate
accordingly. In response to competitive pressures, the Company may take certain
pricing or marketing actions that could have a material adverse effect on the
Company'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 the Company's
quarterly operating results. Due to the foregoing factors, the Company 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."
COMPETITION; PRICING FLUCTUATION
The market for Internet connectivity and related services is extremely
competitive. The Company 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,
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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. The Company believes
that a reliable national network, knowledgeable salespeople and the quality of
technical support currently are the primary competitive factors in the Company's
targeted market, and that price is usually secondary to these factors.
The Company'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 DIGEX. While
the Company 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 the Company, and have extensive
coast-to-coast Internet backbones. The Company 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, and Sprint, offer Internet access
services and compete with the Company. 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
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, the Company believes that there
is a move toward horizontal integration through acquisitions of, joint ventures
with, and the wholesale purchase of connectivity from, ISPs. The
WorldCom/MFS/UUNet consolidation, the NETCOM/ICG merger, 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 the Company's ability to compete effectively with the
telecommunications providers and may result in pricing pressure on the Company
that would have an adverse effect on the Company'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. The Company competes to a lesser extent with these on-line
service providers.
Recently, there have been several announcements regarding the planned
deployment of broadband services for high speed Internet access by cable and
telephone companies through new technologies such as cable modems and xDSL.
While these providers have initially targeted the residential consumer, it is
likely that their target markets will expand to encompass the Company's target
markets, which may significantly affect the pricing of the Company's service
offerings.
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As a result of an increase in the number of competitors, and vertical and
horizontal integration in the industry, the Company 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 the Company cannot predict
the effect that ongoing or future developments may have on the Company or the
pricing of its products and services. See "-- Fluctuations in Operating
Results," "-- Dependence on the Internet; Uncertain Adoption of Internet as a
Medium of Commerce and Communications" and "-- Potential Liability for
Information Disseminated Over Network; Regulatory Matters."
In connection with the OSP Agreement (as defined) between the Company and
NTT, NTT will be entitled to "most favored customer" status and pricing
provisions, though the specific terms of such arrangement have not yet been
negotiated. See "Business -- NTT Strategic Relationship" and "Certain
Transactions -- Other Transactions."
MANAGEMENT OF GROWTH; INTEGRATION OF ACQUISITIONS AND INVESTMENTS
The Company is currently experiencing a period of rapid expansion with the
acquisition and integration of its ISPs. The rapid growth of the Company's
business and its product and service offerings has placed, and is likely to
continue to place, a significant strain on the Company's managerial, operating,
financial and other resources. The Company's future performance will depend, in
part, upon its ability to manage its growth effectively, which will require that
the Company 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 the Company 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 the
Company's ability to integrate the ISPs it has acquired and continues to
acquire. While the Company anticipates that it will recognize various economies
and efficiencies of scale as a result of the Buyouts and the integration of the
businesses of the ISPs it has acquired, the process of consolidating the
businesses and implementing the strategic integration of the Company and its
ISPs, even if successful, may take a significant period of time, will place a
significant strain on the Company's resources, and could subject the Company to
additional expenses during the integration process. Furthermore, the Company's
performance will depend on the internal growth generated through ISP operations.
As a result, there can be no assurance that the Company 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 the Company would have a material adverse
effect on the Company's business, financial condition and results of operations.
DEPENDENCE UPON IMPLEMENTATION OF NETWORK INFRASTRUCTURE; ESTABLISHMENT AND
MAINTENANCE OF PEERING RELATIONSHIPS
The Company'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 the Company'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 -- Verio National
Network -- 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 corporate peering policies. 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, the
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Company may have to comply with those additional requirements in order to
continue to maintain its peering relationships. The Company 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 the
Company's network infrastructure will require substantial financial, operational
and managerial resources. There can be no assurance that the Company 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 the
Company 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 the Company to incur additional operating expenditures
which would have a material adverse effect on the Company's business, financial
condition and results of operations.
CHALLENGES OF GROWTH BY ACQUISITIONS
The Company's business strategy is dependent, in part, upon its ability to
continue to successfully identify and acquire ISPs that meet the Company's
investment criteria. The Company is continuing to seek and evaluate qualified
ISP candidates in order to optimize its market presence in the regions it
currently serves, and to expand its focus to encompass the remaining top 50 MSAs
not currently served by Verio. In pursuing these opportunities, the Company may
compete with other communications companies with similar acquisition strategies,
many of which may be larger and have greater financial and other resources than
the Company. 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 the Company will be able to successfully identify
suitable ISPs or, once identified, will be able to consummate an acquisition of
or an investment in those targeted ISPs on terms and conditions acceptable to
the Company. See "Business -- The Verio Strategy" and "-- Competition; Pricing
Fluctuation." Further, the Company's ability to consummate transactions with
ISPs that it identifies will require significant financial resources. Failure to
raise and generate sufficient funds may require the Company to delay or abandon
some of its planned future expansion or expenditures, which could have a
material adverse effect on the Company's growth. See "-- Requirements for
Additional Capital."
DEPENDENCE ON KEY PERSONNEL
The Company 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
the Company. The Company currently is conducting an executive search to fill the
President and Chief Operating Officer roles previously held by Mr. Johnson. The
Company 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 the Company's activities.
There can be no assurance that the Company 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 the Company's business, financial condition and results of operations.
RISK OF SYSTEM FAILURE
The Company'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
the Company's computer equipment, including components critical to the operation
of its Internet backbone, are located at the Company's facility in Englewood,
Colorado and the Company's NOC located in Dallas, Texas. Despite precautions
taken by and planned by the Company, the occurrence of a natural disaster or
other unanticipated problem at the Company's NOC or at a number of the Company's
national nodes could cause interruptions in the services provided by the
Company. The failure of a local POP would result in interruption of service to
the customers served by such POP until necessary repairs were effected or
replacement equipment were installed.
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Additionally, failure of the Company's telecommunications providers to provide
the data communications capacity required by the Company as a result of natural
disaster, operational disruption or for any other reason could cause
interruptions in the services provided by the Company. Any damage or failure
that causes interruptions in the Company's operations could have a material
adverse effect on the Company's business, financial condition and results of
operations.
SECURITY RISKS
Despite the implementation of security measures by the Company, 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, current and former employees or others. Unauthorized access
could also potentially jeopardize the security of confidential information
stored in the computer systems of the Company and its customers, which may
result in liability of the Company to its customers and also may deter potential
subscribers. Although the Company 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 the Company
will not be circumvented in the future. Eliminating computer viruses and
alleviating other security problems may require interruptions, delays or
cessation of service to the Company's customers which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON THE INTERNET; UNCERTAIN ADOPTION OF INTERNET AS A MEDIUM OF
COMMERCE AND COMMUNICATIONS
The Company's products and services are targeted toward users of the
Internet, which has experienced rapid growth. As is typical in the case of a new
and rapidly evolving industry characterized by rapidly changing technology,
evolving industry standards and frequent new product and service introductions,
demand and market acceptance for recently introduced products and services are
subject to a high level of uncertainty. 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 the Company.
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 Company is also at risk as a result of fundamental technological
changes in the way Internet solutions may be marketed and delivered. Integrating
technological advances may require substantial time and expense, and there can
be no assurance that the Company will succeed in adapting its network
infrastructure. While the Company believes that its plan of combining the scale
and scope of a national operation with the local presence of its ISP operations
offers significant advantages for commerce and communication over the Internet,
there can be no assurance that commerce and communication over the Internet will
become widespread, or that the Company's offered Internet access and
communications services will become widely
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adopted for these purposes. The failure of the market for business-related
Internet solutions to continue to develop would adversely impact the Company's
business, financial condition and results of operations.
In addition, new technologies or industry standards have the potential to
replace or provide lower cost alternatives to the Company's existing products
and services. The adoption of such new technologies or industry standards could
render the Company's existing products and services obsolete and unmarketable.
For example, the Company'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 the Company and its ISPs are not broadly
accepted, the Company's business, operating results and financial condition will
be materially adversely affected.
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. Although the Supreme Court has declared the Communications Decency
Act ("CDA") 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. The imposition upon ISPs
or Web server hosts of potential liability for materials carried on or
disseminated through their systems could require the Company 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 the
Company's business, operating results and financial condition.
Although the Company is not currently subject to direct regulation by the
Federal Communications Commission (the "FCC") or any other federal or state
agency, 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 the Company 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 the Company's costs
of serving dial up customers and could have a material adverse effect on the
Company's business, operating results and financial condition.
DEPENDENCE UPON SUPPLIERS; LIMITED SOURCES OF SUPPLY
The Company 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 the Company, are
available only from limited sources. For example, the Company currently relies
on Cisco Systems to supply routers critical to the Company's network, and the
Company 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 the Company, are the Company's primary providers of data
communications facilities and network capacity. The Company also is dependent
upon LECs, which often are competitors of the Company, to provide
telecommunications services and lease physical space to the Company for routers,
modems and other equipment. The Company has from time to time experienced delays
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in receiving telecommunications services, which can lead to the loss of
customers or prospective customers. There can be no assurance that, on an
ongoing basis, the Company will be able to obtain such services on the scale and
within the time frames required by the Company 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 the Company's business, operating
results and financial condition.
FINANCIAL INFORMATION CONCERNING ACQUISITIONS
The regional ISPs targeted by the Company for acquisition typically do not
have audited financial statements and have varying degrees of internal controls
and detailed financial information. The pro forma financial information in this
Prospectus includes financial information concerning certain recently completed
acquisitions for which audited financial statements are not presently available.
These companies are included in the "Unaudited Pro Forma Condensed Combined
Financial Statements." While the Company believes such information to be
reliable, the Company has only recently acquired certain of these companies.
There can be no assurance that a subsequent audit by the Company will not reveal
matters of significance, including with respect to liabilities, contingent or
otherwise, of these companies. The Company's business strategy involves the
continued and potentially rapid acquisition of additional ISPs. While the
Company is not currently party to any probable acquisition agreements, the
Company currently has entered into non-binding letters of intent to acquire
three ISPs, and is seeking additional acquisition candidates. Accordingly, the
Company expects that it will, from time to time in the future, enter into
additional acquisition agreements, the pro forma effect of which is not known,
cannot be predicted and has not been included herein. The Company's completion
of additional acquisitions may have a material impact on the financial
information set forth herein. There can be no assurance as to the number, timing
or size of future acquisitions, if any, or the effect any such acquisitions
would have on the Company's financial information.
ANTI-TAKEOVER PROVISIONS
Certain provisions of Delaware law and the Company's Certificate of
Incorporation (the "Certificate of Incorporation") and Bylaws (the "Bylaws") may
have the effect of delaying, deterring or preventing a future takeover or change
in control of the Company unless such takeover or change in control is approved
by the Company's Board of Directors. Such provisions also may render the removal
of directors and management more difficult. Such provisions could limit the
price that certain investors might be willing to pay in the future for shares of
the Company's Common Stock. These provisions of Delaware law and the Company's
Certificate of Incorporation and Bylaws may also have the effect of discouraging
or preventing certain types of transactions involving an actual or threatened
change of control of the Company (including unsolicited takeover attempts), even
though such a transaction may offer the Company's stockholders the opportunity
to sell their stock at a price above the prevailing market price. The Company's
Certificate of Incorporation places certain restrictions on who may call a
special meeting of stockholders. In addition, the Company's Board of Directors
has the authority to issue up to 12,500,000 shares of undesignated preferred
stock (the "Undesignated Preferred Stock") and to determine the price, rights,
preferences, and privileges of those shares without any further vote or actions
by the stockholders. The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any
Undesignated Preferred Stock that may be issued in the future. The issuance of
such shares of Undesignated Preferred Stock, while potentially providing
desirable flexibility in connection with possible acquisitions and serving other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or may discourage a third party from attempting to
acquire, a majority of the outstanding voting stock of the Company. In addition,
the Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law (the "DGCL"), which will prohibit the Company
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder unless the business combination is approved in
a prescribed manner. The application of Section 203 of the DGCL also could have
the effect of delaying or preventing a change of control of the Company. In
addition, the Company's Certificate of Incorporation provides that upon
consummation of the Offering the Board of Directors will be divided into three
classes of directors serving staggered terms and all stockholder actions must be
effected at a duly called meeting and not by a consent in writing. The
classification provision and the prohibition on stockholder action by written
consent could have the effect of
16
<PAGE> 18
discouraging a third party from making a tender offer or otherwise attempting to
gain control of the Company. Additionally, certain federal regulations require
prior approval of certain transfers of control which could also have the effect
of delaying, deferring or preventing a change of control. See "Description of
Capital Stock -- Anti-Takeover Provisions."
In addition, the NTT Investment Agreement (as defined) provides NTT with
the right to designate a member of the Board of Directors, and imposes certain
standstill and other limitations on its ability to make further acquisitions of
the Company's stock, that could have the effect of delaying, deferring or
preventing a change of control. See "Principal Stockholders -- NTT Investment."
DIVIDEND POLICY; RESTRICTION ON PAYMENT OF DIVIDENDS
The Company does not anticipate paying cash dividends in the foreseeable
future. See "Dividend Policy." The Company's ability to pay dividends is limited
by covenants imposed under the indenture, dated June 24, 1997, under which the
1997 Notes were issued (the "1997 Indenture"), the indenture, dated March 25,
1998, under which the 1998 Notes were issued (the "1998 Indenture"), and the
Bank Facility. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
DILUTION
The public offering price may be substantially higher than the tangible
book value of the outstanding Common Stock. Purchasers of Shares in the Offering
will therefore experience immediate and substantial dilution in tangible book
value per share, and the existing stockholders will receive a material increase
in the tangible book value per share of their shares of Common Stock. The
dilution to new investors will be $13.97 per Share after giving effect to the
NTT Investment based upon an assumed initial public offering of 5,000,000 shares
of Common Stock at an assumed Price to Public of $19.00 per share.
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop or
be sustained. The offering price has been determined by negotiations between the
Company and the Underwriters and there can be no assurance that the prices at
which the Common Stock will sell in the public market after the Offering will
not be lower than the price at which the Common Stock is sold in the Offering.
See "Underwriting." Historically, the market prices for securities of emerging
companies in the telecommunications industry have been highly volatile. The
trading price of the Common Stock after the Offering could be subject to wide
fluctuations in response to numerous factors, including, but not limited to,
quarterly variations in operating results, competition, announcements of
technological innovations or new products by the Company or its competitors,
product enhancements by the Company or its competitors, regulatory changes, any
differences in actual results and results expected by investors and analysts,
changes in financial estimates by securities analysts and other events or
factors. In addition, the stock market has experienced volatility that has
affected the market prices of equity securities of many companies and that often
has been unrelated to the operating performance of such companies. These broad
market fluctuations may adversely affect the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering and the NTT Investment, there will be
outstanding 31,819,913 shares of Common Stock (or 32,569,913 shares if the
Underwriters' over-allotment option is exercised in full) of which 26,819,913
will be "restricted shares." The 5,000,000 shares (or up to 5,750,000 shares if
the Underwriters' over-allotment option is exercised in full) of Common Stock
sold in the Offering will be freely tradeable without further restriction or
further registration under the Securities Act, except for shares purchased by an
affiliate (as such term is defined in the Securities Act) of the Company, which
will be subject to the limitations of Rule 144 ("Rule 144") under the Securities
Act. Subject to certain contractual limitations, holders of restricted shares
generally will be entitled to sell these shares in the public securities market
without registration either pursuant to Rule 144 (or Rule 145, as applicable) or
any other applicable exemption under the Securities Act.
17
<PAGE> 19
Within 90 days of the date of this Prospectus, the Company intends to file
one or more registration statements under the Securities Act to register shares
of Common Stock reserved for issuance under its equity incentive plans. As of
April 24, 1998, options to purchase approximately 4,063,340 shares were
outstanding under the Company's stock option plans.
The Company, its directors and its executive officers, and certain
stockholders, who hold, as of April 24, 1998 approximately 20,661,978 shares of
Common Stock (or options to purchase Common Stock that are currently exercisable
or exercisable within 60 days), have agreed not to offer, sell or contract to
sell, or otherwise dispose of, directly or indirectly, or announce an offering
of, any shares of Common Stock or any securities convertible into, or
exchangeable for shares of Common Stock for a period of six months from the date
of this Prospectus, without the prior written consent of Smith Barney Inc.,
except under limited circumstances. An additional 12,000 shares of Common Stock
issuable upon exercise of outstanding options, will become saleable after the
six-month lock-up period.
In addition, NTT has agreed not to offer, sell or contract to sell, or
otherwise dispose of, directly or indirectly, or announce an offering of, any
NTT Shares for a period of six months from the date of the consummation of the
NTT Investment without the prior written consent of Smith Barney Inc.
In connection with the Buyouts and acquisitions that involved the issuance
of shares of Series D-1 Preferred Stock, the Company has entered into market
standoff agreements with the holders of the Series D-1 Preferred Stock so
issued, which restrictions expire in one-third increments on the six, twelve,
and eighteen month anniversaries of the date of this Prospectus. Following the
six-month, twelve-month and eighteen-month lock-up periods, approximately
738,171, 738,171 and 738,171 additional shares of Common Stock, respectively,
will become immediately saleable, subject to the limitations imposed by Rule 144
which could be applicable to certain holders of such Common Stock.
Sales of a substantial amount of Common Stock in the public market, or the
perception that such sales may occur, could adversely affect the market price of
the Common Stock prevailing from time to time in the public market and could
impair the Company's ability to raise additional capital through the sale of its
equity securities. See "Shares Eligible for Future Sale."
YEAR 2000 COMPLIANCE
Currently, many computer systems and software products are coded to accept
only two digit entries in the date code field. These date code fields will need
to accept four digit entries to distinguish 21st century dates from 20th century
dates. As a result, many companies' software and computer systems may need to be
upgraded or replaced in order to comply with such "Year 2000" requirements. The
Company and third parties with which the Company does business rely on numerous
computer programs in their day to day operations. The Company is evaluating the
Year 2000 issue as it relates to the Company's internal computer systems and
third party computer systems with which the Company interacts. The Company
expects to incur internal staff costs as well as consulting and other expenses
related to these issues; these costs will be expensed as incurred. In addition,
the appropriate course of action may include replacement or an upgrade of
certain systems or equipment at a substantial cost to the Company. There can be
no assurance that the Year 2000 issues will be resolved in 1998 or 1999. The
Company may incur significant costs in resolving its Year 2000 issues. If not
resolved, this issue could have a significant adverse impact on the Company's
business, operating results and financial condition.
DISCRETIONARY AUTHORITY OVER USE OF NET PROCEEDS
Management will retain a significant amount of discretion over the
application of the net proceeds of the Offering. Because of the number and
variability of factors that determine the Company's use of the net proceeds of
the Offering, there can be no assurance that such applications will not vary
substantially from the Company's current intentions. Pending such utilization
the Company intends to invest the net proceeds of the Offering in short-term
investment grade and government securities. See "Use of Proceeds."
FORWARD-LOOKING STATEMENTS
The statements contained in this Prospectus that are not historical fact
are "forward-looking statements" (as such term is defined in the Reform Act),
which can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should," or "anticipates" or the negative
thereof or
18
<PAGE> 20
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. 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 in connection with an
initial public offering. Management wishes to caution the reader that these
forward-looking statements such as 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
matters contained above and herein in this 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 the Company, which, although considered reasonable by the
Company, may not be realized. Because of the number and range of the assumptions
underlying the Company's projections and forward-looking statements, many of
which are subject to significant uncertainties and contingencies that are beyond
the reasonable control of the Company, some of the assumptions inevitably will
not materialize and unanticipated events and circumstances may occur subsequent
to the date of this Prospectus. These forward-looking statements are based on
current expectations, and the Company assumes no obligation to update this
information. Therefore, the actual experience of the Company 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 the Company 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.
USE OF PROCEEDS
The Company will receive approximately $87.6 million of net proceeds (after
deducting the Underwriters' discounts and commissions and estimated expenses
related to the Offering) from the Offering. The Company also will receive
approximately $87.3 million in cash from the sale of the NTT Shares based upon
an assumed initial public offering of 5,000,000 shares of Common Stock at an
assumed Price to Public of $19.00 per share. The combined net proceeds are
expected to be used to further the Company's acquisition, Buyout and investment
strategy, to continue the development and implementation of the national
backbone, customer care center, network operations center and billing and
accounting services, and to fund the Company's general working capital
requirements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a discussion of the Company's anticipated funding
requirements.
Management will retain a significant amount of discretion over the
application of the net proceeds of the Offering. Because of the number and
variability of factors that determine the Company's use of the net proceeds of
the Offering, there can be no assurance that such applications will not vary
substantially from the Company's current intentions. Pending such utilization,
the Company intends to invest the net proceeds of the Offering in investment
grade obligations of corporations, financial institutions and U.S. Government
Securities. See "Risk Factors -- Discretionary Authority Over Use of Net
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid any dividends on its Common Stock
and does not expect to pay dividends in the foreseeable future. The Company's
current policy is to retain all of its earnings to finance future growth and
acquisitions. Furthermore, the terms of the 1997 Indenture, the 1998 Indenture
and the Bank Facility place limitations on the Company's ability to pay
dividends. Future dividends, if any, will be at the discretion of the Board and
will depend upon, among other things, the Company's operations, capital
requirements and surplus, general financial condition, contractual restrictions
and such other factors as the Board may deem relevant. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
19
<PAGE> 21
CAPITALIZATION
(dollars in thousands)
The following table sets forth at December 31, 1997 (i) the actual
capitalization of the Company, (ii) the pro forma capitalization adjusted for
the Completed Acquisitions and Buyouts, and the conversion of all the
outstanding Preferred Stock into Common Stock upon the completion of the
Offering, and (iii) the pro forma capitalization adjusted to reflect the
Offering, the proceeds from the 1998 Notes, the Refinancing, and the NTT
Investment. This table should be read in conjunction with the Selected
Consolidated Financial Data, the Unaudited Pro Forma Condensed Combined
Financial Statements and the Historical Consolidated Financial Statements and
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------
PRO FORMA
HISTORICAL PRO FORMA(1) AS ADJUSTED(2)
---------- ------------ --------------
<S> <C> <C> <C>
Cash and cash equivalents................................ $ 72,586 $155,304 $330,186
Restricted cash and securities........................... 40,554 27,822 27,822
======== ======== ========
Long-term debt and capital lease obligations, net of
current portions....................................... 142,321 272,694 272,694
-------- -------- --------
Redeemable preferred stock(3):
Series A, par value $0.001 per share; 6,100,000 shares
authorized: 6,033,333 shares outstanding............ 18,080 -- --
Series B, par value $0.001 per share; 10,117,000 shares
authorized: 10,028,334 shares outstanding........... 59,193 -- --
Series C, par value $0.001 per share; 2,500,000 shares
authorized and outstanding.......................... 19,976 -- --
-------- -------- --------
97,249 -- --
-------- -------- --------
Stockholders equity (deficit):
Preferred stock, Series D-1, par value $0.001 per
share; 3,000,000 shares authorized: 680,000 shares
outstanding (2,384,000 shares pro forma)(3)......... 10,200 -- --
Common stock, par value $0.001 per share; 35,133,000
shares authorized; 1,254,533 shares outstanding
historical; 22,200,200 shares pro forma; 31,949,667
shares pro forma -- as adjusted and additional paid
in capital(4)....................................... 1,598 134,607 309,489
Warrants............................................... 12,675 12,675 12,675
Accumulated deficit.................................... (51,474) (61,578) (61,578)
-------- -------- --------
Total stockholders' equity (deficit)........... (27,001) 85,704 260,586
-------- -------- --------
Total capitalization........................... $212,569 $358,398 $533,280
======== ======== ========
</TABLE>
- ---------------
(1) Pro forma for (i) the Completed Acquisitions as if they had occurred on
December 31, 1997, (ii) the conversion of the Preferred Stock into Common
Stock upon completion of the Offering, (iii) 1,704,000 shares of Series D-1
Preferred Stock that as of December 31, 1997 were proposed and assumed to be
issued in connection with acquisitions and Buyouts completed subsequent to
December 31, 1997 as if they had occurred on December 31, 1997 and (iv) the
proceeds from the 1998 Notes and the application of the proceeds therefrom
to effect the Refinancing and to reflect the extraordinary charge of
approximately $10.1 million for the loss on early extinguishment of $50.0
million of the 1997 Notes. See "Unaudited Pro Forma Condensed Combined
Financial Statements."
(2) As adjusted to give effect to (i) the Offering after deducting the
Underwriter's discounts and commissions and estimated expenses, and (ii) the
sale of 4,749,467 shares of Common Stock to NTT for approximately $87.3
million (based upon an assumed initial public offering of 5,000,000 shares
of Common Stock at an assumed Price to Public of $19.00 per share)
concurrently with the Offering.
(3) All of the shares of the Company's Preferred Stock are convertible into
Common Stock on a one-for-one basis, subject to certain anti-dilution
adjustments. The shares of Series A, B and C Preferred Stock are subject to
mandatory redemption beginning on October 10, 2004, and are subject to
mandatory conversion into Common Stock upon consummation of the Offering.
(4) Includes 1,704,000 shares of Series D-1 Preferred Stock that as of December
31, 1997 were proposed and assumed to be issued in connection with
acquisitions and Buyouts, all of which have been assumed to have been
converted to Common Stock for pro forma and pro forma as adjusted purposes.
Does not include 2,237,050 shares of Common Stock reserved for issuance
pursuant to outstanding stock options as of December 31, 1997, or 2,112,480
shares of Common Stock issuable upon exercise of outstanding warrants.
20
<PAGE> 22
DILUTION
The net tangible book value (deficit) of the Company at December 31, 1997,
after giving effect to the conversion of the Preferred Stock into Common Stock
which will occur upon completion of the Offering, was ($22.6) million or ($1.11)
per share of Common Stock. "Net tangible book value" per share represents total
tangible assets of the Company less total liabilities, divided by the total
number of shares of Common Stock outstanding. After giving effect to (i) the
sale of 5,000,000 shares of Common Stock offered hereby at an assumed Price to
Public of $19.00 per share, after deducting the underwriting discounts and
commissions and estimated offering expenses, and (ii) the sale of 4,749,467
shares of Common Stock pursuant to the NTT Investment (based upon an assumed
initial public offering of 5,000,000 shares of Common Stock at an assumed Price
to Public of $19.00 per share), the pro forma net tangible book value of the
Company as of December 31, 1997 would be $152.2 million or $5.03 per share. This
represents an immediate increase in net tangible book value of $6.14 per share
to existing stockholders and an immediate dilution of $13.97 per share to
purchasers of Common Stock in the Offering.
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $19.00
Net tangible book value (deficit) per share before the
Offering(1)............................................ $(1.11)
Increase per share attributable to new investors in the
Offering and the NTT Investment........................ 6.14
------
Net tangible book value per share after the Offering........ 5.03
------
Dilution per share to investors in the Offering............. $13.97
======
</TABLE>
- ---------------
(1) Based on 20,496,200 shares of Common Stock outstanding as of December 31,
1997 after giving effect to the conversion of all outstanding Preferred
Stock.
The following table summarizes, on a pro forma basis as of December 31,
1997, the actual number of shares of Common Stock purchased from the Company,
the actual total consideration paid and the average price paid per share by the
existing stockholders (assuming conversion of the Preferred Stock into Common
Stock upon completion of the Offering), by NTT and by new investors purchasing
shares of Common Stock in the Offering (at an assumed initial public offering
price of $19.00 per share before deducting underwriting discounts and
commissions and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 20,496,200 67.8% $121,722,385 40.0% $ 5.94
New investors in the
Offering.................... 5,000,000 16.5 95,000,000 31.3 19.00
NTT........................... 4,749,467 15.7 $ 87,307,077 28.7 18.38
---------- ------ ------------ ------
Total............... 30,245,667 100.0% $304,029,462 100.0%
========== ====== ============ ======
</TABLE>
- ---------------
(1) Excludes (i) up to 9,200,000 shares of Common Stock that, effective upon
consummation of the Offering, will be reserved for issuance under the
Company's employee stock option plans, of which 4,063,340 shares were
issuable upon exercise of outstanding options as of April 24, 1998 at a
weighted average exercise price of $10.05 per share, (ii) 2,112,480 shares
of Common Stock issuable upon exercise of outstanding warrants at a weighted
average exercise price of $.01 per share, (iii) 3,000,000 shares of Common
Stock reserved for issuance under the Company's 1998 Employee Stock Purchase
Plan, and (iv) 300,000 shares of Common Stock reserved for issuance under
the Company's 1998 Non-Employee Director Stock Incentive Plan. See Notes to
Consolidated Financial Statements.
21
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA
(dollars in thousands, except per share amounts)
The selected historical consolidated financial data as of and for the
period from inception (March 1, 1996) to December 31, 1996 and as of and for the
year ended December 31, 1997 have been derived from the audited Consolidated
Financial Statements of the Company included elsewhere in this Prospectus.
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 the Company and the notes thereto included
elsewhere in this Prospectus. Results of operations for the year ended December
31, 1997 are not necessarily indicative of results of operations for future
periods. The Company's development and expansion activities, including
acquisitions, during the periods shown below 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."
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)(2)
-------------------------------- ---------------
PERIOD FROM
INCEPTION
(MARCH 1, 1996) YEAR ENDED YEAR ENDED
TO DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1997
--------------- ------------ ---------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Dedicated connectivity........................ $ 1,100 $ 16,383 $ 46,330
Dial-up connectivity.......................... 1,139 7,093 16,725
Enhanced services and other................... 126 12,216 25,210
-------- ---------- -----------
Total revenue......................... 2,365 35,692 88,265
Costs and expenses:
Internet services operating costs............. 974 15,974 38,145
Selling, general and administrative and
other...................................... 7,002 49,383 82,070
Depreciation and amortization................. 669 10,624 25,911
-------- ---------- -----------
Total costs and expenses................... 8,645 75,981 146,126
-------- ---------- -----------
Loss from operations....................... (6,280) (40,289) (57,861)
Other income (expense):
Interest income............................... 593 6,080 6,147
Interest expense.............................. (115) (11,826) (12,417)
Equity in losses of affiliates................ -- (1,958) --
Minority interests.............................. 680 1,924 --
-------- ---------- -----------
Net loss.............................. (5,122) (46,069) (64,131)
Accretion of redeemable preferred stock to
liquidation value............................. (23) (260) --
-------- ---------- -----------
Net loss attributable to common
stockholders........................ $ (5,145) $ (46,329) $ (64,131)
======== ========== ===========
Loss per common share -- basic and diluted(3)... $ (5.29) $ (40.47) $ (2.90)
======== ========== ===========
Weighted average common shares
outstanding -- basic and diluted.............. 971,748 1,144,685 22,090,352
======== ========== ===========
OTHER DATA:
EBITDA(4)....................................... $ (5,611) $ (29,665) $ (31,950)
Capital expenditures(5)......................... 3,430 14,547 14,547
Cash flows information:
Net cash used by operating activities......... (2,326) (35,323)
Net cash used by investing activities......... (9,123) (120,329)
Net cash provided by financing activities..... 77,916 161,772
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
AS OF ----------------------------------------
DECEMBER 31, PRO FORMA
1996 ACTUAL PRO FORMA(1) AS ADJUSTED(6)
------------ -------- ------------ --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $66,467 $ 72,586 $155,304 $330,186
Restricted cash and securities.............. -- 40,554 27,822 27,822
Goodwill, net............................... 8,736 83,216 152,241 152,241
Total assets................................ 82,628 246,471 394,997 569,879
Long-term debt and capital lease
obligations, net of discount.............. 106 142,321 272,694 272,694
Redeemable preferred stock.................. 76,877 97,249 -- --
Stockholders' equity (deficit).............. (4,055) (27,001) 85,704 260,586
</TABLE>
- ---------------
(1) Pro forma for the Completed Acquisitions as if they had occurred on December
31, 1997 for balance sheet purposes and on January 1, 1997 for statement of
operations data purposes, for the conversion of the Preferred Stock into
Common Stock upon completion of the Offering, and for the proceeds from the
sale of the 1998 Notes and the application of the proceeds therefrom to
effect the Refinancing and to reflect the extraordinary charge of
approximately $10.1 million for the loss on early extinguishment of $50.0
million of the 1997 Notes. See "Unaudited Pro Forma Condensed Combined
Financial Statements."
(2) Pro forma interest expense, including amortization of debt issuance costs,
assuming that the 1998 Notes had been issued on January 1, 1997 and after
giving effect to the Refinancing, totaled $27.3 million for the year ended
December 31, 1997.
(3) The Company paid no cash dividends on its Common Stock during the period
from inception (March 1, 1996) to December 31, 1996 and the year ended
December 31, 1997.
(4) 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. The primary measure of operating
performance is net earnings (loss). Although EBITDA is a measure commonly
used in the Company'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
the Company may not be comparable to other similarly titled measures of
other companies.
(5) Excludes equipment and leasehold improvements acquired in business
acquisitions.
(6) As adjusted to give effect to (i) the Offering after deducting the
Underwriters' discounts and commissions and estimated expenses, and (ii) the
sale of 4,749,467 shares of Common Stock to NTT for approximately $87.3
million (based upon an initial public offering of 5,000,000 shares of Common
Stock at an assumed Price to Public of $19.00 per share), concurrently with
the Offering.
23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis is based on the historical and pro
forma results of the Company and includes a number of ISPs acquired at various
times. See "Unaudited Pro Forma Condensed Combined Financial Statements" 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 the Company. 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 in
connection with an initial public offering. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company, 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 national provider of Internet connectivity and enhanced
Internet services to small and medium sized businesses. Since its inception in
March 1996, the Company has rapidly established a national presence through the
acquisition, integration, and growth of local 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. The Company believes it has a unique
competitive advantage in serving small and medium sized business customers
through the combination of the technical competency, hands-on support and
entrepreneurial culture of locally based ISPs 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 35 ISPs that provide a
comprehensive range of Internet connectivity and enhanced products and services
to over 100,000 customer accounts in 36 of the top 50 MSAs in the country, with
combined revenues of approximately $25.0 million for the three months ended
December 31, 1997.
From March 1996 through September 1997, Verio's strategy was to acquire 51%
to 100% of a large regional ISP, and a minority interest in smaller ISPs within
each region. Verio now seeks to acquire 100% of new ISPs, and is in the process
of bringing its ownership interest in its existing ISPs to 100%. Upon achieving
100% ownership of its ISPs in a region, Verio then consolidates the management
teams, network operations, and marketing efforts within that region. While some
one-time costs are incurred in these consolidation efforts, Verio believes that
the combined organizations will be able to increase revenues faster and more
cost effectively. In addition, 100% ownership facilitates the introduction of
the Verio brand name, a suite of nationwide product offerings, and the
transition of all ISPs onto Verio's national network and financial systems.
In conjunction with the consolidation of its regional operations, as of
December 31, 1997, the Company had completed the Buyout of four of its initially
non-wholly owned ISPs. Since then, the Company has completed ten additional
Buyouts and currently expects to complete the Buyouts of the two remaining ISPs
in which it did not initially acquire 100% ownership during the remainder of
1998. Verio has incurred costs of approximately $43.2 million, in the aggregate,
in 1998 in connection with the Buyouts, which were paid with a combination of
cash, preferred stock and options to acquire preferred stock of Verio. 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.
24
<PAGE> 26
To fund its acquisitions and operations, Verio has raised approximately
$100.0 million of equity capital primarily from venture capital funds and Brooks
(recently acquired by WorldCom, Inc.). It also issued $150.0 million principal
amount of 1997 Notes to a group of institutional investors and Brooks, $100.0
million of which remain outstanding following the Refinancing. On March 25,
1998, the Company consummated the sale of $175.0 million principal amount of
1998 Notes, a portion of the proceeds of which was used to effect the
Refinancing. See "-- Liquidity and Capital Resources" and "Certain
Transactions."
RESULTS OF OPERATIONS
REVENUE
The Company derives the majority of its revenues from business customers
who purchase Internet connections and enhanced services such as Web hosting.
Verio's ISP affiliates offer a broad range of connectivity options to their
customers including dedicated, dial-up, ISDN, frame relay and point-to-point
connections. Dedicated 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 pay a one-time setup fee and fixed monthly
service charges that vary depending on the amount of disk space and bandwidth
required. Additional sources of 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 revenues.
However, revenues from enhanced services, especially Web hosting, are expected
to represent an increasing percentage of total revenues in future periods.
Revenue from business customers currently represents more than 80% of total
revenues and is projected to increase as a percent of total revenues. In
addition to the growth that the Company is achieving through acquisitions,
revenues are also expected to increase due to the internal growth of
consolidated ISPs. For ISPs consolidated for the entire fiscal year of 1997,
revenue increased an average of 16% quarter-over-quarter for the three quarters
ended December 31, 1997.
Period from Inception to December 31, 1996 compared to the Year Ended December
31, 1997
Total consolidated revenues were $2.4 million for the period from inception
(March 1, 1996) to December 31, 1996 (the "1996 Period"), compared to $35.7
million for the year ended December 31, 1997. Internet connectivity represented
95% and 66% of total revenue for the 1996 Period and the year ended December 31,
1997, respectively, 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 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.
Three ISPs were included in the consolidated financial statements at
December 31, 1996. Twenty-two ISPs were included in the consolidated financial
statements at December 31, 1997, three of which were included in the
consolidated financial statements for the entire year ended December 31, 1997.
25
<PAGE> 27
COSTS AND 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 the Company's POPs and a transit provider, or various
Internet access points. Internet access expense includes the cost incurred by
the Company to transport its Internet traffic and for its national network. In
some instances the Company also will pay for the local telecommunications
line(s) from the customer's location to one of the POPs. As of December 31,
1997, 25 ISP affiliates were utilizing the Verio national network for their
Internet access and paying Verio for these network services based on their
bandwidth requirements. The Company recently signed a long-term long haul
capacity agreement with Qwest 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 because of the time required to convert from existing circuits;
however, the Company expects that the pricing advantages provided by this
agreement will substantially reduce the cost of these services in future years.
Additionally, the Company has the right to fund 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 currently would be approximately
$60.0 million.
Selling, general and administrative and other expenses consist primarily of
salaries and related employment expenses, consulting, travel and entertainment,
rent, and utilities. 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.
Period from Inception to December 31, 1996 compared to the Year Ended December
31, 1997
Internet services operating costs were 41% and 45% of total revenues for
the 1996 Period and the year ended December 31, 1997, respectively. Internet
services operating costs attributable to acquisitions completed in 1996
accounted for $.7 million, or 69%, of total Internet services operating costs
for the 1996 Period. Of these acquisitions, the costs from material acquisitions
were $.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 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. The Company
expects Internet services operating costs to increase in absolute dollars but to
decrease as a percentage of total revenues over time as additional ISP
affiliates are added onto Verio's national network, as enhanced services become
a larger percentage of total revenues, and as the Capacity Agreement (as
defined) with Qwest is implemented.
Selling, general and administrative and other expenses were 296% and 138%
of revenues for the 1996 Period and the year ended December 31, 1997,
respectively. Selling, general and administrative and 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 expenses accounted for 56% of total selling, general and
administrative and other expenses for the 1996 Period. 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
26
<PAGE> 28
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 the Company's decision to emphasize the
quality of its engineering and technical support for its customers. Sales and
marketing expenses were 22% of total selling, general and administrative and
other expenses compared to 17% for the 1996 Period, primarily as a result of the
Company's hiring and training of additional sales personnel during the year
ended December 31, 1997. Executive and finance expenses were 12% of total
selling, general and administrative and other expenses compared to 20% for the
1996 Period.
The Company expects selling, general and administrative expenses to
continue to increase in absolute dollars but to decrease as a percentage of
total revenues as the Company acquires additional ISPs, allowing it to spread
its corporate overhead over a larger revenue base, as its scaleable systems
reduce the incremental costs of additional revenues, as sales force productivity
increases with experience, and as indirect selling channels are expanded. The
anticipated 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 the Company's acquisition and
investment strategies. Also, the Company will continue to have non-recurring
expenses related to its strategy of acquiring and regionalizing groups of ISPs.
Three ISPs were included in the consolidated financial statements at
December 31, 1996. Twenty-two ISPs were included in the consolidated financial
statements at December 31, 1997, three of which were included in the
consolidated financial statements for the entire year ended December 31, 1997.
OTHER EXPENSES
During the year ended December 31, 1997, the Company 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 the Company.
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 1998
Notes.
INCOME TAXES
As of December 31, 1997, the Company 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 2011. 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 the Company in 1996 or 1997 due to uncertainties regarding
the utilization of the loss carryforward.
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<PAGE> 29
QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue:
Dedicated connectivity..................... $ 1,954 $ 3,852 $ 4,314 $ 6,263
Dial-up connectivity....................... 1,106 1,564 1,644 2,779
Enhanced services and other................ 1,354 2,833 3,666 4,363
------- ------- -------- --------
Total revenue...................... 4,414 8,249 9,624 13,405
Costs and expenses:
Internet services operating costs.......... 2,042 3,433 4,029 6,470
Selling, general and administrative and
other................................... 6,718 11,122 13,393 18,150
Depreciation and amortization.............. 1,246 2,548 2,943 3,887
------- ------- -------- --------
Total costs and expenses................ 10,006 17,103 20,365 28,507
------- ------- -------- --------
Loss from operations.................... $(5,592) $(8,854) $(10,741) $(15,102)
======= ======= ======== ========
EBITDA....................................... $(4,346) $(6,306) $ (7,798) $(11,215)
======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
(AS A PERCENTAGE OF TOTAL REVENUE)
<S> <C> <C> <C> <C>
Total revenue................................ 100% 100% 100% 100%
Costs and expenses:
Internet services operating costs.......... 46% 42% 42% 48%
Selling, general and administrative and
other................................... 152% 135% 139% 135%
Depreciation and amortization.............. 28% 31% 31% 29%
Total costs and expenses................ 227% 207% 212% 213%
Loss from operations.................... (127%) (107%) (112%) (113%)
EBITDA....................................... (98%) (76%) (81%) (84%)
</TABLE>
The Company'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 costs associated with the Buyouts and the
introduction of value-added enhanced services and new services by the Company.
Additional factors that may contribute to variability of operating results
include: the pricing and mix of services offered by the Company; customer
retention rate; changes in pricing policies and product offerings by the
Company'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. The Company 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 the Company's quarterly
operating results. Due to the foregoing factors, the Company 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
The Company's business and acquisition strategy has required and will
continue to require substantial capital for investments in ISPs, capital
expenditures for expansion of services, operating losses and working capital.
28
<PAGE> 30
Net cash used by operating activities was $35.3 million during the year
ended December 31, 1997, which includes a decrease of $.1 million in working
capital. Net cash used by investing activities was $120.3 million during the
year ended December 31, 1997, which includes the investment of restricted cash
totalling $46.6 million from the proceeds of the 1997 Notes, and approximately
$64.0 million for acquisitions. Net cash provided by financing activities was
$161.8 million during the year ended December 31, 1997, primarily from the sale
of 2,500,000 shares of Series C Preferred Stock for gross proceeds of
approximately $20.0 million and issuance of the 1997 Notes for gross proceeds of
approximately $150.0 million.
Since inception, the Company has financed itself primarily through the
private sale of Preferred Stock and debt and, to a lesser extent, Common Stock.
In 1996, the Company raised approximately $79.2 million (gross) through the
issuance of Common Stock, Series A Preferred Stock and Series B Preferred Stock.
In June 1996, the Company sold 6,033,333 shares of Series A Preferred Stock and
in December 1996, the Company sold 10,000,000 shares of Series B Preferred Stock
for gross proceeds of approximately $18.1 million and approximately $60.0
million, respectively. During the course of 1996, 1,090,000 shares of Common
Stock were sold for gross proceeds of approximately $1.1 million. In 1997, an
additional 164,533 shares of Common Stock were issued for approximately
$508,000. In May 1997, the Company completed the sale of 2,500,000 shares of
Series C Preferred Stock for gross proceeds of approximately $20.0 million. In
December 1997, the Company issued 680,000 shares of Series D-1 Preferred Stock
to fund a portion of the acquisition cost of one ISP. Each share of Preferred
Stock is convertible into Common Stock on a one-for-one basis.
On June 24, 1997, the Company 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 the Company's Common Stock at a price
of $.01 per share, for a total of 2,112,480 shares of 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, the Company 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 1998 Notes and the Refinancing,
that portion of the escrowed amount attributable to the principal amount of the
1997 Notes refinanced was released to the Company. The 1997 Notes are redeemable
at the option of the Company commencing June 15, 2002. The 1997 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 1997 Notes impose
significant limitations on the Company's ability to incur additional
indebtedness unless the Company'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. The Company is also limited in its ability to
pay dividends or make Restricted Payments (as defined), 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, the Company is
required to make an offer to purchase all of the Notes then outstanding at a
price equal to 101% of the principal amount, plus accrued and unpaid interest.
On March 25, 1998, the Company completed the placement of $175.0 million
principal amount of the 1998 Notes. The 1998 Notes mature on April 1, 2005.
Interest on the 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 1998 Notes are redeemable at the option of the Company
commencing April 1, 2002. The 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 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 effect the Refinancing. As a
result of the Refinancing, 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.
On April 6, 1998, Verio entered into 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
29
<PAGE> 31
owns currently or may own in the future and the Capacity Agreement. 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 + 3%, with a 1% decrease in
that rate if the Company has completed a public equity offering of $50.0 million
or more. If the Company has not completed such an offering by December 31, 1998,
or by June 30, 1999, there will be a 2% increase in the rate on each such date.
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 cannot be drawn except for the payment of interest.
The Bank Facility sets forth covenants restricting, among other things, the
Company's ability to borrow, to guarantee the debt of others, and to make
borrowings at the subsidiary level. The Company 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) may not exceed 2.35
times annualized pro forma revenues for the most recent fiscal quarter.
Dividends and certain types of investments are prohibited, as are liens incurred
for borrowed money. Borrowings under the Bank Facility would be required to be
paid down with the proceeds of new Indebtedness (as defined), certain asset
sales, Excess Cash Flow (as defined), or the net proceeds from insurance claims.
On April 7, 1998, the Company entered into agreements establishing a
strategic relationship with NTT pursuant to which the Company agreed to sell to
NTT, concurrently with and conditioned upon consummation of the Offering, a
number of shares of Common Stock equal to the lesser of (i) 12.5% of the total
number of outstanding shares of Common Stock, on a fully diluted and fully
converted basis (taking into account the Offering and the NTT Investment) or
(ii) the quotient of $100.0 million divided by 96.75% of the Price to Public in
the Offering. See "Business -- NTT Strategic Relationship" and "Principal
Stockholders -- NTT Investment."
As of December 31, 1997, the Company had approximately $72.6 million in
cash and cash equivalents (excluding restricted cash). The Company's business
plan currently anticipates investments of approximately $175.0 million in 1998
for capital expenditures, ISP acquisitions, operating losses and working
capital. The Company's anticipated expenditures are inherently uncertain and
will vary widely based on many factors including the operating performance and
working capital requirements of the Company and its existing ISP affiliates, the
number and size of additional ISPs acquired or invested in by the Company, the
cost of such additional acquisitions and investments, the operating performance
and working capital requirements of the Company's ISP affiliates including any
additional ISP affiliates and capital expenditure requirements of the Company
and any existing or additional ISPs. Accordingly, the Company may need
significant amounts in excess of its plan, and no assurance can be given as to
the actual amounts of the Company's expenditures and additional capital
requirements.
The Company 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), and lease financing. There can be no assurance that the Company
will have sufficient resources to fund its investment programs, particularly if
operating losses continue to increase. EBITDA decreased from negative $5.6
million in the 1996 Period to negative $29.7 million in 1997 despite an increase
in revenues from $2.4 million in the 1996 Period to $35.7 million for the year
ended December 31, 1997. EBITDA as a percentage of revenues improved from
negative 233% to negative 83% from the 1996 Period to the year ended December
31, 1997. The Company incurred $49.4 million in selling, general and
administrative expenses in 1997 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. As a result, the Company
expects EBITDA as a percentage of revenue to improve during 1998. Although the
Company is seeking to reduce EBITDA losses as a percentage of revenues over
time, there can be no assurance that the Company 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 the Company. At December 31, 1997, on a pro forma or adjusted basis, the
Company had $57.5 million more in unrestricted cash than in long term debt and
capital leases. See "Summary Consolidated Financial Data." However, the Company
intends to use a significant portion of its cash for acquisitions, and will have
to increase revenues without a commensurate increase in costs to generate
sufficient cash to enable it to meet its debt service obligations as described
above. In the near term, the Company intends to use its excess cash and the Bank
Facility which provides for up to $57.5 million in credit
30
<PAGE> 32
until it matures on December 31, 1999. Over the longer term, the Company 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. There can be no assurance that the Company will be able to service
its indebtedness. Insufficient funding may require the Company to delay or
abandon some of its planned future expansion or expenditures, which could have a
material adverse effect on the Company's growth and its ability to compete. In
addition, the Company'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 the Company's
ability to finance its future operations or capital needs or to engage in
business activities that may be in the interest of the Company.
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), which 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. 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 in connection with
an initial public offering. 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 the Company, which,
although considered reasonable by the Company, may not be realized. Because of
the number and range of the assumptions underlying the Company's projections and
forward-looking statements, many of which are subject to significant
uncertainties and contingencies that are beyond the reasonable control of the
Company, 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 the Company
assumes no obligation to update this information. Therefore, the actual
experience of the Company 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 the
Company, 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.
31
<PAGE> 33
BUSINESS
OVERVIEW
Verio is a leading national provider of Internet connectivity and enhanced
Internet services to small and medium sized businesses. Since its inception in
March 1996, the Company has rapidly established a national presence through the
acquisition, integration, and growth of local 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 rates, and the
expanding Internet needs of these businesses. Because of their limited internal
technical resources, small and medium sized businesses also typically require
hands-on local support and highly reliable turnkey solutions for mission
critical applications. Verio further believes that these needs currently are
underserved by both the national and local ISPs. While national ISPs lack the
local presence to provide customized, hands-on service, local ISPs typically
lack the scale and resources required to provide dedicated, high-capacity
Internet access, around-the-clock support and tailored product offerings at
competitive prices.
The Company believes it has a unique competitive advantage in serving small
and medium sized business customers through the combination of the technical
competency, hands-on support and entrepreneurial culture of locally based ISPs
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 35 ISPs that provide a comprehensive range of Internet
connectivity and enhanced products and services to over 100,000 customer
accounts in 36 of the top 50 MSAs in the country, with combined revenues of
approximately $25.0 million for the three months ended December 31, 1997. The
Company integrates and optimizes the operations of its ISPs by consolidating
their operations into regional operating units with centralized regional
management, connecting their local networks to Verio's high-speed, highly
reliable national backbone, and providing them with Verio's integrated national
support services.
Verio believes that a critical factor in the successful implementation of
its business strategy is the quality of its management team and Board of
Directors. The Company's senior management team and Board of Directors have
previously successfully executed similar consolidation strategies and have
considerable experience in the management and growth of recurring revenue-based
telecommunications businesses. Management believes that its experience in the
deployment of similar systems and services in other emerging telecommunications
industries can be leveraged to significantly improve the quality of services
currently available in the Internet service industry.
INDUSTRY BACKGROUND
Internet connectivity and enhanced Internet services represent two of the
fastest growing segments of the telecommunications services market. Total ISP
revenues in the United States are projected to grow from $3.3 billion in 1996 to
$18.3 billion in 2000, according to IDC, an independent 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. IDC estimates that U.S. corporate dedicated
access revenues will grow from $1.1 billion in 1996 to $5.6 billion in 2000,
representing a 50% compounded annual growth rate. There can be no assurance that
the bases for these projections or the results generated thereby will be
realized.
In addition to Internet connectivity, business customers increasingly are
seeking a variety of enhanced products and applications to take full advantage
of the Internet. For example, a growing number of businesses are implementing
secured virtual private networks ("VPNs") over the Internet as a more economical
option
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<PAGE> 34
than dedicated private networks. Technological advances such as increases in
microprocessor speeds, the introduction of innovative software tools and the
development of higher bandwidth data networking technology have led to rapid
innovation and development of enhanced Internet services. The principal enhanced
services being offered by business-oriented ISPs today include Web hosting,
security, e-commerce, virtual private networks (sometimes called "intranets" and
"extranets"), and advanced Internet applications such as voice and fax, video
conferencing and data storage and retrieval solutions. According to IDC,
enhanced services is the fastest growing segment of the Internet services market
and is expected to grow from $126 million in 1996 to over $7 billion in 2000. As
business users of the Internet adopt enhanced services, they also require
additional bandwidth to support their expanded use of the Internet. The Company
expects this trend to continue as high-bandwidth 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 90,000 in 1996 to just under 800,000 in 2000, representing a 73%
compounded annual growth rate. 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. In addition, they are increasingly reliant on
enhanced product offerings that address their specific business needs on a
cost-effective basis, allowing them to compete with larger companies. For
example, IDC estimates Web hosting revenues from small and medium sized
businesses will grow from $84 million in 1996 to over $3.4 billion in 2000,
representing 95% of the total Web hosting market.
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
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. The Company believes that
independent local and regional ISPs generally have been more adept at serving
small and medium sized businesses, and that these ISPs are often 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 making it more
difficult for the small ISP to meet its customer's demands on a cost-effective
basis. Facing these competitive pressures, Verio believes that independent
regional and local 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 and enhanced Internet
services to small and medium sized businesses. The Company'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 regional and local ISPs with a business customer
focus. The Company 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 the Company expects will result in long-term customer loyalty and an
expanding customer base. Verio intends to enhance this value as it continues to
develop, both internally and through strategic vendor relationships, an
expanding array of enhanced, higher margin product and service offerings to
continue to address the business needs of its customers. The Company 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 based on customized products and
services designed for the customer's particular business needs. The
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Company's market research indicates that Verio's local presence, providing
around-the-clock, 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
The goal of the Company is to be the premier, full-service national
provider of Internet connectivity and enhanced Internet services to small and
medium sized businesses. Key elements of the Company's strategy in accomplishing
this goal are to: (a) continue its role as the leading consolidator of
independent ISPs by acquiring additional local and regional ISPs focused on the
Company's target market; (b) integrate the operations of its ISPs and capture
operational economies of scale by leveraging its national infrastructure and
support services; (c) develop and offer additional high-margin enhanced services
to increase revenues from existing and future customers; and (d) build customer
loyalty and gain market share by expanding the Company's local technical,
distribution and service capabilities and establishing national Verio brand name
recognition.
Continue Consolidation 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 in selected regions throughout the U.S. The Company intends to continue its
consolidation strategy, acquiring additional business-focused ISPs to deepen and
broaden its market presence and to expand its strength in targeted product areas
such as Web hosting. Given the increasing competitive pressures facing the
independent local and regional 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, the Company now seeks to
acquire 100% of new ISP affiliates and has effected the Buyouts of all but two
of the ISPs in which it did not initially acquire 100% ownership. See "-- ISP
Ownership Structure." The Company's decentralized regional management structure
and equity incentive programs that are tied to regional performance foster
continued entrepreneurial culture, local responsiveness and internal growth.
Integrate Operations and Capture Economies of Scale. The Company integrates
and optimizes the operations of the ISPs it acquires by consolidating their
operations into regional operating units with centralized regional management,
connecting their local networks to Verio's high-speed, highly reliable national
backbone, and providing them with Verio's integrated national support services.
These services include national network transit, 7-day X 24-hour network
monitoring and management, customer technical support, a sophisticated billing
and collections system, financial information management through a central,
standardized accounting system, and national marketing and product development
programs. Through this integration of its national infrastructure with its local
ISP operations, the Company believes that it has achieved a significant degree
of operational control and efficiency and has improved the quality, consistency,
and scalability of its services. The Company also has leveraged its national
scale to establish peering relationships, to obtain favorable national
purchasing contracts and to establish strategic relationships with key hardware,
software and telecommunications providers. These providers view Verio as a
powerful distribution channel. For example, Verio has entered into an agreement
with Microsoft whereby Verio is offered as an "in the box" Web hosting program
for Microsoft's FrontPage product and for Microsoft's Small Business Server
Referral program, which facilitates small businesses' entry to the Internet
using Verio's network. In addition, Verio has negotiated advantageous volume
purchase agreements with key vendors such as Cisco and Raptor. In addition,
Verio has established public or private peering relationships with nearly all of
the major national ISPs, as well as with over 90 smaller domestic and
international networks. Furthermore, the Company's scale also allows it to
support a high quality national network and invest in leading edge systems for
network management, billing, customer service, and financial information.
Develop and Offer Enhanced Products and Services to Increase
Revenues. Small and medium sized businesses are purchasing an increasing number
of enhanced products and services as these businesses deploy mission critical
applications on the Internet. As a result, the Company believes that it will be
able to derive incremental revenue from these customers by selling an expanding
array of enhanced services and additional bandwidth to support these services.
The Company accelerated its ability to provide sophisticated Web hosting on a
national scale through its acquisition of Internet Servers, Inc. ("iServer").
While Internet connectivity
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and Web hosting constitute the predominant services offered by Verio today, a
number of additional high-margin enhanced services are being offered by the
Company. These additional services include VPN, security services, electronic
commerce, intranet services and other advanced Internet applications. Verio
encourages continued innovation within its regional operations, and supports the
identification and transfer of products, services and "best practices" among its
regional operations. In addition, the Company's product development groups are
focused on additional services to be developed both internally, through
acquisition, and in conjunction with strategic partners. Verio has entered into,
and expects to continue to enter into, relationships with selected Internet
hardware, software, service and distribution companies to enhance the Company's
ability to deliver cost-effective solutions to its customers, to gain early
access to new technology, to cooperatively market and sell these new products,
and to gain access to their distribution channels for the purpose of lead
generation and customer acquisition.
Build Customer Loyalty and Brand Name Recognition. The Company's goal is to
achieve national recognition as the leading provider of Internet services to
small and medium sized businesses by rebranding its ISPs under the Verio name.
The Company intends to leverage its local presence by continuing to expand and
enhance local technical, distribution and customer support capabilities. By
combining the quality of local service offered through the Company's regional
operations with the Company's national backbone and support services, the
Company expects to generate increased customer loyalty and expanding market
share at the local level while enhancing its national brand. In conjunction with
the consolidation of its ISPs into integrated regional operating units, the
Company has branded these regional operations under the Verio name, with a
regional or local geographical identifier to emphasize its local presence. As
the Company continues to expand, its acquisition strategy will be to continue to
identify and select ISPs that have developed a strong local presence through
quality service, hands-on customer support, local market knowledge and an
entrepreneurial culture.
THE VERIO ORGANIZATION
To date, the Company has pursued a regional acquisition strategy, acquiring
independent, locally based ISPs in selected geographic regions. In each region,
the Company typically sought a larger regional ISP to serve as the focal point
for the region and as the vehicle for integrating and optimizing the networks
and operations in that region. The Company also has invested in smaller ISPs to
increase its local presence and market share. Having established a presence in
each of its initially targeted regions, the Company has 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. It is also in the
process of consolidating most of the Verio ISP operations within each region
into single, integrated operating units.
The Company conducts its operations with both a national and regional
approach. As of April 24, 1998, the Company had acquired the stock or assets of,
or invested in, ISPs in nine regions of the country, and now has operations in:
the Pacific Northwest, serving the primary MSAs in Washington, Oregon and Idaho;
Northern California, serving the greater Bay Area, Stockton and Sacramento;
Southern California, serving the Los Angeles area, Orange County and San Diego;
Texas and Louisiana, serving all of the major cities in Texas as well as New
Orleans; the Mid-Atlantic, serving the Washington DC, Baltimore and Richmond
areas, and the I-95 corridor; the Northeast, serving the major MSAs from New
Jersey to Boston and Upstate New York; the Midwest, serving Chicago, Detroit,
Ann Arbor, Kansas City, St. Louis, Milwaukee, Omaha, Tulsa and Des Moines; and
the Southeast, where the Company has recently completed its first acquisition of
an ISP, serving the Miami and Fort Lauderdale areas. In addition, the Company
has funded a start-up operation in the Rocky Mountain region, which is in the
early stages of establishing a presence in the Denver area and along the Front
Range. Verio also has substantially increased its national Web hosting presence
with its acquisition of iServer, based on which Verio has established a national
operating division through which it can offer Web hosting services to ISP
customers throughout its regions. The Company is now focusing its efforts on
seeking greater coverage in the Midwest and establishing its presence in the
Southeast. In addition, the Company has executed non-binding letters of intent
to acquire three additional ISPs which, if consummated, would further enhance
the Company's market presence in the Midwest, Northeast and Southeast regions.
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The following chart identifies, by operating region, the 37 ISPs acquired
or invested in by Verio, or from which Verio has acquired significant assets, as
of April 24, 1998. The chart provides certain summary information concerning
Verio's revenues for the three months ended December 31, 1997 as if all such
ISPs (other than one ISP in which the Company holds a minority interest) had
been owned by the Company at such date.
<TABLE>
<CAPTION>
REVENUE FOR THE
THREE MONTHS ENDED
OPERATING REGION TOP 50 MSAS SERVED ACQUISITIONS DECEMBER 31, 1997(1)
---------------- ------------------ ------------ --------------------
(IN THOUSANDS)
<S> <C> <C> <C>
VERIO NORTHWEST $ 5,667
- Seattle, WA - NorthWestNet, Inc.
- Portland, OR - Access One, Inc.
- RAINet, Inc.
- Internet Engineering
Associates, Inc.
- Pacific Rim Network, Inc.
- Structured Network
Systems, Inc.
VERIO NORTHERN CALIFORNIA 2,411
- San Francisco - Aimnet Corporation
- Sacramento - CCnet Inc.
- San Jose - West Coast Online, Inc.
- Oakland - NSNet, Inc.
VERIO SOUTHERN CALIFORNIA 2,892
- Los Angeles - Compute Intensive Inc.
- San Diego - ATMnet
- Riverside/San
Bernardino
- Orange County
VERIO TEXAS/GULF SOUTH 4,283
- Houston, TX - On-Ramp Technologies, Inc.
- Dallas, TX - Signet Partners, Inc.
- San Antonio, TX - National Knowledge
- Ft. Worth, TX Networks, Inc.
- New Orleans, LA - Communique, Inc.
- Sesquinet
VERIO MID-ATLANTIC 1,800
- Washington, DC - Clark Internet Services,
- Baltimore, MD Inc.
- Monumental Network
Systems, Inc.
- Internet Online, Inc.(2)
VERIO NORTHEAST 3,282
- New York, NY - Global Enterprise Services
- Boston, MA - Pioneer Global
- Philadelphia, PA Telecommunications, Inc.
- Pittsburgh, PA - ServiceTech, Inc.
- Hartford, CT - Surf Network, Inc.
- Newark, NJ - PREPnet
- Buffalo/Niagara, NY - Wingnet
- Providence, RI - LI Net, Inc.
- Nassau/Suffolk, NY - Matrix Online Media Inc.
- Bergen/Passaic, NJ (d/b/a SpaceLab)
VERIO MIDWEST 3,071
- Chicago, IL - Verio Chicago(3)
- St. Louis, MO - Global Internet Network
- Detroit, MI Services, Inc.
- Kansas City, MO - RustNet, Inc.
- Milwaukee/Waukesha, WI - Branch Information
Services, Inc.
- STARnet, L.L.C.
- Computing Engineers Inc.
(d/b/a Worldwide Access)
VERIO ROCKY MOUNTAIN 49
- Denver, CO - Verio Colorado(4)
- Salt Lake City, UT
</TABLE>
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<PAGE> 38
<TABLE>
<CAPTION>
REVENUE FOR THE
THREE MONTHS ENDED
OPERATING REGION TOP 50 MSAS SERVED ACQUISITIONS DECEMBER 31, 1997(1)
---------------- ------------------ ------------ --------------------
(IN THOUSANDS)
<S> <C> <C> <C>
VERIO SOUTHEAST 393
- Miami, FL - Florida Internet
- Fort Lauderdale, FL Corporation
VERIO WEB HOSTING 1,155
- National Product - Internet Servers, Inc.
Offering
Total: $25,003
=======
</TABLE>
- ---------------
(1) These amounts reflect the revenues of all of the Verio ISPs in each region
(other than Internet Online, in which the Company holds a minority
interest) for the three months ended December 31, 1997, including one ISP
which is subject to a definitive acquisition agreement (the consummation of
which the Company believes is probable).
(2) Verio currently owns approximately 36% of the fully diluted equity of this
ISP. The revenue of this ISP for the three months ended December 31, 1997,
which was approximately $459,000, is not included in the revenue
information provided above.
(3) Funded as a start up to oversee Midwest operations and initiate operations
in Chicago.
(4) Funded as a start up to oversee Rocky Mountain operations and initiate
operations in the primary Colorado business centers. Verio Rocky Mountain
(d/b/a Verio Colorado) is owned 69% by Verio, and therefore is consolidated
for financial reporting purposes.
PRODUCTS AND SERVICES
The Company currently offers, through its regional ISP operations, a
comprehensive range of Internet connectivity and enhanced products and services.
The specific products offered in each market are determined by the needs of the
market and local telco tariffs. The Company 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,
which include Internet access and third-party software and hardware
implementations and configuration services, which are offered in bundled and
unbundled packages. Internet access currently includes ISDN, frame relay, leased
line access, dial-up and xDSL connectivity. The Company is participating in
trials for the deployment of new access technologies, such as wireless access.
The Company also offers a full range of customer premise equipment ("CPE")
hardware required to connect to the Internet, including routers, CSU/DSUs,
servers and other products as needed. Verio's regional operating units are able
to take advantage of the Company's national purchasing and leasing relationships
with a variety of partners in order to realize 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.
Enhanced Services. The Company 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. The Company currently offers a variety of enhanced services. In
addition, the Company'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. The Company's
current and planned enhanced services offerings include the following:
- Web Hosting and Co-location. Web hosting offers business customers a
presence on the Internet, enabling them to take advantage of the
marketing, customer service, internal company information dissemination
("intranets") and other benefits offered by such presence. Verio offers
its customers Web hosting services on a national basis as well as through
local data centers. The services include the full range of Web hosting,
Web design, Web site maintenance and ongoing consulting services through
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<PAGE> 39
a combination of internal efforts and the use of independent partners.
The Company also offers Web site co-location, where a customer-owned Web
server is located at a Verio POP for higher reliability. This solution
allows the customer to own its own Web server without having to maintain
and manage the data center environment. The Company's acquisition of
Utah-based iServer gives the Company access to proprietary Web server
technology, an extensive network of Web hosting resellers and over 25,000
hosted Web sites. The Company believes it will be able to leverage
iServer's proprietary "virtual server" technology across its regional
operations to accelerate the growth and increase the profitability of its
Web hosting product line. In addition to offering Web hosting services,
the Company has established national Web hosting and co-location services
by operating high-end, highly reliable data centers positioned close to
major network access points. The Company is consolidating the majority of
its Web hosting capability into its regional data centers across the
country, strategically located near the Company's public and private
peering points. The Company also intends to implement emerging content
distribution technologies such as content replication ("mirroring") and
caching for enhanced end user performance. Currently, the Company
supports over 35,000 domains and provides hosting services to over 1,600
resellers.
- 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, and (iii) encryption
services, providing secured transmission of company data through the
Internet. The Company currently offers a comprehensive set of firewall
products from Raptor, including the sophisticated Eagle Firewall(TM) and
the more simplified products known as The Wall(TM). The Company also
offers proxy server solutions such as the Microsoft Proxy Server.
Additionally, the Company offers a "managed" security solution that
provides ongoing detection and prevention of intrusions. The Company
plans to expand its security product line with new solutions that
simplify, reduce cost, or offer greater functionality as they become
commercially available.
- Virtual Private Network ("VPN"). 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 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. 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.
The Company currently offers its customers a number of VPN solutions,
including Raptor's VPN products, and is in the process of evaluating
additional products to meet the needs of customers.
- 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. The Company 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.
- Electronic Commerce Solutions. Electronic commerce provides users the
ability to sell products and services on the Internet. The Company
currently provides e-commerce capability to over 500 customers by
providing 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. The
Company supports a large variety of shopping carts, including Shop Site
by Icentral, and provides support for third party transaction processing
through Cybercash and AuthorizeNet. The e-commerce solutions are packaged
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<PAGE> 40
according to the complexity of the individual customer's needs. The
Company also intends to provide enhanced e-commerce hosting environments,
as well as to make use of third party software development partners to
provide certain turnkey e-commerce applications, such as an on-line
catalogs.
- Professional Services. The Company'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, the Company expects its customers to rely on their ISP for
support of many of their information technology applications. As a
result, the Company believes it will be increasingly important for ISPs
to offer onsite, technical consulting to customers. The Company 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. The
Company intends to invest in additional professional services
capabilities as they are required to provide customers with turnkey
Internet solutions.
- Enhanced Products and Services. Customers are increasingly seeking to
tailor the use of the Internet to their business. Verio intends 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. As
businesses commit to using the Internet, the Company believes that the
advanced applications product category will continue to expand, offering
additional revenue opportunities. For example, the Company currently
provides mail list services to customers that have a need to send out
hundreds of thousands of e-mail messages to their customers, suppliers
and prospects.
Verio has and intends to continue to enter into agreements with 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 the Company 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. The
Company 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 the Company
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.
SALES AND MARKETING
Verio offers its products and services through a consultative sales
approach which makes use of local technical talent to understand customer
applications and provide bundled Internet applications solutions consisting of
hardware, software, access and value-added services. Verio believes that this
localized approach will allow it to provide end-to-end customer solutions and
ongoing support. Verio has significant distribution capabilities both through a
direct sales force and indirect channels. The direct sales forces offer a core
base of technically competent, locally based and experienced Internet sales
representatives. Verio is focusing efforts on expanding the direct sales force,
further developing indirect channels and optimizing lead generation techniques
to reduce the cost of new customer acquisitions.
The Company currently provides Internet services to over 100,000 customer
accounts. Over 6,000 of these customer accounts receive dedicated connectivity
services from Verio, and over 14,000 represent Web hosting or Web site server
co-location services provided by Verio. Through the Company's Web services, over
35,000 domains (e.g. yourcompany.com) are hosted. The over 80,000 remaining
accounts are provided dial-up connectivity services, the majority of which are
used for business purposes.
Direct Sales. Verio has a direct sales force of more than 150 individuals.
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
39
<PAGE> 41
to assist in implementing customized 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. The Company 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. The Company 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.
Resellers and Indirect Sales. The Company has an authorized reseller and
referral program that permits the regional operating units to adapt a formal
indirect distribution program to their markets. The Company believes indirect
channels are a significant contributor to its growth. The Company already has
over 1,700 formal and informal reseller arrangements established. The authorized
reseller program offers reseller partners the ability to share in the on-going
revenue stream of customers they bring to Verio. Reseller partners include
system integrators, value-added resellers and other companies that have an
established relationship with the prospective customer base, and have a sales
force capable of selling Internet services as a part of the reseller's suite of
services. Referral partners, including organizations such as Web designers,
advertising agencies or property managers, are another source of customer leads.
The referral 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 benefits of these programs to Verio include
greater market reach without fixed overhead costs and the ability to use the
partners to assist in the delivery of complete solutions to meet customer needs.
In addition to local resellers, Verio is working with several national companies
to expand its indirect sales capability.
Branding. The Company has recently announced the consolidation of the
operations and marketing efforts of all of its ISPs under the Verio brand name,
with a regional or local geographical identifier to emphasize its local
presence. The Company has undertaken national public relations efforts to raise
the awareness and visibility of Verio in its target market.
VERIO NATIONAL NETWORK
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 the Company believes is adequate for the provision of
current and future planned access and enhanced services needs. The Company's
national network interconnects more than 15 national nodes and over 180 local
POPs across the United States. The Company 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
national 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.
Network Infrastructure. As of April 1998, the national network carried
traffic for 27 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.
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Following is a diagram of the Company's national network as of April 1998:
[MAP]
Currently, the national network architecture includes a presence at
selected national exchange points and redundant network nodes to link the
Company's regional networks to the national network. As of April 1998, Verio's
network included connectivity at MAE West, MAE East and the NY NAP, each of
which is a major national exchange point for ISPs. The Company also has a
presence at the Palo Alto Internet Exchange (PAIX), NASA Ames and a number of
other regional connecting points, including Seattle, Washington; Portland,
Oregon; Sacramento and San Diego, California; Denver, Colorado; Dallas and
Houston, Texas; Chicago, Illinois; Ann Arbor, Michigan; Philadelphia,
Pennsylvania; 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, Brooks and
others. These access points are linked, using a nationwide, high-speed DS-3 (45
Mbps) and OC-3 (155 Mbps) ATM, and DS-3 and OC-3 clear line network
infrastructure, utilizing capacity leased from a variety of national telco
providers, including Sprint, MCI, WorldCom and Qwest. The ATM portion of the
network relies on Sprint's 4-fiber ring SONET network. Sprint's SONET
architecture is designed to survive multiple failures with near instant
restoration to full capacity, thereby providing highly reliable performance.
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, the Northeast and the Southeast which
the Company currently plans to put on-line during the remainder of 1998.
Multiple national access nodes facilitate connection to Verio's national network
by its regional operations. The Company plans to add additional private peering
points and access nodes as it
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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. The Company has begun the migration
of selected links from ATM to clear line. It is anticipated that the Company
will require nationwide OC-3 capacity in late 1998 to handle its projected
traffic requirements. The Company anticipates the potential need to exceed OC-3
speeds in 1999.
On March 31, 1998, the Company entered into a 15-year Capacity and Services
Agreement (the "Capacity Agreement") with 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 minimum 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 level, and after the
expiration of the Commitment Term, at the same agreed upon prices. The Company
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.
The Company believes that the currently installed Cisco routers will be
sufficient to support its traffic routing needs up to and including OC-3 speeds.
To handle the routing at speeds higher than OC-3, new technology will be
required. The Company is investigating and testing various options to support
these higher 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, the Company
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.
The Company believes that substantial traffic volume and national scale will
continue to be the focal criteria necessary to establish and maintain 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.
The Company has established public or private peering relationships with
nearly all of the major national ISPs, as well as with over 90 smaller domestic
and international networks. 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. The Company has moved its GTE Internetworking and DIGEX
public peering points to private peering locations and is in the process of
moving its MCI public peering points to private peering locations. Verio also is
evaluating additional private peering proposals from other national ISPs. The
Company 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 the Company. 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."
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National Network Management. The Company considers world-class network
management an essential capability for network monitoring and expansion,
maintaining high customer satisfaction and improving network quality. The
Company has established a 7-day X 24-hour 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. The Company utilizes many leading edge systems to provide the NOC
capabilities. The Company currently monitors the national network and the local
networks of approximately 18 of the ISPs it has acquired. The Company plans to
provide network and customer monitoring throughout its regional operations by
the end of 1998.
Engineering Support Services. The Company has negotiated national level
telecommunications contracts with LECs, such as MFS/WorldCom, providing
favorable terms for local transport. The Company 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 the suppliers. National level distribution agreements have been
negotiated with a number of additional national-scope suppliers. The Company's
relationships with Sprint and MCI provide discounted services including leased
line, local access and long distance. Co-location agreements have also been
established with companies such as Sprint, MCI, Brooks, MFS/WorldCom and Digital
Equipment Corporation. The Company 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 the Company's services. These support services
include 7-day X 24-hour 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 the Company 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. The Company's national
customer support center (located in Dallas, Texas) enables Verio to provide
7-day X 24-hour 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. The Company is currently providing
customer care services to 23 of the ISPs it has acquired 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 the Vantive Corporation. The system offers the Company 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
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through the trouble ticketing system, as well as through the centralized billing
and collections system, the Company is able to monitor network reliability and
outage experiences. To date, this information, as well as the low churn rates
among the Company's dedicated connectivity customers, reflects that the outages
experienced by the Company's customers, for the 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 the Company and its ISPs do not provide general service warranties
and have not instituted a uniform policy relating to the provision or extent of
service credits, the Company and its ISPs have provided and continue to provide
credits for outages resulting from network failures in certain circumstances. To
date, these credits have been immaterial. The Company will continue to monitor
outage experiences, and would expect to record appropriate reserves if the level
of outage credits becomes material.
Financial Information Management. The Company 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. Currently, 19 of the ISPs acquired to
date are utilizing the financial reporting system and eight are 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 the Company's initiative to implement
continuous improvement methodology and to create a learning organization.
Billing and Collections. The Company 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. This system currently serves 16 of the ISPs
acquired to date. The Company 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, the Company entered into agreements establishing a
strategic relationship with NTT. These agreements provide for an investment by
NTT or one of its affiliates in the Company, concurrent with and conditioned
upon the consummation of the Offering, for up to 12.5% of Company's fully
diluted Common Stock (after giving effect to the Offering and the issuance of
the NTT Shares) up to a maximum investment of $100.0 million, at a 3.25%
discount to the Price to Public. In connection with the NTT Investment, NTT will
be entitled to designate one member to serve on the Company's Board of
Directors. See "Principal Stockholders -- NTT Investment."
In addition, the Company and NTT America entered into a three year Outside
Service Provider Agreement (the "OSP Agreement"), which will take effect upon
the closing of the NTT Investment. Pursuant to the OSP Agreement, the Company
will be designated as the preferred provider of Internet access and related
services to customers of NTT America on a reseller basis. Verio and NTT will
connect their backbones and establish a peering and transit relationship. During
the term of the OSP Agreement, NTT America will pay the Company for the services
provided by the Company at predetermined rates reflective of the strategic
relationship between the parties, under which, NTT will be entitled to "most
favored customer" status and pricing provisions, through the specific terms of
such arrangement have not yet been negotiated. Within 30 days after the
consummation of the Offering, NTT America and the Company have agreed to
establish certain working groups to develop the details for implementation of
the specific technical and administrative aspects arising under the OSP
Agreement.
ISP OWNERSHIP STRUCTURE
While the Company now typically seeks to acquire 100% of new ISPs, the
Company's early acquisition strategy was to rapidly build mass and scale by
acquiring less than 100% of its ISPs. In each case where the Company acquired
less than 100% of an ISP initially, it obtained the right to acquire 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, the Company has effected the Buyouts of all but two of the ISPs in
which it did not initially acquire 100% ownership through the use of cash on
hand and the issuance of equity. Verio currently
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expects to effect the Buyouts of the remaining two non-wholly owned ISPs during
the remainder of 1998. However, there can be no assurance that the Company will
be able to complete these additional Buyouts at the times, or on the terms and
conditions, that it currently contemplates.
As the Company completes the Buyouts, in general, the ISPs in each region
are consolidated into integrated regional operating subsidiaries which are
wholly owned by the Company. In certain instances, some of the ISPs may continue
to exist as separate, indirect, wholly owned subsidiaries of Verio, but operated
as part of the particular integrated operating region.
COMPETITION
The market for Internet connectivity and related services is extremely
competitive. The Company 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. The Company believes that a reliable national
network, knowledgeable salespeople and the quality of technical support
currently are the primary competitive factors in the Company's target market,
and that price is usually secondary to these factors.
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. The Company'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 DIGEX. While the Company 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 the Company, and have extensive coast-to-coast Internet backbones. The
Company 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, and Sprint, offer
Internet access services and compete with the Company. 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, the Company believes that there is a move toward horizontal
integration through acquisitions of, joint ventures with, and the wholesale
purchase of connectivity from, ISPs. The WorldCom/MFS/UUNet consolidation, the
NETCOM/ICG merger, 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 the Company's ability to compete
effectively with the telecommunications providers and may result in pricing
pressure on the Company that would have an adverse effect on the Company's
business, financial condition and results of operations. The Company 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.
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
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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. The Company competes to a
lesser extent with these on-line service providers.
Recently, there have been several announcements regarding the planned
deployment of broadband services for high speed Internet access by cable and
telephone companies through new technologies such as cable modems and xDSL.
While these providers have initially targeted the residential consumer, it is
likely that their target markets will expand to encompass the Company's targeted
markets, which may significantly affect the pricing of the Company's service
offerings.
PROPERTIES
The Company's corporate headquarters is located in Englewood, Colorado
where the Company leases approximately 39,200 square feet of office space. The
Company's lease agreement, which commenced February 1, 1998, is for a term of
five years. The Company also has executed a lease covering 20,700 square feet of
space in the InfoMart in Dallas, Texas, where the Company maintains its network
operations center and customer support center. That lease expires on June 30,
2002. The Company 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. The Verio ISPs typically are party to
lease agreements for administrative office space sufficient for their respective
personnel, as well as smaller site leases to house their network equipment.
EMPLOYEES
As of March 31, 1998, the Company employed approximately 960 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. The Company considers its employee relations to be good. None
of the employees of the Company is covered by a collective bargaining agreement.
TRADEMARKS AND TRADE NAMES
The Company filed for federal trademark protection of "Verio" on November
29, 1996. This application is pending and the Company has no assurance that it
will be granted. Trademark protections for the Verio mark also 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
The Company is not currently party to any material legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages as of April 24, 1998, and
positions of the officers and directors of the Company. Their respective
backgrounds are described below.
<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
James C. Allen(2).................................... 51 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
Sean G. Brophy....................................... 39 Vice President of Corporate Development
James F. B. Browning................................. 43 Vice President of Network Operations
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 Finance and
Administration
James M. Kieffer..................................... 36 Vice President of Customer Operations
John R. Viviani...................................... 43 Vice President of Sales and Marketing
</TABLE>
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Executive Committee
(4) Member of Finance Committee
Mark D. Johnson, who served as the Company's President, Chief Operating
Officer and a director of the Company, died on March 9, 1998. While Mr. Johnson
played an important role in overseeing the Company's operations, the Company
does not expect that his death will adversely affect the Company's operations,
growth or financial prospects, because of the strength of the Company's core
management team. On March 18, 1998, Mr. Jaschke was appointed to serve as the
Company's President while the Company conducts an executive search to seek a
replacement for the positions that were held by Mr. Johnson. See
"Summary -- Recent Developments."
All of the officers identified above serve at the discretion of the Board
of Directors of the Company. There are no family relationships between any
persons identified above. The following are brief biographies of the persons
identified above.
Steven C. Halstedt has served as Chairman of the Board of Directors of
Verio since the Company'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., Pluto Technologies International, Inc. and V-I-A Internet, Inc. Mr.
Halstedt was recently a director of 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 College, where he was named an Edward Tuck Scholar. He attended the
University of
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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 the
Company's inception in March 1996. He is also a member of the Company'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 V-I-A Internet, Inc. 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.
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 twenty-five 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
Telcom 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. which invests in and advises media,
communications 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, Ltd., CableLabs, J.D. Edwards, Inc., Founders Funds and The
University of Denver. Previously, Mr. Myhren served as chairman of the 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
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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 the Company since the Company'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, Intergram
International, 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 the Company since the Company's
inception in March 1996. Mr. Still, based in Palo Alto, California, is a
Managing Partner of Norwest Venture Partners VI, L.P. and Norwest Equity
Partners V, L.P., and a General Partner of Norwest Equity Partners IV. 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, Intrepid Systems, 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.
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 the Company 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 F. B. Browning was appointed Vice President of Network Operations for
the Company in January 1998, having previously served as President and CEO of
ATMnet, a company he founded in 1995 to provide integrated digital
communications services to businesses with broadband networking requirements.
Verio acquired ATMnet in November 1997. Mr. Browning has 20 years of experience
managing high technology development and operations. From 1988 to 1994, as
co-founder, he served as Chief Financial Officer and Chief Operating Officer of
VisiCom Laboratories, Inc., a systems engineering firm specializing in digital
satellite communications and operating system level software development. From
1983 to 1988, Mr. Browning served as Executive Vice President and then President
of Pacific Microcomputers, Inc., which developed and produced Single Board
Computers for use in Unix workstations and real time embedded computing
environments. Previously, Mr. Browning held financial and operational management
positions with Advanced Digital Systems and Tetra Tech, a subsidiary of
Honeywell. Mr. Browning holds a Bachelor of Science degree in accounting from
San Diego State University.
Chris J. DeMarche has been Chief Technical Officer of the Company since
joining the Company 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
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<PAGE> 51
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 the Company 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 the Company
since June 1997. From September 1993 until June 1997, Mr. Fritzinger served as
Chief Financial Officer of Louis Dreyfus Natural Gas Corp., an 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 Finance and
Administration for the Company since joining the Company 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
the Company since joining the Company 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.
John R. Viviani joined the Company in December 1997 and serves as its Vice
President of Sales and Marketing. Prior to that time, Mr. Viviani was most
recently Sales Director of Worldwide Channels for IBM Networking Hardware
Division. In that capacity, he was responsible for developing worldwide indirect
channels. Prior thereto from 1992 to 1996, Mr. Viviani implemented and directed
national sales and marketing teams responsible for launching IBM U.S. into the
internetworking solution market place and establishing the IBM Networking
division in the indirect channels. Mr. Viviani was employed by IBM since 1978,
serving as a
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business unit executive, account executive and marketing manager. Mr. Viviani
received his Master of Business Administration from St. Thomas Aquinas College
and his Bachelor of Science degree in management and finance from Marymount
College.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's 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 the Company
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 Board has specifically delegated final decision-making
authority to the Executive Committee. The Executive Committee is composed of
Messrs. Halstedt and Jaschke. The Finance Committee is responsible for reviewing
and, where appropriate, authorizing certain corporate actions with respect to
the finances of the Company 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 the Company'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 Board has also 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 the Company's financial statements, discussing
the scope and results of the audit with the independent accountants, reviewing
the functions of the Company's management and independent accountants with
respect to the Company's financial statements and performing such other related
duties and functions as are deemed appropriate by the Audit Committee and the
Board.
DIRECTORS COMPENSATION
From and after the consummation of the Offering, each non-employee director
of the Company will receive an annual retainer fee of $5,000 and a fee of $1,000
for each meeting of the Board attended in person or $500 for each meeting
attended by telephone. The fee for Board committee meetings is $500 per meeting.
A director may elect to receive these payments in the form of Common Stock. In
addition, upon consummation of the Offering, each non-employee director
automatically will be granted an option to acquire 30,000 shares of Common Stock
at an exercise price per share equal to the fair market value of the 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 Board following the Offering
also will be granted automatically at the time of election or appointment an
option to acquire 30,000 shares of Common Stock with the same terms and
conditions at an exercise price equal to the then fair market value of the
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 Common Stock at an exercise price equal to
the fair market value of the 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, the Company adopted a separate stock incentive plan under which
options may be granted and shares of Common Stock may be issued to non-employee
directors in accordance with these compensation arrangements, from and after the
consummation of the Offering. See "Stock Option and Incentive Plans -- 1998
Non-Employee Director Stock Incentive Plan."
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<PAGE> 53
EXECUTIVE COMPENSATION
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) the Company's Chief Executive Officer and (b) the Company'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
Operating 1996 -- -- -- -- --
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 the Company's President and Chief Operating
Officer beginning in March 1997, died on March 9, 1998. See
"Summary -- Recent Developments."
(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 the Company of tax reimbursements.
(8) Represents the cost to the Company of providing relocation benefits.
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<PAGE> 54
STOCK OPTIONS GRANTED IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock
options by Verio under the Company'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 Common Stock on the date of grant, as
determined by the Board of Directors.
(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 the Company's estimate or projection of future stock price. Actual
gains, if any, resulting from stock option exercises and Common Stock
holdings are dependent on the future performance of the Common Stock and
overall stock market conditions. There can be no assurance that the amounts
reflected in this table will be achieved.
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END 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 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 Common Stock)
as of December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED FISCAL YEAR-END (#) FISCAL YEAR-END ($)(1)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Justin L. Jaschke.......... 60,000 1,040,000 -- 180,000 -- 2,880,000
Mark D. Johnson............ -- -- -- 200,000 -- 2,600,000
Chris J. DeMarche.......... -- -- 14,000 76,000 224,000 1,141,000
Carla Hamre Donelson....... -- -- 12,000 68,000 192,000 1,013,000
Peter B. Fritzinger........ -- -- -- 75,000 -- 975,000
</TABLE>
- ---------------
(1) The value of options at year-end is based on an assumed fair market value of
$19.00 per share of Common Stock (the mid-point of the assumed price range
per share in the Offering).
EMPLOYMENT AGREEMENTS
As a general matter, the Company 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, the Company and the
officer executed an offer letter, in which the general compensation and benefits
provided to the officer are outlined,
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<PAGE> 55
including base salary, targeted annual bonus, option grants and employee
benefits. The base salary and targeted bonus levels for each of the officers
remains the same in 1998 as in 1997. However, upon consummation of the Offering,
the base salary for Mr. Jaschke will be increased to $260,000, which will result
in an increase in his annual targeted bonus level of 30% to 40% of his base
salary.
COMPENSATION PROTECTION AGREEMENTS
The Company 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 the
Company. Each of the Compensation Protection Agreements contain substantially
similar terms. The form of Compensation Protection Agreement has been filed as
an exhibit to the Company's Registration Statement of which this Prospectus is a
part. The Compensation Protection Agreements will be for a term of three years
from April 1, 1998 (the "Effective Date"), subject to automatic yearly
extensions. In no event will the Compensation Protection Agreements terminate
within 12 months of a Change in Control of the Company. "Change in Control"
includes the following:
(a) An acquisition (other than directly from the Company) of any
voting securities of the Company (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 the Company'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 Board, are members of the Board (the
"Incumbent Board"), cease for any reason to constitute at least a majority
of the Board (subject to certain provisos);
(c) Approval by stockholders of the Company of: (1) a merger,
consolidation or reorganization involving the Company, 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 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 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 the Company is terminated
within 12 months following a Change in Control by the Company 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, retirement, or by the Protected Officer other than for
Good Reason (as defined in the Compensation Protection Agreements), then
the Company 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 the Company during the period ending on the Termination Date, and
vacation pay.
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<PAGE> 56
(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 the Company'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");
(C) an amount equal to two (2) 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 (3) times that sum;
(D) until the third anniversary of the Termination Date, the same
rights with respect to benefits provided by the Company, 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 the
Company's stock option and other stock incentive plans or arrangement.
The Compensation Protection Agreements will further provide that the
Protected Officers will not be 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 the Company's employee
benefit plans and other applicable programs, policies and practices then in
effect. The Compensation Protection Agreements will 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 Board of
Directors in May 1996 and by the stockholders of the Company in June 1996. In
February 1998, the 1996 Stock Option Plan was amended, with the approval of the
Board, to reserve a total of 2,205,300 shares of Common Stock for issuance under
this plan. As of April 24, 1998, options to purchase 115,933 shares of Common
Stock granted under the 1996 Stock Option Plan had been exercised, options to
purchase 1,970,967 shares of Common Stock were outstanding and no additional
options to purchase shares of 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 $6.55 per share. Outstanding options to purchase an aggregate of
1,340,967 shares were held by employees who are not officers or directors of the
Company. Of the 115,933 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 the Company 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
Board of Directors.
The Board of Directors has delegated administration of the 1996 Stock
Option Plan to its Compensation Committee (the "Committee"). The 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
Common Stock that are designed to qualify, under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), as "incentive stock options"
("Incentive Stock Options") or (ii) options to purchase Common
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<PAGE> 57
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 Committee has discretion to grant Incentive Stock Options to employees
and officers (including directors who are employees) of the Company or any
Affiliate (as defined in the 1996 Stock Option Plan) of the Company and
Non-Qualified Stock Options to employees, officers, directors or consultants of
the Company and its Affiliates. The 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 the Company or an Affiliate (a "10% Holder")
may not be longer than five years; (ii) the aggregate fair market value of all
shares 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
April 24, 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 the Company 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 disability may be
exercised prior to the earlier of such Option's specified expiration date or 18
months from the date of the optionee's disability, or such longer or shorter
period as specified in the Option.
In the event of (i) a dissolution or liquidation of the Company, (ii) a
merger or consolidation in which the Company is not the surviving corporation,
(iii) a reverse merger in which the Company is the surviving corporation but the
shares of the Company's outstanding 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 the
Company's shareholders 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
The Company's 1997 California Stock Option Plan (the "1997 California
Plan") was adopted by the Board of Directors in February 1997, and approved by
the Company's stockholders in April 1997. In February 1998, the 1997 California
Plan was amended, with the approval of the Board, to reserve a total of 795,400
shares of Common Stock for issuance under this plan. This amendment has been
approved by the Company's stockholders. As of April 24, 1998, no options to
purchase shares of Common Stock had been exercised under the 1997 California
Plan, options to purchase 617,605 shares of Common Stock were outstanding and
options to purchase an additional 177,795 shares of Common Stock remained
available for grant. The outstanding options were exercisable at a weighted
average exercise price of $12.47 per share. Outstanding options to
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purchase an aggregate of 507,605 shares were held by employees who are not
officers or directors of the Company.
The 1997 California Plan may be administered by the Board of Directors or
the Committee (either, the "1997 Plan Administrator"). The 1997 California Plan
provides for the granting to employees of the Company 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 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 Board of Directors, of the 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 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 the Company'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 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
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 the
Company with or into another corporation or a consolidation, sale of
substantially all of the Company's assets or like transaction involving the
Company in which the Company's stockholders before the transaction do not retain
a majority interest in the Company, 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 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 Common Stock
previously issued and sold or any Option previously granted under the 1997
California Plan without the optionees consent.
1998 Stock Incentive Plan
The Company's 1998 Stock Incentive Plan (the "1998 Stock Incentive Plan"),
which was adopted by the Board of Directors in February 1998, was amended and
restated as of March 19, 1998 and has been approved by the Company's
stockholders. From and after the Offering, all further option grants will be
made solely under the 1998 Stock Incentive Plan. Initially, 165,000 shares of
Series D-1 Preferred Stock and 1,749,300 shares of Common Stock, together with
any shares of Common Stock represented by awards under the 1996 Stock Option
Plan which are forfeited, expire or are cancelled following the adoption of the
1998 Stock Incentive Plan, were reserved for issuance under the 1998 Stock
Incentive Plan. Upon and after the Offering, 6,199,300 shares of Common Stock
will be reserved for issuance under the 1998 Stock Incentive Plan, together with
(a) any shares of Common Stock available for future awards under the 1997
California Plan as of the Offering and (b) any shares of 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 Offering. In connection with the adoption of the 1998 Stock Incentive Plan,
the Board determined that the Company will limit the issuance of 1998 Awards (as
defined) 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 Company's outstanding
fully-diluted equity.
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As of April 24, 1998, no options to purchase shares of Common Stock had
been exercised under the 1998 Stock Incentive Plan, options to purchase
1,314,266 shares of Common Stock were outstanding, options to purchase 160,502
shares of Series D-1 Preferred Stock were outstanding (which will automatically
convert to options to acquire shares of Common Stock upon consummation of the
Offering), and options to purchase an additional 232,430 shares of Common Stock
remained available for grant prior to the consummation of the Offering. The
outstanding options were exercisable at a weighted average exercise price of
$13.71 per share. Outstanding options to purchase an aggregate of 1,059,768
shares were held by employees who are not officers or directors of the Company.
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 the Company and its related entities and to promote
the success of the Company'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
the Company and its related entities.
With respect to 1998 Awards granted to directors or officers, the 1998
Stock Incentive Plan is administered by the Board of Directors or a committee
designated by the Board of Directors 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 Board of Directors or a committee
designated by the Board of Directors. 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 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 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 the
Company's outstanding capital stock, the exercise price of any Incentive Stock
Option must equal at least 110% of the fair market value of the 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 Plan Administrator, but not less than 85% of the fair
market value of the stock. The consideration to be paid for the shares of 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 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 the 1998
Award for a certain period of time following the recipient's termination of
service with the Company, disability, or death, the 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 the 1998 Award, whichever occurs first.
Unless terminated sooner, the 1998 Stock Incentive Plan will terminate
automatically in 2008. The 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.
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1998 Employee Stock Purchase Plan
The Company's 1998 Employee Stock Purchase Plan (the "Stock Purchase Plan")
was approved by the Board of Directors in February 1998 and has been approved by
the Company'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 the Company with an opportunity to purchase Common Stock
through payroll deductions. An aggregate of 3,000,000 shares of the Company's
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 Common Stock or the capital
structure of the Company. All employees of the Company (and employees of
"subsidiary corporations" and "parent corporations" of the Company (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 hired after the consummation of the Offering 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.
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 will begin on the effective date of the Stock
Purchase Plan, which is the effective date of the Company's Registration
Statement relating to the Company's initial public offering of its Common Stock,
and end 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 the Company with or into another
corporation, the sale of all or substantially all of the assets of the Company,
or certain other transactions in which the stockholders of the Company before
the transaction own less than 50% of the total combined voting power of the
Company'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 Common Stock of the Company. The price per share at which
shares of 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
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 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 Common Stock is lower than the fair market value of the 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 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 Common Stock
which may be purchased during any calendar year are imposed by the Code.
The Stock Purchase Plan will be administered by the Board of Directors or a
committee designated by the Board, which will have the authority to terminate or
amend the Stock Purchase Plan (subject to specified
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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 Company's Board of Directors 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
300,000 shares of Common Stock, in order to provide for option grants and stock
issuances to members of the Company's Board of Directors who are not employees
of the Company, following the consummation of the Offering, in accordance with
the compensation guidelines described in "-- Directors Compensation." No awards
will be made under the 1998 Non-Employee Director Plan until consummation of the
Offering. The 1998 Non-Employee Director Plan has been approved by the Company's
stockholders.
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 the Company'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").
Under the Automatic Option Grant Program, each non-employee director
serving on the Company's Board of Directors upon consummation of the Offering
automatically will be granted an option to acquire 30,000 shares of Common Stock
at an exercise price per share equal to the fair market value of the 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 Board of Directors following the
Offering also will be granted automatically at the time of election or
appointment an option to acquire 30,000 shares of Common Stock with the same
terms and conditions at an exercise price equal to the then fair market value of
the 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 Common Stock at an exercise price equal to
the fair market value of the 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
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 the Company with or into another corporation, a sale of
substantially all of the Company's assets, a person becoming more than a 50%
owner of the Company or a like transaction involving the Company in which the
Company's stockholders before the transaction do not retain a majority interest
in the Company, immediately prior to the transaction, one-third of the shares
subject to the options to purchase 30,000 shares of Common Stock will vest and
become exercisable and all of the shares subject to the options to purchase
3,000 shares of 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 the Company or
change in the majority of the Board of Directors 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
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
Common Stock by dividing the selected dollar amount by the then fair market
value per share of the 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 Board of
Directors or a committee designated by the Board of Directors (either, the "1998
Plan Administrator") constituted to permit Non-
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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 Board of Directors 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, the Company implemented an employee savings and retirement
plan (the "401(k) Plan") covering certain of the Company's employees who have at
least one month of service with the Company and have attained the age of 21.
Pursuant to the 401(k) Plan, eligible employees may elect to reduce their
current compensation by 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. The Company may make
contributions to the 401(k) Plan on behalf of eligible employees. Employees
become 20% vested in these Company 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
Internal Revenue Code of 1986, as amended, so that contributions by employees or
by the Company 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 the Company, if any, will be deductible by
the Company 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. The Company made no contributions to the 401(k) Plan in 1996
or in 1997. The Company does not presently expect to make any contributions to
the 401(k) Plan during the 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 the Company. No member of
the Compensation Committee of the Company serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Company's Board of Directors or Compensation
Committee. See "Certain Transactions" for a description of transactions between
the Company and entities affiliated with members of the Compensation Committee.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Restated Certificate of Incorporation and bylaws provide that
the Company 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 Company's Restated Certificate of Incorporation and bylaws also
authorize the Company 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. The Company intends to enter into agreements to indemnify its directors
and officers, in addition to indemnification provided for in the Company's
charter documents. These agreements, among other things, provide for the
indemnification of the Company'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 the Company, arising out of such person's services as a director or
officer of the Company, any subsidiary of the Company or any other company or
enterprise to which such person provides services at the request of the Company
to the fullest extent permitted by applicable law. The Company believes that
these provisions and agreements will assist the Company in attracting and
retaining qualified persons to serve as directors and officers.
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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 Company's Restated Certificate of Incorporation will provide for
the elimination of personal liability of a director for breach of fiduciary
duty, as permitted by Section 102(b)(7) of the DGCL.
The Underwriting Agreement provides for indemnification by the Underwriters
under certain circumstances of directors, officers and controlling persons of
the Company against certain liabilities, including liabilities under the
Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions contained in the Certificate of Incorporation and
Bylaws of the Company, the DGCL, the Underwriting Agreement, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit, or proceeding) is
asserted by such director, officer or controlling person in connection with the
Common Stock being registered hereunder, the Company will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
The Company intends to purchase and maintain 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.
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CERTAIN TRANSACTIONS
SERIES A PURCHASE AGREEMENT
Pursuant to a Series A Preferred Stock purchase agreement by and among
Centennial Fund IV, L.P., Centennial Holdings, Inc., Telecom Partners, L.P.,
Norwest Equity Partners, V and Brooks Fiber Properties, Inc. (together, the
"Series A Purchasers") and the Company, dated as of June 25, 1996 (the "Series A
Purchase Agreement"), the Series A Purchasers made their initial investments in
the Company. The Series A Purchasers purchased, in the aggregate, 5,250,000
shares of Series A Preferred Stock for an aggregate purchase price of
$15,750,000. Pursuant to Amendment No. 1 to the Series A Stock Purchase
Agreement, dated as of July 3, 1996, the Company sold an additional 756,666
shares of Series A Preferred Stock to certain of the Series A Purchasers and to
certain additional purchasers for the aggregate purchase price of $2,270,000.
Subsequently, the Company sold an additional 26,667 shares of Series A Preferred
Stock to certain members of the Company's management for an aggregate purchase
price of $80,001. In connection with the Series A Purchase Agreement, the
Company, the Series A Purchasers and certain members of the Company's management
entered into a stockholders agreement, dated as of June 25, 1996 (the "Series A
Stockholders Agreement"), which provided the Series A Stockholders with certain
demand and piggyback registration rights. The parties to Amendment No. 1 to the
Series A Stock Purchase Agreement became parties to the Series A Stockholders
Agreement. The Series A Stockholders Agreement was replaced by the Series B
Stockholders Agreement which, in turn was replaced by the Stockholders
Agreement. See "-- Series B Purchase Agreement" and "-- Series C Purchase
Agreement."
SERIES B PURCHASE AGREEMENT
The Company, certain of the Series A Purchasers and several additional
purchasers (together, the "Series B Purchasers") entered into a Series B
Preferred stock purchase agreement, dated as of December 5, 1996 (the "Series B
Stock Purchase Agreement"), pursuant to which the Series B Purchasers acquired,
in the aggregate, 10,000,000 shares of Series B Preferred Stock for the
aggregate purchase price of $60,000,000. In connection with the Series B Stock
Purchase Agreement, the Company, the Series A Purchasers, the Series B
Purchasers and members of the Company's management entered into a stockholders
agreement, dated as of December 5, 1996 (the "Series B Stockholders Agreement").
The Series B Stockholders Agreement replaced the Series A Stockholders Agreement
and was later replaced by the Stockholders Agreement. See "-- Series C Purchase
Agreement."
SERIES C PURCHASE AGREEMENT
The Company, certain of the Series A Purchasers and certain of the Series B
Purchasers (together, the "Series C Purchasers") entered into a Series C
Preferred stock purchase agreement, dated as of May 20, 1997 (the "Series C
Stock Purchase Agreement"), pursuant to which the Series C Purchasers acquired,
in the aggregate, 2,500,000 shares of Series C Preferred Stock for the aggregate
purchase price of $20,000,000. In connection with the Series C Stock Purchase
Agreement, the Company, the Series A Purchasers, the Series B Purchasers, the
Series C Purchasers, and members of the Company's management entered into a
Stockholders Agreement (the "Stockholders Agreement"), which replaced the Series
B Stockholders Agreement. See "-- Stockholders Agreement."
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The following table sets forth the number of shares of Series A, Series B
and Series C Preferred Stock, and Common Stock purchased by the Company's
directors, five percent stockholders and their respective affiliates.
<TABLE>
<CAPTION>
COMMON SERIES A SERIES B SERIES C
HOLDERS STOCK PREFERRED PREFERRED PREFERRED
- ------- ------- --------- --------- ---------
<S> <C> <C> <C> <C>
Brooks Fiber Properties, Inc.(1)................. -- 1,666,667 2,500,000 498,304
Norwest Equity Partners V, L.P.(2)............... 270,000 1,666,667 2,083,333 281,250
Providence Equity Partners, L.P.(3).............. -- -- 2,083,333 972,360
Centennial Fund V, L.P.(4)....................... -- -- 1,627,983 674,320
Centennial Fund IV, L.P.(4)...................... 250,000 1,543,210 353,395 12,500
Centennial Entrepreneurs Fund V, L.P.(4)......... -- -- 50,350 20,855
Centennial Holdings I, LLC(4).................... 14,452 89,208 37,289 316
Justin L. Jaschke................................ 110,000 33,333 22,501 --
Estate of Mark D. Johnson........................ 60,000 -- -- --
James C. Allen................................... 25,000 -- -- --
Trygve E. Myhren................................. -- -- 10,000 --
</TABLE>
- ---------------
(1) 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. James C.
Allen served as CEO of Brooks until the acquisition. Mr. Allen serves on the
Company's Board of Directors.
(2) George J. Still, Jr. is a general partner of Itasca Partners V. ("Itasca"),
which is the sole general partner of Norwest Equity Partners V, L.P.
("Norwest"). Mr. Still serves on the Company's Board of Directors.
(3) Paul J. Salem, a member of Providence Equity Partners LLC ("PEPLLC"), which
is the sole general partner of Providence Equity Partners, L.P.
("Providence"), serves on the Company's Board of Directors.
(4) The sole General Partner of Centennial Fund IV, L.P. ("Centennial IV") is
Centennial Holdings IV, L.P. ("Holdings IV"), the sole General Partner of
Centennial Fund V, L.P. ("Centennial V") and Centennial Entrepreneurs Fund
V, L.P. ("Centennial Entrepreneurs") is Centennial Holdings V, L.P.
("Holdings V"). Steven C. Halstedt is a general partner of Holdings IV and
Holdings V, and a unit holder of Centennial Holdings I, L.L.C. ("Holdings
LLC"). Mr. Halstedt serves as the Chairman of the Board of Directors of the
Company.
SERIES D-1 AGREEMENTS
In connection with the acquisitions of iServer and NSNet, the Company
issued a total of 797,642 shares of Series D-1 Preferred Stock to former
stockholders of iServer and NSNet. The Company has issued a total of
approximately 1,416,871 additional shares of Series D-1 Preferred Stock pursuant
to Buyouts completed as of April 24, 1998. In addition, options to acquire
164,989 shares of Series D-1 Preferred Stock were issued in connection with the
Buyout of NorthWestNet, Inc.
The Series D-1 Preferred Stock will automatically convert into Common
Stock, and the options to acquire shares of Series D-1 Preferred Stock will
automatically convert into options to acquire shares of Common Stock, upon
completion of the Offering. The recipients of the shares of Series D-1 Preferred
Stock issued in the Buyouts and the acquisition of NSNet have been granted
certain registration rights with respect to the shares of Common Stock issuable
upon conversion of the Series D-1 Preferred Stock and have agreed to certain
market standoff provisions following the Offering in the agreements pursuant to
which the Series D-1 Preferred Stock is issued (the "Series D-1 Agreements").
See "Description of Capital Stock -- Registration Rights" and "Shares Eligible
for Future Sale."
STOCKHOLDERS AGREEMENT
Pursuant to the terms of the Stockholders Agreement, the holders of the
Series A Preferred Stock, the Series B Preferred Stock and the Series C
Preferred Stock (together, the "Investors") acquired certain
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registration rights with respect to the Company. At any time after the effective
date of the first registration statement filed by the Company under the
Securities Act, holders of 25% or more of the Registrable Securities (as defined
in the Stockholders Agreement) may require the Company to effect registration
under the Securities Act of their Registrable Securities, subject to the Board
of Directors' right to defer such registration for a period of up to 180 days.
In addition, if the Company proposes to register securities under the Securities
Act (other than a registration relating either to the sale of securities to
employees pursuant to a stock option, stock purchase or similar plan or a
transaction under Rule 145 of the Securities Act), then any of the Investors has
a right (subject to quantity limitations determined by underwriters if the
offering involves an underwriting) to request that the Company register such
holder'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 the Company. Each Investor will pay for selling
expenses pro rata on the basis of the number of shares sold by such Investor.
The Company has agreed to indemnify the Investors (including the officers,
directors, partners, agents, employees and representatives, and each person
controlling such Investor within the meaning of Section 15 of the Securities
Act) against all expenses, claims, losses, damages and liabilities (or actions,
proceedings or settlements in respect thereof) arising out of or based on any
untrue or alleged untrue statement of a material fact contained in any
prospectus, offering circular or other document (including any related
registration statement, notification or the like) incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the
Company of the Securities Act or any rule or regulation thereunder applicable to
the Company and relating to action or inaction required of the Company in
connection with any such registration, qualification or compliance, and will
reimburse each such Investor for any legal and any other expenses reasonably
incurred in connection with investigating and defending or settling any such
claim, loss, damage, liability or action; provided, however, that the Company
will not be liable in any such case to the extent that such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission based upon written information furnished to the Company by such
Investor and stated to be specifically for use therein. This indemnification
does not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Company.
Subject to certain exceptions, the Company has a right of first refusal to
purchase shares of Common Stock held by Management Holders (as defined in the
Stockholders Agreement) which, to the extent not purchased by the Company, are
subject to an additional right of first refusal by the Investors according to
their respective pro rata shares. In addition, transfers of Common Stock held by
Investors are subject to a right of first refusal by other Investors who also
are holders of Common Stock. Subject to certain exceptions, upon the issuance by
the Company of any Common Stock or any other equity securities, each of the
Specified Investors (as defined in the Stockholders Agreement) has the
preemptive right to purchase its pro rata share of up to 80% of the securities
so offered according to their respective pro rata interests. If any Specified
Investor declines to exercise such right in full, the remaining electing
Specified Investors are entitled to purchase such Specified Investor's
unpurchased portion of the offered securities on a pro rata basis. All
preemptive rights and rights of first refusal contained in the Stockholders
Agreement terminate upon consummation of the Offering.
TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
On June 16, 1997, the Company 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
On March 18, 1998, in response to an offer by Brooks, the Company and
Brooks reached an agreement pursuant to which the Company agreed to repurchase
the $50.0 million principal amount of the Company'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. See "Summary -- Recent Developments."
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On April 7, 1998, the Company entered into the NTT Investment Agreement and
the OSP Agreement. The NTT Investment Agreement provides NTT with certain Board
representation rights, and imposes certain standstill and other limitations on
its ability to make further acquisitions of the Company's stock. Under the OSP
Agreement, NTT will be entitled to "most favored customer" status and pricing
provisions, through the specific terms of such arrangement have not yet been
negotiated. See "Business -- NTT Strategic Relationship" and "Principal
Stockholders -- NTT Investment."
In April 1998, the Company's Board of Directors approved an additional
equity investment in V-I-A Internet, Inc. ("VIANet") in the amount of up to $8.0
million in order to preserve the Company's current ownership interest of
approximately 18% in VIANet. The Company has no right to acquire the remaining
equity of VIANet. The Board of Directors has determined that its investment in
VIANet will be the primary component of its international strategy in the near
term, but the Company also may pursue direct investments in certain
international markets where appropriate opportunities exist. The Company
believes that its indirect international strategy through VIANet is the most
effective means to leverage the Company's resources.
A number of the Company's significant stockholders (including certain of
The Centennial Funds and Norwest) are, or are expected possibly to become,
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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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of April 24, 1998,
and upon consummation of the Offering and the NTT Investment, with respect to
the beneficial ownership of the Company's Common Stock by (i) each stockholder
known by the Company to own beneficially more than five percent, in the
aggregate, of the outstanding shares of the Company's outstanding Common Stock,
(ii) each director and Named Executive Officer of the Company and (iii) all
executive officers and directors as a group.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY
NUMBER OF OWNED(1)
SHARES --------------------
BENEFICIALLY PRIOR TO AFTER
HOLDERS OWNED OFFERING OFFERING
------- ------------ -------- --------
<S> <C> <C> <C>
Brooks Fiber Properties, Inc.(2)............................ 5,369,131 23.58% 16.51%
425 Woods Mill Road South
Suite 300
Town & Country, Missouri 63017
Nippon Telegraph and Telephone Corporation(3)............... 4,749,467 -- 14.93%
Global Communications Headquarters
Tokyo Opera City Tower
20-2 Nishi-Shinjuku 3-chome
Shinjuku-ku
Tokyo 163-14, Japan
Norwest Equity Partners V, L.P.............................. 4,301,250 19.49% 13.52%
245 Lytton Avenue
Palo Alto, California 94301
Providence Equity Partners, L.P............................. 3,055,693 13.85% 9.60%
50 Kennedy Plaza
Providence, Rhode Island 02903
Centennial Fund V, L.P.(4).................................. 2,302,303 10.43% 7.24%
1428 Fifteenth Street
Denver, Colorado 80202
Centennial Fund IV, L.P.(4)................................. 2,159,105 9.78% 6.79%
1428 Fifteenth Street
Denver, Colorado 80202
Steven C. Halstedt(5)....................................... -- -- --
Justin L. Jaschke(6)........................................ 185,834 * *
Estate of Mark D. Johnson(7)................................ 130,000 * *
James C. Allen(8)........................................... 25,000 * *
Trygve E. Myhren(9)......................................... 20,000 * *
Paul J. Salem(10)........................................... -- -- --
Stephen W. Schovee.......................................... -- -- --
George J. Still, Jr.(11).................................... -- -- --
Chris J. DeMarche(12)....................................... 88,833 * *
Carla Hamre Donelson(13).................................... 29,917 * *
Peter B. Fritzinger(14)..................................... 40,000 * *
All executive officers and directors as a group (12
persons)(15).............................................. 512,584 2.31% 1.61%
</TABLE>
- ---------------
* Less than 1%
(1) Percentage of beneficial ownership prior to the Offering is based on (i)
1,294,266 shares of Common Stock outstanding at April 24, 1998; (ii)
18,561,667 shares of Common Stock issuable upon conversion of the Series A,
B, and C Preferred Stock outstanding at April 24, 1998; (iii) 2,214,513
shares of Common Stock issuable upon conversion of the Series D-1 Preferred
Stock issued in connection with the acquisitions and Buyouts completed as
of April 24, 1998, totalling 22,070,446 shares of capital stock of the
Company. Percentage of beneficial ownership after the Offering is based on
31,819,913 total shares of capital stock outstanding, which includes the
shares of capital stock outstanding prior to the Offering identified above
plus (i) 4,749,467 shares of Common Stock to be sold by the Company to
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<PAGE> 69
NTT for approximately $87.3 million (based upon an assumed initial public
offering of 5,000,000 shares of Common Stock at an assumed Price to Public
of $19.00 per share) concurrently with the Offering and (ii) 5,000,000
shares of Common Stock to be sold pursuant to the Offering. In computing
the number of shares beneficially owned by a person and the percentage
ownership of that person, shares of Common Stock subject to options or
warrants owned by such person that are currently exercisable or exercisable
within 60 days of April 24, 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 for 704,160 shares of 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 Offering
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 of 12.5% of fully diluted shares that they are permitted to
purchase in the NTT Investment.
(4) Does not include 71,205 shares of the Company's capital stock held by
Centennial Entrepreneurs. 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 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 IV, and Centennial IV disclaims beneficial ownership of the
shares held by Centennial V.
(5) The sole General Partner of Centennial IV is 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
the Company's capital stock held by 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 20,000 shares of Common Stock exercisable within 60
days.
(7) Includes options exercisable for 70,000 shares of Common Stock exercisable
within 60 days.
(8) On April 6, 1998, Mr. Allen transferred all his shares of 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 exercisable for 10,000 shares of Common Stock exercisable
within 60 days.
(10) The sole general partner of Providence is 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) The sole general partner of Norwest is 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.
(12) Includes options exercisable for 28,000 shares of Common Stock exercisable
within 60 days.
(13) Includes options exercisable for 12,000 shares of Common Stock exercisable
within 60 days.
(14) Includes options exercisable for 15,000 shares of Common Stock exercisable
within 60 days.
(15) Includes options exercisable for 109,000 shares of Common Stock exercisable
within 60 days (not including options held by Mr. Johnson's estate).
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<PAGE> 70
NTT INVESTMENT
NTT Stock Purchase Agreement and NTT Investment Agreement. Pursuant to a
Stock Purchase and Master Strategic Relationship Agreement, dated as of April 7,
1998, between the Company and NTT (the "NTT Stock Purchase Agreement"), NTT
agreed to purchase, concurrent with and conditioned upon the consummation of the
Offering (the "IPO Closing"), a number of shares of the Company's Common Stock
equal to the lesser of (i) 12.5% of the total number of shares of Common Stock,
on a fully diluted and fully converted basis (calculated as of the IPO Closing
after giving effect to the Offering and the sale to NTT), or (ii) the quotient
of $100.0 million divided by the "Per Share Price" payable by NTT. The "Per
Share Price" to be paid by NTT will be equal to the Price to Public in the
Offering multiplied by 96.75% (subject to certain adjustments in the event that
shares of Common Stock are issued at less than the Per Share Price prior to the
IPO Closing).
The Company and NTT also entered into an Investment Agreement, dated as of
April 7, 1998 (the "NTT Investment Agreement"), providing for certain
arrangements generally effective from and after the purchase of shares by NTT
under the NTT Stock Purchase Agreement. Pursuant to the NTT Investment
Agreement, the Company agreed to appoint an individual designated by NTT to the
Board of Directors of the Company. So long as certain ownership conditions are
met, the NTT designee will serve for an initial term ending as of the third
annual stockholder meeting following the IPO Closing. Thereafter, the Company
has agreed, subject to certain exceptions, to nominate as a member of the Board
of Directors 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
the Company. Additionally, NTT will have the right, subject to the satisfaction
of certain conditions, to designate up to three individuals to be employed by
the Company in corporate development, technical and/or marketing positions to
assist in implementing and carrying out the commercial relationship between
Verio and NTT.
The Investment Agreement imposes certain limitations on NTT's ability to
dispose of the shares of Common Stock that it acquires. In particular, NTT has
granted to the Company 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 acquires. The specific terms of these rights
vary depending upon the quantity of shares proposed to be sold and other terms
of the proposed sale. In addition, NTT has agreed on behalf of itself and its
affiliates to certain "standstill" restrictions pursuant to which NTT and its
affiliates may make open market or privately negotiated purchases of additional
voting securities (including Common Stock) so long as the total holdings of NTT
and its affiliates do not exceed 17.5% of the Company's fully diluted Common
Stock after taking into account such acquisition. The Company also granted NTT
certain registration rights with respect to the Common Stock it acquires. See
"Certain Transactions -- Description of Capital Stock -- Registration Rights."
The NTT Stock Purchase Agreement may be terminated prior to the IPO Closing
only in certain limited circumstances, including in the event that the sale of
shares to NTT has not occurred by July 31, 1998. The NTT Investment Agreement
will terminate automatically upon any termination of the NTT Stock Purchase
Agreement.
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<PAGE> 71
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Certificate of Incorporation and Bylaws is a summary
and is qualified in its entirety by the provisions of the Certificate of
Incorporation and Bylaws, which have been filed as exhibits to the Company's
Registration Statement of which this Prospectus is a part.
Upon the closing of the Offering, the authorized capital stock of the
Company, after giving effect to the conversion of all outstanding Preferred
Stock into Common Stock will be 137,500,000 shares of capital stock, 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
"Undesignated Preferred Stock").
COMMON STOCK
As of April 24, 1998 there were 1,294,266 shares of Common Stock
outstanding held of record by 26 stockholders.
The holders of 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 Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor. In
the event of a liquidation, dissolution or winding up of the Company, holders of
Common Stock are entitled to share ratably in all assets remaining after payment
of liabilities and the liquidation preferences of any outstanding shares of
Preferred Stock, if any. Holders of Common Stock have no preemptive rights or
rights to convert their Common Stock into any other securities. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are, and all shares of Common Stock to be
outstanding upon completion of the Offering will be, fully paid and
nonassessable. The rights of holders of Common Stock are subject to, and may be
adversely affected by, the rights of any series of Preferred Stock which the
Company may issue in the future.
PREFERRED STOCK
Following completion of the Offering and the conversion of all outstanding
shares of Preferred Stock into Common Stock, the Board of Directors will have
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 Common Stock) and the number of shares constituting each such series,
without any further vote or action by the Company's stockholders. The issuance
of such Undesignated Preferred Stock could adversely affect the rights of
holders of Common Stock and could have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no present plans
to issue any shares of such Undesignated Preferred Stock after the Offering.
WARRANTS
As of April 24, 1998, the Company had warrants outstanding to purchase an
aggregate of 2,112,480 shares of Common Stock at an exercise price per share of
$0.01 (the "Warrants"). The Warrants were issued in connection with the issuance
of the 1997 Notes and will become exercisable after the Offering. Holders of the
Warrants are entitled to certain registration rights. See "-- Registration
Rights."
REGISTRATION RIGHTS
Pursuant to the Stockholders Agreement between the Company and 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.
At any time after the effective date of the first registration statement filed
by the Company under the Securities Act, Investors owning 25% or more of the
Registrable Securities may require the Company to effect registration under the
Securities Act of their Registrable Securities, subject to the Board of
Directors' right to defer such registration for a period of up to 180 days. In
addition, if the Company 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
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<PAGE> 72
underwriting) to request that the Company 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 the
Company. 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. See "Certain Transactions -- Stockholders Agreement."
In connection with the Series D-1 Agreements the Company entered into
certain investment agreements (the "Investment Agreements") with the holders
(the "Series D-1 Holders") of shares of Series D-1 Preferred Stock. Pursuant to
the Investment Agreements, some of the Series D-1 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), the Company 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 Series D-1 Holders are
entitled to notice of such registration and are entitled to include such Series
D-1 Holder's Registrable Securities therein. All such rights granted under the
Investment Agreements shall terminate with respect to the Registrable Securities
of a Series D-1 Holder upon the earliest to occur of (i) the second anniversary
of the initial public offering of the Company, (ii) such time as all such
Registrable Securities may be immediately sold pursuant to Rule 144 under the
Securities Act within any 90-day period, or (iii) upon any sale of such
Registrable Securities pursuant to a registration statement or Rule 144 under
the Securities Act. The Company is required to bear all registration expenses
(other than underwriting discounts and commissions) incurred in connection with
any such registrations. The Company is not responsible for any expenses of any
counsel retained to act on behalf of Series D-1 Holder participating in such
registration. All of these registration rights are subject to certain conditions
and limitations including, in particular, 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 Series D-1 Holders) shall include their shares in such
offering in priority to the Series D-1 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 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
the Company 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 the Company (other than
(a) a registration statement on Form S-8 or S-4, (b) a registration statement
filed in connection with an offer of securities solely to existing
securityholders or (c) a Demand Registration (as defined in the registration
rights agreement)), whether or 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, after the first anniversary of the
consummation of the Offering, NTT may require, on up to three occasions, that
the Company effect a registration statement under the Securities Act for the
sale of the shares of Common Stock issued to NTT, subject, in certain
circumstances, to the Company's right to defer any such demand for registration
for specified periods. In addition, if the Company proposes to register its
securities under the Securities Act, or another holder of the Company's 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 shares of NTT's Common Stock in any such offering. All
registration expenses will be borne by the Company subject to certain
exceptions, other than selling expenses which must be paid by NTT. In the event
that any shares of NTT's Common Stock are included in a registration statement,
the Company has agreed to indemnify NTT against certain losses for which NTT may
become liable under the Securities Act.
ANTI-TAKEOVER PROVISIONS
General
Certain provisions of the DGCL and the Company's Certificate of
Incorporation and Bylaws could have the effect of delaying, deterring or
preventing a future takeover or change in control of the Company unless
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such takeover or change in control is approved by the Company's Board of
Directors. Such provisions also may render the removal of directors and
management more difficult. Such provisions could limit the price that certain
investors might be willing to pay in the future for shares of the Company's
Common Stock. These provisions of Delaware law and the Company's Certificate of
Incorporation and Bylaws also may have the effect of discouraging or preventing
certain types of transactions involving an actual or threatened change of
control of the Company (including unsolicited takeover attempts), even though
such a transaction may offer the Company's stockholders the opportunity to sell
their stock at a price above the prevailing market price. See "Risk
Factors -- Anti-Takeover Provisions."
Certificate of Incorporation and Bylaws
Certain provisions of the Certificate of Incorporation and Bylaws could
have the effect of discouraging potential acquisition proposals or delaying or
preventing a change of control of the Company. In particular, effective upon
consummation of the Offering, all stockholder actions must be effected at a duly
called meeting and not by a consent in writing, and an affirmative vote of the
holders of 80% of the Company's capital stock would be required to amend such
provision.
The Certificate of Incorporation and Bylaws of the Company also provide
that, upon consummation of the Offering, the Board of Directors will be divided
into three classes of directors, as nearly equal in number as is reasonably
possible, serving staggered terms so that directors' initial terms will expire
at the first, second and third succeeding annual meeting of the stockholders
following the Offering, respectively. At each such succeeding annual meeting of
stockholders, directors elected to succeed those directors whose terms are
expiring at such meeting shall be elected for a term of office to expire at the
third succeeding annual meeting of stockholders following such election. A vote
of at least 80% of the Company's capital stock would be required to amend such
provision.
The Company believes that a classified board of directors will help to
assure the continuity and stability of the Board of Directors and the Company's
business strategies and policies as determined by the Board of Directors, since
a majority of the directors at any given time will have had prior experience as
directors of the Company. The Company believes that this, in turn, will permit
the Board of Directors to more effectively represent the interest of
stockholders. With a classified board of directors, at least two annual meetings
of stockholders, instead of one, will generally be required to effect a change
in the majority of the Board of Directors. As a result, a provision relating to
a classified Board of Directors may discourage proxy contests for the election
of directors or purchases of a substantial block of the Common Stock because its
provisions could operate to prevent obtaining control of the Board of Directors
in a relatively short period of time. The classification provision and the
prohibition on stockholder action by written consent could also have the effect
of discouraging a third party from making a tender offer or otherwise attempting
to obtain control of the Company. Under the DGCL, a director on a classified
board may be removed by the stockholders of the corporation only for cause.
The Company's Bylaws provide that special meetings of the stockholders of
the Company may be called only by the President or, at the direction of the
Board of Directors, the Secretary of the Company. The Company's Bylaws require
advance written notice, which generally must be received by the Secretary of the
Company not less than 30 days nor more than 60 days prior to the meeting, by a
stockholder of a proposal or director nomination which such stockholder desires
to present at a meeting of stockholders. Any amendment of this provision would
require a vote of at least 80% of the Company's capital stock.
The Company's Certificate of Incorporation does not include a provision for
cumulative voting in the election of directors. Under cumulative voting, a
minority stockholder holding a sufficient number of shares may be able to ensure
the election of one or more directors. The absence of cumulative voting may have
the effect of limiting the ability of minority stockholders to effect changes in
the Board of Directors and, as a result, may have the effect of deterring a
hostile takeover or delaying or preventing changes in control or management of
the Company.
The Company's Bylaws and, effective upon consummation of the Offering, the
Company's Certificate of Incorporation provide that vacancies in the Board of
Directors may be filled by a majority of directors in office, although less than
a quorum, and not by the stockholders.
The Certificate of Incorporation allows the Company to issue up to
12,500,000 shares of Undesignated Preferred Stock with rights senior to those of
the Common Stock and that otherwise could adversely affect the
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interests of holders of Common Stock, which could decrease the amount of
earnings or assets available for distribution to the holders of Common Stock or
could adversely affect the rights and powers, including voting rights, of the
holders of Common Stock. In certain circumstances, such issuance could have the
effect of decreasing the market price of the Common Stock, as well as having the
anti-takeover effect discussed above.
These provisions are intended to enhance the likelihood of continuity and
stability in the composition of the Board of Directors and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions that may involve an actual or threatened change of control of the
Company. These provisions are designed to reduce the vulnerability of the
Company to an unsolicited acquisition proposal and to discourage certain tactics
that may be used in proxy fights. However, such provisions could have the effect
of discouraging others from making tender offers for the Company's shares and,
as a consequence, they also may inhibit fluctuations in the market price of the
Company's shares that could result from actual or rumored takeover attempts.
Such provisions also may have the effect of preventing changes in the management
of the Company. See "Risk Factors -- Anti-Takeover Provisions."
Delaware Takeover Statute
The Company is subject to Section 203 of the DGCL ("Section 203"), which,
subject to certain exceptions, prohibits a Delaware corporation from engaging in
a "business combination" with an "interested stockholder" for a period of three
years following the date that such stockholder became an interested stockholder,
unless: (i) prior to such date, the board of directors of the corporation
approved either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder; (ii) upon consummation of the
transaction that 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 for
purposes of determining the number of shares outstanding those shares owned (x)
by persons who are directors and also officers and (y) by employee stock plans
in which employee participants do not have the right to determine confidentially
whether shares held subject to the plan 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 and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
NTT Investment
The NTT Investment Agreement provides NTT with the right to designate a
member of the Board of Directors, and imposes certain standstill and other
limitations on its ability to make further acquisitions of the Company's stock,
that could have the effect of delaying, deferring or preventing a change of
control. See "Risk Factors -- Anti-takeover Provisions."
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, National Association has been appointed as the
transfer agent and registrar for the Company's Common Stock.
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SHARES ELIGIBLE FOR FUTURE SALE
The Shares sold in the Offering will be freely tradeable without
restriction or further registration under the Securities Act, except for any
Shares purchased by an affiliate of the Company, which will be subject to the
limitations of Rule 144 under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned his or her restricted
securities (as that term is defined in Rule 144) for at least one year from the
date such securities were acquired from the Company or an affiliate of the
Company would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of (i) one percent of the then
outstanding shares of the Common Stock and (ii) the average weekly trading
volume of the common stock during the four calendar weeks preceding a sale by
such person. Sales under Rule 144 are also subject to certain manner-of-sale
provisions, notice requirements and the availability of current public
information about the Company. Under Rule 144, however, a person who has held
shares for a minimum of two years from the later of the date such securities
were acquired from the Company or an affiliate of the Company and who is not,
and for the three months prior to the sale of such shares has not been, an
affiliate of the Company is free to sell such shares without regard to the
volume, manner-of-sale and certain other limitations contained in Rule 144.
In general, under Rule 701 of the Securities Act as currently in effect,
any employee, officer, director, consultant or advisor of the Company who
purchased shares from the Company in connection with a compensatory stock or
option plan or written employment agreement is eligible to resell such shares 90
days after the effective date of this offering in reliance on Rule 144, but
without compliance with certain restrictions, including the holding period,
contained in Rule 144.
Within 90 days of the date of this Prospectus, the Company intends to file
one or more registration statements under the Securities Act to register shares
of Common Stock reserved for issuance under its equity incentive plans, thus
permitting the resale of such shares by non-affiliates in the public market
without restriction under the Securities Act. Such registration statements will
become effective immediately upon filing. As of April 24, 1998, options to
purchase approximately 4,063,340 shares of Common Stock were outstanding under
the Company's stock option plans.
The Company, its directors and its executive officers, and certain
stockholders, who hold, as of April 24, 1998 approximately 20,661,978 shares of
Common Stock (or options to purchase Common Stock that are currently exercisable
or exercisable within 60 days), have agreed not to offer, sell or contract to
sell, or otherwise dispose of, directly or indirectly, or announce an offering
of, any shares of Common Stock or any securities convertible into, or
exchangeable for shares of Common Stock for a period of six months from the date
of this Prospectus, without the prior written consent of Smith Barney Inc.,
except under limited circumstances. An additional 12,000 shares of Common Stock
issuable upon exercise of outstanding options, will become saleable after the
six-month lock-up period. In addition, NTT has agreed not to offer, sell or
contract to sell, or otherwise dispose of, directly or indirectly, or announce
an offering of, any NTT Shares for a period of six months from the date of this
Prospectus without the prior written consent of Smith Barney Inc.
In connection with the Buyouts and acquisitions that involved the issuance
of shares of Series D-1 Preferred Stock, the Company has entered into market
standoff agreements with the holders of the Series D-1 Preferred Stock so
issued, which restrictions expire in one-third increments on the six, twelve and
eighteen month anniversaries of the date of this Prospectus. Following the
six-month, twelve-month and eighteen-month lock-up periods, approximately
738,171, 738,171 and 738,171 additional shares of Common Stock, respectively,
will become immediately saleable subject to the manner of sale, volume, notice
and information requirements of Rule 144 of the Securities Act which could be
applicable to certain holders of such Common Stock.
In addition, the Company has granted certain holders of its capital stock
rights to require the registration for sale of such capital stock under the
Securities Act. See "Certain Transactions -- Stockholders Agreement" and
"Description of Capital Stock -- Registration Rights."
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<PAGE> 76
Prior to the Offering, there has been no established market for the Common
Stock and no predictions can be made about the effect, if any, that market sales
of Common Stock or the availability of such shares for sale will have on the
market price prevailing from time to time. Nevertheless, the actual sale of, or
the perceived potential for the sale of, Common Stock in the public market may
have an adverse effect on the market price for the Common Stock.
After the closing of the Offering, the holders of approximately 26,958,127
shares of Common Stock, including approximately 2,112,480 shares of Common Stock
issuable upon exercise of outstanding Warrants, will be entitled to certain
rights with respect to the registration of such shares under the Securities Act.
See "Description of Capital Stock -- Registration Rights."
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UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
among the Company and the Underwriters (the "Underwriting Agreement"), the
Company has agreed to sell to each of the Underwriters named below (the
"Underwriters"), and each of the Underwriters, for whom Smith Barney Inc.,
Credit Suisse First Boston Corporation and Donaldson, Lufkin & Jenrette
Securities Corporation are acting as the representatives (the
"Representatives"), has severally agreed to purchase the number of Shares set
forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Smith Barney Inc............................................
Credit Suisse First Boston Corporation......................
Donaldson, Lufkin & Jenrette Securities Corporation.........
---------
Total............................................. 5,000,000
=========
</TABLE>
The Company has been advised by the Representatives that the several
Underwriters initially propose to offer such Shares to the public at the Price
to Public set forth on the cover page of this Prospectus and part of the Shares
to certain dealers at such price less a concession not in excess of $
per Share under the Price to Public. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per Share to
certain other dealers. After the Offering, the Price to Public and such
concessions may be changed.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 750,000
additional shares of Common Stock from the Company at the Price to Public less
the Underwriting Discount, solely to cover over-allotments. To the extent that
the Underwriters exercise such option, each Underwriter will be committed,
subject to certain conditions, to purchase a number of option shares
proportionate to such Underwriter's initial commitment.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities and expenses, including liabilities
under the Securities Act, or contribute to payments the Underwriters may be
required to make in respect thereof. The Underwriting Agreement further provides
that this Offering is conditioned upon the concurrent closing of the NTT
Investment.
Subject to certain exceptions, the Company, its directors, officers,
certain stockholders and NTT have agreed not to offer, sell, contract to sell or
otherwise dispose of, directly or indirectly, or announce the offering of any
shares of Common Stock, including any such shares beneficially or indirectly
owned or controlled by any such person, or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock, for six months from the
date of this Prospectus, without the prior written consent of Smith Barney Inc.
At the Company's request, the Underwriters have reserved up to 375,000
shares of Common Stock (the "Directed Shares") for sale at the Price to Public
to persons who are directors, officers or employees of, or otherwise associated
with, the Company and its affiliates and who have advised the Company of their
desire to purchase such Shares. The number of Shares available for sale to the
general public will be reduced to the extent of sales of Directed Shares to any
of the persons for whom they have been reserved. Any Shares not so purchased
will be offered by the Underwriters on the same basis as all other Shares
offered hereby.
The Underwriters will not confirm sales to any discretionary account
without the prior specific written approval of the customer.
During and after the Offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include overallotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with the Offering. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members of other
broker-dealers in respect of the Shares of Common Stock sold in the Offering for
their account may be reclaimed by the syndicate if such Shares are repurchased
by the syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or
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<PAGE> 78
otherwise affect the market price of the Common Stock which may be higher than
the price that might otherwise prevail in the open market. The Underwriters are
not required to engage in these activities and may end these activities at any
time.
Prior to the Offering, there has been no public market for the Common
Stock. The Price to Public was determined by negotiations between the Company
and the Representatives. Among the factors considered in determining the Price
to Public were prevailing market conditions, the market values of publicly
traded companies that the Underwriters believed to be somewhat comparable to the
Company, the demand for the Shares and for similar securities of publicly traded
companies that the Underwriters believed to be somewhat comparable to the
Company, the future prospects of the Company and its industry in general, sales,
earnings and certain other financial and operating information of the Company in
recent periods, and other factors deemed relevant. There can be no assurance
that the prices at which the Shares will sell in the public market after the
Offering will not be lower than the Price to Public.
Salomon Brothers Inc, an affiliate of Smith Barney Inc., was an Initial
Purchaser of the 1998 Notes. In addition, Smith Barney Inc. or certain of its
affiliates may provide financial advisory services to the Company, for which it
expects to receive customary compensation.
Credit Suisse First Boston Corporation has provided financial advisory
services to the Company during the past 12 months for which it has received
customary compensation.
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<PAGE> 79
LEGAL MATTERS
The validity of the Shares offered hereby and general corporate legal
matters will be passed upon for the Company by Morrison & Foerster LLP, San
Francisco, California. Certain legal matters relating to the sale of Shares in
the Offering will be passed upon by Cahill Gordon & Reindel (a partnership
including a professional corporation), New York, New York. Members of the firm
Morrison & Foerster LLP will purchase shares in the Company's directed share
program. See "Underwriting."
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; and 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, have been included herein and in the
Registration Statement 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.
ADDITIONAL INFORMATION
The Company is not currently subject to the information requirements of the
Exchange Act. The Company is filing concurrently with the Registration Statement
on Form S-1 of which this Prospectus forms a part, a Registration Statement on
Form S-4 covering exchange offers for the Company's 1997 Notes and 1998 Notes.
When the Securities and Exchange Commission (the "Commission") declares
effective the Registration Statement on Form S-1, the Company will be required
to file reports and other information with the Commission pursuant to the
informational requirements of the Exchange Act. Such reports and other
information can be inspected and copied at the Public Reference Section of the
Commission and at the Commission's regional offices at the addresses given
below.
As permitted by the rules and regulations of the Commission, this
Prospectus omits certain information, exhibits, schedules and undertakings set
forth elsewhere in this Registration Statement. For further information
pertaining to the Company and the securities offered hereby, reference is made
to such Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents or provisions of any
documents referred to herein are not necessarily complete, and in each instance,
reference is made to the copy of the document filed as an exhibit to this
Registration Statement. The
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<PAGE> 80
Company will issue annual and quarterly reports. Annual reports will include
audited financial statements prepared in accordance with accounting principles
generally accepted in the United States and a report of its independent auditors
with respect to the examination of such financial statements. In addition, the
Company will issue to its securityholders such other unaudited quarterly or
other interim reports as it deems appropriate.
This Registration Statement may be inspected without charge at the office
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies may
be obtained from the Commission at prescribed rates from the Public Reference
Section of the Commission at such address, and at the Commission's regional
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048,
and at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. In addition, registration statements and certain other filings
made with the Commission through its Electronic Data Gathering, Analysis and
Retrieval ("EDGAR") system are publicly available through the Commission's site
on the Internet's World Wide Web, located at http://www.sec.gov.
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<PAGE> 81
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.
CPE Customer Premise Equipment.
CSU/DSU Channel Service Unit/Digital Service Unit. A device used to
terminate telephone company equipment and prepare data for
router interface.
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.
Ethernet A common method of networking computers in a LAN. Ethernet
will handle about 10 Mbps and can be used with almost any
kind of computer.
FDDI Fiber Distributed Data Interface. A standard for
transmitting data on fiber-optic cables at a rate of 100
Mbps.
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.
kbps Kilobits per second. A transmission rate. One kilobit equals
1,024 bits of information.
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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.
MAE-East A major exchange point among ISPs, located in Falls Church,
Virginia.
MAE-West A major exchange point among ISPs, located in Santa Clara,
California.
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.
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 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.
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.
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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 A collection of computer systems supporting a communications
or Web 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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VERIO INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Unaudited Pro Forma Condensed Combined Financial Statements:
Pro Forma Condensed Combined Balance Sheet as of December
31, 1997 (unaudited).................................... F-4
Pro Forma Condensed Combined Statement of Operations for
the Year Ended December 31, 1997 (unaudited)............ F-5
Notes to Pro Forma Condensed Combined Financial Statements
(unaudited)............................................. F-6
Verio Inc. and Subsidiaries -- Consolidated Financial
Statements:
Independent Auditors' Report.............................. F-15
Consolidated Balance Sheets as of December 31, 1996 and
1997.................................................... F-16
Consolidated Statements of Operations for the Period from
Inception (March 1, 1996) to December 31, 1996 and the
Year Ended December 31, 1997............................ F-17
Consolidated Statements of Stockholders' Deficit for the
Period from Inception (March 1, 1996) to December 31,
1996 and the Year Ended December 31, 1997............... F-18
Consolidated Statements of Cash Flows for the Period from
Inception (March 1, 1996) to December 31, 1996 and the
Year Ended December 31, 1997............................ F-19
Notes to Consolidated Financial Statements................ F-20
On-Ramp Technologies, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-30
Balance Sheet as of July 31, 1996......................... F-31
Statement of Operations for the Nine Months Ended July 31,
1996.................................................... F-32
Statement of Stockholders' Deficit for the Nine Months
Ended July 31, 1996..................................... F-33
Statement of Cash Flows for the Nine Months Ended July 31,
1996.................................................... F-34
Notes to Financial Statements............................. F-35
Global Enterprises Services -- Network Division -- Financial
Statements:
Independent Auditors' Report.............................. F-38
Balance Sheets as of December 31, 1995 and 1996........... F-39
Statements of Operations and Owner's Deficit for the Years
Ended December 31, 1994, 1995, 1996 and Period Ended
January 17, 1997........................................ F-40
Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996 and Period Ended January 17, 1997... F-41
Notes to Financial Statements............................. F-42
Compute Intensive, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-45
Balance Sheets as of December 31, 1995 and 1996........... F-46
Statements of Operations for the Years Ended December 31,
1995 and 1996 and Period Ended February 18, 1997........ F-47
Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1995 and 1996 and Period Ended
February 18, 1997....................................... F-48
Statements of Cash Flows for the Years Ended December 31,
1995 and 1996 and Period Ended February 18, 1997........ F-49
Notes to Financial Statements............................. F-50
NorthWestNet, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-55
Balance Sheets as of June 30, 1995 and 1996............... F-56
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-57
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-58
Statements of Cash Flows for the Year Ended June 30, 1995
the Six Months Ended December 31, 1995, and the Six
Months Ended June 30, 1996 and the Eight Months Ended
February 28, 1997....................................... F-59
Notes to Financial Statements............................. F-60
Aimnet Corporation -- Financial Statements:
Independent Auditors' Report.............................. F-67
Balance Sheet as of March 31, 1997........................ F-68
Statement of Operations for the Year Ended March 31, 1997
and Period Ended May 19, 1997........................... F-69
Statements of Stockholders' Equity for the Year Ended
March 31, 1997 and Period Ended May 19, 1997............ F-70
Statements of Cash Flows for the Year Ended March 31, 1997
and Period Ended May 19, 1997........................... F-71
Notes to Financial Statements............................. F-72
West Coast Online, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-75
Balance Sheet as of September 30, 1997.................... F-76
Statement of Operations and Accumulated Deficit for the
Nine Months Ended September 30, 1997.................... F-77
Statement of Cash Flows for the Nine Months Ended
September 30, 1997...................................... F-78
Notes to Financial Statements............................. F-79
Clark Internet Services, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-82
Balance Sheet as of September 30, 1997.................... F-83
Statements of Operations and Retained Earnings for the
Year Ended September 30, 1997 and Period Ended October
17, 1997................................................ F-84
Statements of Cash Flows for the Year Ended September 30,
1997 and Period Ended October 17, 1997.................. F-85
Notes to Financial Statements............................. F-86
ATMnet -- Financial Statements:
Independent Auditors' Report.............................. F-88
Balance Sheets as of October 31, 1996 and 1997............ F-89
Statements of Operations for the Years Ended October 31,
1996 and 1997........................................... F-90
Statements of Stockholders' Deficit for the Years Ended
October 31, 1996 and 1997............................... F-91
</TABLE>
F-1
<PAGE> 85
<TABLE>
<S> <C>
Statements of Cash Flows for the Years Ended October 31,
1996 and 1997........................................... F-92
Notes to Financial Statements............................. F-93
Global Internet Network Services, Inc. -- Financial
Statements:
Independent Auditors' Report.............................. F-97
Balance Sheets as of December 31, 1996 and November 26,
1997.................................................... F-98
Statements of Operations for the Year Ended December 31,
1996 and the Period Ended November 26, 1997............. F-99
Statements of Stockholders' Equity (Deficit) for the Year
Ended December 31, 1996 and the Period Ended November
26, 1997................................................ F-100
Statements of Cash Flows for the Year Ended December 31,
1996 and the Period Ended November 26, 1997............. F-101
Notes to Financial Statements............................. F-102
Pennsylvania Research Partnership Network
(PREPnet) -- Financial Statements:
Independent Auditors' Report.............................. F-105
Balance Sheets as of November 30, 1996 and 1997........... F-106
Statements of Operations and Owner's Deficit for the Years
Ended November 30, 1996 and 1997 and the Period Ended
December 24, 1997....................................... F-107
Statements of Cash Flows for the Years Ended November 30,
1996 and 1997 and the Period Ended December 24, 1997.... F-108
Notes to Financial Statements............................. F-109
Monumental Network Systems, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-112
Balance Sheets as of December 31, 1996 and 1997........... F-113
Statements of Operations for the Years Ended December 31,
1996 and 1997........................................... F-114
Statements of Stockholders' Deficit for the Years Ended
December 31, 1996 and 1997.............................. F-115
Statements of Cash Flows for the Years Ended December 31,
1996 and 1997........................................... F-116
Notes to Financial Statements............................. F-117
Internet Servers, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-121
Balance Sheets as of December 31, 1996 and 1997........... F-122
Statements of Operations for the Period from Inception
(August 23, 1995) to December 31, 1995 and Years Ended
December 31, 1996 and 1997.............................. F-123
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-124
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-125
Notes to Financial Statements............................. F-126
NSNet, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-129
Balance Sheets as of December 31, 1996 and 1997........... F-130
Statements of Operations for the Years Ended December 31,
1996 and 1997........................................... F-131
Statements of Owner's and Stockholder's Equity for the
Years Ended December 31, 1996 and 1997.................. F-132
Statements of Cash Flows for the Years Ended December 31,
1996 and 1997........................................... F-133
Notes to Financial Statements............................. F-134
Access One, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-137
Balance Sheet as of December 31, 1997..................... F-138
Statement of Operations and Accumulated Deficit for the
Year Ended December 31, 1997............................ F-139
Statement of Cash Flows for the Year Ended December 31,
1997.................................................... F-140
Notes to Financial Statements............................. F-141
STARnet, L.L.C. -- Financial Statements:
Independent Auditors' Report.............................. F-144
Balance Sheet as of December 31, 1997..................... F-145
Statement of Operations for the Year Ended December 31,
1997.................................................... F-146
Statement of Members' Equity for the Year Ended December
31, 1997................................................ F-147
Statement of Cash Flows for the Year Ended December 31,
1997.................................................... F-148
Notes to Financial Statements............................. F-149
Computing Engineers Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-151
Balance Sheets as of December 31, 1996 and 1997........... F-152
Statements of Operations for the Years Ended December 31,
1996 and 1997........................................... F-153
Statements of Stockholders' Equity for the Years Ended
December 31, 1996 and 1997.............................. F-154
Statements of Cash Flows for the Years Ended December 31,
1996 and 1997........................................... F-155
Notes to Financial Statements............................. F-156
LI Net, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-158
Balance Sheets as of April 30, 1997 and January 31,
1998.................................................... F-159
Statements of Operations for the Years Ended April 30,
1996 and 1997 and the Nine Months Ended January 31,
1998.................................................... F-160
Statements of Stockholders' Equity (Deficit) for the Years
Ended April 30, 1996 and 1997 and the Nine Months Ended
January 31, 1998........................................ F-161
Statements of Cash Flows for the Years Ended April 30,
1996 and 1997 and the Nine Months Ended January 31,
1998.................................................... F-162
Notes to Financial Statements............................. F-163
</TABLE>
F-2
<PAGE> 86
VERIO INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
During the period from August 1, 1996 through the date of this Registration
Statement, Verio Inc. ("Verio" or the "Company") completed numerous business
combinations, whereby the Company 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 "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
Completed Acquisitions are described in Note A to the accompanying pro forma
condensed combined financial statements.
While the Company now seeks to acquire 100% of new ISPs, the Company's
early acquisition strategy was to rapidly build mass and scale by acquiring less
than 100% of its ISPs. In each case where the Company 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, the Company has
effected the Buyouts of all but two of the ISPs in which it did not initially
acquire a 100% interest, through the use of cash on hand and the issuance of
equity. As of the date of this Registration Statement, Verio has consummated the
Buyout of the following fourteen 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. and Structured
Network Systems, Inc. With respect to those Buyouts that have not yet been
completed, the Company has contractual rights to effect those two Buyouts and
expects to complete these Buyouts during the remainder of 1998. However, there
can be no assurance that the Company will be able to complete these Buyouts at
the times, or in accordance with the terms and conditions, that it currently
contemplates. These acquisitions will also be accounted for using the purchase
method of accounting.
The unaudited pro forma condensed combined balance sheet assumes that the
Completed Acquisitions occurred on December 31, 1997 and includes the December
31, 1997 historical consolidated balance sheets of Verio and the acquired
businesses adjusted for the pro forma effects of these acquisitions. The
unaudited pro forma condensed combined statement of operations for the year
ended December 31, 1997 assumes that the Completed Acquisitions had occurred on
January 1, 1997, and includes the historical consolidated statements of
operations of Verio and the Completed Acquisitions for the year ended December
31, 1997, adjusted for the pro forma effects of the acquisitions. The unaudited
pro forma condensed combined balance sheet also assumes the conversion of the
Preferred Stock into common stock upon completion of the Offering.
The unaudited pro forma condensed combined statement of operations is not
necessarily indicative of the results of operations that would actually have
occurred if the transactions had been consummated as of January 1, 1997 and is
not intended to indicate the expected results for any future period. These
statements should be read in conjunction with the historical consolidated
financial statements and related notes thereto of Verio, and certain acquired
businesses, included herein. The actual purchase accounting adjustments may be
revised upon completion of the acquisitions.
F-3
<PAGE> 87
VERIO INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1997 (UNAUDITED)
AMOUNTS IN THOUSANDS
ASSETS
<TABLE>
<CAPTION>
HISTORICAL
-----------------------
COMPLETED PRO FORMA PRO FORMA
ACQUISITIONS ADJUSTMENTS COMBINED
VERIO (NOTE B) (NOTE D) VERIO
-------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents...................... $ 72,586 $ 1,169 $(46,456)(1) $155,304
128,005(8)
Restricted cash and securities................. 21,015 -- (12,732)(8) 8,283
Receivables, net............................... 7,565 2,012 -- 9,577
Prepaid expenses and other..................... 4,656 975 (535)(3) 5,096
-------- ------- -------- --------
Total current assets................... 105,822 4,156 68,282 178,260
Investments in affiliates, at cost............... 2,378 -- (1,198)(1) 1,180
Restricted cash and securities................... 19,539 -- -- 19,539
Equipment and leasehold improvements, net........ 28,213 4,358 -- 32,571
Other assets:
Goodwill, net.................................. 83,216 -- 69,025(1) 152,241
Other, net..................................... 7,303 237 3,666(8) 11,206
-------- ------- -------- --------
Total assets........................... $246,471 $ 8,751 $139,775 $394,997
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses.......... $ 19,634 $ 2,507 $ -- $ 22,141
Lines of credit, notes payable and current
portion of long-term debt and capital lease
obligations................................. 4,326 1,616 (535)(3) 5,407
Deferred revenue............................... 7,177 1,874 -- 9,051
-------- ------- -------- --------
Total current liabilities.............. 31,137 5,997 (535) 36,599
Long-term debt and capital lease obligations,
less current portion........................... 142,321 1,330 129,043(8) 272,694
-------- ------- -------- --------
Total liabilities...................... 173,458 7,327 128,508 309,293
Minority interests in subsidiaries............... 2,765 -- (2,765)(5) --
Redeemable preferred stock....................... 97,249 2,716 (2,716)(2) --
(97,249)(7)
Stockholders' deficit:
Preferred stock................................ 10,200 -- (10,200)(7) --
Common stock and additional paid-in capital.... 1,598 1,692 (1,692)(2) 134,607
107,449(7)
25,560(1)
Warrants....................................... 12,675 -- -- 12,675
Retained earnings (deficit).................... (51,474) (2,984) 2,984(2) (61,578)
(10,104)(9)
-------- ------- -------- --------
(27,001) (1,292) 113,997 85,704
-------- ------- -------- --------
Total liabilities and stockholders'
deficit.............................. $246,471 $ 8,751 $139,775 $394,997
======== ======= ======== ========
</TABLE>
F-4
<PAGE> 88
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
-------------------------
COMPLETED PRO FORMA PRO FORMA
ACQUISITIONS ADJUSTMENTS COMBINED
VERIO (NOTE C) (NOTE D) VERIO
---------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Internet connectivity............................. $ 23,476 $39,677 $ (98)(3) $ 63,055
Enhanced services and other....................... 12,216 12,994 -- 25,210
---------- ------- ----------- -----------
Total revenue.............................. 35,692 52,671 (98) 88,265
---------- ------- ----------- -----------
Costs and expenses:
Internet services operating costs................. 15,974 22,247 (76)(3) 38,145
Selling, general and administrative and other..... 49,383 32,687 -- 82,070
Depreciation and amortization..................... 10,624 3,257 12,030(4) 25,911
---------- ------- ----------- -----------
Total costs and expenses................... 75,981 58,191 11,954 146,126
---------- ------- ----------- -----------
Loss from operations............................ (40,289) (5,520) (12,052) (57,861)
Other income (expense):
Interest income................................... 6,080 67 -- 6,147
Interest expense.................................. (11,826) (591) -- (12,417)
Equity in losses of affiliates.................... (1,958) -- 1,958(5) --
---------- ------- ----------- -----------
Loss before minority interests and income
taxes......................................... (47,993) (6,044) (10,094) (64,131)
Minority interests.................................. 1,924 -- (1,924)(5) --
Income taxes........................................ -- (1,247) 1,247(6) --
---------- ------- ----------- -----------
Net loss................................... (46,069) (7,291) (10,771) (64,131)
Accretion of preferred stock to liquidation value... (260) -- 260(7) --
---------- ------- ----------- -----------
Net loss attributable to common stockholders........ $ (46,329) $(7,291) $ (10,511) $ (64,131)
========== ======= =========== ===========
Weighted average shares outstanding -- basic and
diluted........................................... 1,144,685 20,945,667(7) 22,090,352
========== =========== ===========
Loss per common share -- basic and diluted.......... $ (40.47) $ (2.90)
========== ===========
</TABLE>
F-5
<PAGE> 89
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(A) BASIS OF PRESENTATION
During the period from inception (March 1, 1996) to May 5, 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. All of the acquisitions have been or will be
accounted for using the purchase method of accounting. Summary information
regarding the Completed Acquisitions is as follows:
<TABLE>
<CAPTION>
OWNERSHIP
PERCENTAGE
FOR THE
COMPLETED CONSIDERATION
ACQUISITIONS ------------------------------
THROUGH CASH
MAY 5, AND PREFERRED
COMPLETED ACQUISITIONS ACQUISITION DATE(S) 1998 NOTES STOCK(B) TOTAL(C)
---------------------- ------------------- ------------- ------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
On-Ramp Technologies, Inc. .............. August 1, 1996 51%
October 4, 1996 4%
February 26, 1998 45% $13,485 $6,985 $ 20,470
National Knowledge Networks, Inc. ....... August 2, 1996 26%
November 7, 1997 15%
February 27, 1998 59% 2,999 -- 2,999
RAINet, Inc. ............................ August 2, 1996 100% 2,000 -- 2,000
Access One, Inc.......................... December 12, 1996 20%
February 27, 1998 80% 6,006 -- 6,006
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% 1,234 1,283 2,517
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% 850 -- 850
Pioneer Global Telecommunications,
Inc. .................................. February 6, 1997 100% 1,011 -- 1,011
Compute Intensive Inc. .................. February 18, 1997 55%
April 24, 1998 45% 7,099 8,042 15,141
NorthWestNet, Inc. ...................... February 28, 1997 85%
March 6, 1998 15% 12,089 2,475 14,564
Internet Engineering Associates, Inc. ... March 4, 1997 20%
February 25, 1998 80% 206 1,500 1,706
Internet Online, Inc. ................... March 5, 1997 36% 1,050 -- 1,050
Structured Network Systems, Inc. ........ March 6, 1997 20%
April 16, 1998 80% 1,250 -- 1,250
</TABLE>
F-6
<PAGE> 90
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OWNERSHIP
PERCENTAGE
FOR THE
COMPLETED CONSIDERATION
ACQUISITIONS ------------------------------
THROUGH CASH
MAY 5, AND PREFERRED
COMPLETED ACQUISITIONS ACQUISITION DATE(S) 1998 NOTES STOCK(B) TOTAL(C)
---------------------- ------------------- ------------- ------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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% 3,969 3,431 7,400
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
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% 1,535 1,765 3,300
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
--------
Total........................... $165,896
========
</TABLE>
- ---------------
The total consideration, exclusive of acquisition costs, for the Completed
Acquisitions has been allocated as follows:
<TABLE>
<S> <C>
Equipment................................................... $ 18,095
Goodwill.................................................... 152,156
Net current liabilities..................................... (5,405)
Investment in Internet Online, Inc.......................... 1,050
--------
Total............................................. $165,896
========
</TABLE>
(a) Assets of this entity were purchased by On-Ramp Technologies, Inc.
F-7
<PAGE> 91
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(b) Represents shares of Series D-1 Preferred Stock valued at $15 per share.
For NorthWestNet, Inc., the amount represents options to purchase Preferred
Stock at $15 per share. Such per share value was 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.
(c) Total consideration does not include acquisition costs.
The accompanying unaudited pro forma condensed combined balance sheet as of
December 31, 1997 includes historical balances of Verio and the businesses
acquired adjusted for the pro forma effects of the acquisitions completed
through May 5, 1998, including the acquisitions of the remaining interests in
certain consolidated subsidiaries and minority owned affiliates. All
acquisitions are assumed to have been completed for cash, debt or the issuance
of preferred stock of Verio. The unaudited pro forma condensed combined
statement of operations for the year ended December 31, 1997 includes 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, adjusted for the pro forma effects of the
acquisitions.
F-8
<PAGE> 92
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(B) HISTORICAL CONDENSED BALANCE SHEET INFORMATION -- COMPLETED ACQUISITIONS
Historical condensed balance sheet information for the Completed
Acquisitions as of December 31, 1997 is as follows:
<TABLE>
<CAPTION>
INTERNET NATIONAL STRUCTURED
PACIFIC RIM SIGNET ENGINEERING KNOWLEDGE NETWORK
NETWORK, INC. PARTNERS, INC. ASSOCIATES, INC. NSNET, INC. NETWORKS, INC. SYSTEMS, INC.
------------- -------------- ---------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.... $ -- $ 60 $271 $ 20 $ 166 $ 27
Receivables, net............. 46 112 106 86 73 206
Prepaid expenses and other... 31 83 49 354 12 1
----- ----- ---- ---- ------- -----
Total current
assets.............. 77 255 426 460 251 234
Equipment and leasehold
improvements, net............ 181 238 191 379 92 54
Other assets................. -- 25 45 67 13 7
----- ----- ---- ---- ------- -----
Total assets.......... $ 258 $ 518 $662 $906 $ 356 $ 295
===== ===== ==== ==== ======= =====
Current liabilities:
Accounts payable and accrued
expenses................... $ 366 $ 285 $119 $139 $ 70 $ 252
Lines of credit, notes
payable and current portion
of long-term debt and
capital lease
obligations................ 100 35 32 234 89 70
Deferred revenue............. 12 88 157 83 112 16
----- ----- ---- ---- ------- -----
Total current
liabilities......... 478 408 308 456 271 338
Long-term debt and capital
lease obligations, less
current portion............ 124 10 10 62 65 15
----- ----- ---- ---- ------- -----
Total liabilities..... 602 418 318 518 336 353
Redeemable preferred stock..... 150 802 206 -- 899 150
Stockholders' equity:
Common stock and additional
paid-in capital............ 55 38 10 107 227 1
Retained earnings
(deficit).................. (549) (740) 128 281 (1,106) (209)
----- ----- ---- ---- ------- -----
Total stockholders'
equity (deficit).... (494) (702) 138 388 (879) (208)
----- ----- ---- ---- ------- -----
Total liabilities and
stockholders' equity
(deficit)........... $ 258 $ 518 $662 $906 $ 356 $ 295
===== ===== ==== ==== ======= =====
</TABLE>
F-9
<PAGE> 93
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FLORIDA COMPUTING MATRIX
ACCESS ONE, LI NET INTERNET ENGINEERS STARNET ONLINE MEDIA,
INC. INC. CORPORATION INC. LLC. INC. TOTAL
----------- ------ ----------- --------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents........... $ 259 $ 25 $ 4 $ 16 $210 $111 $ 1,169
Receivables, net........ 344 225 107 430 112 165 2,012
Prepaid expenses and
other................. 146 9 145 39 88 18 975
------ ----- ----- ------ ---- ---- -------
Total current
assets......... 749 259 256 485 410 294 4,156
Equipment and leasehold
improvements, net....... 679 501 219 1,050 208 566 4,358
Other assets............ 10 29 3 20 4 14 237
------ ----- ----- ------ ---- ---- -------
Total assets..... $1,438 $ 789 $ 478 $1,555 $622 $874 $ 8,751
====== ===== ===== ====== ==== ==== =======
Current liabilities:
Accounts payable and
accrued expenses...... $ 550 $ 268 $ 96 $ 259 $ 44 $ 59 $ 2,507
Lines of credit, notes
payable and current
portion of long-term
debt and capital lease
obligations........... 453 153 -- 308 -- 142 1,616
Deferred revenue........ 294 159 212 250 372 119 1,874
------ ----- ----- ------ ---- ---- -------
Total current
liabilities.... 1,297 580 308 817 416 320 5,997
Long-term debt and
capital lease
obligations, less
current portion....... 38 270 -- 614 -- 122 1,330
------ ----- ----- ------ ---- ---- -------
Total
liabilities.... 1,335 850 308 1,431 416 442 7,327
Redeemable preferred
stock................... 509 -- -- -- -- -- 2,716
Stockholders' equity:
Common stock and
additional paid-in
capital............... 93 317 298 6 -- 540 1,692
Retained earnings
(deficit)............. (499) (378) (128) 118 206 (108) (2,984)
------ ----- ----- ------ ---- ---- -------
Total
stockholders'
equity
(deficit)...... (406) (61) 170 124 206 432 (1,292)
------ ----- ----- ------ ---- ---- -------
Total liabilities
and
stockholders'
equity
(deficit)...... $1,438 $ 789 $ 478 $1,555 $622 $874 $ 8,751
====== ===== ===== ====== ==== ==== =======
</TABLE>
F-10
<PAGE> 94
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(C) HISTORICAL CONDENSED STATEMENTS OF OPERATIONS INFORMATION -- COMPLETED
ACQUISITIONS
Historical condensed statement of operations information for the 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>
PIONEER GLOBAL
AIMNET RUSTNET, COMPUTE NORTHWEST TELECOMMUNICATIONS, WEST COAST
YEAR ENDED DECEMBER 31, 1997 CORPORATION INC. GES INTENSIVE NET INC. ONLINE, 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
INFORMATION
YEAR ENDED 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>
F-11
<PAGE> 95
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
KNOWLEDGE FLORIDA COMPUTING MATRIX
ACCESSONE, NETWORKS, LI INTERNET ENGINEERS STARNET, ONLINE
INC. INC. NET, INC. CORPORATION INC. L.L.C. MEDIA, INC. TOTAL
---------- --------- --------- ----------- --------- -------- ----------- -------
<S> <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 $39,677
Enhanced services
and other........ 1,035 234 120 264 758 399 233 12,994
------ ------ ------ ------ ------ ------ ------ -------
Total
revenue..... 3,519 1,403 2,027 1,436 4,080 1,601 1,327 52,671
Operating costs and
expenses:
Internet services
operating
costs............ 1,510 669 792 773 1,026 717 393 22,247
Selling, general
and
administrative
and other........ 2,251 1,282 1,573 578 2,341 570 787 32,687
Depreciation and
amortization..... 245 55 135 121 329 156 127 3,257
------ ------ ------ ------ ------ ------ ------ -------
Total costs and
expenses.... 4,006 2,006 2,500 1,472 3,696 1,443 1,307 58,191
------ ------ ------ ------ ------ ------ ------ -------
Earnings (loss)
from
operations..... (487) (603) (473) (36) 384 158 20 (5,520)
Interest income...... -- 6 -- -- -- 9 2 67
Interest expense..... (26) (26) (39) (12) (96) (6) (19) (591)
------ ------ ------ ------ ------ ------ ------ -------
Earnings (loss)
before income
taxes.......... (513) (623) (512) (48) 288 161 3 (6,044)
Income taxes......... -- (3) -- -- (110_ (61) -- (1,247)
------ ------ ------ ------ ------ ------ ------ -------
Net earnings
(loss)...... $ (513) $ (626) $ (512) $ (48) $ 178 $ 100 $ 3 $(7,291)
====== ====== ====== ====== ====== ====== ====== =======
</TABLE>
F-12
<PAGE> 96
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(D) PRO FORMA ADJUSTMENTS
The following pro forma adjustments have been made to the condensed
combined balance sheet as of December 31, 1997 and the condensed combined
statement of operations for the year ended December 31, 1997. The purchase
accounting adjustments relating to the acquisitions completed prior to January
1, 1998 are included in the historical consolidated balance sheet of Verio as of
December 31, 1997.
(1) To reflect cash of $46,456,000 and 1,704,000 shares of preferred
stock valued at $25,560,000, which is the approximate number of shares
proposed and assumed to be issued as of December 31, 1997 in connection
with the Completed Acquisitions subsequent to December 31, 1997, and the
allocation of excess purchase price to goodwill in the amount of
$69,025,000 and to adjust investments in affiliates in the amount of
$1,198,000 for the proposed acquisitions of majority interests. Preferred
shares issued for acquisitions were recorded at fair value as determined by
the Company's Board of Directors and based on other third-party issuances
of Company securities. In the opinion of management, the historical
balances of all other assets acquired and liabilities assumed approximate
fair value.
Cash and notes payable issued for all acquisitions completed from inception
through May 5, 1998 (exclusive of acquisition costs), as described in note
A, is summarized as follows (in thousands):
<TABLE>
<S> <C>
Cash and notes payable issued for acquisitions completed
through December 31, 1997................................. $ 83,759
Cash consideration for Completed Acquisitions subsequent to
December 31, 1997 and through May 5, 1998................. 46,456
--------
Total............................................. $130,215
========
</TABLE>
(2) To eliminate equity accounts and redeemable preferred stock of the
Completed Acquisitions.
(3) To eliminate intercompany revenue, expenses, receivables and
payables.
(4) To adjust amortization expense due to increase in carrying value
of goodwill, using a ten-year life, including additional amortization
expense related to consolidated acquisitions completed during 1997, as if
such acquisitions had been completed as of January 1, 1997, as follows (in
thousands):
<TABLE>
<S> <C>
Pro forma goodwill for acquisitions completed or proposed to
be completed after December 31, 1997 as if the
acquisitions occurred on January 1, 1997.................. $69,025
Amortization period (years)................................. 10
-------
Amortization of goodwill for acquisitions completed or
proposed to be completed after December 31, 1997.......... 6,903
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....... 5,127
-------
Total....................................................... $12,030
=======
</TABLE>
(5) To eliminate minority interests share of equity and equity in
losses of affiliates upon acquisition of 100% ownership interests.
(6) To eliminate income tax expense or benefit of acquired businesses
due to consolidated net operating loss for the year ended December 31,
1997.
(7) To reflect the conversion of 20,945,667 shares of preferred stock
into common stock upon completion of the Offering, including 1,704,000
shares of preferred stock assumed to be issued and
F-13
<PAGE> 97
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
converted to common stock subsequent to December 31, 1997, and to eliminate
accretion of preferred stock to liquidation value.
(8) To adjust for the effects of the issuance of the 1998 Notes, after
giving effect to the Refinancing, as follows (in thousands):
<TABLE>
<CAPTION>
CASH AND CASH EQUIVALENTS:
--------------------------
<S> <C>
Proceeds from 1998 Notes.................................... $175,000
Less:
Proceeds used to complete the Refinancing................. (54,515)
Offering costs............................................ (5,212)
Reduction of restricted cash requirements in connection
with the Refinancing................................... 12,732
--------
Net increase in cash and cash equivalents......... $128,005
========
</TABLE>
<TABLE>
<CAPTION>
OTHER ASSETS:
-------------
<S> <C>
Deferred financing costs related to 1998 Notes.............. $ 5,212
Less write-off of portion of deferred financing costs
related to 1997 Notes repurchased in the Refinancing...... (1,546)
--------
Net increase in other assets...................... $ 3,666
========
</TABLE>
<TABLE>
<CAPTION>
LONG-TERM DEBT:
---------------
<S> <C>
Principal amount of 1998 Notes.............................. $175,000
Less face amount of 1997 Notes repurchased.................. (50,000)
Add portion of unamortized debt discount related to 1997
Notes repurchased......................................... 4,043
--------
Net increase in long-term debt.................... $129,043
========
</TABLE>
(9) To reflect the extraordinary charge of approximately $10,104,000
for the loss on the Refinancing representing the excess of the repurchase
price of a portion of the 1997 Notes over the carrying value of the notes,
including debt discount and related deferred financing costs.
F-14
<PAGE> 98
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-15
<PAGE> 99
VERIO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
-------------------- DECEMBER 31,
1996 1997 1997(1)
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 66,467 $ 72,586
Restricted cash and securities (notes 3 and 4)............ -- 21,015
Receivables:
Trade, net of allowance for doubtful accounts of $117
and $1,233............................................. 611 7,565
Affiliates.............................................. 119 735
Prepaid expenses and other................................ 410 3,921
-------- --------
Total current assets................................ 67,607 105,822
Restricted cash and securities (notes 3 and 4).............. -- 19,539
Investments in affiliates, at cost (note 2)................. 1,536 2,378
Equipment and leasehold improvements:
Internet access and computer equipment.................... 4,485 30,535
Furniture, fixtures and computer software................. 220 3,301
Leasehold improvements.................................... 141 1,596
-------- --------
4,846 35,432
Less accumulated depreciation and amortization............ (359) (7,219)
-------- --------
Net equipment and leasehold improvements............ 4,487 28,213
Other assets:
Goodwill, net of accumulated amortization of $303 and
$3,595 (note 2)......................................... 8,736 83,216
Debt issuance costs, net of accumulated amortization of
$330.................................................... -- 4,858
Organization costs and other, net......................... 262 2,445
-------- --------
Total assets........................................ $ 82,628 $246,471
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 2,132 $ 7,389
Accrued expenses.......................................... 931 11,401
Accrued interest payable.................................. -- 844
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
Current portion of capital lease obligations (note 4)..... 64 1,575
Deferred revenue.......................................... 659 7,177
-------- --------
Total current liabilities........................... 7,469 31,137
Long-term debt, less current portion, net of discount (note
3)........................................................ 20 139,376
Capital lease obligations, less current portion (note 4).... 86 2,945
-------- --------
Total liabilities................................... 7,575 173,458
-------- --------
Minority interests in subsidiaries (note 2)................. 2,231 2,765
Redeemable preferred stock (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. Liquidation preference of
$18,100................................................. 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. Liquidation
preference of $60,170................................... 58,799 59,193 --
Series C, convertible, $.001 par value. 2,500,000 shares
authorized, issued and outstanding at December 31, 1997.
Liquidation preference of $20,000....................... -- 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. Liquidation preference
of $10,200 (note 5)..................................... -- 10,200 --
Common stock, $.001 par value; 35,133,000 shares
authorized; 1,090,000 and 1,254,533 shares issued and
outstanding at December 31, 1996 and 1997 (20,496,200
shares pro forma)....................................... 1 1 20
Additional paid-in capital................................ 1,089 14,272 121,702
Accumulated deficit....................................... (5,145) (51,474) (51,474)
-------- -------- --------
Total stockholders' equity (deficit)................ (4,055) (27,001) 70,248
-------- -------- --------
Commitments (notes 2, 4 and 5)
Total liabilities and stockholders' deficit......... $ 82,628 $246,471
======== ========
</TABLE>
- ---------------
(1) Reflects the conversion of all preferred shares into common stock on the
basis described in Note 5, only upon completion of the offering described in
the registration statement.
See accompanying notes to consolidated financial statements.
F-16
<PAGE> 100
VERIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEAR
(MARCH 1, 1996) ENDED
TO DECEMBER 31, DECEMBER 31,
1996 1997
----------------- ------------
<S> <C> <C>
Revenue:
Internet connectivity:
Dedicated.............................................. $ 1,100 $ 16,383
Dial-up................................................ 1,139 7,093
Enhanced services and other............................... 126 12,216
------- ---------
Total revenue..................................... 2,365 35,692
Costs and expenses:
Internet services operating costs......................... 974 15,974
Selling, general and administrative and other............. 7,002 49,383
Depreciation and amortization............................. 669 10,624
------- ---------
Total costs and expenses.......................... 8,645 75,981
------- ---------
Loss from operations.............................. (6,280) (40,289)
Other income (expense):
Interest income........................................... 593 6,080
Interest expense.......................................... (115) (11,826)
Equity in losses of affiliates............................ -- (1,958)
------- ---------
Loss before minority interests.................... (5,802) (47,993)
Minority interests.......................................... 680 1,924
------- ---------
Net loss.......................................... (5,122) (46,069)
Accretion of preferred stock to liquidation value........... (23) (260)
------- ---------
Net loss attributable to common shareholders...... $(5,145) $ (46,329)
======= =========
Loss per common share -- basic and diluted.................. $ (5.29) $ (40.47)
======= =========
Weighted average number of common shares outstanding --basic
and diluted............................................... 971,748 1,144,685
======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE> 101
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 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)
======= ========= === ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE> 102
VERIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION YEAR
(MARCH 1, 1996) ENDED
TO DECEMBER 31, DECEMBER 31,
1996 1997
--------------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(5,122) $(46,069)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization.......................... 669 10,624
Minority interests' share of losses.................... (680) (1,924)
Equity in losses of affiliates......................... -- 1,958
Changes in operating assets and liabilities, excluding
effects of business combinations:
Receivables.......................................... (265) (1,561)
Prepaid expenses and other current assets............ (284) (2,305)
Accounts payable..................................... 1,439 (1,656)
Accrued expenses..................................... 1,910 3,082
Accrued interest payable............................. -- 844
Deferred revenue..................................... 7 1,684
------- --------
Net cash used by operating activities............. (2,326) (35,323)
------- --------
Cash flows from investing activities:
Acquisition of equipment and leasehold improvements....... (3,430) (14,547)
Acquisition of net assets in business combinations and
investments in affiliates, net of cash acquired........ (5,627) (64,023)
Restricted cash and securities............................ (40,554)
Other..................................................... (66) (1,206)
------- --------
Net cash used by investing activities............. (9,123) (120,330)
------- --------
Cash flows from financing activities:
Proceeds from lines of credit, notes payable and long-term
debt................................................... -- 145,512
Repayments of lines of credit and notes payable........... (20) (3,468)
Repayments of capital lease obligations................... (8) (950)
Proceeds from issuance of common and preferred stock, net
of issuance costs...................................... 77,944 20,678
------- --------
Net cash provided by financing activities......... 77,916 161,772
------- --------
Net increase in cash and cash equivalents......... 66,467 6,119
Cash and cash equivalents:
Beginning of period....................................... -- 66,467
------- --------
End of period............................................. $66,467 $ 72,586
======= ========
Supplemental disclosures of cash flow information:
Cash paid for interest.................................... $ -- $ 10,982
======= ========
Equipment acquired through capital lease obligations...... $ 58 $ 3,301
======= ========
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............................ $ -- $ 10,200
======= ========
Warrants issued in connection with debt offering.......... $ -- $ 12,675
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE> 103
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(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 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 and December 31, 1997 are U.S. government,
municipal and corporate debt securities, money market accounts and commercial
paper, totaling $61,769,000 and $75,442,000 (exclusive of cash overdraft in the
amount of $11,228,000), 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, 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 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.
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
F-20
<PAGE> 104
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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).
(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 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 a culmination of an earnings process.
Accordingly, these arrangements are appropriately not reflected in the
operations of the Company.
(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.
F-21
<PAGE> 105
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 and 1997,
and all common stock equivalents are antidilutive.
(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
------------- ---------------- ------------ --------------- -----------
<S> <C> <C> <C> <C>
On-Ramp Technologies, Inc........ August 1, 1996 51%
October 4, 1996 4% 55%(b) $ 8,775,000
RAINet, Inc...................... August 2, 1996 100% 100%(c) 2,000,000
CCnet Inc........................ December 19, 1996 100% 100%(c) 1,800,000
-----------
$12,575,000
Acquisition costs................ 284,000
-----------
$12,859,000
===========
</TABLE>
The aggregate purchase price, including acquisition costs was allocated based
upon fair value as follows:
<TABLE>
<S> <C>
Equipment............................................ $ 1,359,000
Goodwill............................................. 9,039,000
Net current assets................................... 2,461,000
-----------
Total purchase price........................ $12,859,000
===========
</TABLE>
Unconsolidated investments in 1996:
<TABLE>
<CAPTION>
OWNERSHIP TOTAL OWNERSHIP APPROXIMATE
INTEREST INTEREST AT PURCHASE
BUSINESS NAME ACQUISITION DATE PURCHASED(A) DECEMBER 31, 1996(A) PRICE
------------- ---------------- ------------ -------------------- -----------
<S> <C> <C> <C> <C>
West Coast Online, Inc....... July 26, 1996 20% 20%(b) $ 225,000
National Knowledge Networks,
Inc........................ August 2, 1996 26% 26%(b) 300,001
Access One, Inc.............. December 12, 1996 20% 20%(b) 506,039
Signet Partners, Inc......... December 19, 1996 25% 25%(b) 402,960
----------
$1,434,000
Acquisition costs............ 102,000
----------
$1,536,000
==========
</TABLE>
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
F-22
<PAGE> 106
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
OWNERSHIP TOTAL OWNERSHIP APPROXIMATE
INTEREST INTEREST AT PURCHASE
BUSINESS NAME ACQUISITION DATE PURCHASED(A) DECEMBER 31, 1997(A) PRICE(E)
------------- ---------------- ------------ -------------------- -----------
<S> <C> <C> <C> <C>
Global Enterprise
Services -- Network
Division............... January 17, 1997 100% 100%(d) $ 2,350,000
Pioneer Global
Telecommunications,
Inc. .................. February 6, 1997 100% 100%(c) 1,011,000
Compute Intensive
Inc. .................. February 18, 1997 55% 55%(b) 4,900,000
NorthWestNet, Inc. ...... February 28, 1997 85% 85%(c) 9,464,000
RUSTnet, Inc. ........... March 14, 1997 100% 100%(c) 1,703,000
Aimnet Corporation....... May 19, 1997 55%
September 22, 1997 45% 100%(c) 7,613,000
Branch Information
Services, Inc. ........ September 17, 1997 100% 100%(c) 1,687,000
West Coast Online,
Inc. .................. April 29, 1997 12%
September 30, 1997 68% 100%(b) 1,775,000
Communique, Inc. ........ October 2, 1997 100% 100%(c) 3,000,000
Clark Internet Services,
Inc. .................. October 17, 1997 51% 51%(b) 3,520,000
ATMnet .................. November 5, 1997 100% 100%(d) 5,522,000
Global Internet Network
Services, Inc. ........ December 1, 1997 100% 100%(c) 6,000,000
Surf Network, Inc. ...... January 31, 1997 25%
December 22, 1997 75% 100%(b) 603,000
PREPnet.................. December 24, 1997 100% 100%(d) 1,405,000
Sesquinet................ December 24, 1997 100% 100%(d) 732,000
Service Tech, Inc. ...... August 1, 1997 40%
December 31, 1997 60% 100%(b) 2,055,000
Monumental Network
Systems, Inc. ......... December 31, 1997 100% 100%(c) 3,962,000
Internet Servers,
Inc. .................. December 31, 1997 100% 100%(c) 20,000,000
-----------
$77,302,000
Acquisition costs........ 3,396,000
-----------
$80,698,000
===========
</TABLE>
The aggregate purchase price, including acquisition costs of $3,396,000 was
allocated based upon fair values as follows:
<TABLE>
<S> <C>
Equipment...................................... $ 12,378,000
Goodwill....................................... 77,772,000
Net current liabilities........................ (9,452,000)
------------
Total purchase price................. $ 80,698,000
============
</TABLE>
F-23
<PAGE> 107
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unconsolidated investments in 1997:
<TABLE>
<CAPTION>
OWNERSHIP TOTAL OWNERSHIP APPROXIMATE
INTEREST INTEREST AT PURCHASE
BUSINESS NAME ACQUISITION DATE PURCHASED(A) DECEMBER 31, 1997(A) PRICE(E)
------------- ---------------- ------------ -------------------- -----------
<S> <C> <C> <C> <C>
Pacific Rim Network,
Inc. ............... February 4, 1997 27% 27%(b) 150,000
Internet Engineering
Associates, Inc. ... March 4, 1997 20% 20%(b) 206,000
Internet Online,
Inc. ............... March 5, 1997 35% 35%(b) 1,050,000
Structured Network
Systems, Inc. ...... March 6, 1997 20% 20%(b) 150,000
National Knowledge
Networks, Inc. ..... November 7, 1997 15% 41%(b) 599,000
Signet Partners,
Inc. ............... November 20, 1997 16% 41%(b) 414,000
----------
$2,569,000
Acquisition costs..... 253,000
----------
$2,822,000
==========
</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 and notes payable for all
Acquisitions except Internet Servers, Inc. which included the issuance of
680,000 shares of Series D-1 preferred stock at $15 per share. Such per
share value was 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.
The following unaudited condensed pro forma information presents the
unaudited results of operations of the Company as if the above consolidated
acquisitions had occurred on January 1, 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997
---------- ----------
(AMOUNTS IN THOUSANDS,
EXCEPT FOR PER SHARE DATA)
<S> <C> <C>
Revenue..................................................... $ 44,693 $ 63,665
Net loss.................................................... (33,326) (59,006)
Net loss attributable to common shareholders................ (33,349) (59,266)
Loss per common share -- basic and diluted.................. $ (34.32) $ (51.77)
</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.
For all of its less-than-100%-owned ISP affiliates, the Company has the
option to acquire all of the remaining ownership interests. Generally, the
option may be exercised beginning one year from the date of the initial
investment or upon the earlier of the completion of an initial public offering
of common stock by the
F-24
<PAGE> 108
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company or a significant strategic investment in the Company. In one case, the
Company's option becomes mandatorily exercisable upon completion of an initial
public offering.
Subsequent to December 31, 1997 and through February 25, 1998, the Company
has completed or expects to complete the acquisition of the remaining ownership
interests and acquisitions of 12 ISPs, for total consideration of approximately
$50 million in preferred stock and cash.
(3) DEBT
Lines of credit, notes payable and long-term debt consists of the following
as of December 31, 1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
--------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
13.5% Senior Notes due in 2004, net of unamortized discount
of $12,130,136(a)......................................... $ -- $137,870
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
Other....................................................... 93 660
------- --------
2,593 142,127
Less current portion........................................ (2,573) (2,751)
------- --------
Long-term debt, less current portion.............. $ 20 $139,376
======= ========
</TABLE>
- ---------------
(a) In June 1997, the Company completed a debt offering of $150,000,000, 13.5%
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. 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.
Maturities of lines of credit, notes payable and long-term debt are as
follows:
<TABLE>
<S> <C>
1998.............................................. $ 2,751
1999.............................................. 1,032
2000.............................................. 474
2001.............................................. --
2002.............................................. --
Thereafter........................................ 137,870
--------
$142,127
========
</TABLE>
F-25
<PAGE> 109
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of February 25, 1998, Verio had received commitments from a group of
commercial lending institutions to provide an aggregate of up to $57.5 million
pursuant to a two-year revolving credit financing facility. The Company is in
the process of negotiating the definitive terms and conditions and final
documentation for this facility. Chase Manhattan Bank has committed to serve as
agent for the lenders in this facility. In addition, the Company is considering
a possible private placement of up to $100 million in senior notes. There can be
no assurance that the Company will be able to negotiate final terms and
conditions that are acceptable to the Company with respect to, or to consummate,
either of such financing efforts.
(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 was $128,000 and $1,856,000,
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
December 31, 1997 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 $1,500,000 had been
paid as of December 31, 1997. Annual payments will be based on actual usage by
the Company.
The Company had an outstanding irrevocable letter of credit in the amount
of $1.1 million as of December 31, 1997. 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 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 $1,400,000 secures the letter of credit.
F-26
<PAGE> 110
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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, and are 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 shares at $15 per share in connection with an
acquisition. The preferred shares are 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 are entitled to
receive an amount equal to the original issuance price, plus any declared and
unpaid dividends.
In addition, the Series A, B and C preferred shares are subject to
mandatory redemption, in total, by the Company in October 2004. The Series D-1
preferred shares are not redeemable. Upon redemption, the Series C shares are
senior to Series B shares, which are senior to Series A shares, on the basis
provided in the preferred stock terms. Series A, B, C and D-1 preferred shares
may be converted into shares of common stock at any time at the option of the
holder. The Series A, B, C and D-1 preferred shares are also subject to
mandatory conversion upon consummation of a public offering of common stock
resulting in proceeds to the Company of not less than $30 million and at an
offering price per share equal to at least $15. In addition, shares of Series
D-1 preferred stock are subject to mandatory conversion upon the election of
each of the Series A, B and C classes, each voting as a separate class, to
convert to common.
(6) 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 December 31, 1997, the Company had reserved 2,750,000 shares
for issuance under the Plans. The Plans were amended subsequent to December 31,
1997 to increase the number of shares reserved for issuance to 4,750,000. 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. 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-27
<PAGE> 111
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 December 31, 1997:
<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
========= =====
</TABLE>
As discussed in Note 1, 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 relating to
option grants in 1996 and 1997. 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.
(7) INCOME TAXES
Income tax benefit for the year and period ended December 31 differs from
the amounts that would result from applying the federal statutory rate of 34% as
follows:
<TABLE>
<CAPTION>
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>
F-28
<PAGE> 112
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Temporary differences that give rise to the components of deferred tax
assets as of December 31 are as follows:
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Net operating loss carryforwards, including acquisitions.... $ 2,238 18,586
Other, net.................................................. 39 163
------- --------
Gross deferred tax asset.......................... 2,277 18,749
Valuation allowance......................................... (2,277) (18,749)
------- --------
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" 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 and 1997, 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, 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 December 31, 1997, 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 or 1997.
(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
March 31, 1996 (Amounts in Thousands).
<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>
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) (8,120) (12,762) (20,770) (46,329)
Loss per common share -- basic and
diluted................................ (4.29) (7.28) (10.84) (18.06) (40.47)
</TABLE>
F-29
<PAGE> 113
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-30
<PAGE> 114
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-31
<PAGE> 115
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-32
<PAGE> 116
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-33
<PAGE> 117
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-34
<PAGE> 118
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-35
<PAGE> 119
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-36
<PAGE> 120
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-37
<PAGE> 121
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-38
<PAGE> 122
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-39
<PAGE> 123
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-40
<PAGE> 124
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-41
<PAGE> 125
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-42
<PAGE> 126
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-43
<PAGE> 127
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-44
<PAGE> 128
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-45
<PAGE> 129
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-46
<PAGE> 130
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-47
<PAGE> 131
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-48
<PAGE> 132
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-49
<PAGE> 133
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-50
<PAGE> 134
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-51
<PAGE> 135
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-52
<PAGE> 136
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-53
<PAGE> 137
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-54
<PAGE> 138
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-55
<PAGE> 139
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-56
<PAGE> 140
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-57
<PAGE> 141
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-58
<PAGE> 142
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-59
<PAGE> 143
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-60
<PAGE> 144
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>
<CAPTION>
<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-61
<PAGE> 145
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-62
<PAGE> 146
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-63
<PAGE> 147
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-64
<PAGE> 148
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-65
<PAGE> 149
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-66
<PAGE> 150
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-67
<PAGE> 151
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-68
<PAGE> 152
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-69
<PAGE> 153
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-70
<PAGE> 154
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
1997 MAY 19, 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-71
<PAGE> 155
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-72
<PAGE> 156
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-73
<PAGE> 157
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-74
<PAGE> 158
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-75
<PAGE> 159
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-76
<PAGE> 160
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-77
<PAGE> 161
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-78
<PAGE> 162
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-79
<PAGE> 163
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-80
<PAGE> 164
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-81
<PAGE> 165
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-82
<PAGE> 166
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-83
<PAGE> 167
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-84
<PAGE> 168
CLARK INTERNET SERVICES, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1997 AND PERIOD ENDED OCTOBER 17, 1997
<TABLE>
<CAPTION>
PERIOD ENDED
1997 OCTOBER 17, 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-85
<PAGE> 169
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-86
<PAGE> 170
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-87
<PAGE> 171
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-88
<PAGE> 172
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-89
<PAGE> 173
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-90
<PAGE> 174
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-91
<PAGE> 175
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-92
<PAGE> 176
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-93
<PAGE> 177
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-94
<PAGE> 178
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-95
<PAGE> 179
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-96
<PAGE> 180
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-97
<PAGE> 181
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-98
<PAGE> 182
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-99
<PAGE> 183
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-100
<PAGE> 184
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-101
<PAGE> 185
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-102
<PAGE> 186
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-103
<PAGE> 187
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-104
<PAGE> 188
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-105
<PAGE> 189
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-106
<PAGE> 190
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-107
<PAGE> 191
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-108
<PAGE> 192
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-109
<PAGE> 193
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-110
<PAGE> 194
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-111
<PAGE> 195
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-112
<PAGE> 196
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-113
<PAGE> 197
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-114
<PAGE> 198
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-115
<PAGE> 199
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-116
<PAGE> 200
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-117
<PAGE> 201
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-118
<PAGE> 202
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-119
<PAGE> 203
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-120
<PAGE> 204
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-121
<PAGE> 205
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-122
<PAGE> 206
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-123
<PAGE> 207
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-124
<PAGE> 208
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-125
<PAGE> 209
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-126
<PAGE> 210
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-127
<PAGE> 211
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-128
<PAGE> 212
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-129
<PAGE> 213
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-130
<PAGE> 214
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-131
<PAGE> 215
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-132
<PAGE> 216
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-133
<PAGE> 217
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-134
<PAGE> 218
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.
F-135
<PAGE> 219
NSNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(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 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-136
<PAGE> 220
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-137
<PAGE> 221
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-138
<PAGE> 222
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-139
<PAGE> 223
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-140
<PAGE> 224
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-141
<PAGE> 225
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-142
<PAGE> 226
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.
(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-143
<PAGE> 227
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-144
<PAGE> 228
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-145
<PAGE> 229
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-146
<PAGE> 230
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-147
<PAGE> 231
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-148
<PAGE> 232
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-149
<PAGE> 233
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-150
<PAGE> 234
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-151
<PAGE> 235
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-152
<PAGE> 236
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-153
<PAGE> 237
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-154
<PAGE> 238
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-155
<PAGE> 239
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-156
<PAGE> 240
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-157
<PAGE> 241
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-158
<PAGE> 242
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-159
<PAGE> 243
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-160
<PAGE> 244
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-161
<PAGE> 245
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-162
<PAGE> 246
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-163
<PAGE> 247
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-164
<PAGE> 248
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-165
<PAGE> 249
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-166
<PAGE> 250
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 9
Use of Proceeds....................... 19
Dividend Policy....................... 19
Capitalization........................ 20
Dilution.............................. 21
Selected Consolidated Financial
Data................................ 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 24
Business.............................. 32
Management............................ 47
Certain Transactions.................. 63
Principal Stockholders................ 67
Description of Capital Stock.......... 70
Shares Eligible for Future Sale....... 74
Underwriting.......................... 76
Legal Matters......................... 78
Experts............................... 78
Additional Information................ 78
Glossary of Terms..................... 80
Index to Financial Statements......... F-1
</TABLE>
Until , 1998 (25 days after the commencement of the offering),
all dealers effecting transactions in the Common Stock, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
======================================================
======================================================
5,000,000 SHARES
VERIO INC.
COMMON STOCK
[VERIO INC. LOGO]
------------
PROSPECTUS
, 1998
------------
SALOMON SMITH BARNEY
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
======================================================
<PAGE> 251
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, incurred in connection with the sale of
Common Stock being registered (all amounts are estimated except the SEC
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee).
<TABLE>
<CAPTION>
ITEM AMOUNT
---- ----------
<S> <C>
SEC registration fee........................................ $ 33,925
NASD filing fee............................................. 12,000
NASDAQ National Market listing fee.......................... 95,000
Printing and engraving expenses............................. 350,000
Legal fees and expenses..................................... 350,000
Accounting fees and expenses................................ 400,000
Blue sky fees and expense................................... 2,000
Transfer agent fees and expenses............................ 2,000
Miscellaneous............................................... 5,075
----------
Total............................................. $1,250,000
==========
</TABLE>
ITEM 14. 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 Company eliminates the personal
liability for monetary damages of directors under certain circumstances and
provides indemnification to directors and officers of the Company 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.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In June and July of 1996, the Registrant issued an aggregate of 6,033,333
shares of Series A Preferred Stock to Centennial Fund IV, L.P., Centennial
Holdings, Inc., Telecom Partners, L.P., Norwest Equity Partners, V and Brooks
Fiber Properties, Inc. for an aggregate of $18,100,001, pursuant to a Series A
Preferred Stock purchase agreement dated June 25, 1996, and Amendment No. 1
thereto, dated July 3, 1996. The transactions were exempt from registration
under Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act").
In December 1996, the Registrant issued an aggregate of 10,000,000 shares
of Series B Preferred Stock to Centennial Fund IV, L.P., Centennial Fund V,
L.P., Centennial Entrepreneurs Fund V, L.P., Centennial Holdings, Inc., Norwest
Equity Partners, V, Brooks Fiber Properties, Inc., Fleet Venture Resources,
Inc., Fleet Equity Partners VI, L.P., Providence Equity Partners L.P.,
Providence Equity Partners II L.P., Bessemer Venture Partners, WNA, Boston
Capital Ventures III, L.P., BCV Partners WNA, WNA-DMG Investors, LLC, Perkman
Associates, L.P., GC&H Investments and 11 individuals for an aggregate of
$60,000,000, pursuant to a Series B Preferred Stock purchase agreement, dated as
of December 5, 1996. A private placement fee of $1.46 million was paid by the
Registrant to Deutsche Morgan Grenfell. The transaction was exempt from
registration under Section 4(2) of the Securities Act.
II-1
<PAGE> 252
In May 1997, the Registrant issued an aggregate of 2,500,000 shares of
Series C Preferred Stock to Centennial Fund IV, L.P., Centennial Fund V, L.P.,
Centennial Entrepreneurs Fund V, L.P., Centennial Holdings I, LLC, Norwest
Equity Partners, V, Brooks Fiber Properties, Inc., Providence Equity Partners
L.P., Providence Equity Partners II L.P., Boston Capital Ventures III, L.P. and
BCV Partners WNA for an aggregate of $20,000,000, pursuant to a Series C
Preferred Stock purchase agreement dated May 20, 1997. The transaction was
exempt from registration under Section 4(2) of the Securities Act.
In June 1997, the Registrant issued and sold $150,000,000 principal amount
of 13 1/2% Senior Notes Due 2004 (the "1997 Notes") to Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Lazard Freres & Co. LLC
(together, the "1997 Initial Purchasers"). In connection with the issuance and
sale of the 1997 Notes, the Registrant issued warrants (the "Warrants" and
together with the 1997 Notes, the "Units") to the 1997 Initial Purchasers to
purchase an aggregate of 2,112,480 shares of Common Stock at an exercise price
per share of $0.01. The Warrants will become exercisable after the Offering. The
aggregate underwriting discounts paid by the Registrant to the 1997 Initial
Purchasers was $3,500,000. Issuance of the Units to the 1997 Initial Purchasers
was made in reliance on Section 4(2) of the Securities Act. The resale of the
Units by the 1997 Initial Purchasers was made in reliance on Rule 144A under the
Securities Act, Rule 501 under the Securities Act, and Regulation S under the
Securities Act.
During the period from April 1996 through April 1998, the Registrant
granted options to purchase an aggregate of 2,205,300 shares of Common Stock
(options for 1,970,967 shares of Common Stock of which are outstanding, options
for 115,933 shares of Common Stock have been exercised and options for 118,400
shares of Common Stock have been forfeited) to directors, employees and
consultants pursuant to the Registrant's 1996 Stock Option Plan in reliance on
Rule 701 promulgated under the Securities Act.
During the period from April 1997 through April 1998, the Registrant
granted options to purchase an aggregate of 617,605 shares of Common Stock (none
of which have been exercised) to directors, employees and consultants pursuant
to the Registrant's 1997 California Stock Option Plan in reliance on Rule 701
promulgated under the Securities Act.
During the period of March 1998 through April 1998, the Registrant granted
options to purchase an aggregate of 1,314,266 shares of Common Stock (all of
which are outstanding) and 164,989 shares of Series D-1 Preferred Stock (options
for 4,487 shares of which have been forfeited) to employees and consultants
pursuant to the Registrant's 1998 Stock Incentive Plan in reliance on Rule 701
promulgated under the Securities Act.
In January 1998, the Registrant issued an aggregate of 680,000 shares of
Series D-1 Preferred Stock to five investors pursuant to an Agreement and Plan
of Merger dated as of December 31, 1997, in connection with its acquisition of
Internet Servers, Inc. A finders fee of $300,000 was paid by the Registrant to
Daniel & Associates ("Daniels") in connection with this acquisition. The
transaction was exempt from registration under Regulation 506 of the Securities
Act.
In February 1998, the Registrant issued an aggregate of 85,556 shares of
Series D-1 Preferred Stock to a total of two investors in connection with its
Buyout of Signet Partners, Inc. pursuant to an Agreement and Plan of
Reorganization. The transaction was exempt from registration under Regulation
506 of the Securities Act.
In February 1998, the Registrant issued an aggregate of 107,168 shares of
Series D-1 Preferred Stock to a total of two investors in connection with its
Buyout of Internet Engineering Associates, Inc. pursuant to an Agreement and
Plan of Reorganization. The transaction was exempt from registration under
Regulation 506 of the Securities Act.
In February 1998, the Registrant issued an aggregate of 117,642 shares of
Series D-1 Preferred Stock to a total of two* investors in connection with the
acquisition of NSNet, Inc. pursuant to an Agreement and Plan
- ---------------
* Shares issued in the acquisition of NSNet, Inc. were issued to two investors
jointly in a single stock certificate.
II-2
<PAGE> 253
of Reorganization. A finders fee of $133,224 was paid by the Registrant to
Daniels in connection with this acquisition. The transaction was exempt from
registration under Regulation 506 of the Securities Act.
In February 1998, the Registrant issued an aggregate of 465,685 shares of
Series D-1 Preferred Stock to a total of 15 investors in connection with its
Buyout of On-Ramp Technologies, Inc. pursuant to an Agreement and Plan of
Reorganization. The transaction was exempt from registration under Section 4(2)
of the Securities Act.
In February 1998, the Registrant issued an aggregate of 228,700 shares of
Series D-1 Preferred Stock to a total of three investors in connection with its
Buyout of Clark Internet Services, Inc. pursuant to an Agreement and Plan of
Reorganization. This transaction was exempt from registration under Section 4(2)
of the Securities Act.
In March 1998, the Registrant issued and sold $175,000,000 principal amount
of 10 3/8% Senior Notes Due 2005 (the "1998 Notes") to Salomon Brothers Inc,
Lazard Freres & Co. LLC, Chase Securities Inc. and BancBoston Securities Inc.
(together, the "1998 Initial Purchasers"). The aggregate underwriting discounts
paid by the Registrant to the 1998 Initial Purchasers was $4,812,500. Issuance
of the 1998 Notes to the 1998 Initial Purchasers was made in reliance on Section
4(2) of the Securities Act. The resale of the 1998 Notes by the 1998 Initial
Purchasers was made in reliance on Rule 144A under the Securities Act, and
Regulation S under the Securities Act.
In April 1998, the Registrant issued an aggregate of 529,762 shares of
Series D-1 Preferred Stock to a total of 45 investors in connection with its
Buyout of Compute Intensive Inc. pursuant to an Agreement and Plan of
Reorganization. This transaction was exempt from registration under Section
3(a)(10) of the Securities Act.
II-3
<PAGE> 254
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1** -- Form of Underwriting Agreement.
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 -- Specimen Stock Certificate of the Registrant.
5.1** -- Form of Opinion of Morrison & Foerster LLP.
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 Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, and Lazard
Freres & Co. LLC (collectively, the "Initial
Purchasers").
10.4** -- Registration Rights Agreement, dated as of June 17, 1997,
by and among the Registrant and the Initial 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 Registrant'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.
</TABLE>
II-4
<PAGE> 255
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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 Salomon Brothers
Inc, Lazard Freres & Co. LLC, Chase Securities Inc. and
BancBoston Securities Inc.
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.
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 Morrison & Foerster LLP (contained in Exhibit
5.1).
24.1** -- Power of Attorney.
27.1** -- Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
** Exhibit previously filed.
+ Document for which confidential treatment has been requested.
II-5
<PAGE> 256
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
------------ -----------
<C> <S>
II Valuation and Qualifying Accounts
</TABLE>
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934, as amended; and, where interim financial information required to be
presented by Article 3 of Regulation S-X are not set forth in the prospectus, to
deliver, or cause to be delivered to each person to whom the prospectus is sent
or given, the latest quarterly report that is specifically incorporated by
reference in the prospectus to provide such interim financial information.
(b) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
(c) The undersigned Registrant hereby undertakes that for the purposes of
determining any liability under the Securities Act, the information omitted from
the form of prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was declared
effective.
For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-6
<PAGE> 257
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement on Form S-1
to be signed on its behalf by the undersigned, thereunto duly authorized, in
Englewood, Colorado on May 8, 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. 3 to the Registration Statement on Form S-1 has been signed by the following
persons in the capacities and on the dates indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ STEVEN C. HALSTEDT* Chairman of the Board May 8, 1998
- -----------------------------------------------------
Steven C. Halstedt
/s/ JUSTIN L. JASCHKE* Chief Executive Officer and May 8, 1998
- ----------------------------------------------------- Director
Justin L. Jaschke
/s/ JAMES C. ALLEN* Director May 8, 1998
- -----------------------------------------------------
James C. Allen
/s/ TRYGVE E. MYHREN* Director May 8, 1998
- -----------------------------------------------------
Trygve E. Myhren
/s/ PAUL J. SALEM* Director May 8, 1998
- -----------------------------------------------------
Paul J. Salem
/s/ STEVEN W. SCHOVEE* Director May 8, 1998
- -----------------------------------------------------
Steven W. Schovee
/s/ GEORGE J. STILL, JR.* Director May 8, 1998
- -----------------------------------------------------
George J. Still, Jr.
/s/ PETER B. FRITZINGER* Chief Financial Officer May 8, 1998
- -----------------------------------------------------
Peter B. Fritzinger
/s/ DEB MAYFIELD GAHAN* Vice President of Finance and May 8, 1998
- ----------------------------------------------------- Administration (Principal
Deb Mayfield Gahan Accounting Officer)
*By: /s/ CARLA HAMRE DONELSON
------------------------------------------------
Carla Hamre Donelson
Attorney-in-Fact
</TABLE>
II-7
<PAGE> 258
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
Under date of February 25, 1998, we reported on the 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, which are included in the prospectus. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule in the registration statement. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Denver, Colorado
February 25, 1998
S-1
<PAGE> 259
SCHEDULE II
VERIO INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Period from Inception (March 1, 1996) to
December 31, 1996:
Allowance for doubtful Accounts............. $ -- 117 -- 117
Year ended December 31, 1997:
Allowance for doubtful Accounts............. $ 117 1,116 -- 1,233
</TABLE>
S-2
<PAGE> 260
EXHIBIT INDEX
EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1** -- Form of Underwriting Agreement.
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 -- Specimen Stock Certificate of the Registrant.
5.1** -- Form of Opinion of Morrison & Foerster LLP.
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 Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, and Lazard
Freres & Co. LLC (collectively, the "Initial
Purchasers").
10.4** -- Registration Rights Agreement, dated as of June 17, 1997,
by and among the Registrant and the Initial 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 Registrant'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.
</TABLE>
<PAGE> 261
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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 Salomon Brothers
Inc, Lazard Freres & Co. LLC, Chase Securities Inc. and
BancBoston Securities Inc.
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.
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 Morrison & Foerster LLP (contained in Exhibit
5.1).
24.1** -- Power of Attorney.
27.1** -- Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
** Exhibit previously filed.
+ Document for which confidential treatment has been requested.
<PAGE> 1
EXHIBIT 4.1
Number Shares
VI CUSIP 923433 10 6
SEE REVERSE FOR CERTAIN DEFINITIONS
VERIO
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE IN
SOUTH ST. PAUL, MN OR NEW YORK, NY
This Certifies that
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK PAR VALUE $.001 PER SHARE OF
Verio Inc. transferable on the books of the Corporation by the holder hereof in
person or by duly authorized attorney upon the surrender of this Certificate
properly endorsed. This Certificate is not valid unless countersigned by the
Transfer Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
/s/ Carla Hamre Donelson [VERIO INC.] /s/ Justin L. Jaschke
Secretary [ SEAL ] Chief Executive Officer
[ DELAWARE ]
Countersigned and Registered:
NORWEST BANK MINNESOTA, N.A.
Transfer Agent
and Registrar
By
Authorized Signature
<PAGE> 2
VERIO INC.
The Corporation will, upon request and without charge, furnish any
stockholder information as to the powers, designations, preferences and relative
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
<TABLE>
<CAPTION>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT- __________ Custodian _________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants
in common Act _________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value received, __________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]__________________________________________
________________________________________________________________________________
(NAME AND ADDRESS OF ASSIGNEE SHOULD BE PRINTED OR TYPEWRITTEN)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate and do hereby
irrevocably constitute and appoint ____________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation, with
full power of substitution in the premises.
Dated__________________________________
AFFIX MEDALLION SIGNATURE
GUARANTEE IMPRINT BELOW _________________________________________
NOTICE: THE SIGNATURE
TO THIS ASSIGNMENT ------>
MUST CORRESPOND WITH _________________________________________
THE NAME(S) AS ABOVE SIGNATURE(S) TO THIS ASSIGNMENT
WRITTEN UPON THE FACE MUST CORRESPOND WITH THE NAME AS WRITTEN
OF THE CERTIFICATE IN UPON THE FACE OF THE CERTIFICATE IN EVERY
EVERY PARTICULAR, PARTICULAR, WITHOUT ALTERATION OR
WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
ENLARGEMENT, OR ANY
CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION SUCH AS A
SECURITIES BROKER/DEALER, COMMERCIAL
BANK, TRUST COMPANY, SAVINGS ASSOCIATION
OR A CREDIT UNION PARTICIPATING IN A
MEDALLION PROGRAM APPROVED BY THE
SECURITIES TRANSFER ASSOCIATION, INC.
<PAGE> 1
EXHIBIT 10.25
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
QWEST COMMUNICATIONS CORPORATION
CAPACITY AND SERVICES AGREEMENT
This Capacity and Services Agreement, having Service Agreement No.
___________________, is entered into as of March 31, 1998 (the "EFFECTIVE
DATE"), by and between Qwest Communications Corporation, a Delaware
corporation ("QWEST"), and Verio Inc. a Delaware corporation ("VERIO").
1. SERVICES TO BE PROVIDED BY QWEST:
1.1 Qwest shall make available to Verio the telecommunications capacity, and
related ancillary services identified in the Service and Pricing Exhibit
attached hereto as "EXHIBIT A", which is incorporated by this reference
(the "SERVICE AND PRICING EXHIBIT") together with any other services
and/or products or facilities that Qwest makes generally available to its
customers from time to time (the "SERVICE" or "SERVICES"). Services
requested by Verio shall be in the form of the Service Order attached as
"EXHIBIT B" to this Agreement, which is incorporated by this reference
(hereafter, any such order is a "SERVICE ORDER(S)"). Each Service Order
shall reference this Agreement by Service Agreement Number and shall become
a part of this Service Agreement when executed by duly authorized
representatives of Qwest and Verio.
1.2 Qwest shall be deemed to have accepted on receipt any Service Order
submitted by Verio that is (i) complete; (ii) conforms with the terms of
this Agreement; (iii) requests services at an (***) level or below; and
(iv) is within the Network Build Plan attached as "EXHIBIT C" to this
Agreement, as such plan may be amended from time to time ("a Permitted
Service Order") and, to the extent applicable, the Interval Guidelines set
forth in Schedule A-1 to Exhibit A. Qwest shall provide to Verio the
Services identified in the Permitted Service Order, in accordance with the
terms of the Service Order and this Agreement. In addition to any Permitted
Service Order, Verio may submit Service Orders for other Services
("Additional Service Orders"). Qwest reserves the right to reject any
Additional Service Order. Any Additional Service Order not rejected by
Qwest within five (5) business days of submission shall be deemed to have
been accepted by Qwest. Upon acceptance by Qwest of a duly executed
Additional Service Order, Qwest shall provide to Verio those Services
identified in the Service Order, in accordance with the terms of the
Service Order and this Agreement.
1.3 As used herein, the term "Verio" includes Verio, Inc., and any subsidiary
or other entity in which Verio, Inc. holds or has the option to acquire at
least a twenty percent (20%) ownership interest (each a "Verio Affiliate").
Any Verio Affiliate may order Services subject to the terms and conditions
of this Agreement, and all payments to Qwest for such Services by any Verio
Affiliate shall be aggregated for the purposes of determining whether the
Total Minimum Commitment or any Minimum Annual Purchase ("MAPC") set forth
in EXHIBIT A has been satisfied. Verio, Inc. shall remain primarily
Qwest Communications
1
Confidential and Proprietary Verio Initials:____
<PAGE> 2
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
liable to Qwest for all payments due to Qwest hereunder, irrespective of
whether a given Service was ordered by or provided to any Verio Affiliate.
1.4 For purposes of this Agreement, a reference to a "year" means a contract
year.
1.5 If Qwest fails to deliver Services ordered under a Permitted Service Order
or an accepted Additional Service Order within (***) days of the
Availability Date stated in such Service Order, then the charges that would
have been payable for such services over the Service Term stated in the
Service Order, calculated in accordance with Exhibit A hereof, shall be
included for purposes of determining whether Verio has met its MAPC and
Total Minimum Commitment for purposes of Exhibit A hereto and at Verio's
election:
(a) Verio shall be entitled to terminate the Service Order or to obtain
specific performance of Qwest's obligation to deliver the Services; or
(b) Verio may require Qwest to obtain, on Verio's behalf, services from a
third party substantially equivalent to the Services for the term of
the Service Order ("alternative services"), provided, however, that
Qwest shall pay to Verio the difference between the cost of the
alternative services and the charges which would have been payable for
the Ordered Services under this Agreement. If Qwest provisions
alternative services, Qwest shall ensure that the alternative services
are discontinued at Qwest's costs and replaced with Services provided
by Qwest under this Agreement at such time as Qwest is able to provide
such Services. If Qwest fails to obtain the alternative services within
(***) days of the Availability Date, Qwest shall immediately advise
Verio of the period by which Qwest believes that it will be in a
position to provide the Services ("future availability date"),
following which Verio may obtain alternative services. Qwest shall pay
to Verio the difference between the costs of the alternative Services
and the charges which Verio would have paid had Qwest provided the
Services in accordance with this Agreement, provided that Verio agrees
to use reasonable efforts to minimize such costs and, to the extent
commercially practicable, to negotiate terms for the provision of the
alternative services that will permit Qwest, at Qwest's cost, to
replace the alternative services as at the future availability date
with equivalent Services to be delivered by Qwest.
1.6 In the event that Verio (***) hereof, and in addition to the remedies set
forth in Section 1.5, if Qwest fails to deliver (***) Services ordered by
Verio under (***) Permitted Service Order, or fails to deliver (***)
Services ordered under an accepted Additional Service Order, on (***)
consecutive occasions or more than (***) times in any one year during the
Term, the charges for which over the (***) year of the Minimum Service Term
for those Services would equal or exceed (***) percent (***%) of the
MAPC for the year in which the Services are ordered, then, (***)
Qwest Communications
2
Confidential and Proprietary Verio Initials:____
<PAGE> 3
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(***)
1.7 In addition to the remedies in Section 1.5, if Qwest fails to deliver (***)
Services ordered by Verio under a Permitted Service Order, or fails to
deliver one or more Services ordered by Verio under an accepted Additional
Service Order, the charges for which over the (***) year of the Minimum
Service Term for those Services would equal or exceed (***) percent (***%)
of the MAPC for the year in which the Services are ordered, then Verio may
elect, at its option either to (i) terminate the provisions of Sections 3.1
and 3.2 of Exhibit A and continue this Agreement in effect without the MAPC
applying thereafter or (ii) terminate this Agreement with no further
obligations to Qwest hereunder (except for the obligation to pay for any
Services delivered prior to the date of termination not previously invoiced
or paid), whereupon Qwest shall immediately (***).
1.8 Qwest shall make available to Verio collocation facilities in accordance
with the Network Build Plan, subject to the terms and conditions of the
Collocation Agreement set forth in the attached "EXHIBIT E" and subject to
Qwest's commitments as at the date of this Agreement.
1.9 (***)
2. OBLIGATIONS OF VERIO:
Verio acknowledges that Qwest shall have no responsibility for
installation, testing and operation of the Interconnection Facilities (as
defined in Section 1.4 of the Service and Pricing Exhibit), and any
services and equipment other than those Services specifically provided by
Qwest under this Agreement.
3. IMPLEMENTATION, NETWORK PLANNING, AND JOINT MARKETING
3.1 Within thirty (30) days of the Effective Date each party will assign a
Project Manager with responsibility for ensuring coordination between the
parties and implementation of this Agreement.
3.2 Qwest and Verio will jointly establish a Network Planning Team. This
Network Planning Team will be responsible for developing the Network
Transition Plan, which will define the key components of the timely
transition of the Verio network capacity requirements onto the Qwest
network. Once the Network Transition Plan has been completed, the Network
Planning Team will be responsible for developing the Verio Network
Evolution Plan on the Qwest network during the term of this Agreement. This
Network Planning Team will meet as required, but not less than once a
quarter, to develop the Verio
Qwest Communications
3
Confidential and Proprietary Verio Initials:_____
<PAGE> 4
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
network evolutionary design and capacity forecast requirements. Qwest will
deliver Services under this Agreement in accordance with the Network
Build Plan which is attached hereto as Exhibit B. Qwest may amend the
Network Build Plan from time to time by adding to the capacity or routes
which Qwest plans to construct, but Qwest may not delete routes or capacity
from a prior version of the Network Build Plan, or extend projected
delivery dates. The Network Build Plan and delivery schedule reflected
therein for new capacity not reflected in the prior version of the Network
Build Plan shall be consistent with network build plans developed by Qwest
for its other customers. Verio will have the right to order Services in
accordance with the routes, service availability, and space availability
information set forth in the Network Build Plan. As part of the Network
Planning Team, Qwest will provide at a minimum quarterly updates of its
Network Build Plan. In the event that Qwest proposes to undertake major
expansions of its network, including in relation to capacity or route
swaps, Qwest shall notify Verio of such expansion proposals as soon as
practicable.
3.3 In the event that Verio has requirements for circuits or Services not
included in the Network Build Plan, then at Verio's request, Qwest will
work cooperatively with Verio to purchase off-net circuits (i.e., circuits
or Services acquired by Qwest from a network operated by a third party) in
order to make such circuits or services available to Verio in lieu of
Services provided by use of Qwest's own network.
3.4 Qwest will use its best efforts to provide an electronic provisioning tool
to Verio, as it becomes available to Qwest as part of its network
facilities. Qwest and Verio will cooperate to link their respective Network
Operating Centers through use of a common platform and integrated trouble
ticketing systems.
3.5 (***)
3.6 The parties agree to use reasonable efforts to develop a non-exclusive
joint marketing program for products and services. The joint marketing
program may include linkage of brands in marketing communications, joint
product development and leverage of customer relationships, as the parties
may agree in writing. Qwest will grant Verio the right to incorporate the
"QwestLinked(TM)" logo and brand name into any sales initiative that may
become a part of any such joint marketing programs.
4. TERM:
4.1 This Agreement shall be effective between the parties as of the Effective
Date. The initial term (the "INITIAL TERM") of this Agreement shall expire
fifteen (15) years from the
Qwest Communications
4
Confidential and Proprietary Verio Initials:____
<PAGE> 5
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
Effective Date, unless either party earlier terminates this Agreement in
the manner provided herein.
4.2 Upon the expiration of the Initial Term, the term of this Agreement shall
be renewed automatically on a month-to-month basis (hereafter, the "RENEWAL
TERM") unless and until an Amendment is executed by both parties extending
the Renewal Term, or either party terminates this Agreement in the manner
provided herein.
4.3 The Initial Term and Renewal Term are sometimes referred to together herein
as the "TERM."
4.4 Notwithstanding anything to the contrary in this Section 4, if the Minimum
Service Term (as set forth in Section 4.3 of the Service and Pricing
Exhibit) for a particular circuit or Service extends beyond the expiration
of the Term of this Agreement, then this Agreement shall continue in effect
until the expiration or termination of the applicable Minimum Service Term,
but only as to the circuit or Service so affected, subject to the
termination rights of Qwest and Verio under Sections 1 and 8 of this
Service Agreement.
5. MINIMUM COMMITMENTS, RATES AND PAYMENTS:
5.1 Rates and charges for the Services, as well as Verio's Total Minimum
Commitment and Minimum Annual Purchase Commitments to purchase Services,
are set forth in the Service and Pricing Exhibit except as otherwise
specifically provided in this Agreement.
5.2 Recurring charges shall be invoiced by Qwest on a monthly basis in advance
and non-recurring charges shall be invoiced in arrears. On or after the
fifth business day of each month during the Term, Qwest shall issue one
consolidated invoice covering all recurring charges for the current month
and non-recurring charges for the previous month. If the Start of Service
Date (as defined in Section 2.1 of the Service and Pricing Exhibit) for any
Service falls on other than the first day of any month, the first invoice
to Verio shall consist of: (1) the pro-rata portion of the applicable
monthly charge covering the period from the Start of Service Date to the
first day of the subsequent month, and (2) the monthly charge for the
following month.
5.3 Verio shall make all payments due hereunder within thirty (30) days after
the date of Verio's receipt of Qwest's invoice. If any undisputed amount
due under this Agreement is not received by the due date, in addition to
its other remedies available hereunder, Qwest may in its sole discretion:
(a) impose a late payment charge of the lower of 1.5% per month and the
highest rate legally permissible (such late charge shall be payable upon
demand by Qwest); and/or (b) if there are three (3) or more failures by
Verio in any twelve (12) month period to make payments of undisputed
recurring charges in accordance with this Section 5.3 or if Verio fails to
make payments when due of undisputed non-recurring charges in excess of
$(***), require the prepayment of up to two (2) months of recurring
charges referred to in the relevant unpaid invoices as a
Qwest Communications
5
Confidential and Proprietary Verio Initials:____
<PAGE> 6
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
condition of the continued availability of the Services, which prepayment
subject to Sections 1.6 and 1.7 hereof shall be held until satisfaction of
the Total Minimum Commitment, or, if the Total Minimum Commitment has not
been satisfied shall be held and applied against the last two (2) months of
charges hereunder prior to termination of this Agreement. Notwithstanding
anything in this Agreement to the contrary, no payment due hereunder is
subject to reduction, set-off or adjustment of any nature by Verio, except
as is specifically provided in Section 1 of this Agreement or Section 5 of
the Service and Pricing Exhibit regarding Outage Credits. In no event shall
the malfunction or nonoperation of Verio's Interconnection Facilities
(including local access when Verio is responsible therefor) relieve Verio
of its obligation to pay for the Services.
5.4 (***)
5.5 All disputes or requests for billing adjustments must be submitted in
writing and submitted with payment of undisputed amounts due. Any amounts
which are determined by Qwest to be in error or not in compliance with this
Agreement shall be adjusted on the next month's invoice. Disputes shall not
be cause for Verio to delay payment of the undisputed balance to Qwest
according to the terms outlined in Section 5.3 above.
5.6 Invoices submitted to Verio by Qwest shall conform to Qwest's standard
billing format and content, as modified by Qwest from time to time.
5.7 Verio shall be responsible for payment of any local, state or federal
sales, excise, access or other similar surcharges imposed on or based upon
the provision, sales or use of Services provided under this Agreement,
unless otherwise exempt as a matter of law.
6. EVENTS OF DEFAULT
6.1 A "DEFAULT" shall occur if: (a) Verio fails to make any undisputed payment
required to be made by it under this Agreement and any such failure remains
uncorrected for a period of twenty (20) business days after written notice
by Qwest to Verio of the payment failure; (b) Verio fails to make a deposit
which is required to be made under Section 5.3 hereof within twenty (20)
business days after written notice by Qwest to Verio of the requirement for
such deposit; (c) either party fails in any material respect to perform or
observe any material term or obligation contained in this Agreement (other
than any payment, or
Qwest Communications
6
Confidential and Proprietary Verio Initials:_____
<PAGE> 7
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
deposit obligation of Verio), which failure remains uncorrected for a
period of 30 calendar days after written notice from the non-defaulting
party informing the defaulting party of such failure; (d) there is an
Adverse Material Change (as defined Section 6.2 of this Service Agreement)
in Verio's creditworthiness following the Effective Date; (e) if more than
(***) percent (***%) of the Services comprised of telecommunications
capacity provided to Verio hereunder chronically fail to comply with the
Technical Specifications set forth in Schedule A-2 to Exhibit A hereto
(with chronic failure meaning a service, facility or circuit experiencing
(***) or (***) failures or more than (***) hours of Outages over any (***)
consecutive day period); (f) Qwest makes a general assignment for the
benefit of creditors, or a petition in bankruptcy or under any insolvency
law us filed by or against Qwest and such petition is not dismissed within
sixty (60) days after it has been filed; (***)
7. REMEDIES FOLLOWING DEFAULT
7.1. If Verio is in Default under Section 6.1 (a) hereof, Qwest shall be
entitled to exercise the remedies described in Section 5.3 hereof and no
others. If Verio is in Default under Section 6.1 (b) hereof, Qwest may, at
its election, condition its acceptance of any further Service Orders
submitted by Verio following the date of such Default on Verio's curing
such Default or, if Verio fails to cure such Default, providing such other
assurance of payment as Qwest may require to establish assurance of
payment. If a Default by Verio under Section 6.1 (b) continues uncured for
a period of thirty (30) days, subject to the last sentence of this Section,
Qwest may then suspend Services or terminate this Agreement by providing
written notice to Verio in the manner provided in Section 8.2 below. If
Verio is in default under Section 6.1 (c), and such Default would have a
material adverse impact on Verio's ability to discharge its payment
obligations hereunder or is a Default with respect to Section 12.1 hereof,
or if Verio is in Default under Section 6.1 (d), then, in addition to its
other rights and remedies under this Services Agreement or under law, Qwest
may terminate this Services Agreement as provided herein. (***)
7.2 If Qwest is in Default under Section 6.1 (c) as a result of its failure to
deliver Services hereunder, then Verio shall be entitled to exercise the
remedies described in Sections 1.5, 1.6 and 1.7 hereof, including the right
to terminate this Agreement in the events and as described in Section 1.7,
or (***) If Qwest is in Default under Section 6.1 (e), then Verio shall be
entitled to exercise the same remedies described in Sections 1.5, 1.6 and
1.7, as if Qwest had failed to
Qwest Communications
7
Confidential and Proprietary Verio Initials:____
<PAGE> 8
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
deliver the Services that chronically failed to meet the Technical
Specifications. (***)
7.3 Except as and to the extent that the rights and remedies of the parties are
expressly defined or limited pursuant to Sections 7.1 and 7.2 above or
Section 14 below, all remedies provided under this Services Agreement are
cumulative and are without prejudice to any other rights or remedies that
the parties may have at law or in equity.
8. TERMINATION:
8.1 Verio may terminate this Agreement: (a) effective upon written notice to
Qwest as provided in Sections 1.7 and 7.2 if Qwest is in Default
hereunder; (b) effective upon thirty (30) calendar days prior written
notice, if any material rate or term contained herein and relevant to the
affected Services is materially changed by order of the highest court of
competent jurisdiction to which the matter is appealed, the Federal
Communications Commission, or other local, state or federal government
authority; (c) effective upon thirty (30) calendar days prior written
notice, with or without cause, following the expiration of the Initial
Term; or (d) pursuant to Section 9.2 hereof or elect to terminate one or
more Service Orders and/or terminate the provisions of Sections 3.1 and
3.2 of Exhibit A and continue the remaining Agreement in place.
8.2 Qwest may terminate this Agreement: (a) effective upon written notice to
Verio as provided in Section 7.1 if Verio is in Default hereunder; (b)
effective upon thirty (30) calendar days prior written notice, with or
without cause, following the expiration of the Initial Term; or (c)
provided that Qwest has complied with its obligations under Section 9.4
hereof, effective immediately upon written notice to Verio if Qwest does
not maintain or loses any required regulatory or other governmental
authorizations to provide the Services, as described in Section 9.1 of this
Agreement, without any further obligation on the part of Verio thereafter
other than to meet its payment obligations hereunder for Services delivered
by Qwest prior to the date of termination.
8.3 Verio may terminate the affected circuit, facility or other portion or
portions of a Service Order or Service Orders upon ten (10) calendar days
prior written notice following failure of performance, in the manner and
subject to Sections 1.5, 10.2 of this Agreement or in the event that a
Service, facility or circuit chronically (as that term is defined in
Section 8.1(d) hereof) fails to comply with the Specifications. If Verio
exercises its termination
Confidential and Proprietary Verio Initials:
-----
Qwest Communications
8
<PAGE> 9
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
rights pursuant to this Section 8.3, the charges which would have been
payable for the terminated Services for the Service Term for those Services
shall be included for purposes of determining whether Verio has met its
MAPC and Total Minimum Commitment pursuant to Section 3 of Exhibit A
hereof.
8.4 Upon any termination of this Agreement by Verio pursuant to Section 8.1(a),
any and all of Verio's remaining obligations pursuant to Exhibit A
hereto shall terminate, (***) On any other termination of this Agreement
by Verio pursuant to Section 8.1, (***) Should Verio exercise its right to
terminate this Agreement in whole or in part pursuant to Section 8, at
Verio's election, (***)
9. GOVERNMENTAL AUTHORITY:
9.1 Each party shall fully comply with all laws, regulations and authorities
relating to its business which are material to its performance under this
Service Agreement, including, but not limited to, those outlined in this
Section 9.
9.2 Verio acknowledges that the obligation of Qwest to provide the Services to
Verio is subject to the receipt by Qwest of any required regulatory or
other governmental authorizations. In the event that Qwest files a tariff
with the appropriate regulatory agency that is in any manner inconsistent
with the Terms of this Agreement, the Terms of this Agreement shall
control. If Qwest chooses to apply tariff terms which are inconsistent with
the Terms set forth herein, Verio may terminate this Agreement without any
liability to Qwest, apart from liability for Services rendered by Qwest in
accordance with this Agreement to the date of termination. Qwest
acknowledges that any tariff provision which alters Verio's right to
terminate this Agreement is materially inconsistent with this Agreement.
Provided that Qwest has met its obligations under Section 9.3(c) hereof,
Qwest reserves the right to terminate this Agreement pursuant to Section
8.2 of this to this Agreement pursuant to Section 8.2 of this
Qwest Communications
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<PAGE> 10
Service Agreement if at any time Qwest does not have or loses the required
regulatory or other governmental authorizations to provide the Services.
9.3 Verio represents and warrants that: (a) Verio has received all necessary
permits, licenses, approvals, grants, and charters of whatsoever kind
necessary to carry out the business in which Verio is engaged; and (b)
Verio has complied and does comply with all laws, regulations, orders, and
statutes which may be applicable to Verio, whether local, State or Federal.
From the date of this Agreement until the termination hereof, Verio agrees
to operate in accordance with and to maintain current all such
certifications, permits, licenses, approvals, grants, charters, and to
comply with all applicable laws, regulations, orders and statutes, whether
local, State or Federal. A breach by Verio of any of the representations,
warranties or covenants of this Section 9.2 shall be deemed a Default
hereunder, and shall allow Qwest to terminate this Agreement in the manner
described in Section 8.2 of this Service Agreement.
9.4 Qwest represents and warrants that: (a) Qwest has received all necessary
permits, licenses, approvals, grants, and charters of whatsoever kind
necessary to carry out the business in which Qwest is engaged; (b) Qwest
has complied and does comply with all laws, regulations, orders, and
statutes which may be applicable to Qwest, whether local, State or Federal;
(c) from the date of this Agreement until the termination hereof, Quest
agrees to operate in accordance with and to obtain and maintain current all
such certifications, permits, licenses, approvals, grants, charters, and to
comply with all applicable laws, regulations, orders and statutes, whether
local, State or Federal.
9.5 Notwithstanding any other provision of this Agreement, a failure by a Party
to comply with its obligations under Sections 9.1, 9.3 or 9.4 shall not be
deemed a Default by that Party unless the failure would have a material
adverse effect on the Party's ability to perform its obligations under this
Agreement.
10. FORCE MAJEURE
10.1 Except as is provided in Section 10.2 below, neither party shall not be
liable for any failure of performance hereunder due to causes beyond its
reasonable control, including, but not limited to: acts of God, storm,
extreme temperatures or other similar catastrophes; any law, order,
regulation, direction, action or request of the United States government,
or of any other government, including state and local governments having
jurisdiction over either of the parties, or of any department, agency,
commission, court, bureau, corporation or other instrumentality of any one
or more said governments, or of any civil or military authority; national
emergencies, insurrections, riots, wars, or strikes, lock-outs, work
stoppages or other labor difficulties; actions or inaction's of a third
party provider or operator of facilities employed in provision of the
Services; or any other conditions or circumstances beyond the reasonable
control of Qwest which impede or affect the Services or the transmission of
telecommunications services. Notwithstanding the foregoing, the following
are not events of Force Majeure: fire, explosion, vandalism, fiber
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optic cable cut, or the failure of a subcontractor to perform its
obligations under an agreement with a Party.
10.2 If any failure of performance on the part of Qwest described in Section
10.1 of this Service Agreement shall be: (a) for thirty (30) calendar days
or less, then this Agreement shall remain in effect, but Verio shall be
relieved of its obligation to pay for that portion of the Services affected
for the period of such failure of performance; or (b) for more than thirty
(30) days, then Verio may terminate only that portion of any Service Order
or Service Orders related to the Services so affected, by written notice to
Qwest, in accordance with Section 8.3 of this Service Agreement, in which
case the charges which would have been payable in respect of the terminated
Services for the Service Term applicable to those Services shall be
included for purposes of determining whether Verio has met its MAPC and
Total Minimum Commitment pursuant to Section 3 of Exhibit A hereof.
10.3 If the Services are unavailable to Verio as a result of any events
described in Section 10.1, Verio shall be entitled to an Outage Credit
under Section 5 of the Service and Pricing Exhibit.
11. INDEMNIFICATION:
Each party ("Indemnitor") shall defend, hold harmless, and indemnify the
other ("Indemnitee") from and against all claims, demands, actions, causes
of action, judgments, costs and reasonable attorneys' fees and expenses of
any kind or nature for bodily injury, death, property damage, or other
damages of any kind incurred by Indemnitee, its employees, or third parties
arising under this Agreement due to Indemnitor's negligence or willful
misconduct; except that Verio shall defend, indemnify and hold Qwest
harmless from and against any claim of libel, slander, or infringement of
any third party's copyright, trademark or other proprietary right if such
claim is caused by Verio's transmissions using Qwest Facilities unless due
to Qwest's negligence or willful misconduct.
12. ASSIGNMENT:
12.1 Neither this Agreement nor any of Verio's rights or obligations hereunder
may be sold, assigned, sublet, encumbered or transferred by operation of
law or otherwise (hereafter, a "Transfer"), except (a) in the ordinary
course of its business as an Internet service provider, (b) to a Verio
Affiliate, (c) in connection with a sale or assignment by operation of law
or otherwise of all or substantially all of Verio's assets, without the
prior written consent of Qwest, which will not be unreasonably withheld or
(d) in connection with a transfer to or enforcement by a secured creditor
by way of security (each a "Permitted Transfer"). Any Transfer by Verio
other than a Permitted Transfer without Qwest's prior written Consent shall
entitle Qwest, at its option, to: (x) consider the Transfer void; (y)
consent to the Transfer, and thereafter hold any transferee(s) liable
hereunder; or (z) terminate this Agreement upon delivering written notice
to Verio. Subject to the
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
foregoing, this Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors or assigns. (***) In all
other cases, Qwest may transfer, assign or otherwise in any manner encumber
this Agreement and its rights and obligations hereunder without the need to
obtain Verio's prior consent.
13. TITLE:
(***) Verio expressly disclaims any right, title, perpetual right of
use or any other interest in or to any equipment or property used or
supplied by Qwest under this Agreement.
14. WARRANTIES AND LIMITATION OF LIABILITY:
14.1 Qwest warrants (a) that the Services shall be provided to Verio and shall
operate in accordance with prevailing telecommunications industry standards
(hereinafter the "TECHNICAL STANDARDS") and the Specifications set forth in
Exhibit A hereof. If Verio determines that the Services are not being
provided in accordance with the Technical Standards and the Specifications
(hereinafter, a "DEFECT" or "DEFECTS"), Qwest shall use commercially
reasonable best efforts under the circumstances to conform the Services to
the Technical Standards, and (b) the Services and any that all components
of any systems/product utilized or relied upon by Qwest to perform the
Services, are designed to be used prior to, during and after the calendar
year 2000 AD, and that the Services and the systems/product will operate
during each such time period without error or interruption relating to
date data, including without limitation, any error or interruption relating
to, or the product of, date data which represents or references different
centuries or more than one century, or leap year, in any level of any
systems/product hardware or software, including, without limitation,
microcode, firmware, application programs, user interfaces, files and
databases.
14.2 THE WARRANTIES CONTAINED IN SECTION 14.1 OF THIS SERVICE AGREEMENT ARE
EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES, WHETHER EXPRESS, IMPLIED OR
STATUTORY, INCLUDING WITHOUT LIMITATION IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. QWEST HEREBY
SPECIFICALLY DISCLAIMS ANY LIABILITY TO CUSTOMER FOR INTERRUPTIONS
AFFECTING THE SERVICES FURNISHED HEREUNDER WHICH ARE ATTRIBUTABLE TO
CUSTOMER'S INTERCONNECTION FACILITIES (AS DEFINED IN SECTION 1.4 OF THE
SERVICE AND PRICING EXHIBIT) OR TO CUSTOMER'S EQUIPMENT FAILURES, OR TO
CUSTOMER'S BREACH OF THIS AGREEMENT.
Qwest Communications
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
14.3 APART FROM CLAIMS ARISING UNDER SECTION 15 HEREOF, IN NO EVENT SHALL EITHER
PARTY OR ANY OF ITS AFFILIATES BE LIABLE TO THE OTHER PARTY OR ANY OF ITS
AFFILIATES OR EMPLOYEES OR TO ANY THIRD PARTY FOR ANY LOSS OF PROFIT OR
REVENUE, OR FOR ANY INDIRECT, CONSEQUENTIAL, INCIDENTAL, PUNITIVE OR
SIMILAR OR ADDITIONAL DAMAGES, WHETHER INCURRED OR SUFFERED AS A RESULT OF
UNAVAILABILITY OF FACILITIES OR SERVICES, INCORRECT OR DEFECTIVE
TRANSMISSIONS, PERFORMANCE, NON-PERFORMANCE, TERMINATION, BREACH, OR OTHER
ACTION OR INACTION UNDER THIS AGREEMENT, OR FOR ANY OTHER REASON, EVEN IF
THAT PARTY IS ADVISED OF THE POSSIBILITY OF SUCH LOSS OR DAMAGE;
14.4 Verio acknowledges that Qwest has no ability to independently test or
maintain Services between off net cities. Consequently, if Qwest provides
such Services, then notwithstanding anything in this Agreement to the
contrary, Qwest's entire duty with respect to such Services shall be to use
its best efforts to test and maintain such Services in accordance with
Qwest's Specifications.
15. NON-DISCLOSURE AND PUBLICITY:
15.1 The parties acknowledge that the Mutual Non-Disclosure Agreement dated
October 31, 1997 ("NDA"), currently in effect between Verio and Qwest,
remains in full force and effect, and that this Agreement and all
information related hereto constitutes Proprietary Information as defined
therein. The parties further acknowledge and agree that all "Proprietary
Information," as defined in the NDA, disclosed in the course of their
discussions concerning this Agreement shall be subject to the terms of that
agreement. Notwithstanding the foregoing, the parties shall not be
precluded from confidential discussions with their respective
stockholders, key employees, legal counsel, accountants, banks and other
agents, who are subject to a duty of confidence in relation to the
Proprietary Information which duty is not inconsistent with the terms of
the NDA and this Agreement, as reasonably deemed necessary by each party,
respectively, in order to facilitate the transactions contemplated hereby.
By its execution hereof, Qwest Communications International, Inc. hereby
agrees that it shall be and hereby is bound by all of the agreements and
obligations of Qwest under the NDA, as if it was a direct party thereto.
16. ARBITRATION:
16.1 The parties shall endeavor to equitably settle all disputes arising out of
or related to this Agreement in an informal manner and in good faith. If
after good-faith negotiations the Parties still are unable to resolve the
dispute, then either Party may escalate resolution of the dispute to
mediation under the auspices of JA.M.S/ENDISPUTE. If the dispute is not
resolved in this manner, either Party may pursue its remedies in a court of
law.
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<PAGE> 14
16.2 The parties hereto agree that a prevailing party shall be entitled to
recover all reasonable costs and expenses (including all reasonable
attorney's fees and disbursements) of such court proceedings, as well as
all cost for said proceeding. Such prevailing party shall also be entitled
to reasonable attorney's fees and costs incurred in enforcing a judgment of
the court separately from and in addition to any other amount included in
such judgment. This Section 16.3 shall be severable from the other
provisions of this Service Agreement and shall survive and not be merged
into any such judgment.
17. USE OF SERVICES:
17.1 Verio shall use and permit the use of the Services provided by Qwest
hereunder solely in connection with Verio's provision of Services to
Verio's Affiliates or provision by Verio or Verio's Affiliates to third
parties of Internet-based services or data services, and not for the
provision of voice telephone services not using Internet protocol
(directly or through an Affiliate, reseller or other third party). Qwest's
obligation to provide the Services specified herein is conditioned upon
Verio using commercially reasonable best efforts to ensure that the
Services are not used for any unlawful purpose or in violation of any
governmental regulations or authorizations as outlined in Section 9 of this
Service Agreement.
18. MISCELLANEOUS:
18.1 Verio shall execute such other documents, provide such information and
cooperate with Qwest, all as may be reasonably required by Qwest in
connection with providing the Services.
18.2 Neither this Agreement, nor the provision of Services hereunder, shall
constitute, create, give effect to or otherwise recognize a joint venture,
partnership, or business entity of any kind, or result in a joint
communications service offering to any third parties, and the rights and
obligations of the parties will be limited to those expressly set forth
herein. Nothing herein will be construed as providing for the sharing of
profits or losses arising out of the efforts of the parties hereto.
18.3 The failure of either party to give notice of default or to enforce or
insist upon compliance with any of the terms or conditions of this
Agreement shall not constitute a waiver of any term or condition of this
Agreement.
18.4 Subject to Section 16 of this Service Agreement, in the event suit is
brought or an attorney is retained by either party to enforce the terms of
this Agreement or to collect any moneys due hereunder or to collect money
damages for breach hereof, the prevailing party shall be entitled to
recover, in addition to any other remedy, reimbursement for reasonable
attorneys' fees, court costs, costs of investigation and other related
expenses incurred in connection therewith.
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18.5 Verio acknowledges that at least part of the Services are or will be
provided through a Qwest "NETWORK MANAGEMENT CENTER" located in Denver,
Colorado. Accordingly, this Agreement shall be construed under the laws
of the State of Colorado without regard to its choice of law principles.
Except as is provided in Section 16 of this Service Agreement, venue and
jurisdiction shall lie exclusively with the District Court in the City
and County of Denver.
18.6 No subsequent agreement concerning the Services or modification to this
Agreement shall be binding upon the parties unless it is made in writing
by an authorized representative of Verio and an authorized Representative
of Qwest Communications at its headquarters in Denver, Colorado.
18.7 If any part of any provision of this Agreement shall be invalid or
unenforceable under applicable law, said part shall be ineffective to the
extent of such invalidity only, without in any way affecting the
remaining parts of said provision or the remaining provisions of this
Agreement, and the Verio and Qwest agrees to negotiate with respect to
any such invalid or unenforceable part to the extent necessary to render
such part valid and enforceable.
18.8 The terms and provisions contained in this Agreement that by their sense
and context are intended to survive the performance thereof by the
parties hereto shall survive the completion of performance and
termination of this Agreement, including, without limitation, the making
of any and all payments due hereunder.
18.9 Words having technical or trade meanings shall be so construed.
18.10 All notices, requests, demands and other communications required or
permitted hereunder shall be in writing and shall be given by: (a) hand
delivery; (b) first-class registered or certified mail with postage
prepaid; (c) overnight receipted courier service, or (d) telephonically
confirmed facsimile transmission, which notice is addressed to the party
at the address set forth below, or such other address as may hereafter be
designated in writing by the party. Notices given in accordance with this
Section shall be effective upon receipt or when receipt is refused.
All notices to Qwest shall be addressed to
Qwest Communications Corporation
555 17th Street, Suite 1000
Denver, Colorado 80202
Facsimile: (303) 291-1724
Phone: (303) 291-1400
Attn.: Carrier Contracts Admin.
Qwest Communications
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
All notices to Verio shall be addressed to:
Verio, Inc.
8005 S. Chester Street, Suite 200
Englewood, Colorado 80112
Facsimile, 303-792-5621 Phone: 303-645-1903
Attn.: Mr. Chris DeMarche
Copy to: Carla Hamre Donelson, Esq.
At the above address
Facsimile: 303-708-2494 Phone: 303-645-1908
The addresses set forth may be changed by appropriate notice to the other
party.
18.11 This Agreement, including its schedules and exhibits incorporated
herein by reference, together with (*) executed
concurrently herewith and the NDA comprises the complete and exclusive
statement of the agreement of the parties concerning the subject matter
hereof, and supersedes all previous statements, representations, and
agreements concerning the subject matter hereof. In the event of any
conflict between the provisions of this Agreement and the terms of any
Service Order(s) issued and accepted hereunder or any exhibits hereto,
the conflict shall be resolved by reference to said documents in the
following order of priority of interpretation (except as is otherwise
specifically provided in this Agreement or in any exhibits): (a) any
exhibit, with reference to the same in order of attachment to this
Agreement; (b) this Agreement; and (c) any Service Order(s).
Notwithstanding the foregoing, no provision or term of any Service Order
or exhibit shall be a part of this Agreement or binding on Qwest or
Verio unless and until such Service Order or document has been executed
by authorized representatives of Qwest and Verio.
DATED as of the first date written above.
VERIO, INC.:
By: /s/ CHRIS DEMARCHE
--------------------------------------
Name: Chris DeMarche
Title: Chief technical Officer
Date: 3/31/98
QWEST COMMUNICATIONS CORPORATION:
By: /s/ GREGORY M. CASEY
--------------------------------------
Name: Gregory M. Casey
Title: Sr. Vice President, Carrier Markets
Date: 3/31/98
Qwest Communications
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<PAGE> 17
EXHIBITS
Exhibit A: Service and Pricing Exhibit
Schedules to Exhibit A
----------------------
"A-1" Interval Guidelines
"A-2" Technical Specifications
"A-3" Maintenance Policy
Exhibit B: Service Order Form
Exhibit C: Qwest Network Build Plan
Exhibit D: SONET Protection Availability
Exhibit E: Collocation Agreement
(*) (*)
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EXHIBIT A
TO
QWEST COMMUNICATIONS
CAPACITY AND SERVICES AGREEMENT
SERVICE AND PRICING EXHIBIT
This Service and Pricing Exhibit (this "SERVICE AND PRICING EXHIBIT")
is made as of March 31, 1998 with respect to Service Agreement
No._____, (the "AGREEMENT") by and between Qwest Communications
Corporation, a Delaware corporation ("QWEST"), and Verio Inc, Delaware
corporation ("VERIO"),
1. QWEST SERVICES:
1.1 During the Term of the Agreement, Qwest will provide to Verio the
Service or Services requested by Verio in a Permitted Service Order or
a Service Order otherwise accepted by Qwest.
1.2 Qwest shall deliver each Service to be provided under a Permitted
Service Order, or under an Additional Service Order which has been
accepted by Qwest, on or before the Availability Date stated in the
Permitted Service Order or Additional Service Order for that Service.
Services shall be delivered in compliance with the specifications
attached as Schedule A-2 to this Exhibit A (the "Specifications")
which may not be amended without Verio's consent, such consent not to
be unreasonably withheld.
1.3 At each end of the city pairs (the "CITY PAIRS") on which Verio orders
Services, Qwest shall provide, at Qwest's cost, appropriate equipment
in its terminal locations necessary to connect the Services to Verio's
Interconnection Facilities (as defined in Section 1.4 of this Service
and Pricing Exhibit). Qwest hereby grants Verio the right to acquire
leased floor space in Qwest terminals for the purpose of collocation
of Verio equipment, subject to site specific space availability and
mutual agreement upon the applicable charges and other terms, which
shall be reflected in a written Collocation Agreement in the form of
Exhibit E hereof. Verio will be permitted to participate in the
planning process for the building out of collocation space and is
hereby granted a right of first refusal for terminal space available
from Qwest, subject to Qwest's other obligations regarding such space
existing on the date hereof.
1.4 Verio agrees that Verio's Interconnection Facilities shall connect to
the Services provided by Qwest hereunder at the network interface
points located in the Qwest terminals and defined in the
Specifications (as defined in Section 2.1 of this Service and Pricing
Exhibit). As used herein, the term "INTERCONNECTION FACILITIES" shall
mean transmission capacity provided by Verio or its third party
supplier to extend
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
the Services provided by Qwest from a Qwest terminal to any other
location (e.g., a local access telephone service provided by a local
telephone company).
1.5 Qwest shall use reasonable efforts to order Interconnection Facilities
on behalf of Verio from Verio's designated supplier, provided that
Verio furnishes Qwest with an acceptable letter of agency. Verio shall
be billed directly by the supplier of such Interconnection Facilities,
and shall hold harmless and indemnify Qwest from any loss or liability
incurred by Qwest as a result of Qwest's ordering Interconnection
Facilities from any third party. Verio may, at its election, but
subject to Qwest's prior written approval, order its own
Interconnection Facilities. Qwest will make available to Verio at
Qwest's cost, subject to availability of facilities, Interconnection
Facilities which Qwest may have in place with local exchange carriers
and which are in excess of Qwest's own requirements. If any party
other than Qwest provides Interconnection Facilities, then
unavailability, incompatibility, delay in installation, or other
impairment of Interconnection Facilities shall not excuse Verio's
obligation to pay Qwest all Rates or charges applicable to the
Services, whether or not such Services are useable by Verio.
2. START OF SERVICES:
2.1 Start of service for each Service (the "START OF SERVICE DATE") shall
begin on the date on which Verio accepts delivery of such Service. If
Verio fails to give written notice that the Service is in material
non-compliance with the Specifications within five (5) business days
after notification to Verio by Qwest that the Service is available,
Verio shall be deemed to have accepted such Service, and the Start of
Service Date shall commence as of the fifth day following such
notification by Qwest. Following notice by Verio of material
non-compliance as set forth above, Qwest shall promptly take such
reasonable action as is necessary to correct any such non-compliance
in the Service and shall, upon correction, notify Verio of a new Start
of Service Date.
2.2 Notwithstanding anything in Section 2.1 of this Service and Pricing
Exhibit to the contrary, Verio may delay the Start of Service Date for
any Service for up to thirty (30) days from Qwest's Availability Date
by written notice to Qwest at least seventy-two (72) hours prior to
any applicable Availability Date.
Qwest Communications
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
3. MINIMUM COMMITMENTS AND RATES:
3.1 Set forth below is each of Verio's minimum annual purchase commitments
("MAPC"), payable in each of the first seven (7) years of the Initial
Term of this Agreement commencing on the Effective Date, and which
total One Hundred Million Dollars ($100,000,000.00) (the "Total
Minimum Commitment"), Commencing February 25, 1998, all payments by
Verio to Qwest or any affiliate of Qwest for services, facilities or
products used by Verio, including services, facilities or products
which are provided pursuant to this Agreement and/or any other
agreement between Qwest or an affiliate of Qwest and Verio, together
with payments to third party providers under Section 1.5 of the
Agreement and any credits toward the MAPC as provided for in the
Agreement, shall be included in determining whether Verio has
satisfied its MAPC.
<TABLE>
<CAPTION>
Minimum Annual Purchase Commitments (*)
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
</TABLE> (*) (*) (*) (*) (*) (*) (*)
3.2 (***)
3.3 (***)
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(***)
3.4 (***)
3.5 Qwest shall provide the Services at the rates (the "RATES") set forth
in this Section 3 (exclusive of all sales, use, commercial or other
taxes, surcharges or license fees) or such lower rates as are
determined in accordance with Section 3.7 hereof. The Rates for each
Service include certain Monthly Recurring and Non-Recurring charges,
all as defined in this Section 3. The Rates vary depending on whether
the Services are (***). Finally, the rates vary depending upon the Tier
usage level in effect during each given month of the Term. The Rates
are as follows:
(a) MONTHLY RECURRING CHARGES:
<TABLE>
<CAPTION>
MONTHLY RUN RATE
FOR ALL QWEST SERVICE
(***) (***) (***) (***) (***)
------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
TIER 1 LESS THAN (***) $ (***) $ (***) $ (***) $ (***)
TIER 2 (***) $ (***) $ (***) $ (***) $ (***)
TIER 3 GREATER THAN (***) $ (***) $ (***) $ (***) $ (***)
</TABLE>
After accepting Service Orders for Services that, taken
together with all other existing Services being then provided by
Qwest, an affiliate of Qwest or a third party provider, result in a
monthly total of billed Rates in a (***), the prices for all new and
existing Services shall be adjusted as of the next billing cycle to
reflect the new (***).
(b) NON-RECURRING CHARGES:
A Non-Recurring Installation Charge of (***) per
point-to-point (***) (or Equivalent) shall apply. (***)
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(c) OTHER CHARGES:
In addition to the foregoing Rates, Verio shall pay to Qwest
the following additional charges, as applicable, including any and all
recurring charges imposed on Qwest for the handling of calls under
this agreement:
(i) WAIVED CHARGES:
(***)
(ii) OTHER MONTHLY RECURRING CHARGES:
(***)
(iii) OTHER NON-RECURRING CHARGES
(***)
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(iv) OTHER MISCELLANEOUS CHARGES:
(***)
3.6 The Rates set forth in this Section 3 shall be in effect for the
entire Term of this Agreement, subject to such downward adjustment,
if any, as may result from the application of Section 3.7 of this
Service and Pricing Exhibit.
3.7 (***)
4. FACILITY-SPECIFIC MINIMUM SERVICE TERM:
4.1 Subject to Qwest performing its obligations under the Agreement and
this Service and Pricing Exhibit, and subject to Verio's remedies
under Sections 1.4, 1.5, 8.1 and 8.3 of the Agreement, Verio
acknowledges that the Rates and charges described in Section 3 of this
Service and Pricing Exhibit are based on the commitment of Verio to
each MAPC and to the Total Minimum Commitment. In addition, the Rates
are based on Verio's agreement to utilize each of the specific
circuits, facilities, or other Services provided by Qwest for a
specified minimum period of time. Therefore, notwithstanding anything
in this Agreement to the contrary, Verio shall be liable for and shall
pay to Qwest all Rates, fees and charges which accrue under this
Agreement for each circuit, facility, or identifiable component of any
Service or portion thereof for the entire Minimum Service Term (as
defined in Section 4.2 of this Service and Pricing Exhibit),
regardless of whether or not Verio utilizes all or any part of such
circuit, facility, or Service during all or any part of the Minimum
Service Term applicable to such Service, except as is set forth in
Section 4.3 of this Service and Pricing Exhibit.
4.2 The "MINIMUM SERVICE TERM" for each circuit or other component of
Service shall be (***) months.
Qwest Communications
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<PAGE> 24
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
4.3 Notwithstanding anything in this Agreement to the contrary, Verio's
obligation to pay all Rates, fees and charges which accrue under this
Agreement for each Service for the entire Minimum Service Term
applicable to each such Service shall terminate, as each such Service,
if this Agreement is terminated during the Minimum Service Term which
pertains to each such Service: (a) by Verio, pursuant to Sections 8.1
of the Agreement,; or (b) by Qwest, pursuant to Section 8.2(b) or (c)
of the Service Agreement.
5. OUTAGES:
5.1 Verio acknowledges the possibility of an unscheduled, continuous
and/or interrupted period of time when a Service or Services are
"unavailable" (as defined in Sections 2.2 or 2.3 of Schedule A-2 to
this Exhibit A) (hereafter an "Outage"). In the event of an Outage,
Verio shall be entitled to a credit (the "Outage Credit") determined
according to the following formula:
(***)
5.2 (***)
5.3 (***)
5.4 (***)
Qwest Communications
8
Confidential and Proprietary Verio Initials:__________
<PAGE> 25
month shall not exceed the amount payable by Verio to Qwest for that
same month for such Service.
5.5 In the event of an unscheduled Outage, Qwest will use commercially
reasonable best efforts to restore Services to a level that accords
with the service quality set forth in the Specifications.
Qwest Communications
9
Confidential and Proprietary Verio Initials:__________
<PAGE> 26
SCHEDULE A-1 TO EXHIBIT A
STANDARD & EXPEDITE INTERVAL GUIDELINES
These are the standard order intervals for domestic services on Qwest Owned
Fiber Optic Network ("On-Net" services). If you have any questions regarding
the interval process, please contact your Sales Director.
<TABLE>
<CAPTION>
TOTAL SERVICE INTERVAL IN
CALENDAR DAYS
SERVICE TYPE STANDARD EXPEDITE
<S> <C> <C>
OPTICAL:
POP TO POP (OC-3) 28 ICB
POP TO POP (ALL OTHERS) ICB ICB
LOA PROVIDER ICB ICB
LEC TO LEC ICB ICB
CAP TO CAP ICB ICB
CAP TO LEC ICB ICB
CROSS CONNECTS ICB ICB
DS-3:
POP TO POP 15 ICB
LOA PROVIDED 15 ICB
LEC TO LEC 22 ICB
CAP TO CAP 22 ICB
CAP TO LEC 22 ICB
CROSS CONNECTS 8 ICB
DS-1:
POP TO POP 12 ICB
LOA PROVIDED 12 ICB
LEC TO LEC 20 ICB
CAP TO CAP 20 ICB
CAP TO LEC 20 ICB
CROSS CONNECTS 8 ICB
</TABLE>
ALL INTERVALS ARE SUBJECT TO NETWORK CAPACITY AND LEC FACILITY
AVAILABILITY. SHOULD OFF-NET CAPACITY BE REQUIRED, INTERVALS WILL BE
DETERMINED ON AN ICB BASIS. QWEST DOES NOT GUARANTEE OFF-NET CAPACITY
AND PERFORMANCE.
"ICB" means "Individual Case Basis"
"POP TO POP" means Qwest controls CFA.
CAP's: No optical interface anywhere except with MFS & TCG in Los
Angeles. Equipment Plug-ins: Add 2 days.
================================================================================
Qwest Communications
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Confidential and Proprietary Verio Initials:__________
<PAGE> 27
SCHEDULE A-2 TO EXHIBIT A
TO
QWEST COMMUNICATIONS CAPACITY AND SERVICES AGREEMENT
TECHNICAL SPECIFICATIONS
1. INTERCONNECT SPECIFICATIONS:
1.1 The customer interconnection point of DS-1 & DS-3 signals at the Qwest
(SPT) location will be at an industry standard (DSX-1) & (DSX-3)
digital cross-connect panels and will be referred to as Qwest Network
Interface in this document.
1.2 The DS-1 & DS-3 signals terminating at the Qwest digital cross-connect
panels will meet the electrical specifications as defined in AT&T
Compatibility Bulletin (CB) No. 119, Issue 3, October, 1979.
1.3 The Qwest Digital Network will be compatible with the Bell System
hierarchical clock synchronization methods and stratum levels as
described in Bellcore Technical Advisory (GR436-Core).
1.4 Verio equipment must also meet the interconnect specifications listed
above and shall comply with jitter requirements of AT&T Technical
Reference PUB 63411.
2. PERFORMANCE STANDARDS.
2.1 DSI, DS3, OC-3, OC-12, OC-48, OC-3c, OC-12c, and OC-48c circuit
performance will be measured using two parameters: Availability and
Error-Free Seconds.
The following assumptions apply to the derived data:
* The circuits originate and terminate on the SONET OC-48 backbone
* High speed protection switching: 1 for N, where N=2
* MTTR for SONET equipment: 2 hours
* MTTR for fiber optic cable: 12 hours (Bellcore Standard)
* Cable cut rate: 4.39 /year/1,000 sheath miles (Bellcore Standard)
The system includes three (3) DCS in Los Angeles, Sacramento,
and San Jose (although not all circuits are routed through the
DCS, they are included in all the calculations)
2.2 Availability is a measure of the relative amount of time during which
the circuit is available for use. According to CCITT and ANSI
definitions, unavailability begins when the Bit Error Ratio (BER) in
each second is worse than 1.0 E-3 for a period of 10 consecutive
seconds.
Qwest Communications
11
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<PAGE> 28
INTER OFFICE CHANNEL (IOC): An Inter Office Channel refers to the
Qwest Communications network between the points of presence (POP).
OPTICAL CARRIER LEVEL 1 (OC-1): The optical signal that results from
an optical conversion of an electrical STS-1 signal (51.840 Mb/s).
This signal forms the basis of the interface.
OC-3: Optical Carrier level 3 signal operating at 155.520 Mb/s.
OC-12: Optical Carrier level 12 signal transmitting at 622.080 Mb/s.
OC-48: Optical Carrier level 48 signal transmitting at 2488.32 Mb/s.
POINT OF PRESENCE (POP): A physical location where a long distance
carrier terminates lines before connecting to the local exchange
carrier, another carrier, or directly to a customer.
2.3 The availability objective for all circuits between Qwest Network
Interface points specified above is to provide performance levels over
a 12 month period as follows:
<TABLE>
<S> <C>
DS1, DS3, OC-3, OC-12
OC-48, OC-3c, OC-12c,
V&H MILES AND OC-48c
--------- ---------------------
0-2500 99.999%
2501-4000 99.998%
</TABLE>
This excludes any customer provided access links to the Qwest digital
network.
2.4 Error-Free Seconds (EFS) and Error Seconds (ES) are the primary
measure of error performance. An Error-Free Second is defined as any
second in which no bit errors are received. Conversely, an Error
Second is any second in which one or more bit errors are received.
3. SONET: Synchronous Optical Network is a family of optical transmission
rates and interface standards allowing internetworking of products
from different vendors. Base optical rate is 51.840 Mb/s. Higher rates
are direct multiples.
SONET TRANSPORT: Services associated with carrying OC-1 or higher
level signals.
SYNCHRONOUS TRANSPORT SIGNAL LEVEL 1 (STS-1): The basic logical
building block electrical signal with a rate of 51.840 Mb/s.
Qwest Communications
12
Confidential and Proprietary Verio Initials:__________
<PAGE> 29
SYNCHRONOUS TRANSPORT SIGNAL LEVEL N (STS-N): This electrical signal
is obtained by byte interleaving N STS-1 signals together, The rate of
the STS-N is N times 51.840 Mb/s.
TERMINATING MULTIPLEX (TM): Provides the multiplex functions for
multiplexing and demultiplexing between the DS1 or higher signal level
and the SONET OC-N level.
4. ACCEPTANCE CRITERIA. The acceptance criteria for DS1, DS3, OC-3,
OC-12, OC-48, OC-3c, OC-12c, and OC-48c circuits between Qwest Network
Interface points is to provide the performance levels reflected in
Section 2.3 of this Schedule A-2 during a 60 minute test period. lf no
errors are observed during the first 15 minutes of the test, the
facility may be considered acceptable. Access connections to customer
location will be tested in accordance with Bell Publication 62508.
Qwest Communications
13
Confidential and Proprietary Verio Initials:__________
<PAGE> 30
SCHEDULE A-3 TO EXHIBIT A
QWEST MAINTENANCE POLICY
PURPOSE
The Purpose of this document is to provide guidelines for maintenance activity
performed on the Qwest network.
OVERVIEW
Any work that has the potential of causing a service disruption to customer
traffic must be scheduled in advance per the maintenance notification
guidelines (next page). Additionally, the work must be scheduled to be
performed during a maintenance window as outlined below.
I. MAINTENANCE WINDOWS: FRIDAY: 12:00 Midnight until 6:00 Saturday Morning.
SATURDAY: 12:00 Midnight until 6:00 Sunday Morning.
SUNDAY: 12:00 Midnight until 5:00 Sunday Morning.
II. EXEMPT PERIODS: Routine maintenance will not normally be approved to
occur during holiday weekends, including "Mothers day",
or during the period from Thanksgiving weekend through
the first week of January.
III. Typical maintenance not authorized outside of the "maintenance window."
1) Power work: When connecting power equipment, or cabling to
existing power systems, or when modifying existing power
systems.
2) Software upgrade: Software upgrades to DCS, Sonet, or
Switching Systems.
3) Loss of redundancy: Maintenance that will cause the loss of
protection in DCS, Sonet, or Switching Systems.
4) Fiber: Splicing within an existing fiber cable that is
carrying live traffic, or that carries customer fibers.
5) Splice tray: Work to be performed in a fiber splice tray that
has "working" fibers, must normally be performed during the
"maintenance window." Exceptions may be approved by the FOPs
and NMC directors.
6) DSX-3 Panels: Changes, re-cabling, or patch changes on the
"back-side" of a DSX-3 panel must be scheduled to occur during
the maintenance window.
Qwest Communications
14
Confidential and Proprietary Verio Initials:_________
<PAGE> 31
ESCALATION AND CONTACT LIST
24 Hours Response "HOT-LINE" 800-776-7372
SPECIALIST ON DUTY DIRECT LINE 303-291-1631
Network Management Center FACSIMILE 303-291-1762
1st Level Escalation
"ON-DUTY" SUFERVISOR
Network Management Center
2nd Level Escalation
KIM HICKS
Manager - Network Management Center
OFF# 303-291-1582
PGR# 888-712-1979
CELL# 303-907-0330
E-MAIL [email protected]
3rd Level Escalation
JIM THORNBY
Director - Network Management Center
OFF# 303-291-1446
PGR# 888-712-1981
CELL# 303-748-1987
E-MAIL [email protected]
ESCALATION TO VP OPS/NMC.........THROUGH MANAGER OR DIRECTOR
4th Level Escalation
MIKE HENIGAR
Vice President - Network Services
OFF# 303-382-5708
PGR# 888-284-1741
E-Mail [email protected]
ESCALATION BEYOND 4TH LEVEL..........THROUGH V.P. OPS/NMC
TROUBLE TICKET PRIORITIZATION
A Network Management Service Representative will assign a priority to each
reported trouble, based on the following guidelines:
Qwest Communications
15
Confidential and Proprietary Verio Initials:__________
<PAGE> 32
PRIORITY 1:
* Dedicated location account with greater than or equal to 50% of
total service out-of-service
* International country isolation
* Inability to complete to a single or multiple NPA's
* Private line data circuit outage, loss of customer DS3, or
service impairing degradation
* Switched access location greater than 50% of total
service-out-of-service
* Event outage (fiber cut, equipment failure, natural
disaster, etc,)
PRIORITY 2:
* Chronic quality problems
* Switched access connectivity problems
* Dial-up data/Fax quality or connectivity problems
* Technical assistance
PRIORITY 3:
* Trended problems not meeting Priority 1 or 2 criteria
* Single non-circuit-specific quality problems
PRIORITY 4:
* Informational tickets
Escalation Objectives
Qwest Internal Escalation Intervals
<TABLE>
<S> <C> <C>
Management Priority 1 Priority 2
Level Referral +
1 - Supervisor 1 Hour 8 Hours
2 - Manager 2 Hours 16 Hours
3 - Director 4 Hours 32 Hours
4 - Vice President 8 Hours 40 Hours
</TABLE>
<TABLE>
<S> <C> <C>
MANAGEMENT PRIORITY 3 PRIORITY 4
LEVEL (REFERRAL +) (REFERRAL+)
1 - Supervisor 24 Hours N/A
2 - Manager 48 Hours N/A
3 - Director 96 Hours N/A
</TABLE>
Qwest Communications
16
Confidential and Proprietary Verio Initials:__________
<PAGE> 33
EXHIBIT B
CARRIER SERVICES
PRIVATE LINE - SERVICE ORDER
[QWEST LOGO]
Customer Order Number: _________________
Order Date: _______ Requested Availability Date: _______ Sales Person: _______
BILLING INFORMATION
Function Code: / / New / / Change / / Revision / / Supplement / / Disconnect
Expedite: / / Yes / / No - Customer Initial __________
Contract Term: / / 12 M / / 24 M / / 36 M / / 48 M / / 60 M
Customer Name: _____________________________________ Cust. #: _______________
Billing Address: ______________________________________________________________
City: _____________________ State: __________________ Zip: ____________________
Billing Contact: ____________________ Phone: ______________ Fax: ______________
Order Contact: ______________________ Phone: ______________ Fax: ______________
SERVICE INFORMATION
Service V&H City City Qty.
Type Originating Terminating
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Unit MRC Total MRC Unit NRC Total NRC
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
ORIGINATING ACCESS TYPE TERMINATING ACCESS TYPE
Access: / / Cust. Ordered (CFA/LOA) Access: / / Cust. Ordered (CFA/LOA)
/ / QCC Ordered / / QCC Ordered
Site: _____________________________ Site: _____________________________
Address:___________________________ Address:___________________________
City: ______ State: ____ Zip:______ City: ______ State: ____ Zip:______
Ops. Contact:________ Phone:_______ Ops. Contact:________ Phone:_______
Alternate: _________ Phone:________ Alternate: _________ Phone:________
Access Provider: __________________ Access Provider: __________________
QCC requires 5 working days from QCC requires 5 working days from
receipt of DLR to complete circuit receipt of DLR to complete circuit
installation. installation.
Special Remarks/Comments: ________ Special Remarks/Comments: ________
__________________________________ __________________________________
SIGNATURE / APPROVAL
This Service Order is subject to and governed by the terms and conditions set
forth in the s Capacity and Services Agreement between QCC and Customer. Your
signature acknowledges that you have read, understand and accept such terms and
conditions and that you are duly authorized to execute and deliver this Service
Order. This Service Order shall not become a valid and binding obligation of
Qwest unless so provided under the Capacity and Services Agreement or until
this Service Order has been executed by an authorized representative of Qwest.
For Customer By: _____________________ For Qwest By: _______________________
Signature: ___________________________ Signature: __________________________
Title: _______________________________ Title: ______________________________
<PAGE> 34
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
EXHIBIT C
QWEST COMMUNICATIONS
SERVICE READY POP REPORT
Current on: 3/25/98
(***)
Qwest Confidential Page 1
<PAGE> 35
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
Qwest Communications
Service Ready POP Report
Current on: 3/25/98
(***)
Page 2
<PAGE> 36
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
QWEST COMMUNICATIONS
SERVICE READY POP REPORT
Current on: 3/25/98
(***)
Qwest Confidential
Page 3
<PAGE> 37
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
QWEST COMMUNICATIONS
SERVICE READY POP REPORT
CURRENT ON: 3/25/98
(***)
Page 4
<PAGE> 38
QWEST COMMUNICATIONS
SERVICE READY POP REPORT
Current on: 3/25/98
------------------
(***)
QWEST CONFIDENTIAL Page 5
<PAGE> 39
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
QWEST COMMUNICATIONS
SERVICE READY POP REPORT
Current on: 3/25/98
---------------
(***)
Qwest Confidential Page 6
<PAGE> 40
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
QWEST COMMUNICATIONS
SERVICE READY POP REPORT
Current on: 3/25/98
-------------------
(***)
Page 7
<PAGE> 41
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
QWEST COMMUNICATIONS
SERVICE READY POP REPORT
CURRENT ON: 3/25/98
(***)
Page 8
<PAGE> 42
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
QWEST COMMUNICATIONS
SERVICE READY POP REPORT
Current on: 3/25/98
(***)
Page 9
<PAGE> 43
EXHIBIT D
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(***)
[Page 1]
<PAGE> 44
EXHIBIT E
COLLOCATION LICENSE AGREEMENT
(Caged Space)
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(***)
1
<PAGE> 45
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(***)
2
<PAGE> 46
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(***)
3
<PAGE> 47
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(***)
4
<PAGE> 48
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(***)
5
<PAGE> 49
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(***)
6
<PAGE> 50
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(***)
7
<PAGE> 51
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(***)
8
<PAGE> 52
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(***)
9
<PAGE> 53
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(***)
10
<PAGE> 54
ATTACHMENT TO COLLOCATION LICENSE AGREEMENT
THE EQUIPMENT SPACE
11
<PAGE> 55
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
EXHIBIT F
(***)
[Page 1]
<PAGE> 56
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(***)
[Page 2]
<PAGE> 57
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(***)
[Page 3]
<PAGE> 58
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(***)
[Page 4]
<PAGE> 59
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(***)
[Page 5]
<PAGE> 60
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(***)
[Page 6]
<PAGE> 61
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(***)
[Page 7]
<PAGE> 62
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(***)
[Page 8]
<PAGE> 1
EXHIBIT 10.28
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
===============================================================================
VERIO INC.
INVESTMENT AGREEMENT
APRIL 7, 1998
===============================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
1. COMPANY BOARD OF DIRECTORS; OBSERVERS...............................1
1.1 Board Designee.............................................1
1.2 Nomination to Company Board................................2
1.3 Observer Rights............................................2
1.4 Committee Rights...........................................2
1.5 Eligible Individuals; Confidentiality......................3
1.6 Vacancies..................................................3
2. STANDSTILL COVENANT; VOTING OF SECURITIES...........................4
2.1 Standstill Agreement.......................................4
2.2 Exceptions.................................................7
2.3 Notice of Acquisition; Compliance..........................8
2.4 Voting.....................................................9
2.5 Consultation...............................................9
3. TRANSFER RESTRICTIONS...............................................9
3.1 Prohibited Transfers.......................................9
3.2 Compliance with Law.......................................11
3.3 Right of First Offer and Right of First Refusal...........12
4. REGISTRATION RIGHTS................................................15
4.1 Certain Definitions.......................................15
4.2 Demand Registration Rights................................15
4.3 Piggyback Registration....................................18
4.4 Obligations of the Company................................20
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
4.5 Certain Holder Obligations................................23
4.6 Expenses of Registration..................................24
4.7 Delay of Registration.....................................24
4.8 Indemnification...........................................24
4.9 Assignment of Registration Rights.........................27
4.10 Termination of Registration Rights........................27
4.11 Rule 144..................................................28
4.12 No Conflicting Agreements.................................28
4.13 Remedies..................................................28
5. DESIGNATED EMPLOYEES...............................................28
5.1 Right to Designate........................................28
5.2 Access to Information; Confidentiality....................29
5.3 Status of Designated Employees; Expenses..................29
5.4 Purpose of Designated Employees...........................29
6. RESTRICTIVE LEGEND.................................................30
6.1 Legend....................................................30
6.2 Stop Transfer Order.......................................30
6.3 Removal of Legends........................................30
7. CONFIDENTIAL TREATMENT OF CONFIDENTIAL INFORMATION.................31
7.1 Protection of Confidential Information....................31
7.2 Return of Confidential Information........................32
7.3 Equitable Remedies........................................32
8. OTHER AGREEMENTS...................................................32
8.1 Nonsolicitation...........................................32
8.2 Further Assurances........................................32
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
9. TERMINATION........................................................33
9.1 Termination...............................................33
9.2 Effect of Termination.....................................33
10. SUCCESSORS AND ASSIGNS.............................................33
10.1 Successors and Assigns....................................33
10.2 Novation..................................................33
10.3 Guarantee.................................................34
10.4 Certain Waivers and Authorizations........................35
11. MISCELLANEOUS......................................................37
11.1 Interpretation............................................37
11.2 Fees and Expenses.........................................38
11.3 Governing Law; Jurisdiction and Venue; Waiver of Jury
Trial.....................................................38
11.4 Specific Enforcement......................................39
11.5 No Third Party Beneficiaries..............................39
11.6 Entire Agreement..........................................39
11.7 Severability..............................................39
11.8 Amendment and Waiver......................................39
11.9 Relationship of the Parties...............................40
11.10 Notices...................................................40
11.11 Counterparts..............................................41
11.12 Attorneys' Fees...........................................41
</TABLE>
iii
<PAGE> 5
EXHIBIT 10.28
INVESTMENT AGREEMENT
This Investment Agreement (this "Agreement") is entered into as of
April 7, 1998, by and between VERIO INC., a Delaware corporation (the
"Company"), and NIPPON TELEGRAPH AND TELEPHONE CORPORATION, a Japanese
corporation (the "Purchaser").
WHEREAS, pursuant to a Stock Purchase and Master Strategic Relationship
Agreement dated of even date herewith between the Company and the Purchaser (the
"Master Agreement"), the Purchaser has agreed to purchase, and the Company has
agreed to sell to the Purchaser, shares of the Common Stock of the Company, par
value $0.001 per share (the "Common Stock"), such purchase and sale to take
place concurrently with the Company's initial public offering;
WHEREAS, the parties hereto desire to set forth certain terms and
conditions applicable to, among other things, the acquisition, ownership and
disposition of Common Stock and securities (including, without limitation,
options, warrants, convertible or exchangeable securities or indebtedness, and
other rights) convertible into, exchangeable for or exercisable for, directly or
indirectly, Common Stock (whether at the time of issue or upon the passage of
time or the occurrence of some future event) (collectively, "Company
Securities"); and
WHEREAS, terms used herein without definition shall have the respective
meanings given them in the Master Agreement;
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein, the parties hereto, intending to be legally bound, agree as follows:
1. COMPANY BOARD OF DIRECTORS; OBSERVERS.
1.1 BOARD DESIGNEE.
(a) The Company shall take all corporate action necessary to appoint
to the Board of Directors of the Company (the "Company Board"), promptly upon
the closing of the purchase and sale to the Purchaser of Company Securities
pursuant to the Master Agreement (the "Closing"), an individual designated by
the Purchaser (such person, the "Purchaser Board Designee"). The Purchaser Board
Designee shall have an initial term on the Company Board ending at the third
annual stockholder meeting following the Closing (a "Class III Director"), and
thereafter shall be subject to election by the Company's stockholders.
(b) The Purchaser Board Designee shall be entitled to serve as a
member of the Company Board through the expiration of the initial term specified
in the preceding paragraph (a) so long as the Purchaser and its Affiliates
collectively shall own beneficially either (i) at least fifty percent (50%) of
the aggregate Company Securities purchased by the Purchaser at the time of the
IPO pursuant to the Master Agreement (including shares of Common Stock issuable
upon the conversion of any shares of Junior
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Preferred Stock purchased by the Purchaser pursuant to the Master Agreement, and
adjusted as appropriate for any subsequent stock split or reverse stock split or
other similar action) or (ii) at least five percent (5%) of the Diluted Common
Stock (the amount in clause (i) or (ii) above, the "Ownership Threshold"). If at
any time during such initial term the Purchaser and its Affiliates collectively
shall cease to own beneficially Company Securities at least equal to the
Ownership Threshold, the Purchaser shall, upon the request of the Company, cause
the Purchaser Board Designee to resign from the Company Board.
1.2 NOMINATION TO COMPANY BOARD.
Following the expiration of the initial term of the Purchaser Board
Designee as provided in Section 1.1(a) above, until such time as the Purchaser
and its Affiliates collectively no longer beneficially own Company Securities at
least equal to the Ownership Threshold, the Company shall take all corporate
action necessary to nominate for election to the Company Board as a Class III
Director an individual appointed by the Purchaser (the "Purchaser Board
Nominee"), and to recommend to the Company stockholders the Purchaser Board
Nominee's election to the Company Board as a Class III Director.
1.3 OBSERVER RIGHTS.
From and after the Closing, until such time as the Purchaser and its
Affiliates collectively no longer beneficially own Company Securities at least
equal to the Ownership Threshold, the Purchaser shall have the right to appoint
an observer (the "Purchaser Board Observer"), who shall have observer rights at
meetings of the Company Board, provided, that the Company Board shall have the
right to keep confidential from the Purchaser Board Observer for such period of
time as the Company Board deems reasonable any information and copies of written
materials the Company is required by law or agreement with a third party to keep
confidential.
1.4 COMMITTEE RIGHTS.
(a) From and after the Closing, until such time as the Purchaser and
its Affiliates collectively no longer beneficially own Company Securities at
least equal to the Ownership Threshold, the Company shall, at the request of the
Purchaser, cause to be appointed to the executive committee of the Company Board
(the "Executive Committee") the Purchaser Board Designee or any Purchaser Board
Nominee elected to the Company Board pursuant to Section 1.2 above, provided,
that, notwithstanding the foregoing, the Company shall not be required to cause
such appointment unless and until, and then only for so long as, (i) the
Executive Committee is delegated by the Company Board final decision-making
authority (which, for the purpose of clarification, shall not include any
decisions which require subsequent ratification by the Company Board) with
respect to material matters affecting the Company (other than matters listed on
Schedule 1 hereto), or (ii) the Company appoints and there continues to be as a
member
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of the Executive Committee more than a single individual who is not an employee
of the Company or the Chairman of the Company Board.
(b) From and after the Closing, during any period during which the
Purchaser would be entitled to appoint an individual to the Executive Committee
but for the operation of the proviso in paragraph (a) above, the Purchaser shall
have the right to appoint an observer (the "Purchaser Executive Committee
Observer"), who shall have observer rights at meetings of the Executive
Committee, provided, that the Executive Committee shall have the right to keep
confidential from the Purchaser Executive Committee Observer for such period of
time as the Executive Committee deems reasonable any information and copies of
written materials the Company is required by law or agreement with a third party
to keep confidential.
1.5 ELIGIBLE INDIVIDUALS; CONFIDENTIALITY.
The Purchaser Board Designee, the Purchaser Board Nominee, the Purchaser
Board Observer and the Purchaser Executive Committee Observer shall not be
employees of the Company, provided, that the Purchaser Executive Committee
Observer may be the Designated Employee with the rank of Assistant Vice
President. Each such individual, as a condition to his or her appointment or
nomination, or prior to attending any meeting of the Company Board or any
committee thereof, shall execute a confidentiality agreement in form and
substance satisfactory to the Company that is generally executed by other
similarly situated members of the Company Board or, if there are no such other
members, a confidentiality agreement in form and substance reasonably
satisfactory to the Company. In addition, each such individual shall be subject
to the procedures for the protection of certain information of the Company, as
set forth in Exhibit B hereto, provided, that such procedures are generally
applicable to other similarly situated members of the Company Board. For
purposes of this Section 1.5, a "similarly situated" member of the Board shall
be a member that (i) is not an employee of the Company and (ii) was appointed or
elected to the Company Board as the designee of a holder of at least five
percent (5%) of the Diluted Common Stock that maintains a strategic relationship
with the Company.
1.6 VACANCIES.
In the event that the Purchaser Board Designee or any Purchaser Board
Nominee ceases to serve as a member of the Company Board during such
individual's term of office for any reason and at such time the Purchaser would
have the right to a designation hereunder if an election for the resulting
vacancy were to be held, the director to fill such vacancy shall be designated
by the Purchaser, subject to the requirements provided herein for any such
designee.
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2. STANDSTILL COVENANT; VOTING OF SECURITIES.
2.1 STANDSTILL AGREEMENT.
(a) During the period commencing on the date hereof and ending on the
fifth anniversary of the Closing Date (the "Standstill Period"), except as (i)
specifically permitted by this Agreement or (ii) specifically requested in
writing in advance by the Company upon the approval of the Company Board
(without any prior solicitation or request (or other act encouraging the
delivery of such a writing) having been made to the Company or the Company Board
or otherwise having been publicly made), the Purchaser shall not, and shall
ensure that its Affiliates do not, in any manner, directly or indirectly:
(i) acquire, or offer or agree to acquire, or make any
proposal or indicate any interest with respect to the acquisition of,
directly or indirectly, by purchase or otherwise, any material amount of
the assets or property of, any amounts of the Voting Securities of, or any
material amounts of the securities (other than Voting Securities) of the
Company or any of its successors or Controlled Affiliates, except, if
applicable, for any shares of Common Stock that may be issuable upon the
conversion of any shares of Junior Preferred Stock purchased by the
Purchaser pursuant to the Master Agreement or otherwise as permitted
pursuant to this Agreement, provided, that the foregoing limitation shall
not prohibit the acquisition of securities of the Company or any of its
successors or Controlled Affiliates issued as dividends or as a result of
stock splits and similar reclassifications of shares held by the Purchaser
or any of its Affiliates at the time of such dividend, split or
reclassification;
(ii) solicit proxies or consents or become a "participant" in
a "solicitation" (as such terms are defined or used in Regulation 14A under
the Exchange Act) of proxies or consents with respect to any Voting
Securities of the Company or any of its successors or Controlled
Affiliates, or initiate or become a participant in any stockholder proposal
or "election contest" (as such term is defined or used in Rule 14a-11 under
the Exchange Act) with respect to the Company or any of its successors or
Controlled Affiliates or induce others to initiate the same, or otherwise
seek to advise or influence any Person with respect to the voting of any
Voting Securities of the Company or any of its successors or Controlled
Affiliates;
(iii) take any action for the purpose of calling a
stockholders' meeting of the Company or any of its successors or Controlled
Affiliates;
(iv) make any proposal or any public announcement relating to,
or submit to the Company or any of its directors, officers,
representatives, trustees, employees, attorneys, advisors, agents or
Affiliates any proposal for, a tender or exchange offer for Voting
Securities of the Company or any of its successors or Controlled
Affiliates, the acquisition of Voting Securities of the Company that would
result in the Purchaser (together with its Affiliates)
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exceeding the Percentage Limitation or a merger, business combination, sale
of assets, liquidation, restructuring, recapitalization or other
extraordinary corporate transaction relating to the Company or any of its
successors or Controlled Affiliates (other than with respect to joint
ventures, licenses, transactions contemplated by the Outside Service
Provider Agreement or other transactions in the ordinary course of
business) or take any action that might require the Company or any of its
successors or Controlled Affiliates to make any public announcement
regarding any of the foregoing, provided that nothing set forth in this
Section 2.1(a)(iv) shall prohibit or restrict the Purchaser or any of its
Affiliates from soliciting, offering, seeking to effect and negotiating
with any Person with respect to Transfers of Company Securities otherwise
permitted by this Agreement, and provided, further, that in so doing, the
Purchaser may, and may permit its Affiliates to, make any statement
required by applicable law, including without limitation, the amendment of
any statement on Schedule 13D under the Exchange Act;
(v) deposit Voting Securities of the Company or any of its
successors or Controlled Affiliates held by it into a voting trust or
subject any such securities to voting agreements (except for this Agreement
and except for any such agreement among the Purchaser and any or all of its
Affiliates who may hold such securities), or grant any proxy with respect
to any such securities to any person not designated by the Company;
(vi) except to the extent contemplated by this Agreement,
form, join or in any way participate in a "group" (within the meaning of
Section 13(d)(3) of the Exchange Act) (except an arrangement solely among
the Purchaser and any or all of its Affiliates who may hold Voting
Securities of the Company or any of its successors or Controlled
Affiliates) for the purpose of acquiring, holding, voting or disposing of
Voting Securities of the Company or any of its successors or Controlled
Affiliates or taking any other actions restricted or prohibited under
clauses (i) through (v) above;
(vii) disclose to any Person any intention, plan or
arrangement inconsistent with the foregoing;
(viii) advise, assist or encourage any other Person in
connection with any of the foregoing;
(ix) enter into any discussions, negotiations, arrangements or
understandings with any other Person with respect to, or aid, abet or
encourage any action prohibited by, any of the foregoing;
(x) make (publicly or to the Company or any of its directors,
officers, representatives, trustees, employees, attorneys, advisors,
agents, Affiliates or security holders, directly or indirectly) any request
or proposal to
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amend, waive or terminate any provision of this Section 2 or any inquiry
or statement relating thereto; or
(xi) act, alone or in concert with others, to seek to control
or influence in any material respect the management or policies of the
Company (beyond the actions of the Purchaser Board Designee or any
Purchaser Board Nominee in his or her role as such and while serving as a
member of the Company Board or the actions of the Designated Employees in
their roles as such and while serving in such capacity).
References in this Section 2.1 to the "acquisition" of securities, or any
derivation of such term, shall include, without limitation, any acquisitions
deemed to be purchases for purposes of Section 16 of the Securities Act.
(b) Notwithstanding the provisions of Section 2.1(a), from and after
the date six months following the Closing, the Purchaser or its Affiliates may
acquire Voting Securities of the Company through open market and privately
negotiated purchases or otherwise if, and only to the extent that, after the
acquisition thereof the Purchaser and its Affiliates collectively would
beneficially own in the aggregate no more than seventeen and one-half percent
(17.5%) of the Diluted Common Stock (such percentage limitation being the
"Percentage Limitation"). For purposes of clarification, the parties agree that
under no circumstances shall the Purchaser or any of its Affiliates, prior to
the date six months following the Closing, acquire any securities of the Company
in any manner, other than the Company Securities purchased pursuant to the
Master Agreement.
(c) The Percentage Limitation shall not be exceeded in violation of
Section 2.1(b) or any other provision of this Agreement if the percentage of
Diluted Common Stock beneficially owned by the Purchaser and its Affiliates
collectively is increased as a result of corporate action taken solely by the
Company and not caused by any action taken by the Purchaser or any of its
Affiliates, provided, that neither the Purchaser nor any of its Affiliates shall
thereafter acquire beneficial ownership of any additional Company Securities
unless such acquisition would not result in the Purchaser and its Affiliates
beneficially owning Company Securities in excess of the Percentage Limitation.
(d) Nothing contained in this Section 2 shall be deemed to (i)
restrict the manner in which the Purchaser Board Designee or any Purchaser Board
Nominee elected to the Company Board may participate in deliberations or
discussions of the Company Board or individual consultations with the Chairman
of the Board or any other members of the Company Board, so long as such actions
do not otherwise violate any provision of Section 2.1(a), (ii) prohibit or
restrict the Purchaser or any of its Affiliates from soliciting, offering,
seeking to effect and negotiating with any Person with respect to Transfers of
Company Securities otherwise permitted by this Agreement, (iii) prohibit or
restrict the Purchaser or any of its Affiliates from exercising any registration
rights pursuant to Section 4 of this Agreement or (iv) prohibit or restrict any
Designated Employees from acquiring securities of the Company or any of its
Controlled Affiliates
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pursuant to stock plans or other employee benefit plans of the Company or any of
its Controlled Affiliates (which securities shall not be deemed to be acquired
by Affiliates of the Company).
2.2 EXCEPTIONS.
Notwithstanding anything in Section 2.1 to the contrary:
(a) In the event (i) the Company publicly announces or invites any
Person other than the Purchaser to make a proposal, or elects to enter into
negotiations, with respect to, or (ii) the Company Board adopts a plan or
program regarding (whether or not publicly announced), any merger, consolidation
or other business combination, liquidation or recapitalization of the Company,
or any sale or transfer of all or substantially all of the assets of the Company
or any sale or transfer of Voting Securities of the Company that, if
consummated, would constitute a Change of Control, then the Purchaser and its
Affiliates shall be permitted to participate in any such process on terms that
are substantially comparable to those made available to any other participant in
such process.
(b) In the event of any agreement between the Company and any other
Person or group pursuant to which, if consummated, a Change of Control would
occur (any such event being an "Acquisition Event"), the restrictions of Section
2.1 shall lapse and have no further force and effect, provided, that in the
event that the transactions contemplated in connection with the Acquisition
Event are not completed, all restrictions contained in Section 2.1 shall be
reinstated upon two (2) Business Days' written notice to the Purchaser and shall
remain effective until subsequently terminated pursuant to this Agreement. The
Purchaser and its Affiliates shall be entitled to retain any Company Securities
purchased by them following such termination but prior to such reinstatement,
provided, that such Company Securities shall be subject to all of the provisions
of this Agreement, and provided, further, that all subsequent acquisitions of
Company Securities by the Purchaser or any of its Affiliates must be in complete
compliance with all provisions of this Agreement, including, without limitation,
Section 2.1(b) hereof.
(c) In the event any Person or group shall commence a tender offer or
exchange offer which, if successful, would result in a Change of Control (a
"Third Party Offer"), and the bidder has financing or financial commitments from
responsible financial institutions sufficient to finance the cash portion of
such Third Party Offer, then the restrictions of Section 2.1 shall lapse and
have no further force and effect so long as such Third Party Offer remains in
effect, provided, that in the event the Third Party Offer is not completed, all
restrictions contained in Section 2.1 shall be reinstated upon two (2) Business
Days' written notice to the Purchaser and shall remain effective until
subsequently terminated pursuant to this Agreement. The Purchaser and its
Affiliates shall be entitled to retain any Company Securities purchased by them
following such termination but prior to such reinstatement, provided, that such
Company Securities shall be subject to all of the provisions of this Agreement,
and provided, further, that all subsequent acquisitions of Company Securities by
the Purchaser or any of its Affiliates
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must be in complete compliance with all provisions of this Agreement, including
without limitation, Section 2.1(b) hereof.
(d) For purposes of this Section 2, a "Change of Control" shall be
deemed to have occurred with respect to the Company if:
(i) any "person," as such term is used in Sections 13(d) and
14(d) of the Exchange Act (other than the Company, a Controlled Affiliate
of the Company, any trustee or other fiduciary holding securities under any
compensatory benefit plan of the Company or an Affiliate of the Company, or
any entity owned directly or indirectly by the stockholders of the Company
in substantially the same proportions as their ownership of stock of the
Company), is or becomes the beneficial owner, directly or indirectly, of
Voting Securities representing more than fifty percent (50%) of the
Company's then outstanding Voting Securities;
(ii) a merger or consolidation of the Company with any other
corporation which is not a Controlled Affiliate of the Company is
consummated, other than a merger that would result in the Voting Securities
of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity) more than forty percent (40%) of
the combined voting power of the Voting Securities of the Company (or the
comparable voting securities of such surviving entity) outstanding
immediately after such merger or consolidation, provided, that a merger or
consolidation effected to implement a recapitalization of the Company or
such Affiliate (or similar transaction) in which no person acquires more
than thirty percent (30%) of the combined voting power of the Company's
then outstanding Voting Securities shall not constitute a "Change of
Control" of the Company; or
(iii) the sale or disposition by the Company of all or
substantially all of the Company's assets, other than to a Controlled
Affiliate of the Company, is consummated. (e) Nothing in this Section 2
shall prohibit or restrict the Purchaser from purchasing Company Securities
from the Company on the Closing Date as contemplated by Section 1.1 of the
Master Agreement.
2.3 NOTICE OF ACQUISITION; COMPLIANCE.
(a) At all times prior to the termination of the restrictions of
Section 2.1 above, prior to any time that the Purchaser or any of its Affiliates
wishes to purchase additional Company Securities, the Purchaser will give the
Company written notice of such intention at least two (2) Business Days prior to
the date the Purchaser or any such Affiliate purchases or agrees to purchase any
such securities.
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(b) The Purchaser shall not, and shall ensure that its Affiliates do
not, make any purchase or other acquisition of Company Securities other than in
compliance with all Requirements of Law.
2.4 VOTING.
At all times prior to the termination or lapsing of the restrictions of
Section 2.1 above, the Purchaser shall take all action as may be required so
that all Voting Securities of the Company owned by the Purchaser and its
Affiliates are voted (i) with respect to elections of members of the Board of
Directors, for the Company Board's nominees to the Company Board, and (ii) with
respect to all other matters to be voted on by stockholders, either (A) in
accordance with the recommendations of the Company Board, or (B) for or against
any such matter in the same proportion as the shares owned by all other
stockholders (excluding the Purchaser and each of its Affiliates that is a
stockholder of the Company) are voted with respect to such matters. The
Purchaser and all Affiliates of the Purchaser owning any such securities shall
be present, in person or by proxy, at all meetings of stockholders of the
Company so that all such securities owned by the Purchaser and any such
Affiliate may be counted for the purposes of determining the presence of a
quorum at such meeting.
2.5 CONSULTATION.
Notwithstanding anything in this Agreement to the contrary, (i) legal
counsel for the Purchaser at all times shall have the right to confer with legal
counsel for the Company regarding the application of the provisions of this
Section 2, and (ii) the Purchaser Board Designee, the Purchaser Board Nominee,
the Purchaser Board Observer and the Purchaser Executive Committee Observer
(while serving in such positions) and any member of the Board of Directors or
executive officer of the Purchaser may from time to time consult with the Chief
Executive Officer of the Company regarding the ownership of Company Securities
and other matters regarding the obligations of the Purchaser and its Affiliates
under this Section 2, provided, that such consultations pursuant to clauses (i)
and (ii) above shall not include any proposal regarding the acquisition of
control of the Company, any proposal for any other action prohibited by this
Section 2 or any proposal for the amendment of this Section 2 in contemplation
of any such acquisition or other action.
3. TRANSFER RESTRICTIONS.
3.1 PROHIBITED TRANSFERS.
(a) In the case of the IPO and, if requested by any underwriter of
the Common Stock, in the case of any other offering of securities of the Company
registered under the Securities Act, the Purchaser shall not, and shall ensure
that its Affiliates do not, directly or indirectly, sell, offer, pledge,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, warrant or right to purchase, or
otherwise dispose of or transfer, or enter into any swap or other agreement
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or any arrangement that transfers, in whole or in part, directly or indirectly,
the economic consequence of ownership in, any Company Securities held by it or
them, during the period following the effective date of a registration statement
of the Company filed under the Securities Act equal to (i) in the case of the
IPO, six (6) months, or (ii) in the case of any other offering of securities of
the Company registered under the Securities Act, ninety (90) days, except in
either case for Company Securities included in such registration, provided that
if directors and officers of the Company holding Common Stock generally are
subject to hold-back restrictions of shorter duration, such shorter periods
shall apply to the Purchaser and its Affiliates. If requested, the Purchaser
shall enter, and shall ensure that all Affiliates of the Purchaser holding
securities of the Company enter, into a lock-up agreement with the applicable
underwriters that is consistent with the agreement in the preceding sentence.
(b) Notwithstanding anything herein to the contrary, the Purchaser
shall not, and shall ensure that its Affiliates do not, directly or indirectly,
sell, pledge or otherwise dispose of (any such action, a "Transfer") any Company
Securities to any of the following:
(i) except in accordance with Section 3.3 below, any Person
specified in Schedule 2 attached hereto, or any Affiliate of any such
Person, provided, that Schedule 2 may be revised or updated from time to
time by the Company upon notice to the Purchaser to include additional
Persons that are, or that the Company reasonably believes (based on the
publicly announced intent or plan of such Person) are likely to become,
competitors of the Company in the business of providing access to the
Internet for business customers in the U.S., provided, that such Schedule
2 shall be updated or revised no more than semi-annually and shall not
include at any time more than fifteen (15) Persons; and
(ii) except in accordance with Section 3.3 below, any Person
that following such Transfer would (alone or collectively with all
Affiliates of such Person) beneficially own more than ten percent (10%) of
the outstanding Common Stock.
(c) The Purchaser shall not, and shall ensure that its Affiliates do
not, Transfer any Company Securities while there is pending, or otherwise
Transfer any Company Securities in contemplation of, any Acquisition Proposal,
unless such Acquisition Proposal has been recommended publicly by the Company
Board to all Company stockholders, provided, that if the Company Board has not
publicly recommended against such Acquisition Proposal within three (3) months
of the later of (i) the initial public announcement thereof by the acquiror or
(ii) the formal presentation of such an Acquisition Proposal to the Company
Board, then the restrictions of this Section 3.1(c) shall lapse and have no
further force or effect, provided, further, that in the event such Acquisition
Proposal is not completed, all restrictions contained in this Section 3.1(c)
shall be reinstated upon two (2) Business Days' written notice to the Purchaser
and shall remain effective until subsequently terminated pursuant to this
Agreement. For purposes of this Agreement, "Acquisition Proposal" shall mean any
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offer or agreement by a third party to acquire, or proposal or indication of
interest with respect to the acquisition of (including any written or oral
proposal to the Company Board or to any director, officer or shareholder of the
Company or any public or other announcement of such a proposal or indication of
interest), by purchase or otherwise, from any Person or group of Persons,
capital stock of the Company representing in excess of thirty percent (30%) of
the voting power of the Company or assets of the Company representing in excess
of fifty percent (50%) of the assets or earning power of the Company and its
Controlled Affiliates, taken as a whole, or direct or indirect rights or options
to acquire (whether through purchase, exchange, conversion or otherwise) such
capital stock, assets or earning power.
(d) In order to enforce the foregoing covenants, the Company may
impose stop transfer instructions with respect to all Purchaser Shares (and the
shares or securities of every other person subject to the foregoing restriction)
until the end of the applicable period for each such covenant.
(e) Any purported Transfers in violation of this Section 3 shall be
null and void.
(f) Nothing in Section 3.1(a), 3.1(b) or 3.1(c) shall be deemed to
restrict the Transfer of Company Securities by the Purchaser to any of its
Affiliates or by any such Affiliate to the Purchaser or any other Affiliate of
the Purchaser, provided, that all such Affiliates agree in writing to the
reasonable satisfaction of the Company to be bound by the provisions of this
Agreement.
3.2 COMPLIANCE WITH LAW.
(a) The Purchaser shall, and shall ensure that its Affiliates shall,
observe and comply with the Securities Act, the Exchange Act and applicable
state securities laws, and the rules and regulations promulgated under both, as
each is now in effect and as each is from time to time amended, and all other
Requirements of Law in connection with any permitted Transfer of Company
Securities, including, without limitation, all Requirements of Law relating to
the use of insider information or the trading of securities while in the
possession of nonpublic information.
(b) In furtherance of the foregoing, and in addition to the
restrictions specified above, the Purchaser shall not, and shall ensure that its
Affiliates do not, Transfer any Company Securities unless at such time at least
one of the following is satisfied:
(i) a registration statement under the Securities Act covering
the Company Securities proposed to be Transferred, describing the manner
and terms of the proposed sale, transfer or other disposition, and
containing a current prospectus, shall have been filed with the SEC and
made effective under the Securities Act;
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(ii) counsel representing the Purchaser, reasonably
satisfactory to the Company, shall have advised the Company in a written
opinion letter reasonably satisfactory to the Company and its counsel, and
upon which the Company and its counsel may rely, that no registration
under the Securities Act would be required in connection with the proposed
Transfer; or
(iii) an authorized representative of the SEC shall have
rendered written advice to the Purchaser (sought by the Purchaser or
counsel to the Purchaser, with a copy thereof and of all other related
communications delivered to the Company) to the effect that the SEC would
take no action, or that the staff of the SEC would not recommend that the
SEC take action, with respect to the proposed Transfer.
3.3 RIGHT OF FIRST OFFER AND RIGHT OF FIRST REFUSAL.
(a) In addition to the other restrictions provided in this Agreement,
if the Purchaser desires to Transfer any Company Securities (other than to any
Affiliate of the Purchaser), the Purchaser will give written notice to the
Company of such intention to Transfer Company Securities (as used in this
Section 3.3, the "Sale Notice"). The Sale Notice will describe either (i) if the
Purchaser intends to Transfer Company Securities to any Person that (A)
following such Transfer, would (alone or collectively with all Affiliates of
such Person) beneficially own more than ten percent (10%) of the outstanding
Common Stock or (B) is listed on Schedule 2 hereto, as revised or updated from
time to time in accordance with Section 3.1(b)(i) hereof (any such Transfer, a
"Significant Transfer"), (1) the class and number of Company Securities to be
transferred, (2) the minimum consideration for which the Purchaser will Transfer
the securities, and (3) the proposed Transferee and, to the extent such
information is reasonably available to the Purchaser, the amount of securities
of the Company then held by such proposed Transferee, or (ii) in the case of all
other proposed Transfers, the class and number of Company Securities to be
Transferred. In the event the Transfer is being made pursuant to paragraph (f)
below, the Sale Notice shall so state.
(b) In the event the proposed transfer is not a Significant Transfer,
the Company shall have the right, within (i) in the event the Market Price of
the Company securities proposed to be Transferred is less than fifty million
dollars ($50,000,000) (a "Small Sale"), fifteen (15) days, (ii) in the event the
Market Price of the Company Securities proposed to be Transferred is fifty
million dollars ($50,000,000) or more, but less than one hundred million dollars
($100,000,000) (a "Medium Sale"), thirty (30) days, and (iii) in the event the
Market Price of the Company Securities proposed to be Transferred is one hundred
million dollars ($100,000,000) or more (a "Large Sale"), sixty (60) days, in
each case after the delivery of the Sale Notice, to offer to purchase all (but
not less than all) of the Company Securities proposed to be Transferred, at a
price determined by the Company in its sole discretion, by delivery to the
Purchaser of a written notice (the "Right of First Offer Notice") stating the
price offered by the Purchaser. The Purchaser shall have the right within five
(5) Business Days after the
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delivery of the Right of First Offer Notice to accept such offer with respect
to all (but not less than all) such shares by delivery of written notice to
the Company.
(c) In the event the proposed Transfer is a Significant Transfer, the
Company shall have the right, within sixty (60) days after delivery of the Sale
Notice, to elect to purchase all (but not less than all) of the Company
Securities proposed to be so Transferred (the "Option Shares") on the same terms
and subject to the same conditions as those specified in the Sale Notice,
exercisable by delivery to the Purchaser of a written notice stating that the
Company elects to purchase the Option Shares.
(d) If the Purchaser accepts the Company's offer pursuant to
paragraph (b) above, or the Company exercises its rights to purchase the Option
Shares pursuant to paragraph (c) above, such purchase shall be consummated on a
date selected by the Purchaser and agreed by the Company, provided, that the
Company shall not be required to consummate such purchase prior to (i) (A) in
the event the proposed sale is a Small Sale, thirty (30) days, (B) in the event
the proposed sale is a Medium Sale, sixty (60) days, and (C) in the event the
proposed sale is a Large Sale, ninety (90) days, in each case following the
Purchaser's delivery of its acceptance notice to the Company, or (ii) in the
case of a Significant Transfer, ninety (90) days after the Company's delivery of
its election notice to the Purchaser. On such date, the Company shall pay to the
Purchaser the purchase price according to the terms and conditions set forth in
the Right of First Offer Notice or the Sale Notice, as the case may be, and the
Purchaser shall deliver to the Company a certificate or certificates evidencing
the shares so purchased, provided, that in the event of a Transfer in which the
consideration for the Company Securities is property other than cash or
instruments of indebtedness, the purchase price will be the fair market value of
such property, as determined by an independent third-party appraiser appointed
by the Company and approved by the Purchaser, in its reasonable discretion.
(e) If and to the extent the Purchaser fails to accept the offer of
the Company pursuant to paragraph (b) above, or the Company fails to exercise
its right of first refusal pursuant to paragraph (c) above, the Purchaser may
Transfer that number of shares specified in the Sale Notice (but no more and no
less than such specified number) to any transferee permitted by the terms of
this Agreement (and, in the case of a Significant Transfer, solely to the
transferee specified in the Sale Notice), provided, that (i) such Transfer is
completed within ninety (90) days after the expiration of such period; (ii) such
Transfer is made at a price and upon terms no more favorable to the transferee
than those specified in the Right of First Offer Notice or in the Sale Notice,
as the case may be; and (iii) if the proposed Transfer would be a Transfer of
seven and one-half percent (7.5%) or more of the Diluted Common Stock, or would
be to a Person that following such Transfer would beneficially own seven and
one-half percent (7.5%) or more of the Diluted Common Stock, the proposed
transferee executes and delivers to the Company, prior to receipt of such
shares, a written agreement in form and substance satisfactory to the Company to
be bound by all the provisions of this Section 3 and Section 6 hereof. In the
event that the Purchaser has not Transferred such securities within such ninety
(90) day period, the Purchaser shall not thereafter Transfer any of such
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Company Securities without first complying with the procedures set forth in
this Section 3.3.
(f) Notwithstanding the foregoing, the rights of first offer and
first refusal of the Company under this Section 3.3 shall not apply to: (i) any
Transfer of Company Securities in a Public Distribution; (ii) any Transfer of
Company Securities in a Rule 144 Transaction; (iii) any other Transfer of
Company Securities effected on a nationally recognized securities exchange or
the Nasdaq Stock Market, provided, that, to the knowledge of the Purchaser, no
purchaser of such securities is purchasing more than one-half of one percent
(0.5%) of the outstanding Common Stock in any such Transfer or will beneficially
own more than one percent (1%) of the outstanding Common Stock as a result of
such Transfer, or otherwise is purchasing such securities with the intent of
gaining or exercising control over the Company; (iv) any Transfer of Company
Securities pursuant to an Acquisition Transaction; or (v) any pledge of
securities made pursuant to a bona fide loan transaction with a financial
institution that creates a mere security interest, provided, that in the event
of any such pledge, (A) the Purchaser shall inform the Company of such pledge
prior to effecting it and (B) the pledgee shall execute and deliver to Company,
prior to receipt of such securities, a written agreement in form and substance
satisfactory to the Company to be bound by all the provisions of this Section 3
and Section 6 hereof, and provided, further, that the restrictions on other
Transfers of Company Securities described herein shall continue in accordance
with the terms hereof. For purposes of clarification, the obligation of a
transferee of Company Securities to execute and deliver an agreement of the type
specified in clause (iii) of paragraph (e) above shall not apply to any
Transfers of Company Securities referred to in clauses (i), (ii), (iii) and (iv)
of this paragraph (f).
(g) The Company, at its sole discretion, may exercise its rights of
first offer and first refusal as provided above either directly or through any
other Entities, and may assign such right to any other Entities, provided, that
the Company will guarantee the obligation of such Entities to purchase the
Company Securities subject to the exercise of such rights.
(h) For purposes of this Section 3.3, "Market Price" with respect to
Company Securities shall mean (i) with respect to any Company Securities (or
conversion equivalent) that are publicly traded, the average closing price per
share or unit of such equity interest (or conversion equivalent) on the ten (10)
consecutive trading days immediately preceding the date of determination, or
(ii) with respect to any Company Securities (or conversion equivalent) that are
not publicly traded, the fair market value thereof as determined by a nationally
recognized investment banking firm selected by the Purchaser subject to the
reasonable consent of the Company.
(i) The Purchaser shall ensure that any Affiliate of the Purchaser
desiring to Transfer any Company Securities (other than to the Purchaser or any
other Affiliate of the Purchaser) shall comply with the procedures described in
this Section 3.3 as if it were the "Purchaser" hereunder. All proposed Transfers
by the Purchaser and any of its Affiliates within any three (3) month period
shall be deemed one Transfer for purposes of
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determining whether such proposed Transfers constitute a Significant Transfer
or a Small, Medium or Large Sale.
4. REGISTRATION RIGHTS.
4.1 CERTAIN DEFINITIONS.
As used in this Agreement, the following capitalized terms have the
following meanings:
(a) "Demand Registration" shall mean a registration requested by the
Holders pursuant to Section 4.2 hereof.
(b) "Holders" shall mean the Purchaser and any transferee of the
Purchaser's rights under this Section 4 as permitted by the terms hereof.
(c) "Registrable Securities" shall mean the Purchaser Shares,
together with any securities issued or issuable by the Company in respect of any
of such securities by way of a distribution or split or in connection with a
combination or subdivision of such securities of the Company or a
reclassification, recapitalization, merger, consolidation or other
reorganization of the Company, provided, that as to any particular Registrable
Securities, such securities shall cease to be Registrable Securities when:
(i) a registration statement with respect to the sale of such
securities shall have become effective under the Securities Act and such
securities shall have been disposed of under such registration statement;
(ii) such securities shall have been transferred pursuant to
Rule 144 promulgated under the Securities Act ("Rule 144");
(iii) such securities shall have been otherwise transferred or
disposed of, and new certificates therefor not bearing a legend
restricting further transfer shall have been delivered by the Company, and
subsequent transfer or disposition of them shall not require their
registration or qualification under the Securities Act or any similar
state law then in force; or
(iv) such securities shall have ceased to be outstanding.
4.2 DEMAND REGISTRATION RIGHTS.
(a) If, after the first anniversary of the closing date of the IPO,
the Company shall receive (i) a written request from the Holders of a majority
of the Registrable Securities then outstanding that the Company file a
registration statement under the Securities Act covering the registration of (A)
at least twenty-five percent (25%) of the aggregate Registrable Securities
purchased by the Purchaser pursuant to the Master Agreement or (B) Registrable
Securities with an anticipated aggregate offering price, net of underwriting
commissions and discounts, of at least twenty-five million
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dollars ($25,000,000) or (ii) if the Company is eligible to file a registration
statement on Form S-3 under the Securities Act, a written request from any
Holder or Holders of the Registrable Securities that the Company file a
registration statement on Form S-3 under the Securities Act covering the
registration of Registrable Securities with an anticipated aggregate offering
price, net of underwriting discounts and commissions, in excess of fifteen
million dollars ($15,000,000), then, in each case, the Company shall, subject to
the limitations set forth in this Agreement, (y) promptly following receipt
thereof, give written notice of such request to all Holders (the "Notice of
Request for Registration") and (z) as soon as practicable, use its reasonable
best efforts to effect such registration under the Securities Act covering all
Registrable Securities which the Holders request to be registered by notice to
the Company within thirty (30) days of the mailing of the Notice of Request for
Registration by the Company.
(b) If the Holders initiating the registration request hereunder
("Initiating Holders") intend to distribute the Registrable Securities covered
by their request by means of an underwriting, they shall so advise the Company
as part of their request made pursuant to Section 4.2(a) and the Company shall
include such information in the Notice of Request for Registration. The
underwriter shall be selected by the Initiating Holders, subject to the consent
of the Company to such underwriter and its form of underwriting agreement, which
consent shall not be unreasonably withheld. In such event, the right of any
Holder to include its Registrable Securities in such registration shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting (unless
otherwise mutually agreed by a majority in interest of the Initiating Holders
and such Holder) to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting. If any Holder disapproves of the terms of the
underwriting, it may elect to withdraw therefrom by written notice to the
Company and the underwriter. The Registrable Securities so withdrawn shall also
be withdrawn from registration.
(c) Notwithstanding any other provision of this Section 4.2, if the
underwriter or underwriters determine, in good faith, that marketing factors
require a limitation of the number of shares to be underwritten, the
underwriters may limit in their sole discretion the number of Registrable
Securities and other Company Securities to be included in the registration and
underwriting, subject to the terms of this Section 4.2(c). The Company shall so
advise all holders of the Company's securities that would otherwise be
registered and underwritten pursuant to such registration. The Holders of
Registrable Securities shall have absolute priority over any other securities
requested to be included in such registration and underwriting. The number of
shares of such securities, including Registrable Securities, that may be
included in the registration and underwriting shall be allocated in the
following manner:
(i) first, among the Holders of Registrable Securities, in
proportion, as nearly as practicable, to the respective amounts of such
securities held by such holders and otherwise entitled to be included in
such registration;
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(ii) second, among holders of other securities in accordance
with the terms of their respective registration rights, if any, in each
case in proportion, as nearly as possible, to the respective amounts of
such securities held by each such holder and otherwise entitled to be
included in such registration; and
(iii) third, to any Company Securities proposed to be issued
or sold for the account of the Company.
(d) Notwithstanding anything to the contrary in this Section 4.2, in
the event that the underwriters require that the securities included in a
registration statement be cut back as set forth in the preceding paragraph (c),
as a result of which the number of Registrable Securities to be included in such
registration statement is less than fifty percent (50%) of the number of
Registrable Securities requested to be included in such registration statement,
the registration shall not be considered a Demand Registration, and shall not be
counted for purposes of the limit on Demand Registrations set forth in Section
4.2(f) hereof.
(e) Notwithstanding the foregoing, but subject to the terms of this
paragraph (e), the Company shall not be obligated to effect any registration
pursuant to this Section 4.2 if at the time of any request to register
Registrable Securities pursuant to this Section 4.2:
(i) the Company is engaged, or has or is considering plans to
engage, in a registered public offering;
(ii) the Company Board determines in good faith that the
registration might adversely affect any activity, plan or proposal of the
Company or any of its Affiliates, including any activity, plan or proposal
with respect to any financing, acquisition, recapitalization,
reorganization or other transaction;
(iii) the Company Board makes a good faith determination that
the filing or effectiveness of a registration statement would require the
disclosure of information relating to any development, event, occurrence
or change in circumstance relating in any way to the Company or its
business or plans, the disclosure of which might adversely affect the
Company, including without limitation the business and plans of the
Company; or
(iv) audited financial statements of the Company are not
available or the Company is not then able to comply with the SEC
requirements applicable to the requested registration (notwithstanding its
reasonable efforts to comply).
In the circumstances described in clauses (i), (ii), (iii) and (iv) above,
the Company may, at its option, direct that such request be delayed (x) for a
period not in excess of one hundred twenty (120) days from the effective date of
an offering described in clause (i), (y) for such period as the Company Board
determines in good faith is
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necessary to avoid any adverse effect on the Company's activities or planned
activities or to avoid the adverse effect of any required disclosure with
respect to the circumstances described in clauses (ii) and (iii), or (z) for
such period as is necessary to address the circumstance or circumstances
described in clause (iv), provided, that such deferrals cumulatively with
respect to one (1) or more requested registrations pursuant to this Section 4.2
shall not exceed in the aggregate one hundred twenty (120) days in any one (1)
year period or one hundred eighty (180) days in any two (2) year period.
(f) In addition, the Company shall not be obligated to effect, or to
take any action to effect, any registration pursuant to this Section 4.2:
(i) after the Company has effected three (3) Demand
Registrations and such registrations have been declared or ordered
effective;
(ii) during each period following the effective date of a
registration statement effected by the Company in an underwritten offering
of Common Stock, whether for its own account or for the account of others,
equal to the period of any lock-up of stockholders of the Company required
by the underwriting firm which was the lead manager of the offering
related to the registration statement; or
(iii) within one hundred eighty (180) days after the effective
date of any registration statement filed by the Company in response to a
request pursuant to this Section 4.2.
4.3 PIGGYBACK REGISTRATION.
(a) If, after the first anniversary of the closing date of the IPO,
the Company proposes to register any of its stock or other securities under the
Securities Act in connection with the public offering of such securities solely
for cash (other than a registration on Form S-8 or S-4 or a registration in
which the only Common Stock being registered is Common Stock issuable upon the
conversion or exercise of other securities), the Company shall give each Holder
written notice of such registration promptly (which notice, to the extent
reasonably practicable following the Board's determination to effect the
registration, without additional burden or delay, the Company shall use
reasonable efforts to mail at least thirty (30) days prior to the filing of the
applicable registration statement with the SEC). Upon the written request of
each Holder given within fifteen (15) days after mailing of such notice by the
Company, the Company shall, subject to the limitations set forth in this
Agreement, use its reasonable best efforts to include in the registration
statement under the Securities Act all of the Registrable Securities that each
such Holder has requested to be registered, provided, that the Company shall
under no circumstances be required to delay the filing or the effectiveness of
its registration statement in order to accommodate any Holders, regardless of
the time of delivering of any such notice, and provided, further, that nothing
in this Agreement shall prevent the Company from, at any time and for any
reason, in its sole discretion, abandoning, withdrawing or delaying any such
registration without obligation to any
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Holder, regardless of any action whatsoever that the Holder may have taken,
whether as a result of the issuance by the Company of any notice hereunder or
otherwise.
(b) Registrable Securities shall be sold in such offering only in
such quantity as the managing underwriter determines, in its sole discretion,
will not jeopardize the success of the offering by the Company. To the extent
that the managing underwriter will not permit the registration of all of the
securities sought to be registered, in the case of a registration pursuant to
this Section 4.3, the Company shall so advise all holders of the Company's
securities that would otherwise be registered and underwritten pursuant to such
registration, and the number of shares of such securities, including Registrable
Securities, that may be included shall be allocated in accordance with the
following priorities:
(i) first, among the shares of Common Stock proposed to be
included in such registration statement for the account of the Company;
(ii) second, pro rata among holders of Common Stock, if any,
requesting inclusion in such registration statement pursuant to
registration rights existing on the date of this Agreement and ranking
senior to the registration rights of the Holders of Registrable
Securities, as listed on Schedule 3 to this Agreement, to the extent
required by such senior registration rights;
(iii) third, pro rata with respect to all Holders of
Registrable Securities or holders of other Common Stock who have requested
to be included in the registration pursuant to this Section 4.3 or
pursuant to piggyback registration provisions of other agreements that
rank pari passu with the piggyback rights provided hereunder, in
proportion to the number of shares owned by each such holder; and
(iv) fourth, among holders of any other Common Stock, in
accordance with the terms of their respective registration rights, if any,
in proportion to the number of shares owned by each such holders.
The respective ownership percentages of any holder for purposes of prorating any
underwriting cutback or participation under this Section 4.3 shall be measured
as of the date of the determination of the final terms of the offering covered
by the registration statement for which such ownership percentages are being
calculated.
(c) In connection with any offering involving an underwriting under
this Section 4.3, the Company shall not be required to include any Holder's
securities in such underwriting unless such Holder accepts the underwriters
selected by the Company and the proposed pricing and other terms of the
underwriting as agreed upon between the Company and the underwriters (all in the
Company's sole discretion) and executes an underwriting agreement with such
underwriters containing such provisions as may be required by such underwriters.
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4.4 OBLIGATIONS OF THE COMPANY.
Whenever required under this Section 4 to effect the registration of any
Registrable Securities, the Company shall, as expeditiously as reasonably
possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its reasonable best efforts to
cause such registration statement to become effective, and, upon the request of
the Holders of a majority of the Registrable Securities registered thereunder,
keep such registration statement effective for a period of up to one hundred
eighty (180) days or such shorter period as required until the distribution
contemplated in the registration statement has been completed, provided, that
the Company shall have the right to suspend the effectiveness of the
registration statement and by notice to the Holders to require the Holders to
cease using any related prospectus if at any time:
(i) the SEC or any other Governmental Authority issues any
stop order suspending the effectiveness of the registration statement or
qualification of the Registrable Securities or initiates or threatens to
initiate any proceedings for that purpose, provided, that the Company
shall use its reasonable best efforts to obtain the withdrawal of any such
stop order as soon as reasonably practicable;
(ii) any event happens that requires the making of any changes
in the registration statement or the related prospectus so that, as of
such date, the statements therein are not misleading and do not omit to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading, provided, that the Company shall
use its reasonable best efforts to make such required changes as soon as
practicable; or
(iii) the Company determines, in its judgment, that it is
advisable to suspend use of the related prospectus for valid business
reasons including, among other things, the acquisition or divestiture of
assets, public filings with the SEC, pending corporate developments and
similar events, provided, that the maximum period of suspension in
connection with the circumstances described in this clause (iii) that the
Company may require with respect to any registration requested by the
Holders during any one hundred eighty (180) day period shall be either (A)
forty-five (45) days, with respect to any registration which was deferred
by the Company pursuant to Section 4.2(e) above, or (B) ninety (90) days,
with respect to any registration with respect to which the Company did not
exercise any such deferral rights; and provided, further, that if the
Company has exercised any deferral rights pursuant to Section 4.2(e) above
with respect to any registration, then the Company may not suspend such
registration in connection with the circumstances described in this clause
(iii) until at least sixty (60) days shall have passed since the effective
date of the applicable registration statement;
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and provided, further, that the maximum period of one hundred eighty (180) days
specified above shall be extended for a period of time equal to the period of
the suspension of the effectiveness of the registration statement as provided
above.
(b) Notwithstanding the foregoing, if applicable rules under the
Securities Act governing the obligation to file a post-effective amendment
permit, in lieu of filing a post-effective amendment which (x) includes any
prospectus required by Section 10(a)(3) of the Securities Act or (y) reflects
facts or events representing material or fundamental change in the information
set forth in the registration statement, the Company may incorporate by
reference information required to be included in clauses (x) and (y) above to
the extent such information is contained in periodic reports filed pursuant to
Section 13 or 15(d) of the Exchange Act in the registration statement.
(c) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary during the period specified in the
preceding paragraph (a) to comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such registration
statement.
(d) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them.
(e) Use its reasonable best efforts to register or qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided, that the Company shall not be required in connection
therewith or as a condition thereto to qualify to do business, subject itself to
taxation or to file a general consent to service of process in any such
jurisdictions.
(f) Notify each Holder of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the Company's becoming
aware that the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing and, at the
request of any such Holder, prepare and furnish to such Holder a reasonable
number of copies of an amendment to such registration statement or related
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such Registrable Securities, the prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing.
(g) Notify each Holder of Registrable Securities covered by such
registration statement at any time:
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(i) of the issuance by the SEC of any stop order suspending
the effectiveness of the registration statement or any order preventing
the use of the related prospectus, or the initiation or any threats of any
proceedings for such purposes, in each case of which the Company is aware;
and
(ii) of the receipt by the Company of any written notification
of the suspension of the qualification of any of the Registrable
Securities for sale in any jurisdiction or the initiation or any threats
of any proceeding for that purpose.
(h) Use its reasonable best efforts to comply with all applicable
rules and regulations of the SEC, and as soon as reasonably practicable make
available to its stockholders an earnings statement which shall satisfy the
provisions of Section 11(a) of the Securities Act, provided, that the Company
shall be deemed to have complied with this paragraph if it has complied with
Rule 158 under the Securities Act.
(i) If the registration is an underwritten registration, enter into a
customary underwriting agreement and in connection therewith:
(i) make such representations and warranties to the
underwriters in form, substance and scope as are customarily made by
issuers to underwriters in comparable underwritten offerings;
(ii) use reasonable efforts to obtain opinions of counsel to
the Company, addressed to the underwriters, and covering the matters
customarily covered in opinions requested in comparable underwritten
offerings;
(iii) use reasonable efforts to obtain "cold comfort" letters
and bring-downs thereof from the Company's independent certified public
accountants, addressed to the underwriters, such letters to be in
customary form and covering matters of the type customarily covered in
"cold comfort" letters by independent accountants in connection with
underwritten offerings; and
(iv) deliver such documents and certificates as may be
reasonably and customarily requested by the managing underwriters and as
may be reasonably available to the Company to evidence compliance with
clause (f) above and with any customary conditions contained in the
underwriting agreement.
(j) Cooperate with the Holders of Registrable Securities covered by
such registration statement and the managing underwriter or underwriters or
agents, if any, to facilitate the timely preparation and delivery of
certificates (in such denominations as the Holders may reasonably request)
representing the securities to be sold under such registration statement.
(k) Use its reasonable best efforts in cooperation with the
underwriters to list such Registrable Securities on each securities exchange on
which similar securities issued by the Company are then listed.
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(l) Provide a transfer agent and registrar for all Registrable
Securities covered by such registration and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration.
4.5 CERTAIN HOLDER OBLIGATIONS.
(a) It shall be a condition precedent to the obligations of the
Company to take any action pursuant to this Section 4 with respect to the
Registrable Securities of any selling Holder that such Holder shall furnish to
the Company in writing (and signed by the Holder and stated to be specifically
for use in the related registration statement, preliminary prospectus,
prospectus or other document incident thereto) such information regarding
itself, the Registrable Securities held by it, and the intended method of
disposition of such securities as shall be required to effect the registration
of such Holder's Registrable Securities. Any such information, or any comments
on any such information included in a draft of a registration statement provided
to a Holder for its comment, shall be provided to the Company promptly upon
request by the Company.
(b) The Company shall have no obligation with respect to any
registration requested pursuant to Section 4.2 if, due to the operation of
Section 4.5(a), the number of shares or the anticipated aggregate offering price
of the Registrable Securities to be included in the registration does not equal
or exceed the number of shares or the anticipated aggregate offering price
required to originally trigger the Company's obligation to initiate such
registration as specified in Section 4.2(a).
(c) Each Holder shall notify the Company, at any time when a
prospectus is required to be delivered under applicable law, of the happening of
any event as a result of which the prospectus included in the applicable
registration statement, as then in effect, with respect to information provided
or confirmed by such Holder, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances then
existing. Each Holder shall immediately upon the happening of any such event
cease using such prospectus. If so requested by the Company, each Holder
promptly shall return to the Company any copies of any prospectus in its
possession (other than permanent file copies) that contains an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances then existing.
(d) Upon receipt of any notice from the Company (i) of the actual or
contemplated suspension of the effectiveness of a registration statement
pursuant to Section 4.4(a) above or (ii) that the Company has become aware that
the prospectus (or any preliminary prospectus) included in any registration
statement filed pursuant to Section 4.2 or 4.3 above, as then in effect,
contains any untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading, each Holder shall forthwith cease from engaging in any sale or
delivery of Registrable Securities pursuant to the applicable registration
statement or related prospectus until such Holder has received written notice
from the
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Company to the effect that such sales or deliveries may be resumed and, if
applicable, the Company has delivered to the Holder a supplemental or amended
prospectus. In addition, if so directed by the Company, each Holder shall
deliver to the Company at the Company's expense all copies in such Holder's
possession of the prospectus covering the Registrable Securities that was in
effect prior to such amendment or supplement or that otherwise is requested by
the Company in connection with any suspension of the effectiveness of a
registration statement pursuant to Section 4.4(a) above.
4.6 EXPENSES OF REGISTRATION.
The Company will pay all Registration Expenses in connection with all
registrations of Registrable Securities pursuant to this Agreement, and each
Holder shall pay (x) any fees or disbursements of counsel to such Holder (other
than the fees or disbursements of a single counsel to the Holders, which shall
be paid by the Company) and (y) all underwriting discounts and commissions and
transfer taxes, if any, and documentary stamp taxes, if any, relating to the
sale or disposition of such Holder's Registrable Securities pursuant to the
registration statement. The Company shall not be required to pay for any
expenses of any registration proceeding begun pursuant to Section 4.2 if the
registration request is subsequently withdrawn at the request of the Holders of
a majority of the Registrable Securities to be registered (in which case all
participating Holders shall bear such expenses), unless the Holders of a
majority of the Registrable Securities agree to forfeit their right to one
Demand Registration pursuant to Section 4.2. Notwithstanding the foregoing, each
Holder shall pay such Registration Expenses which such Holder is required to pay
under applicable law.
4.7 DELAY OF REGISTRATION.
No Holder shall have any right to obtain or seek an injunction restraining
or otherwise delaying any such registration as the result of any controversy
that might arise with respect to the interpretation or implementation of this
Section 4.
4.8 INDEMNIFICATION.
In the event any Registrable Securities are included in a registration
statement under this Section 4:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, any underwriter (as defined in the Securities Act)
for such Holder and each person, if any, who controls such Holder or underwriter
within the meaning of the Securities Act or the Exchange Act, against any
losses, claims, damages or liabilities (joint or several) to which they may
become subject under the Securities Act, the Exchange Act or other federal or
state law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively, a "Violation"):
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(i) any untrue statement or alleged untrue statement of a
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto;
(ii) the omission or alleged omission to state in such
registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, a
material fact required to be stated therein, or necessary to make the
statements therein not misleading; or
(iii) any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, any state securities law or any rule or
regulation promulgated under the Securities Act, the Exchange Act or any
state securities law applicable to the Company;
and the Company will pay to each such Holder, underwriter or controlling person,
as incurred, any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action, provided, that the indemnity agreement contained in this
Section 4.8(a) shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected without the
consent of the Company (which consent shall not be unreasonably withheld), and
provided, further, that the Company shall not be liable in any such case for any
such loss, claim, damage, liability or action to the extent that it arises out
of or is based upon a Violation which occurs in reliance upon and in conformity
with written information furnished expressly for use in connection with such
registration by any such Holder, underwriter or controlling person and provided,
further, that the Company shall not be liable to any Person who participates as
an underwriter in the offering or sale of Registrable Securities or to any other
Person, if any, who controls such underwriter within the meaning of the
Securities Act, in any such case to the extent that such loss, claim, damage,
liability or action arises out of such Person's failure to send or give a copy
of the final prospectus, as the same may be then supplemented or amended, to the
Person asserting an untrue statement or alleged untrue statement or omission or
alleged omission at or prior to the written confirmation of the sale of
Registrable Securities to such Person if such statement or omission was
corrected in the final prospectus.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Securities Act, any underwriter,
any other Holder selling securities in such registration statement and any
controlling person of any such underwriter or other Holder, against any losses,
claims, damages or liabilities (joint or several) to which any of the foregoing
persons may become subject under the Securities Act, the Exchange Act or other
federal or state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereto) arise out of or are based upon any Violation
specified in clause (i) or (ii) of the definition thereof, in each case to the
extent (and only to the
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extent) that such Violation occurs in reliance upon and in conformity with
written information furnished by such Holder expressly for use in connection
with such registration, and each such Holder will pay, as incurred, any legal or
other expenses reasonably incurred by any Person intended to be indemnified
pursuant to this Section 4.8(b), in connection with investigating or defending
any such loss, claim, damage, liability or action, provided, that the indemnity
agreement contained in this Section 4.8(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holder (which consent shall
not be unreasonably withheld), and provided, further, that in no event shall any
indemnity under this Section 4.8(b) exceed the net proceeds from the offering
received by such Holder.
(c) Promptly after receipt by an indemnified party under this Section
4.8 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 4.8, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel selected by the
indemnifying party (but subject to the reasonable approval of the indemnified
party), provided, that an indemnified party (together with all other indemnified
parties which may be represented without conflict by one counsel) shall have the
right to retain one separate counsel, with the fees and expenses to be paid by
the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if materially prejudicial to its ability to
defend such action, shall relieve such indemnifying party of any liability to
the indemnified party under this Section 4.8, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section 4.8.
(d) If the indemnification provided for in this Section 4.8 is held
by a court of competent jurisdiction to be unavailable to an indemnified party
with respect to any loss, liability, claim, damage or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party, on the one hand, and of the indemnified party, on the other,
in connection with the statements or omissions that resulted in such loss,
liability, claim, damage or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
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knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and each Holder agree that it would not be
just and equitable if contribution pursuant to this Section 4.8 were determined
solely by pro rata allocation or by any other method of allocation which does
not take account of the equitable considerations referred to in this paragraph.
Notwithstanding the provisions of this Section 4.8(d), an indemnified party
shall not be required to contribute any amount in excess of the amount by which
the net proceeds received by such indemnified party or its affiliated
indemnified party in the offering exceeds the amount of any damages which such
indemnified party, or its affiliated indemnified party, has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. 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.
(e) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in the underwriting agreement
entered into in connection with an underwritten public offering are in conflict
with the foregoing provisions, the provisions in the underwriting agreement
shall control.
(f) The obligations of the Company and the Holders under this Section
4.8 shall survive the completion of any offering of Registrable Securities in a
registration statement under this Section 4, and otherwise.
4.9 ASSIGNMENT OF REGISTRATION RIGHTS.
The rights to cause the Company to register Registrable Securities pursuant
to this Section 4 may be assigned (but only with all related obligations) by a
Holder to a transferee or assignee of such securities who (i) receives such
Registrable Securities pursuant to a transfer made in compliance with this
Agreement and any other restrictions on transfer imposed by law and (ii) after
such assignment or transfer, holds at least twenty percent (20%) of the shares
of the aggregate Registrable Securities purchased by the Purchaser or any of its
Affiliates pursuant to the Master Agreement or as permitted by this Agreement
(determined on an as-converted basis), provided, that: (x) the Company is,
promptly after such transfer, furnished with written notice of the name and
address of such transferee or assignee and the securities with respect to which
such registration rights are being assigned; (y) such transferee or assignee
agrees in writing to be bound by and subject to the terms and conditions of
Sections 4 and 6 of this Agreement; and (z) such assignment shall be effective
only if immediately following such transfer the further disposition of such
securities by the transferee or assignee is restricted under the Securities Act.
4.10 TERMINATION OF REGISTRATION RIGHTS.
The right of any Holder to request registration pursuant to Section 4.2 or
inclusion in any registration pursuant to Section 4.3 shall terminate at such
time as all Registrable Securities held or entitled to be held upon conversion
by such Holder may immediately
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be sold under Rule 144 or any similar rule or regulation hereafter adopted by
the SEC during any ninety (90) day period.
4.11 RULE 144.
(a) Following the consummation of the IPO, the Company shall file the
reports required to be filed by it under the Securities Act and the Exchange Act
and the rules and regulations adopted by the SEC thereunder, all to the extent
required from time to time to enable the Holders to sell Registrable Securities
without registration under the Securities Act within the limitation of the
exemptions provided by (i) Rule 144, as such Rule may be amended from time to
time, or (ii) any similar rule or regulation hereafter adopted by the SEC.
(b) Upon the request of any Holder of Registrable Securities, the
Company will deliver to such Holder a written statement as to whether it has
complied with such requirements.
4.12 NO CONFLICTING AGREEMENTS.
The Company will not hereafter enter into any agreement with respect to its
securities which would constitute a violation by the Company of, or prevent the
Company from performing, its obligations to Holders under this Section 4.
Without limiting the generality of the foregoing, the Company will not after the
date hereof grant to any other Person piggyback registration rights superior in
priority to the piggyback registration rights granted to the Purchaser in
Section 4.3 hereof.
4.13 REMEDIES.
The Holders of Registrable Securities, in addition to being entitled to
exercise all rights granted by law, including recovery of damages, will be
entitled to specific performance of their rights under this Section 4. The
Company agrees that monetary damages would not be adequate compensation for any
loss incurred by reason of a breach by it of the provisions of this Section 4
and hereby agrees to waive the defense in any action for specific performance
that a remedy at law would be adequate.
5. DESIGNATED EMPLOYEES.
5.1 RIGHT TO DESIGNATE.
Until the earlier of (i) the date the Purchaser and its Affiliates
collectively shall cease to own beneficially Company Securities at least equal
to the Ownership Threshold (but not less than three (3) years from the Closing
Date), or (ii) the termination or expiration of the Outside Service Provider
Agreement, the Purchaser shall have the right to designate up to a maximum of
three employees (the "Designated Employees") to be employed by the Company
pursuant to this Section 5, who shall have suitable experience and be reasonably
satisfactory to the Company, provided, that if the Purchaser and its Affiliates
collectively cease to own beneficially Company Securities at least equal to the
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Ownership Threshold as a result of a sale of Company Securities by the Purchaser
and its Affiliates pursuant to an Acquisition Transaction, then such right shall
continue until the termination or expiration of the Outside Service Provider
Agreement. One Designated Employee shall serve as an Assistant Vice President or
equivalent and the other Designated Employees shall serve as a director or
manager or the equivalent. Such Designated Employees shall have such substantive
responsibilities as the Company and the Purchaser may from time to time agree.
5.2 ACCESS TO INFORMATION; CONFIDENTIALITY.
The Designated Employees shall perform the normal roles and
responsibilities and have normal access to information required for the
performance of their responsibilities to the Company, provided, that the
Designated Employees shall have no access to Company customer data. Each
Designated Employee, as a condition to his or her employment by the Company,
shall execute a proprietary information and assignment agreement in the form
used by the Company for its employees generally, and shall be entitled following
termination of such employment to utilize, but only to the extent permitted by
such agreement and the procedures referred to below, the general knowledge,
skill and experience, ideas, concepts, techniques, and know-how possessed by
such Designated Employees prior to or acquired during the course of such
employment. In addition, each Designated Employee shall be subject to the
procedures for the protection of certain information of the Company, as set
forth in Exhibit B hereto.
5.3 STATUS OF DESIGNATED EMPLOYEES; EXPENSES.
The Company shall be responsible for the normal compensation expenses of
the Designated Employees, determined at the ordinary compensation levels of the
Company for its employees generally (excluding participation in the Company's
stock incentive plans, other than the Company's Employee Stock Purchase Plan),
and shall afford to the Designated Employees the same benefits as are provided
to similarly situated employees of the Company. The Purchaser shall be solely
responsible for, and shall indemnify and hold the Company harmless from and
against any claims for, the payment of any taxes or governmental charges of any
kind with respect to any such Designated Employees, other than normal income
taxes imposed in the U.S. and required to be withheld by an employer. The
Designated Employees shall, at the Company's expense, be provided with office
space and standard office equipment at the Company's facilities to the extent
reasonably necessary for them to carry out their intended purposes as described
in this Section 5.
5.4 PURPOSE OF DESIGNATED EMPLOYEES.
Without limiting the obligations of the Designated Employees pursuant to
Section 5.2 hereof, the Company and the Purchaser acknowledge that the
Designated Employees will be secunded to the Company in support of the Company's
and the Purchaser's relationship and operations under the Outside Service
Provider Agreement, and so that they may gain knowledge of the operation of
network operations, network
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engineering and service provisioning services as conducted by the Company, with
a view to enabling the Purchaser to provide such services to its customers.
6. RESTRICTIVE LEGEND.
6.1 LEGEND.
All certificates representing the Company Securities deliverable to the
Purchaser pursuant to the Master Agreement or otherwise acquired by the
Purchaser or any of its Affiliates (including, without limitation, any shares of
Common Stock acquired upon the conversion of any Junior Preferred Stock
purchased pursuant to the Master Agreement) (collectively, the "Purchaser
Shares"), and any certificates subsequently issued with respect thereto or in
substitution therefor, shall bear a legend substantially as follows, in addition
to any legend the Company determines is required pursuant to any applicable
Requirement of Law:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED,
SOLD, PLEDGED, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS THERE IS AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT COVERING SUCH SECURITIES OR
THE ISSUER RECEIVES AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IT TO
THE EFFECT THAT AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE FURTHER SUBJECT TO CERTAIN
RESTRICTIONS RELATING TO TRANSFER, VOTING AND OTHER MATTERS SPECIFIED IN
THE INVESTMENT AGREEMENT DATED AS OF APRIL 7, 1998, A COPY OF WHICH IS ON
FILE AT THE OFFICE OF THE CORPORATE SECRETARY OF THE ISSUER.
6.2 STOP TRANSFER ORDER.
The Company, at its discretion, may cause a stop transfer order to be
placed with its transfer agent(s) with respect to the certificates for the
Purchaser Shares.
6.3 REMOVAL OF LEGENDS.
The legend set forth in Section 6.1 above and any stop transfer orders
shall be removed, and the Company shall issue certificates without such legends,
with respect to any Purchaser Shares transferred in any Transfer permitted by
the terms of this Agreement with respect to which (i) the Company has received
an opinion from counsel to the Purchaser or its Affiliates, as the case may be,
in form and substance and from counsel reasonably satisfactory to the Company,
that the Purchaser Shares so Transferred will cease to be "restricted
securities" within the meaning of Rule 144 following such
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Transfer, and (ii) the provisions of this Agreement provide that the transferee
of such Purchaser Shares will not be subject to the restrictions of this
Agreement.
7. CONFIDENTIAL TREATMENT OF CONFIDENTIAL INFORMATION.
7.1 PROTECTION OF CONFIDENTIAL INFORMATION.
(a) In the event any Covered Person (as defined below) (the
"Receiving Party") obtains from any other Covered Person or the Company (the
"Disclosing Party") any Confidential Information (as defined below), the
Receiving Party (subject in the case of the Designated Employees to Section 5.2
hereof): (i) shall treat all such Confidential Information as confidential; (ii)
shall use such Confidential Information only for the purposes contemplated in
this Agreement; (iii) shall protect such Confidential Information with the same
degree of care as the Receiving Party uses to protect its own proprietary
information against public disclosure, but in no case with less than reasonable
care; and (iv) shall not disclose such Confidential Information to any third
party except to such employees and agents of the Receiving Party who need to
know such Confidential Information for the purpose of effectuating this
Agreement and who have been informed of and have agreed to protect the
confidential nature of such Confidential Information (and the Receiving Party
shall be responsible for compliance by such employees and agents with such
agreement).
(b) "Confidential Information" shall mean technical and business
information relating to the Company's intellectual property rights, trade secret
processes or devices, techniques, data, formula, inventions (whether or not
patentable) or products, research and development (including research subjects,
methods and results), production, manufacturing and engineering processes,
computer software, costs, profit or margin information, pricing policies,
confidential market information, finances, customers, distribution, sales,
marketing and production and future business plans and any other information of
a "confidential" nature, specifically including, without limitation, any
information that is identified orally or in writing by the Company to be
confidential, or that the Receiving Party should reasonably understand under the
circumstances to be a trade secret or information of a similar nature, provided,
that Confidential Information shall not include any such information which: (i)
was in the public domain on the date hereof or comes into the public domain
other than through the fault or negligence of the Receiving Party; (ii) was
lawfully obtained by the Receiving Party from a third party without breach of
this Agreement and otherwise not in violation of the Disclosing Party's rights;
(iii) was known to the Receiving Party at the time of disclosure of such
Proprietary Information to the Receiving Party by the Disclosing Party and the
Receiving Party was not, at such time, subject to any confidentiality obligation
with respect thereto; or (iv) was independently developed by the Receiving Party
without making use of any Proprietary Information of the Disclosing Party.
(c) "Covered Person" shall mean the Purchaser or any Person (other
than the Company) that directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with, the
Company or the Purchaser, any
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officer, director, controlling person, partner, employee, representative or
agent of the Purchaser or any of its Affiliates (other than the Company), any
director, officer, employee or agent of the Company or any of its Affiliates, or
any person who was, at the time of the act or omission in question, such a
Person.
(d) "Affiliate" shall mean, with respect to any specified Person, a
Person that directly or indirectly, through one or more intermediaries,
controls, is controlled by, or is under common control with, the Person
specified.
7.2 RETURN OF CONFIDENTIAL INFORMATION.
Upon the Disclosing Party's request at any time, the Receiving Party shall:
(i) return to the Disclosing Party or destroy all documents (including any
copies thereof) embodying the Disclosing Party's Confidential Information and
(ii) certify in writing to the Disclosing Party, within ten (10) days following
the Disclosing Party's request, that all such Confidential Information has been
returned or destroyed.
7.3 EQUITABLE REMEDIES.
The parties acknowledge that the extent of damages in the event of the
breach of any provision of this Section 7 would be difficult or impossible to
ascertain, and that there will be available no adequate remedy at law in the
event of any such breach. Each party therefore agrees that in the event it or
any Covered Person employed by or affiliated with it breaches any provision of
this Section 7, the aggrieved party (including, without limitation, the Company)
will be entitled to injunctive or other equitable relief, in addition to any
other relief to which it may be entitled.
8. OTHER AGREEMENTS.
8.1 NONSOLICITATION.
Unless otherwise agreed in writing, until the date three (3) years
following the date on which the Purchaser and its Affiliates no longer own any
Company Securities, the Purchaser shall not solicit, or allow its Affiliates to
solicit, for hire any employees of the Company or any of its Affiliates (other
than the Purchaser) ("Restricted Employees"), other than employees serving
strictly clerical roles. The phrase "solicit for hire" shall not include general
advertisements or other similar solicitations that are not specifically directed
at such Restricted Employees.
8.2 FURTHER ASSURANCES.
Each party shall execute and deliver such additional instruments, documents
or other writings as may be reasonably requested by the other party in order to
confirm and carry out and to effectuate fully the intent and purposes of this
Agreement.
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9. TERMINATION.
9.1 TERMINATION.
This Agreement (i) may be terminated at any time prior to the Closing by
the written agreement of the Purchaser and the Company and (ii) shall terminate
automatically upon any termination prior to the Closing of the Master Agreement.
9.2 EFFECT OF TERMINATION.
Except for the obligations of Sections 7 and 8.1, this Section 9 and
Section 11, if this Agreement shall be terminated pursuant to the preceding
Section 9.1, all obligations, representations and warranties of the parties
hereto under this Agreement shall terminate and there shall be no liability of
any party hereto to any other party hereto pursuant to the terms hereof,
provided, that nothing in this Section 9 shall relieve any party for breach of
any warranty, covenant or agreement herein or in any other Transactional
Agreement.
10. SUCCESSORS AND ASSIGNS.
10.1 SUCCESSORS AND ASSIGNS.
Except as otherwise expressly provided herein, the provisions hereof shall
inure to the benefit of, and be binding upon, the successors, assigns, heirs,
executors and administrators of the parties hereto. Except as otherwise
expressly provided herein, neither party may assign any of its rights or
obligations hereunder without the written consent of the other party hereto.
10.2 NOVATION.
(a) From and after the date of this Agreement, the Purchaser shall
have the right, with or without the consent of the Company, to assign all of its
rights and obligations under this Agreement (other than its obligations pursuant
to this Section 10, except in the circumstances and subject to the conditions
described in Section 10.2(b)), effecting a novation, to a direct or indirect
wholly-owned subsidiary of the Purchaser (the "Assignee"), provided, that any
such assignment shall only be made in conjunction with an assignment by the
Purchaser to the same transferee of its rights and obligations under the Master
Agreement, pursuant to Section 7 of the Master Agreement. Such assignment shall
become effective immediately upon notification by the Purchaser to the Company
of such assignment.
(b) In the event of a transfer of the rights and obligations of the
Purchaser under this Agreement pursuant to a statutory reorganization of the
Purchaser prescribed in the Supplementary Provisions to the Law Concerning
Partial Amendment to the Nippon Telegraph and Telephone Corporation Law (Law No.
98 of 1997) (the "Amendment"), the Purchaser shall ensure that all the rights
and obligations of the Purchaser under this Agreement and the ownership of the
Purchaser Shares are transferred to the said successor entity without any
dilution or adverse effect on the
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enforceability of such obligations. Subject to the aforesaid, the Company: (i)
agrees that such a reorganization by itself shall not constitute a default by
the Purchaser or any successor entity of the Purchaser under this Agreement and
shall not constitute grounds for termination of this Agreement by any of such
parties; (ii) anything to the contrary herein notwithstanding, consents to the
transfer of all the rights and obligations of the Purchaser under this Agreement
(including, without limitation, its obligations pursuant to Sections 10.3 and
10.4 hereof) to a successor entity as part of such reorganization; (iii)
consents to the transfer of the Purchaser Shares to a successor entity as part
of such reorganization; and (iv) anything to the contrary herein or elsewhere
notwithstanding, agrees to absolutely and irrevocably release the Purchaser from
its obligations under this Agreement and the other Transactional Agreements upon
such reorganization, provided, in each case, that the successor entity shall be
subject to the terms and conditions of this Agreement and the other
Transactional Agreements, including, without limitation, the representations and
warranties of the Purchaser herein and in the other Transactional Agreements,
and shall deliver to the Company a written agreement to such effect, in form and
substance reasonably satisfactory to the Company, and provided, further, in each
case, that the successor entity is either one of the Regional Companies or the
Long Distance Company currently contemplated in the Amendment.
10.3 GUARANTEE.
(a) The Purchaser hereby absolutely, unconditionally and irrevocably
guarantees (i) the full and complete performance by each Assignee and each
Purchaser Party Affiliate of all covenants and obligations to be performed by it
under this Agreement, the Master Agreement and all other Transactional
Agreements, and (ii) the payment of any and all damages, losses, claims,
demands, recoveries, deficiencies, costs and expenses (including, without
limitation, reasonable attorneys' fees and expenses) which the Company or any of
its successors, assigns or Affiliates may suffer or incur in connection with,
resulting from or arising out of any breach by any Assignee or any Purchaser
Party Affiliate of any such covenants and obligations, which guarantee shall be
effective from and after the date hereof or, in the case of any Assignee,
automatically upon the related assignment pursuant to Section 10.2(a).
(b) Without limiting the generality of the preceding paragraph (a),
the Purchaser agrees that, in the event that any Assignee or any Purchase Party
Affiliate fails to perform any of its duties and obligations under this
Agreement or any of the other Transactional Agreements, and monetary claims by
the Company or any of its successors, assigns or Affiliates arising out of or
with respect to such failure to perform have been determined (by any judgment of
a court, by an arbitral award, by execution of a settlement agreement or by
final resolution under the terms of the relevant Transactional Agreement) to be
payable to the Company or any such successor, assign or Affiliate ("Payment
Determination"), then the Purchaser shall promptly pay over to the Company or
such successor, assign or Affiliate all of the amounts so determined to be due
to it within thirty (30) days after such Payment Determination, if and to the
extent that the Assignee or the Purchaser Party Affiliate, as applicable, shall
have failed to pay such amounts within such time period. The Purchaser agrees
that it will pay and perform all
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obligations of the Assignee or the Purchaser Party Affiliate, as applicable,
established through any Payment Determination made as a result of any
litigation, arbitration or other proceeding, even though such litigation,
arbitration or any other proceeding may be appealed or is appealable by the
Purchaser, the Assignee or the Purchaser Party Affiliate.
(c) In addition to all other amounts to which it may be entitled
hereunder, in the event that the Company or any of its successors, assigns or
Affiliates recovers any amounts from the Purchaser or any Affiliate of the
Purchaser pursuant to this Section 10 or otherwise in connection with the
matters giving rise to the Purchaser's guarantee obligation hereunder, the
Company or any such successor, assign or Affiliate shall be entitled to recover
from the Purchaser all costs and expenses (including, without limitation, court
costs and reasonable attorneys' fees and expenses) incurred by the Company or
any such successor, assign or Affiliate in connection with the enforcement of
this Section 10 against the Purchaser and all actions or proceedings, in any
way, manner or respect arising out of or relating to the enforcement by the
Company of its rights under this Section 10 against the Purchaser. In the event
that the Company or any of its successors, assigns or Affiliates seeks to
enforce this Section 10 against the Purchaser and is finally judicially
determined not to be entitled to any recovery with respect to the matter for
which the Purchaser's guarantee hereunder was sought to be enforced, the
Purchaser shall be entitled to recover from the Company all costs and expenses
(including, without limitation, court costs and reasonable attorney's fees and
expenses) incurred by the Purchaser in connection with the Purchaser's defending
such enforcement action.
10.4 CERTAIN WAIVERS AND AUTHORIZATIONS.
In connection with any assignment by the Purchaser pursuant to
Section 10.2(a) above and the guaranty by the Purchaser pursuant to Section 10.3
above:
(a) The Purchaser hereby irrevocably waives, to the fullest extent
permitted by law: (i) all statutes of limitations defenses; (ii) any defense
based upon any legal disability or any discharge or limitation of the liability
of any Assignee or any Purchaser Party Affiliate, whether consensual or arising
by operation of law or by any bankruptcy, reorganization, receivership,
insolvency or similar debtor-relief proceeding, or from any other cause; (iii)
presentment, demand, protest and notice of any kind, including, without
limitation, notices of nonperformance, protest and dishonor; and (iv) any right
to require the Company to proceed against any Assignee, any Purchaser Party
Affiliate or any other party or to pursue any other remedy in the Company's
power whatsoever.
(b) The Purchaser's obligations under Section 10.3 shall be primary
obligations and are independent of those of any Assignee or any Purchaser Party
Affiliate. The Company may bring a separate action against the Purchaser,
without first proceeding against any Assignee, any Purchaser Party Affiliate or
any other Person and without pursuing any other remedy. The Company's rights
hereunder shall not be exhausted by any action of the Company until all
obligations of all Assignees and all
35
<PAGE> 40
Purchaser Party Affiliates have been performed and there shall be no
outstanding default thereunder, and all obligations of the Purchaser otherwise
shall have been performed.
(c) To the fullest extent permitted by law, the Company may at any
time and from time to time, without the consent of or notice to the Purchaser,
without incurring any responsibility to the Purchaser, and without impairing or
releasing the obligations of the Purchaser hereunder, upon or without any terms
or conditions and in whole or in part:
(i) exercise or refrain from exercising any rights against any
Assignee or any Purchaser Party Affiliate or others or otherwise act or
refrain from acting;
(ii) subordinate, release, settle or compromise any of the
obligations of any Assignee or any Purchaser Party Affiliate;
(iii) consent to or waive any breach of, or any act, omission
or default under, this Agreement, the Master Agreement or any other
Transactional Agreements, or otherwise agree with any Assignee or any
Purchaser Party Affiliate to amend, modify or supplement any such
Agreements or any other instrument or agreement; or
(iv) substitute, add or release any one or more guarantors.
(d) The obligations of the Purchaser hereunder shall continue to be
effective if any obligations of any Assignee or any Purchaser Party Affiliate
are rescinded or nullified, or any payment made thereby must otherwise be
restored or returned to such party, or any trustee, receiver, custodian,
liquidator or other similar officer thereof (and is so returned) upon the
bankruptcy of such party or upon or as a result of the appointment of a
custodian, receiver, trustee or other officer with similar powers with respect
to such party.
(e) The obligations of the Purchaser hereunder shall continue to be
effective notwithstanding any other provision hereof or any amendment or
modification of this Agreement or any of the other Transactional Agreements, or
any assignment or any rejection thereof which may occur in any bankruptcy or
proceeding concerning any Assignee or any Purchaser Party Affiliate, whether
permanent or temporary, and whether or not assented to by any of the parties to
this Agreement or any of the other Transactional Agreements.
(f) Without notice to or further assent from the Purchaser, any of
the terms and conditions respecting the duties and obligations of any Assignee
or any Purchaser Party Affiliate under this Agreement and the other
Transactional Agreements may be waived or modified by any of such parties and
the Company, and the time of payment of any amount due or the time of
performance of any obligation of such parties may be compromised, settled or
extended in writing by such parties and the Company.
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<PAGE> 41
The obligations of the Purchaser hereunder shall not be discharged or impaired
or otherwise affected by (i) any extension or renewal of this Agreement or any
of the other Transactional Agreements or any obligations of any Assignee or any
Purchaser Party Affiliate thereunder, without notice or further assent from the
Purchaser; (ii) any rescission or any waiver, amendment or modification of any
of the terms or provisions of this Agreement or any of the other Transactional
Agreements; (iii) any permitted assignment or delegation by the Company, or any
of its successors and assigns, of its rights and obligations under this
Agreement or any of the other Transactional Agreements; or (iv) any other act or
thing which may or might in any manner or to any extent vary the risk of the
Purchaser or which would otherwise operate as a discharge of the Purchaser as a
matter of law.
11. MISCELLANEOUS.
11.1 INTERPRETATION.
(a) References in this Agreement to "beneficial ownership" or
beneficially own," or any derivation of such terms, shall have the meaning set
forth in Rule 13d-3 under the Exchange Act.
(b) The various section headings are inserted for purposes of
reference only and shall not affect the meaning or interpretation of this
Agreement or any provision hereof.
(c) Each party hereto acknowledges that it has been represented by
competent counsel and participated in the drafting of this Agreement and the
other Transactional Agreements, and agrees that any applicable rule of
construction to the effect that ambiguities are to be resolved against the
drafting party shall not be applied in connection with the construction or
interpretation of this Agreement and the other Transactional Agreements.
(d) The original and controlling version of this Agreement and the
other Transactional Agreements shall be the version using the English language.
All translations of this Agreement or any of the other Transactional Agreements
into other languages shall be for the convenience of the parties only, and shall
not control the meaning or application of this Agreement or any of the other
Transactional Agreements. All notices and other communications required or
permitted by this Agreement or any other Transactional Agreement must be in
English, and the interpretation and application of such notices and other
communications shall be based solely upon the English language version thereof.
(e) When a reference is made in this Agreement or any other
Transactional Agreement to a Section, Exhibit or Schedule, such reference shall
be to a Section of, Exhibit to or Schedule to this Agreement or such other
Transactional Agreement, unless otherwise indicated.
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<PAGE> 42
11.2 FEES AND EXPENSES.
Each party hereto shall be solely responsible for the payment of the fees
and expenses of its advisers, counsel, accountants and other experts, if any,
and all other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement and the other
Transactional Agreements, except to the extent expressly set forth in this
Agreement and the other Transactional Agreements.
11.3 GOVERNING LAW; JURISDICTION AND VENUE; WAIVER OF JURY TRIAL.
(a) This Agreement is to be construed in accordance with and governed
by the internal laws of the State of New York (as permitted by Section 5-1401 of
the New York General Obligations Law (or any similar successor provision))
without giving effect to any choice of law rule that would cause the application
of the laws of any jurisdiction other than the internal laws of the State of New
York to the rights and duties of the parties.
(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 (and each appellate court located in the State of
Colorado) in connection with any such legal proceeding, including to
enforce any settlement, order or award;
(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) waives and 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) Each party hereto agrees to the entry of an order to enforce any
resolution, settlement, order or award made pursuant to this Section by the
state and federal courts located in the County of Denver, Colorado and in
connection therewith hereby waives, and agrees not to assert by way of motion,
as a defense, or otherwise, any claim that such resolution, settlement, order or
award is inconsistent with or violative of the laws or public policy of the laws
of the State of New York or any other jurisdiction.
38
<PAGE> 43
(d) The Purchaser hereby irrevocably designates Corporation Service
Company, of One Civic Center Plaza, 1560 Broadway, Denver, Colorado 80202, as
agent for service of process hereunder and the above named is authorized and
directed to accept service of process on behalf of the Purchaser in any suit
regarding the Transactions or otherwise related to this Agreement or the other
Transactional Agreements.
11.4 SPECIFIC ENFORCEMENT.
The parties hereto agree that irreparable damage would occur in the event
that any of the provisions of this Agreement were not performed in accordance
with their specific intent or were otherwise breached. It is accordingly agreed
that the parties shall be entitled to an injunction or injunctions to prevent or
cure breaches of the provisions of this Agreement and to enforce specifically
the terms and provisions hereof, this being in addition to any other remedy to
which they may be entitled by law or equity.
11.5 NO THIRD PARTY BENEFICIARIES.
This Agreement is intended for the benefit of the parties hereto and their
respective permitted successors and assigns and are not for the benefit of, nor
may any provision hereof be enforced by, any other Person.
11.6 ENTIRE AGREEMENT.
This Agreement, the Master Agreement and the other Transactional
Agreements, and the other documents delivered expressly hereby, constitute the
full and entire understanding and agreement between the parties with regard to
the subjects hereof and no party shall be liable or bound to any other in any
manner by any representations, warranties, covenants and agreements except as
specifically set forth herein and therein.
11.7 SEVERABILITY.
The provisions of this Agreement shall be severable, and any invalidity,
unenforceability or illegality of any provision or provisions of this Agreement
shall not affect any other provision or provisions of this Agreement, and each
term and provision of this Agreement shall be construed to be valid and
enforceable to the full extent permitted by law.
11.8 AMENDMENT AND WAIVER.
(a) This Agreement may be modified or amended at any time by the
agreement of the Purchaser and the Company, provided, that without the consent
of the Purchaser, the Company may (i) enter into agreements with permitted
assignees pursuant to the terms of this Agreement, providing in substance that
such permitted assignees will be bound by this Agreement, and (ii) amend this
Agreement (A) to satisfy any requirements, conditions, guidelines or opinions
contained in any opinion, directive, order, ruling or regulation of the SEC, the
Internal Revenue Service or any other United States federal or state agency, or
in any United States federal or state statute, and to cure
39
<PAGE> 44
any ambiguity or correct or supplement any provision of this Agreement that may
be incomplete or inconsistent with any other provision contained herein, so long
as any amendment under this clause (ii) does not adversely affect the investment
in the Company of the Purchaser or any of its Affiliates or the rights of the
Purchaser or any of its Affiliates hereunder, and provided, further, that,
notwithstanding the foregoing provisions of this Section 11.8, no amendment of
this Agreement shall change the provisions of this Section 11.8 without the
prior written consent of the Purchaser.
(b) No failure to exercise and no delay in exercising any right,
power or privilege granted under this Agreement shall operate as a waiver of
such right, power or privilege. No single or partial exercise of any right,
power or privilege granted under this Agreement shall preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
The rights and remedies provided in this Agreement are cumulative and are not
exclusive of any rights or remedies provided by law.
11.9 RELATIONSHIP OF THE PARTIES.
For all purposes of this Agreement and the other Transactional Agreements,
each of the parties hereto and their respective Affiliates shall be deemed to be
independent entities and, anything in this Agreement or the other Transactional
Agreements to the contrary notwithstanding, nothing herein shall be deemed to
constitute the parties hereto or any of their respective Affiliates as partners,
joint venturers, co-owners, an association or any entity separate and apart from
each party itself, nor shall this Agreement or any other Transactional Agreement
make any party hereto an employee or agent, legal or otherwise, of the other
parties for any purposes whatsoever. This Agreement does not create or
constitute, and shall not be construed as creating or constituting, a voting
trust agreement under the Delaware General Corporation Law or any other
applicable corporation law. None of the parties to this Agreement or any other
Transactional Agreement is authorized to make any statements or representations
on behalf of any other party or in any way to obligate any other party, except
as expressly authorized in writing by the other parties. Anything in this
Agreement or any other Transactional Agreement to the contrary notwithstanding,
no party hereto or thereto shall assume nor shall be liable for any liabilities
or obligations of the other parties, whether past, present or future.
11.10 NOTICES.
All notices required or permitted hereunder shall be in writing and shall
be deemed effectively given: (i) upon personal delivery to the party to be
notified; (ii) when sent by confirmed telex or facsimile if sent during normal
business hours of the recipient, if not, then on the next business day; (iii)
five (5) days after having been sent by registered or certified mail, return
receipt requested, postage prepaid; or (iv) two (2) days after deposit with a
nationally recognized overnight courier, specifying next day delivery, with
written verification of receipt. All communications shall be sent to the parties
hereto at the respective addresses set forth below, or as notified by such party
from time to time at least ten (10) days prior to the effectiveness of such
notice:
40
<PAGE> 45
<TABLE>
<S> <C>
if to the Purchaser: Nippon Telegraph and Telephone
Corporation
Global Communications Headquarters
Tokyo Opera City Tower
20-2 Nishi-shinjuku 3-chome
Shinjuku-ku
Tokyo 163-14 Japan
Attention: Tatsuo Kawasaki
Facsimile: 81-3-5353-5753
with a copy to: NTT America, Inc.
101 Park Avenue, 41st Floor
New York, NY 10178
Attention: Richard Nohe
Facsimile: (212) 661-1078
and a copy to: Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004
Attention: Anthony S. Harrington
Facsimile: (202) 637-5910
if to the Company: Verio Inc.
8005 South Chester Street
Suite 200
Englewood, CO 80122
Attention: Carla Hamre Donelson
Facsimile: (303) 708-2494
with a copy to: Morrison & Foerster LLP
425 Market Street
San Francisco, CA 94105
Attention: Gavin B. Grover
Facsimile: (415) 268-7522
</TABLE>
11.11 COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each of which
shall constitute an original, but all of which together shall constitute one
instrument.
11.12 ATTORNEYS' FEES.
If any action at law or in equity is necessary to enforce or interpret the
terms of this Agreement, the prevailing party shall be entitled to reasonable
attorney's fees, costs and necessary disbursements in addition to any other
relief to which such party may be entitled.
41
<PAGE> 46
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date set forth in the first paragraph hereof.
NIPPON TELEGRAPH AND
TELEPHONE CORPORATION
By: /s/ JUN-ICHIRO MIYAZU
--------------------------------
Name: Jun-Ichiro Miyazu
Title: President
VERIO INC.
By: /s/ JUSTIN JASCHKE
---------------------------------
Justin Jaschke
Chief Executive Officer
42
<PAGE> 47
EXHIBIT A
CERTAIN DEFINITIONS
Terms used in the Agreement without definition shall have the respective
meanings given them in the Master Agreement. In addition, for purposes of the
Agreement (including this Exhibit A) the following terms shall have the
following meanings:
ACQUISITION EVENT. "Acquisition Event" shall have the meaning specified in
Section 2.2 of the Agreement.
ACQUISITION PROPOSAL. "Acquisition Proposal" shall have the meaning
specified in Section 3.1 of the Agreement.
ACQUISITION TRANSACTION. "Acquisition Transaction" shall mean a transaction
pursuant to an Acquisition Event, a Third Party Offer or an Acquisition Proposal
which has been publicly approved by the Company Board as described in Section
3.1(c) of the Agreement.
AFFILIATE. "Affiliate" shall have the meaning specified in Section 7.1 of
the Agreement.
AMENDMENT. "Amendment" shall have the meaning specified in Section 10.2 of
the Agreement.
ASSIGNEE. "Assignee" shall have the meaning specified in Section 10.2 of
the Agreement.
BUSINESS DAY. "Business Day" shall mean any day other than a Saturday or
Sunday or other day on which commercial banks in California are authorized or
required by law to close.
CHANGE OF CONTROL. "Change of Control" shall have the meaning specified in
Section 2.2 of the Agreement.
CLASS III DIRECTOR. "Class III Director" shall have the meaning specified
in Section 1.1 of the Agreement.
CLOSING. "Closing" shall have the meaning specified in Section 1.1 of the
Agreement.
COMMON STOCK. "Common Stock" shall have the meaning specified in the
Recitals to the Agreement.
COMPANY BOARD. "Company Board" shall have the meaning specified in Section
1.1 of the Agreement.
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<PAGE> 48
COMPANY SECURITIES. "Company Securities" shall have the meaning specified
in the Recitals to the Agreement.
CONFIDENTIAL INFORMATION. "Confidential Information" shall have the meaning
specified in Section 7.1 of the Agreement.
CONTROLLED AFFILIATE. "Controlled Affiliate" with respect to a Person shall
mean any Affiliate of such Person that is controlled by such Person.
COVERED PERSON. "Covered Person" shall have the meaning specified in
Section 7.1 of the Agreement.
DEMAND REGISTRATION. "Demand Registration" shall have the meaning specified
in Section 4.1 of the Agreement.
DESIGNATED EMPLOYEES. "Designated Employees" shall have the meaning
specified in Section 5.1 of the Agreement.
DILUTED COMMON STOCK. "Diluted Common Stock" shall mean the sum of (i) the
number of shares of Common Stock outstanding at the time the determination is
made plus (ii) the number of shares of Common Stock issuable upon the exercise
or conversion of all then outstanding rights, warrants, options, convertible
securities or indebtedness, exchangeable securities or indebtedness, or other
rights, exercisable for or convertible or exchangeable into, directly or
indirectly, Common Stock whether at the time of issue or upon the passage of
time or the occurrence of some future event.
DISCLOSING PARTY. "Disclosing Party" shall have the meaning specified in
Section 7.1 of the Agreement.
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.
EXCHANGE ACT. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
EXECUTIVE COMMITTEE. "Executive Committee" shall have the meaning specified
in Section 1.4 of the Agreement.
GOVERNMENTAL AUTHORITY. "Governmental Authority" means any nation or
government, any state or other political subdivision thereof and any Entity
properly exercising executive, legislative, judicial, regulatory or
administrative functions of government.
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<PAGE> 49
HOLDERS. "Holders" shall have the meaning specified in Section 4.1 of the
Agreement.
INITIATING HOLDERS. "Initiating Holders" shall have the meaning specified
in Section 4.2 of the Agreement.
IPO. "IPO" shall mean an underwritten initial public offering of Common
Stock pursuant to an effective registration statement filed by the Company under
the Securities Act.
JUNIOR PREFERRED STOCK. "Junior Preferred Stock" shall mean the Series X
Junior Convertible Preferred Stock of the Company.
LARGE SALE. "Large Sale" shall have the meaning specified in Section 3.3 of
the Agreement.
MARKET PRICE. "Market Price" shall have the meaning specified in Section
3.3 of the Agreement.
MASTER AGREEMENT. "Master Agreement" shall have the meaning specified in
the Recitals to the Agreement.
MEDIUM SALE. "Medium Sale" shall have the meaning specified in Section 3.3
of the Agreement.
NOTICE OF REQUEST FOR REGISTRATION. "Notice of Request for Registration"
shall have the meaning specified in Section 4.2 of the Agreement.
OPTION SHARES. "Option Shares" shall have the meaning specified in Section
3.3 of the Agreement.
OWNERSHIP THRESHOLD. "Ownership Threshold" shall have the meaning specified
in Section 1.1 of the Agreement.
PAYMENT DETERMINATION. "Payment Determination" shall have the meaning
specified in Section 10.3 of the Agreement.
PERCENTAGE LIMITATION. "Percentage Limitation" shall have the meaning
specified in Section 2.1 of the Agreement.
PERSON. "Person" shall mean any person, Governmental Authority or Entity.
PUBLIC DISTRIBUTION. "Public Distribution" shall mean an offering and sale
of Company Securities pursuant to an effective registration statement under the
Securities Act that is either: (i) a bona fide public offering that is effected
through an underwriter, provided, that no sales of Company Securities are made
to any Person who would immediately after such sales, to the knowledge of the
Purchaser, beneficially own more
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than two percent (2%) of the outstanding Common Stock, and provided, further,
that if any such Person (A) is a 13G Eligible Person and (B) is not otherwise
known to the Purchaser to be purchasing such securities with the intent of
gaining or exercising control over the Company, then the percentage limitation
described in the preceding proviso may be waived with the prior written consent
of the Company, which consent will not be unreasonably withheld (it being
understood that the Company may withhold consent to a Transfer to a 13G Eligible
Person where, among other things, such Person is of a type which is reasonably
likely to Transfer the Company Securities to a Person who may have the intent of
gaining or exercising control over the Company); or (ii) any other such offering
and sale pursuant to which, to the knowledge of the Purchaser, no Person is
purchasing more than one-half of one percent (0.5%) of the outstanding Common
Stock or will beneficially own more than one percent (1%) of the outstanding
Common Stock as a result of such distribution or otherwise is purchasing such
securities with the intent of gaining or exercising control over the Company.
PURCHASER BOARD DESIGNEE. "Purchaser Board Designee" shall have the meaning
specified in Section 1.1 of the Agreement.
PURCHASER BOARD NOMINEE. "Purchaser Board Nominee" shall have the meaning
specified in Section 1.2 of the Agreement.
PURCHASER BOARD OBSERVER. "Purchaser Board Observer" shall have the meaning
specified in Section 1.3 of the Agreement.
PURCHASER EXECUTIVE COMMITTEE OBSERVER. "Purchaser Executive Committee
Observer" shall have the meaning specified in Section 1.4.
PURCHASER PARTY AFFILIATE. "Purchaser Party Affiliate" shall mean any
Affiliate of the Purchaser that is a party to a Transactional Agreement.
PURCHASER SHARES. "Purchaser Shares" shall have the meaning specified in
Section 6.1 of the Agreement.
RECEIVING PARTY. "Receiving Party" shall have the meaning specified in
Section 7.1 of the Agreement.
REGISTRABLE SECURITIES. "Registrable Securities" shall have the meaning
specified in Section 4.1 of the Agreement.
REGISTRATION EXPENSES. "Registration Expenses" shall mean any and all
out-of-pocket expenses incident to the Company's performance of or compliance
with Section 4 of the Agreement, including, without limitation, (i) all SEC,
National Association of Securities Dealers, Inc. and securities exchange
registration and filing fees, (ii) all fees and expenses of complying with state
securities or blue sky laws (including reasonable fees and disbursements of
counsel for any underwriters in connection with blue sky qualifications of the
Registrable Securities), (iii) all printing, messenger and delivery expenses,
(iv) all fees and expenses incurred in connection with the listing of the
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<PAGE> 51
Registrable Securities on any securities exchange or automated quotation system,
(v) the fees and disbursements of counsel for the Company and of its independent
public accountants, (vi) the reasonable fees and expenses of any special experts
retained by the Company in connection with the requested registration, (vii) the
reasonable fees and expenses of a single counsel to the Holders and (viii)
out-of-pocket expenses of underwriters customarily paid by the issuer to the
extent provided for in any underwriting agreement, but excluding (x)
underwriting discounts and commissions, transfer taxes, if any, and documentary
stamp taxes, if any, and (y) any fees or disbursements of counsel to the Holders
or any Holder (other than a single counsel to the Holders).
REQUIREMENTS OF LAW. "Requirements of Law" shall mean, as to any Person,
the certificate of incorporation and bylaws or other organizational or governing
documents of such Person, and all federal, state, local and foreign laws, rules
and regulations, including, without limitation, securities, antitrust,
communications, licensing, health, safety, labor and trade laws, rules and
regulations, and all orders, judgments, decrees and other determinations of any
Governmental Authority or arbitrator, applicable to or binding upon such Person
or any of its property or to which such Person or any of its property is
subject.
RESTRICTED EMPLOYEES. "Restricted Employees" shall have the meaning
specified in Section 8.1 of the Agreement.
RIGHT OF FIRST OFFER NOTICE. "Right of First Offer Notice" shall have the
meaning specified in Section 3.3 of the Agreement.
RULE 144. "Rule 144" shall have the meaning specified in Section 4.1 of the
Agreement.
RULE 144 TRANSACTION. "Rule 144 Transaction" shall mean a transfer of
Company Securities pursuant to Rule 144.
SALE NOTICE. "Sale Notice" shall have the meaning specified in Section 3.3
of the Agreement.
SECURITIES ACT. "Securities Act" shall mean the Securities Act of 1933, as
amended.
SEC. "SEC" shall mean the Securities and Exchange Commission.
SIGNIFICANT TRANSFER. "Significant Transfer" shall have the meaning
specified in Section 3.3 of the Agreement.
SMALL SALE. "Small Sale" shall have the meaning specified in Section 3.3 of
the Agreement.
STANDSTILL PERIOD. "Standstill Period" shall have the meaning specified in
Section 2.1 of the Agreement.
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<PAGE> 52
THIRD PARTY OFFER. "Third Party Offer" shall have the meaning specified in
Section 2.2 of the Agreement.
13G ELIGIBLE PERSON. "13G Eligible Person" shall mean any Person (i) who is
eligible to report its beneficial ownership of (or will or would be eligible
upon acquisition of) equity securities of the Company (including Common Stock)
on Schedule 13G under the Exchange Act and (ii) without limiting the foregoing,
with respect to whom clause (i) of paragraph (b)(1) of Rule 13d-1 under the
Exchange Act is true and correct.
TRANSACTIONS. "Transactions" shall mean all of the transactions
contemplated by the respective Transactional Agreements, including, without
limitation, the issuance of the Purchased Shares by the Company to the Purchaser
in accordance with the Master Agreement.
TRANSFER. "Transfer" shall have the meaning specified in Section 3.1 of the
Agreement.
VIOLATION. "Violation" shall have the meaning specified in Section 4.8 of
the Agreement.
VOTING SECURITIES. "Voting Securities" shall mean (i) the Common Stock and
any other securities (including voting preferred stock) issued by a company
which are entitled to vote generally for the election of directors or other
governing body of the company, whether currently outstanding or hereafter
issued, and (ii) all rights, warrants, options, convertible securities or
indebtedness, exchangeable securities or indebtedness, or other rights,
exercisable for or convertible or exchangeable into, directly or indirectly,
Common Stock or any such securities, whether at the time of issue or upon the
passage of time or the occurrence of some future event.
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<PAGE> 53
SCHEDULE 1
CERTAIN ACTIVITIES OF THE EXECUTIVE COMMITTEE
Decisions on behalf of the Company or any Controlled Affiliate of the
Company with respect to:
1. Mergers and acquisitions (other than an Acquisition Transaction)
<PAGE> 54
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
SCHEDULE 2
CERTAIN TRANSFEREES
1) (***)
2) (***)
3) (***)
4) (***)
5) (***)
6) (***)
7) (***)
8) (***)
9) (***)
10) (***)
11) (***)
12) (***)
13) (***)
14) (***)
15) (***)
<PAGE> 1
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
EXHIBIT 10.29
OUTSIDE SERVICE PROVIDER AGREEMENT
This OUTSIDE SERVICE PROVIDER AGREEMENT (the "Agreement") is
entered into as of April 7, 1998 by and between Verio, Inc., a
Delaware corporation, whose offices are located at 8005 South Chester
Street, Suite 200, Englewood, Colorado 80112 ("Verio") and NTT
America, Inc., a New York corporation, whose offices are located at
101 Park Avenue, 41st Floor, New York, New York 10178 ("NTT America")
(each a "Party" and collectively the "Parties").
WHEREAS, Verio is engaged in the business of providing
Internet services to customers in the United States and Canada, and
NTT America and its Affiliates are in the business of providing
telecommunications services to customers which include Japanese
multinational corporations, with operations in the United States and
the Pacific Rim;
WHEREAS, Verio desires to sell to NTT America and the NTT
America Affiliates certain services which will then be resold by
members of the NTT America Group to certain of their customers in the
United States and Canada, and members of the NTT America Group desire
to purchase such services, all as set forth herein; and
WHEREAS, contemporaneously with the execution of this
Agreement, Verio and NTT (as hereinafter defined) are entering into
the Stock Purchase and Master Strategic Relationship Agreement (the
"SPA") and the Investment Agreement (the "Equity Investment
Agreement"), both of even date herewith (collectively, the "Investment
Agreements").
NOW, THEREFORE, in consideration of the foregoing, the mutual
agreements herein contained, and other good and valuable
consideration, the receipt and sufficiency of which is hereby
acknowledged, NTT America and Verio agree as follows:
1. CERTAIN DEFINITIONS
1.1. "Affiliate" shall mean, as to a Party hereto, any person, corporation,
firm, partnership or other entity which, directly or indirectly,
through one or more intermediaries, controls (i.e., possesses,
directly or indirectly, the power to direct or cause the direction of
the management and policies of an entity, whether through ownership of
voting securities, by contract, or otherwise), is controlled by or is
under common control with such Party.
1.2. "ATM" or "Asynchronous Transfer Mode" shall mean the information
transfer standard for routing traffic which uses packets (cells) of a
fixed length (53-byte cell).
1.3. "Backbone" shall mean a main network which aggregates smaller,
independent networks.
1.4. "Billing System" shall mean the system operated by each Party to bill
its customers for the use of the Resell Services.
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1.5. "Co-location Service" shall mean the service of renting or leasing
space at the location designated to install a Party's
telecommunications equipment or other equipment.
1.6. "E-Commerce" or "Electronic Commerce" shall mean the business between
trading partners to offer services utilizing electronic information
technologies, including the Internet.
1.7. "Effective Date" shall mean the Closing Date specified in the SPA.
1.8. "Frame Relay" shall mean the 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.
1.9. "Internet Service Provider" shall mean a commercial organization that
provides Internet services.
1.10. "IP" or "Internet Protocol" shall mean the network protocol that
allows computers with different architectures and operating system
software to communicate with other computers on the Internet.
1.11. "IP Fax" shall mean fax services over the Internet utilizing Internet
Protocol.
1.12. "IP Voice" shall mean voice communication services over the Internet
utilizing Internet Protocol.
1.13. "IP-VPN" shall mean Internet Protocol Virtual Private Network, an
Internet Protocol network that provides secure transmission of private
IP traffic through the Internet.
1.14. "Jointly Developed Services" shall have the meaning set forth in
Section 2.3.
1.15. "Managed Private Line" shall mean the management of private
communication lines dedicated to a customer's particular use.
1.16. "Mirroring" shall mean copying and migrating customers' data from
primary storage equipment to distributed storage equipment in order to
reduce access load and to maintain redundancy so that data is
maintained on the distributed storage equipment that is identical to
the data on the primary storage equipment.
1.17. "Net de Pon" or "NDP" shall mean the Internet service provided by NTT
America currently operating under such name in the United States.
1.18. "Network Security Services" shall mean the services provided by
Internet Service Providers to prevent infiltration of their network
and their customers' networks.
1.19. "NMS" or "Network Management System" shall mean the system used to
monitor, control and manage IP networks.
1.20. "NOC" or "Network Operations Center" shall mean a location or an
organization of an Internet Service Provider where human operators
monitor and maintain an Internet Service Provider's network.
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
1.21. "NTT" shall mean Nippon Telegraph and Telephone Corporation, a
Japanese corporation.
1.22. "NTT America Affiliates" shall mean those entities set forth on
Attachment E attached hereto. NTT America may modify the list of
Affiliates set forth in Attachment E with Verio's prior consent, not
to be unreasonably withheld.
1.23. "NTT America Group" shall mean NTT America and the NTT America
Affiliates, collectively.
1.24. (***)
1.25. "Peering" shall mean the commercial practice under which Internet
Service Providers exchange each other's traffic.
1.26. "POP" or "Point of Presence" shall mean a location where facilities
and equipment of an Internet Service Provider are installed.
1.27. "Resell Services" shall mean those services described as such in
Attachment A.
1.28. "Routers" shall mean equipment that routes data packets.
1.29 "Service Level Commitments" shall mean those service levels described
in Attachment B.
1.30. "TCP/IP" or "Transmission Control Protocol/Internet Protocol" shall
mean a suite of network protocols that allows computers with different
architectures and operating system software to communicate with other
computers on the Internet.
1.31. "Telco Facilities" shall mean the telecommunication facilities
provided by Internet Service Providers to enable their customers to
connect to the Internet.
1.32. "Transit" shall mean carrying customers' traffic to the Internet for a
fee.
1.33. "Web" shall mean the World Wide Web.
1.34. "Web Hosting" shall mean the daily operation and maintenance of Web
sites for customers.
1.35. "Working Group" shall have the meaning set forth in Section 6.2.
2. SCOPE OF SERVICES UNDER THIS AGREEMENT
2.1. Application of Agreement. This Agreement shall apply to the provision
of Resell Services and certain Jointly Developed Services by Verio and
NTT America. Neither NTT America nor any of the NTT America
Affiliates shall have any obligation to contract with Verio for any
other services such as Frame Relay, ATM and Managed Private Line
services. In the event NTT
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America requests that Verio provide additional services and Verio
desires to provide such services to NTT America, then such services
shall be included as Resell Services pursuant to a mutually agreed
upon written amendment to this Agreement.
2.2. Resell Services. The Resell Services which Verio shall provide to the
NTT America Group for resale to their respective customers are
described in Attachment A. All Resell Services shall be mutually
agreed upon by the Parties. Any change in the scope of such Resell
Services shall be pursuant to a mutually agreed upon written amendment
to this Agreement. Changes in the scope of the Resell Services may
include such additional services which may be developed by Verio and
NTT America pursuant to Section 6.2.3.
2.3. Jointly Developed Services. The Parties shall use their commercially
reasonable and good faith efforts to jointly develop certain services
as described in Section 6.2.3 below (the "Jointly Developed
Services"). Any change in the scope of such Jointly Developed
Services, or the development of additional services, shall be through
the establishment of one or more Working Groups in accordance with
Section 6.2 below. The implementation of any services which may be
developed pursuant to Section 6.2.3 shall be pursuant to a mutually
agreed upon written amendment to this Agreement. After the services
described in Section 6.2.3 have been developed and implemented for
commercial use, the Parties may include such services as Resell
Services through a mutually agreed upon written amendment to this
Agreement. Thereafter, NTT America and Verio may mutually determine
and appropriately modify the specifications and quality levels for
such services including, but not limited to, (***).
3. RELATIONSHIP OF THE PARTIES
3.1. Independent Contractors. NTT America and Verio are, and shall remain,
independent contractors, each responsible only for its own acts and/or
omissions. Nothing in this Agreement shall be construed to constitute
NTT America and Verio in the relationship of an employer-employee,
franchisor-franchisee, principal-agent, partners or joint venturers,
or as anything other than an independent contractor. Neither Party
shall have the authority to make any representations, claims or
warranties of any kind on behalf of the other Party or on behalf of
such Party's licensors or suppliers.
3.2. Preferred Resell Services Provider. NTT America hereby designates
Verio as the preferred supplier of Resell Services to the NTT America
Group, which Resell Services shall be resold by NTT America to NTT
America's customers in the United States and Canada. For purposes of
this Agreement, NTT America's customers shall include the customers of
any NTT America Affiliate. NTT America shall notify Verio of NTT
America's new customers, after the Effective Date, in the United
States and Canada which desire Resell Services, including a
description of the specific services and scheduling requirements of
such customers, provided that NTT America shall not provide such
notice if: (i) NTT America determines that it is not technically,
commercially or economically feasible under the terms and conditions
of this Agreement for
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Verio to provide the Resell Services to such NTT America customer;
(ii) NTT America's customer requests a service provider other than
Verio; or (iii) Verio cannot meet the customer's target installation
date. Subject to the foregoing, Verio shall provide Resell Services
to members of the NTT America Group for all of their customers for
which Verio receives such notification, provided that (a) Verio
receives a service order which reasonably complies with Verio's
standard business practices and (b) NTT America's customer has agreed
to abide by Verio's posted network use policy. If Verio is unable to
provide Resell Services to a member of the NTT America Group or its
customers in certain geographic areas, Verio and such NTT America
Group member may discuss a solution that is technically, commercially
and economically feasible; provided, however, that Verio shall not be
obligated to provide Resell Services in such geographic areas and such
NTT America Group member shall not be obligated to use Verio to
provide Resell Services to the NTT America Group member's customers in
such geographic areas.
3.3. Customer Relationships. Verio acknowledges that all of the NTT
America Group's customers who utilize the Resell Services provisioned
by Verio through NTT America shall contract exclusively with a member
of the NTT America Group, and Verio shall have no direct contractual
or financial interest in the customer relationships associated
therewith.
4. RESELL SERVICES TO BE PROVIDED
4.1. Verio's Responsibilities.
4.1.1. Services. Verio hereby agrees to provide Resell Services to
members of the NTT America Group so that the members of the
NTT America Group may provide such Resell Services to each
customer designated by a member of the NTT America Group to
receive the Resell Services. Verio shall perform all Resell
Services in accordance with and subject to the Service Level
Commitments set forth in Attachment B.
4.1.2. Equipment. Verio shall manage and maintain, at its expense,
the quality and capacity levels of Verio's network, including
without limitation obtaining any additional equipment
necessary to provide Resell Services to NTT America's
customers in accordance with the Service Level Commitments.
4.1.3. Billing. NTT America may request Verio, from time to time, to
provide billing services to the NTT America customers;
provided, however, that Verio is not obligated to provide such
billing services until such time, if any, as Verio has entered
into an agreement with Kenan Systems Corporation which allows
Verio to provide such billing services on behalf of NTT
America. Verio shall provide NTT America with such billing
information concerning NTT America's customers in Verio's
possession as NTT America may reasonably request in order to
allow NTT America to bill NTT America's customers as
contemplated by Section 4.2.3. NTT America acknowledges that
Verio has disclosed to NTT America that Verio's existing
license agreement with Kenan Systems Corporation
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currently does not permit Verio to bill NTT America's
customers on behalf of NTT America. Verio and NTT America
shall use commercially reasonable efforts to obtain such
licenses, consents and technical assistance from Kenan Systems
Corporation as may be necessary to allow Verio to provide NTT
America with billing services as well as access to Verio's
customer billing system for the purpose of viewing NTT
America's customer data and making appropriate adjustments
thereto. NTT America shall, at its own expense, pay for any
such license, consent or assistance from Kenan Systems
Corporation or other billing arrangements for NTT America's
customers requested by NTT America. Verio will provide access
to such billing records via a remote terminal to be located on
the premises of one or more of the members of the NTT America
Group. Notwithstanding the foregoing, billing and other data
which identifies each Party's customers shall only be
accessible by each Party's employees who need to access such
data to perform billing services, in accordance with the
Firewall Policy as described in Attachment F.
4.1.4. Customer Termination. Verio and NTT America will use
commercially reasonable good faith efforts jointly to develop
appropriate procedures (including suspension of service or
termination of a customer, and applicable notice periods) for
Verio and members of the NTT America Group to respond to
certain contingencies, such as a customer's violation of
Verio's posted network use policy and other situations which
may result in liability to Verio and/or a member of the NTT
America Group. After such procedures have been developed and
mutually agreed upon (the "Adverse Situation Procedures"),
Verio shall not terminate or materially adversely change any
Resell Service provided to NTT America customers except as
provided in the Adverse Situation Procedures. NTT America
acknowledges that members of the NTT America Group will
contractually require their customers to abide by Verio's
posted network use policy. In the Adverse Situation
Procedures, as to matters within the knowledge and control of
a member of the NTT America Group, such NTT America Group
member shall agree to act as quickly to remedy a violation of
Verio's posted network use policy by such members' customers
as Verio customarily acts to remedy comparable violations by
Verio's own customers or, in the event such NTT America Group
member fails to act within such time frame, agree to
compensate Verio for any liability to a third party arising
from such NTT America Group member's failure to act within
such time frame.
4.2. NTT America's Responsibilities.
4.2.1. Services. NTT America shall be responsible to perform its
obligations set forth and described in Attachment A.
4.2.2. Equipment. NTT America shall obtain and maintain, at its
expense, such equipment required pursuant to Attachment A.
4.2.3. Billing. NTT America shall be responsible for billing NTT
America's customers for all Resell Services provided to such
customers by Verio on behalf of NTT America.
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4.2.4. Costs and Expenses. NTT America or the relevant NTT America
Affiliate shall be responsible for payment of the costs and
expenses specifically designated as a responsibility of NTT
America or such NTT America Affiliate pursuant to this
Agreement.
4.3. Customer Service Center.
Verio and NTT America shall work together to develop a group of
Japanese speaking customer support personnel at Verio's Customer
Service Center, to be mutually agreed upon and described in Attachment
A.
5. MARKETING
5.1. Development of Marketing Plan. Verio and NTT America shall jointly
develop and mutually agree upon a marketing plan which shall govern
all aspects of the Parties' joint promotion of the Resell Services
(the "Marketing Plan"). The Marketing Plan shall be based upon the
principles set forth and described in Attachment C attached hereto
and, when mutually agreed upon by the Parties, shall replace and
supersede Attachment C.
5.2. Verio's Responsibilities. Verio shall be responsible to perform its
obligations set forth and described in Attachment C.
5.3. NTT America's Responsibilities. NTT America shall be responsible to
perform its obligations set forth and described in Attachment C.
5.4. Certain Covenants. Verio and NTT America covenant to each other that
it will: (a) not disparage the other Party's products and services or
the good name, good will and reputation of the other Party; (b) avoid
deceptive, misleading, or unethical practices that are or might be
detrimental to the other Party, its products or services, or the
public; (c) make no representations, warranties or guaranties with
regard to the other Party or its products or services, except as
authorized by the other Party in writing; (d) not publish or employ,
or cooperate in the publication or employment of, any misleading or
deceptive advertising material with regard to the other Party or its
products or services; and (e) perform its obligations under this
Article 5 in accordance with the Firewall Policy set forth in
Attachment F. For purposes of this Section 5.4, the term "Party"
shall include the Party's Affiliates.
6. JOINT EFFORTS
6.1. Purpose. During the term of this Agreement, the Parties intend to
develop jointly certain capabilities and to explore certain methods to
integrate the Parties' existing capabilities, as set forth and more
fully described in this Article 6. Prior to the implementation of any
plan developed pursuant to this Article, the Parties shall discuss and
mutually agree upon any amendment to this Agreement reasonably
required to clarify or establish the rights and
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obligations of the Parties in connection with the implementation of
such plan. Any resulting additional service developed pursuant to
Section 6.2.3 which NTT America desires to resell to its customers
shall be included among the Resell Services described in Attachment A
pursuant to a mutually agreed upon amendment to this Agreement. All
of the Parties' joint efforts under this Article 6 shall be subject to
the Firewall Policy set forth in Attachment F.
6.2. Establishment of Working Groups. Within thirty (30) calendar days
after the Effective Date of this Agreement, NTT America and Verio
shall establish working groups to develop certain plans described
below (each a "Working Group"). The representatives of the Parties in
each Working Group shall be experts in the area to be addressed by the
applicable Working Group. Each plan developed by a particular Working
Group must be submitted to the appropriate levels of management in
each Party for approval. Neither Party shall have any obligation to
implement a plan unless the Parties mutually agree to such
implementation in writing pursuant to an amendment to this Agreement
or otherwise.
6.2.1. Operation Support System Working Group ("OSS WG"). The
Parties shall establish and direct the OSS WG sub-working
groups to address and to formulate plans to determine the
following issues:
6.2.1.1. Network Management Systems
Sub-Working Group ("NMS SWG"). The Parties
shall establish and direct the NMS SWG to
develop a plan for the (***) which chooses to
so (*) (the "NMS Plan"). The NMS Plan shall
describe: (a) how and to what extent each
Party's (***), including a description of any
modification to (***) necessitated thereby;
(b) a schedule to (***); (c) the estimated
costs of such efforts; and (d) the ongoing
operating expenses estimated to be incurred by
Verio as a result of (***). The Parties
intend that each Party shall bear its own
expenses related to (***), and that (*)
ongoing operating expenses shall be borne
solely by (*). Any incremental license fees
necessary to support (***) shall be borne
solely by (***).
6.2.1.2. (***)
Sub-Working Group ("(***) SWG"). The Parties
shall establish and direct the (***) SWG to
formulate a plan (the "(***) Plan") which
shall describe: (a) a method to (*)
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(***) which minimizes the costs and delays to
each Party; (b) recommendations on how to
process (***) through each Party's (*); (c)
the estimated licensing fees, if any, to (***)
with respect to (***) utilized by (***); (d)
an estimate of each Party's costs with respect
to (***); and (e) the on-going operating
expenses estimated to be incurred by (*) for
(***), use of and access to (***). The
Parties acknowledge and agree that the
Parties' goal is (i) to minimize development
efforts required to (***) and (ii) that
appropriate license agreements be established
to (***). Any incremental license fees
necessary to support (***) shall be borne
solely by (***).
6.2.1.3. (***) Sub-Working Group
("(***) SWG"). The Parties shall establish
and direct the (***) SWG to formulate a plan
(the "(***) Plan") which shall describe: (a)
recommendations on how to structure a (***)
for (***), including without limitation,
identifying the Party that shall be
responsible for such (***); (b) the estimated
licensing fees, if any, to (***) with respect
to (*) services; (c) an estimate of each
Party's costs with respect to (*) services;
and (d) the on-going operating expenses
estimated to be incurred by (***) for use of
and access to (***). The Parties acknowledge
and agree that the Parties' goal is (i) to
establish a (***) and limit the costs
associated therewith, (ii) to establish
appropriate license agreements to provide the
(***), and (iii) to work together to (***).
6.2.2. (***) Working Group ("(***) WG"). The Parties shall establish
and direct the (***) WG to address (***) and to formulate plans
to determine the (***) (to be embodied, respectively, in the
"Peering Arrangement" and the "Transit Arrangement"). Verio
shall provide the initial proposed pricing schedule for the
Transit Arrangement. The Parties acknowledge and agree that
the amount of time to be allocated to the (***) shall be
determined by the (***) WG. The (***) WG shall also develop a
plan to
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establish the (***); provided, however, that the Parties first
establish and implement a (***). The Parties acknowledge that
until such (***) is developed and implemented as provided
herein, (*) shall remain (***).
6.2.2.1. Peering Arrangement. The (***) WG
shall develop a Peering Arrangement which
would: (a) provide for a (***), without
charge for the (***); (b) identify locations
within the continental United States for
(***); and (c) agree on a cost-sharing
mechanism for the implementation of the
peering plan to include, without limitation,
(***) expenses, (*) costs, and (***) expenses,
as may be required to implement the
agreed-upon peering approach.
6.2.2.2. Transit Arrangement. The (***) WG
shall develop a Transit Arrangement which
would: (a) provide for the (***); (b) provide
for the (***); (c) identify locations within
the continental United States for (*)
relationships; (d) provide for (***), require
Verio to provide to (*) with both the lowest
Transit rates and the most favorable Transit
terms provided to any of Verio's Affiliates,
or, if Verio has no such Transit terms
applicable to Affiliates, to those parties
with whom Verio is involved in a similar
strategic relationship; (e) provide for (*)
between the (***) and the (***) and establish
mutually agreeable Transit terms on a mutual
"most favored nation" basis; and (f) provide
for (***) review of the pricing schedule with
respect to the Transit Arrangement.
6.2.3. Service Development. NTT America and Verio shall use
commercially reasonable good faith efforts to negotiate the
terms and conditions of an amendment to this Agreement to
develop the following services:
6.2.3.1. (***) Working Group ("(*) WG"). The
Parties shall establish and direct the (*) WG
to develop a plan for the implementation of
(*) (the "(*)
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Arrangement") which shall provide (*) services
to their respective customer bases through
both (***).
6.2.3.2. Additional Services. The Parties
shall use commercially reasonable good faith
efforts to jointly develop additional services
under the same procedures provided above for
the (*) WG, including, for example and without
limitation: (i) global (*); (ii) (*); (iii)
(*); and (iv) (*).
6.3. Additional Working Groups. The Parties agree to establish additional
Working Groups to address systems issues encountered by the Parties in
the future during the course of their commercial relationship. In
particular, a Working Group shall be established to address the sales
and marketing issues addressed in Attachment C, and an additional
Working Group shall be established to identify appropriate technical
measurements of Verio's provisioning of Resell Services to be used in
the Service Level Commitments.
6.4. Working Group Expenses. Each Party shall bear its own costs and
expenses incurred in connection with such Party's participation in
each Working Group.
6.5. Results of Working Groups. To the extent necessary, the agreements
reached by the working groups in their respective areas of
responsibility shall be embodied in one or more amendments to this
Agreement.
7. FEES AND EXPENSES
7.1. Fees for Resell Services. NTT America (directly or through the NTT
America Affiliates) agrees to pay Verio for all Resell Services
provided to members of the NTT America Group at such prices and upon
such terms as set forth on Attachment D.
7.2. Customer Pricing. Members of the NTT America Group shall, in their
sole discretion, set the prices for the Resell Services provided to
their respective customers.
7.3. Price Adjustment. In no event shall Verio charge members of the NTT
America Group (***) for any Resell Service at a rate higher than the
lowest rate being charged to any other strategic partner of Verio. In
the event that Verio has no other strategic partners, Verio shall
extend to the members of the NTT America Group (***) prices at least as
favorable as the prices offered by Verio to any other reseller for
similar products or services requiring comparable levels of support and
other services by Verio (regardless of volume), reflecting
appropriately the nature of the strategic relationship between NTT and
NTT America and Verio. Any change in pricing effected as a result of
the application of the immediately preceding sentence shall come into
effect as of the effective time of the lower rate charged to a reseller
or other strategic partner, as the case may be, of Verio.
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7.4. Expenses. The Parties shall set forth their agreement concerning
payment of each Party's expenses in Attachment D hereto.
8. USE OF TRADEMARKS, SERVICE MARKS AND TRADE NAMES
8.1. Trademark License. In no event may either Party or its Affiliates use
the other Party's or the other Party's Affiliates' trademarks, service
marks or trade names without prior written consent of the other Party
or its Affiliate, as the case may be, which may be granted or withheld
in the other Party's or its Affiliate's sole discretion.
8.2. Ownership. Each Party acknowledges that the other Party and its
Affiliates own and retain all trademarks, service marks, trade names,
logos, designations, copyrights and other proprietary rights in or
associated with the other Party and its Affiliates, and agrees that it
will not at any time during or after the term of this Agreement assert
or claim any interest in or do anything that may adversely affect the
validity of any trademark, service mark, trade name, logo, designation
or copyright belonging to or licensed to the other Party or its
Affiliates (including, without limitation, any act or assistance to
act, which may infringe or lead to the infringement of any of the
other Party's or its Affiliates' proprietary rights).
9. ORDERING
9.1. Purchase Orders. NTT America and Verio shall jointly develop and
mutually agree upon an ordering process which shall include the
appropriate use of applicable software and forms that are to be
provided by Verio and which may be altered from time to time as
commercially necessary.
9.2. Cancellation of Purchase Orders. Any purchase order from any member
of the NTT America Group may be canceled in whole or part by such NTT
America Group member without charge upon written notice thereof
received by Verio prior to Verio making commitments which will cause
Verio to incur cancellation charges. NTT America shall reimburse
Verio for any cancellation charges incurred by Verio as a result of a
breach of the immediately preceding sentence by a member of the NTT
America Group.
9.3. Change Orders. Except to the extent that Verio incurs any charges to
any third party, changes may be made by NTT America Group members, at
no additional charge, in any purchase order under this Agreement
(including changes in the quantities and configurations of Verio's
services covered by such purchase order), by a written notice
requesting such changes which is received by Verio at least fifteen
(15) days prior to the scheduled date to initiate services.
10. CONFIDENTIAL INFORMATION
10.1. Confidential Information and Obligations. All documents, other
materials and other information made available to a Party or its
employees by the disclosing Party in connection with this
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Agreement, including but not limited to, this Agreement and any trade
secret, information, process, technique, algorithm, computer program
(source and object code), design, drawing, formula or test data
relating to any research project, work in process, future development,
engineering, manufacturing, marketing, servicing, financing or
personnel matter relating to the disclosing party, its present or
future products, sales, suppliers, clients, customers, employees,
investors or business, whether in oral, written, graphic, or
electronic form (collectively, the "Confidential Information"), shall
be deemed to have been furnished to the other Party in confidence and
shall remain the exclusive property of the disclosing Party both
during and after the term of this Agreement. Each Party shall
maintain in trust and confidence all Confidential Information which it
may (i) develop or accumulate for the disclosing Party during the term
of this Agreement or (ii) acquire from the disclosing Party at any
time, and will not during the term of this Agreement or thereafter,
use the disclosing Party's Confidential Information for its own
benefit or disclose or permit any of its employees or agents to
disclose, through any medium, the Confidential Information to any
other person; provided, however, that the recipient Party may disclose
the disclosing Party's Confidential Information to such employees,
agents and Affiliates of the recipient Party who need to know such
Confidential Information for the purpose of effectuating this
Agreement and who have been informed of and have agreed to protect the
confidential nature of such Confidential Information. For purposes of
this Article 10, the term "Party" shall include the Party's
Affiliates. The rights and obligations of the Parties under this
Article 10 shall be subject to the provisions of Section 5.2 of the
Equity Investment Agreement with respect to the Designated Employees
(as defined in the Equity Investment Agreement).
10.2. Use of Information. Nothing in this Agreement shall prohibit or limit
either Party's use of information (including, but not limited to,
ideas, concepts, know-how, techniques, and methodologies) which (a) is
now, or hereafter becomes, publicly known or available through lawful
means; (b) is rightfully in recipient's possession, as evidenced by
recipient's records; (c) is disclosed to recipient without
confidential or proprietary restriction by a third party who
rightfully possesses the information (without confidential or
proprietary restriction); (d) is independently developed by recipient
without any breach of this Agreement; or (e) is the subject of a
written permission to disclose provided by the disclosing party. In
the event either Party receives a subpoena or other validly issued
administrative or judicial process requesting Confidential Information
of the other Party, it shall provide prompt notice to the other Party
of such receipt and permit the other Party an opportunity to obtain a
protective order with respect to such Confidential Information. The
Party receiving the subpoena shall thereafter be entitled to comply
with such subpoena or other process to that extent required by law.
10.3. Return of Confidential Information. Upon the termination or
expiration of this Agreement or upon request from the disclosing Party
or after the non-disclosing Party's need for it has expired, the
non-disclosing Party shall return all Confidential Information to the
disclosing Party and certify in writing that it has returned or
destroyed all such information to the disclosing Party and has not
kept any copies of the Confidential Information. The obligation of
each Party with respect to the Confidential Information shall survive
the termination or expiration of this Agreement for a period of three
(3) years.
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10.4. Publicity. Except as necessary to comply with applicable securities
laws or the rules of any applicable securities exchange (provided that
the Party undertaking the publicity has first consulted with the other
Party), no publicity, including, but not limited to press releases,
concerning this Agreement and the relationship of the Parties, shall
be issued by either Party without the prior written consent of the
other Party. Notwithstanding the foregoing, (a) the Parties shall
issue a mutually agreeable joint press release in the United States
and Japan announcing this Agreement upon the Closing under the SPA and
(b) NTT may issue a mutually agreeable press release solely in Japan
announcing the Investment Agreements and this Agreement upon the
execution of this Agreement.
11. INTELLECTUAL PROPERTY
11.1. Grant of Rights. The Parties acknowledge and agree that they shall
grant each other the licenses to their respective intellectual
property rights as necessary and as mutually agreed upon on a
case-by-case basis.
11.2. NTT America's and its Affiliates' Intellectual Property. Unless
otherwise herein expressly provided, all work product, documentation,
procedures, methods, computer programs, source code, software
products, IP products, systems designs, ideas, inventions, techniques
and know how ("Work Product and Innovations") that are developed,
discovered or created solely by NTT America or its Affiliates in the
course of performing NTT America's obligations under this Agreement,
shall be the exclusive property of NTT America or its Affiliates, as
the case may be.
11.3. Verio's and its Affiliates' Intellectual Property. Unless otherwise
herein expressly provided, all Work Product and Innovations that are
developed, discovered or created solely by Verio or its Affiliates in
the course of performing Verio's obligations under this Agreement,
shall be the exclusive property of Verio or its Affiliates, as the
case may be.
11.4. Service Development. Subject to the provisions of this Article 11,
the ownership of any intellectual property developed pursuant to
Section 6.2.3 shall be negotiated by the Parties on a project by
project basis.
12. REPRESENTATIONS AND WARRANTIES
12.1. Representations and Warranties of Verio. Verio represents, warrants,
and covenants to NTT America that:
12.1.1. Verio has the right to enter into this Agreement and to
provide the Resell Services described herein, this Agreement
does not violate any material contracts or other obligations
by which Verio or any of its assets are bound, and the Resell
Services as provided by Verio to the members of the NTT
America Group do not infringe any intellectual property right
(including but not limited to patents, copyrights, trademarks
and trade secrets) of any third party.
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<PAGE> 15
12.1.2. Verio shall continue standard operational practices and
procedures with respect to NTT America's customers relating to
its Resell Services, provide sufficient bandwidth and
availability to ensure that the Resell Services are available
to the members of the NTT America Group and their customers,
provide such commercially and economically viable data loss
prevention and disaster recovery mechanisms, and provide the
latest security features to minimize and prevent infiltration
of Verio's network.
12.1.3. Verio will comply with all applicable international, national,
state, regional, and local laws and regulations in performing
its duties hereunder and in any of its dealings with respect
to the products or services of the members of the NTT America
Group where to not so comply will have a material adverse
effect on Verio's ability to perform its obligations under
this Agreement.
12.2. Representations and Warranties of NTT America NTT America represents,
warrants, and covenants to Verio that:
12.2.1. NTT America has the right to enter into this Agreement and to
resell the Resell Services described herein, this Agreement
does not violate any material contracts or other obligations
by which NTT America or any of its assets are bound and,
except to the extent the representation and warranty set forth
in Section 12.1.1 is not correct, the Resell Services as
provided by the members of the NTT America Group to their
customers do not infringe any intellectual property right
(including but not limited to patents, copyrights, trademarks
and trade secrets) of any third party.
12.2.2. NTT America will comply with all applicable international,
national, state, regional, and local laws and regulations in
performing its duties hereunder and in any of its dealings
with respect to the products or services of Verio where to not
so comply will have a material adverse effect on NTT America's
ability to perform its obligations under this Agreement.
13. INDEMNIFICATION
13.1. Agreement of Verio to Indemnify.
Subject to the conditions, provisions and limitations
of this Article 13, and the other applicable provisions of this
Agreement, Verio hereby agrees to indemnify, defend and hold harmless
the members of the NTT America Group from and against all actual and
direct damages, costs and expenses, including, without limitation,
interest, penalties and reasonable attorneys' fees and disbursements,
asserted against, resulting to, imposed upon or incurred by the
members of the NTT America Group by reason of or resulting from any of
the following:
13.1.1. Any grossly negligent act or grossly negligent failure to act
or willful misconduct of Verio under this Agreement or any
violation of law by Verio, its employees, officers,
subcontractors, business invitees or agents;
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<PAGE> 16
13.1.2. Any material breach of, or failure to perform any of Verio's
obligations, representations or covenants under, this
Agreement; or
13.1.3. Any third party claim for personal injury or physical damage
to property caused by the grossly negligent or intentional
acts or omissions of Verio, its employees, agents,
subcontractors, or business invitees.
13.2. Agreement of NTT America to Indemnify.
Subject to the conditions, provisions and limitations
of this Article 13, and the other applicable provisions of this
Agreement, NTT America hereby agrees to indemnify, defend and hold
harmless Verio from and against all actual and direct damages, costs
and expenses, including, without limitation, interest, penalties and
reasonable attorneys' fees and disbursements, asserted against,
resulting to, imposed upon or incurred by Verio by reason of or
resulting from any of the following:
13.2.1. Any grossly negligent act or grossly negligent failure to act
or willful misconduct or any violation of law by NTT America,
its employees, officers, subcontractors, business invitees or
agents;
13.2.2. Any material breach of, or failure to perform any of NTT
America's obligations, representations or covenants under,
this Agreement; or
13.2.3. Any third party claims for personal injury or physical damage
to property caused by the negligent or intentional acts or
omissions of NTT America, its employees, agents,
subcontractors, officers or business invitees.
13.3. Conditions of Indemnification.
The obligations and liabilities of Verio and NTT
America hereunder with respect to their respective indemnities
pursuant to this Article 13, resulting from any claim, demand or other
assertion of liability by third parties (hereinafter called
collectively "Demands"), shall be subject to the following terms and
conditions:
13.3.1. Defense by Indemnifying Party. Subject to the consent of the
Party to be indemnified pursuant to this Article 13 (the
"Indemnified Party") (such consent not to be unreasonably
withheld, conditioned or delayed), the indemnifying Party (the
"Indemnifying Party") will have the right to undertake, by
counsel or representatives of its own choosing, the defense,
compromise or settlement of any such Demand asserted against
the Indemnified Party, such defense, compromise or settlement
to be undertaken on behalf of and for the account and risk of
the Indemnifying Party.
13.3.2. Defense by Indemnified Party. In the event the Indemnifying
Party shall elect not to undertake such defense by its own
representatives, the Indemnifying Party shall give
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prompt written notice of its election to the Indemnified
Party, and the Indemnified Party will undertake the defense,
compromise or settlement thereof by counsel designated by it
whom the Indemnifying Party determines in writing to be
satisfactory for such purposes. The consent of the
Indemnifying Party to the Indemnified Party's choice of
counsel shall not be unreasonably withheld, conditioned or
delayed.
13.3.3. Settlement. No settlement or compromise of any such Demand
may be made by a Party hereto without the prior express
written consent or approval of the other Party hereto.
13.3.4. Joint Liability. In the event that any Demand shall arise out
of a transaction or cover any period or periods wherein NTT
America and Verio each is or may be liable hereunder for part
of the liability or obligation arising therefrom, then such
Parties shall, each choosing its own counsel and bearing its
own expense, defend such Demand, and no settlement or
compromise of such Demand may be made without the joint
consent or approval of Verio and NTT America, except where the
respective liabilities and obligations of NTT America and
Verio are clearly allocable or attributable on the basis of
objective facts.
13.3.5. Survival. The agreements to indemnify contained in this
Article 13 shall survive termination or expiration of this
Agreement for a period of two years after the effective date
of such termination or expiration; provided, however, that
with respect to any Demand or other matter (including actual
and direct damages incurred other than as a result of a third
party claim) for which notice has been timely given within
such two year period, the indemnification period shall be
extended until the final resolution of such Demand or other
matter (including actual and direct damages incurred other
than as a result of a third party claim).
13.3.6. Notice. A Party having reason to believe that it may be
entitled to indemnification under this Article 13 shall give
reasonably prompt written notice to the other Party hereto
from whom indemnification may be sought specifying in
reasonable detail the nature and basis of any Demand or other
matter (including actual and direct damages incurred other
than as a result of a third party claim) which may give rise
to such indemnification but such notice shall not be a
condition of such indemnification. The failure of the
Indemnified Party to provide such notice shall not relieve the
Indemnifying Party of its obligations under this Article 13,
unless the delay or failure to provide such notice prejudices
an Indemnifying Party in a manner that demonstrably results in
additional actual and direct damages to such Indemnifying
Party, in which event such Indemnifying Party shall be
relieved of such obligations but only to the extent such
additional actual and direct damages can be proved.
14. LIMITATION OF LIABILITY
14.1. NO CONSEQUENTIAL DAMAGES. EXCEPT TO THE EXTENT THAT A PARTY IS
REQUIRED TO INDEMNIFY THE OTHER PARTY FOR THE PAYMENT OF THE SAME
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
TO A THIRD PARTY PURSUANT TO ARTICLE 13, NEITHER PARTY (OR THEIR
AFFILIATES) SHALL BE LIABLE TO THE OTHER FOR SPECIAL, INCIDENTAL,
CONSEQUENTIAL OR PUNITIVE DAMAGES OF ANY NATURE, FOR ANY REASON,
INCLUDING, WITHOUT LIMITATION, THE BREACH OF THIS AGREEMENT OR ANY
TERMINATION OF THIS AGREEMENT, WHETHER SUCH LIABILITY IS ASSERTED ON
THE BASIS OF CONTRACT, TORT (INCLUDING NEGLIGENCE OR STRICT LIABILITY)
OR OTHERWISE, EVEN IF THE OTHER PARTY (OR ITS AFFILIATES) HAS BEEN
WARNED OF THE POSSIBILITY OF SUCH DAMAGES. ALL REMEDIES, INCLUDING,
WITHOUT LIMITATION, THE TERMINATION OF THIS AGREEMENT AND ALL OF THE
REMEDIES PROVIDED BY LAW (AND NOT EXCLUDED PURSUANT TO THE FOREGOING
SENTENCE), SHALL BE DEEMED CUMULATIVE AND NOT EXCLUSIVE.
14.2. MAXIMUM AGGREGATE LIABILITY. IN NO EVENT WILL NTT AMERICA'S OR
VERIO'S TOTAL AGGREGATE LIABILITY ARISING FROM OR RELATED TO THIS
AGREEMENT, FROM ALL CAUSES OF ACTION OF ANY KIND, INCLUDING TORT,
CONTRACT, NEGLIGENCE, STRICT LIABILITY AND BREACH OF WARRANTY, EXCEED
THE TOTAL AMOUNT PAID BY THE MEMBERS OF THE NTT AMERICA GROUP
HEREUNDER DURING THE PREVIOUS TWELVE MONTHS FROM THE DATE SUCH CLAIM
AROSE.
15. TERM AND TERMINATION
15.1. Term. The term of this Agreement shall be the period of time
commencing on the Effective Date and ending upon the earlier of (a)
the date immediately preceding the third (3rd) anniversary of the
Effective Date and (b) the termination of this Agreement in accordance
with the provisions of this Article 15. In no event shall either
Party have any obligations or liability under this Agreement, and this
Agreement shall not come into effect, until the Parties execute the
Investment Agreements. Either Party may terminate this Agreement in
the event that such Party terminated, or is entitled to terminate, the
SPA pursuant to Section 6.1 thereof.
15.2. Termination for Cause. This Agreement may be terminated by either
Party upon the expiration of sixty (60) days after written notice of a
material breach of any of the obligations of the other Party contained
in this Agreement or the Investment Agreements, if the other Party
fails to cure such breach during the sixty (60) day cure period.
15.3. (***)
15.4. (***)
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(***)
16. DISPUTE RESOLUTION
16.1. Dispute Resolution. Any controversy or claim arising out of, relating
to or in connection with this Agreement shall be resolved through
arbitration pursuant to the Commercial Arbitration Rules of the
American Arbitration Association then in effect, as modified by the
terms of this Article 16. Arbitration shall be conducted at a
location in Denver, Colorado, to be agreed upon by the Parties.
16.2. Incorporation by Reference. To the extent this Article 16 is deemed a
separate agreement, independent from this Agreement, Section 17.6 and
Section 17.9 are incorporated herein by reference.
16.3. Selection of Arbitrators. Arbitration shall be conducted by three (3)
arbitrators with each Party to this Agreement selecting one (1)
arbitrator each and the two selected arbitrators then selecting the
third arbitrator.
16.4. Limited Discovery. Prior to the commencement of the arbitration, each
Party shall be entitled to take limited discovery, including the
rights to request a reasonable number of documents, to serve no more
than twenty (20) interrogatories and to take no more than three (3)
depositions. This limited discovery shall be conducted in accordance
with the Federal Rules of Civil Procedure, which shall be interpreted
and enforced by the arbitrators.
16.5. Hearing and Decision. The arbitrators shall, as soon as practicable
and upon fifteen (15) days' written notice to each Party, conduct an
arbitration hearing and proceeding on the merits of the
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
dispute and thereafter shall issue a written decision citing the bases
for the decision, including findings of fact and conclusions of law.
The decision of the arbitrators shall be based on a majority vote.
16.6. Costs and Expenses. Each Party shall bear its own costs and expenses
arising out of any arbitration, including the costs of any arbitrator
selected by it, and shall bear equally the costs, expenses and fees of
the third arbitrator.
16.7. Consolidation and Joinder. Any arbitration arising out of or relating
to this Agreement or breach thereof may include by consolidation,
joinder or other manner any other person or persons which or whom a
party to the arbitration reasonably believes to be substantially
involved in a common question of fact or law.
16.8. Enforcement. The agreement to arbitrate shall be specifically
enforceable under prevailing arbitration law. Any award rendered by
the arbitrators shall be final, binding and enforceable by any party
to the arbitration, and judgment may be rendered upon it in accordance
with applicable law in a court of competent jurisdiction.
16.9. Waiver of Right to Litigate. Each Party hereby waives any and all
rights to, and hereby covenants not to, bring any lawsuit, arbitration
or other proceeding in any jurisdiction, judicial body or forum
arising under or relating to this Agreement or its subject matter
(other than an arbitration proceeding described above or a legal
proceeding solely to enforce the award or judgment of such arbitration
proceeding).
16.10. United States Arbitration Act. The Parties acknowledge that this
Agreement evidences a transaction involving interstate commerce. The
United States Arbitration Act shall govern the interpretation,
enforcement, and proceedings pursuant to the arbitration clause in
this Agreement.
17. GENERAL PROVISIONS
17.1. No Third-Party Beneficiary. It is the explicit intention of the
Parties hereto, that, except for the NTT America Affiliates (***), no
person or entity other than the Parties is or shall be entitled to
bring any action to enforce any provision of this Agreement against
either of the Parties, and the covenants, undertakings, and agreements
set forth in this Agreement shall be solely for the benefit of, and
shall be enforceable only by the Parties hereto or their respective
successors and assigns as permitted hereunder.
17.2. NTT America Affiliate. NTT America has the right to assign the
benefits of this Agreement to any one or more of the NTT America
Affiliates but such assignment shall not render them liable for any of
the obligations under this Agreement, which shall remain the exclusive
obligations of NTT America.
17.3. Force Majeure. Subject to the next following sentence, neither Party
shall be deemed in default of this Agreement to the extent that
performance of its obligations or attempts to cure any breach
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<PAGE> 21
are delayed or prevented by reason of any act of God, fire, natural
disaster, accident, act of government, sabotage of material or
supplies or any other cause beyond the control of such Party ("Force
Majeure"), provided that such Party gives the other Party written
notice thereof promptly and, in any event, within fifteen (15) days of
discovery thereof. In the event of such a Force Majeure, the time for
performance or cure shall be extended for a period equal to the
duration of the Force Majeure but not in excess of six (6) months.
17.4. Assignment. This Agreement and the rights and obligations hereunder
shall not be assigned or otherwise transferred by Verio without the
prior written consent of NTT America. NTT America shall have the
right to assign or transfer its rights under this Agreement to an
Affiliate. Any assignment by NTT America to any entity or person
other than an Affiliate of NTT America requires the prior written
consent of Verio.
17.5. Survival. The provisions of this Agreement which by their terms are
intended to survive the termination of this Agreement, including but
not limited to, Sections 8.2, 11.2, 11.3, 15.3 and 15.4 and Articles
10, 13, 14, 16, and 17 shall survive the termination of this
Agreement, regardless of the reason for the termination.
17.6. Notices. All notices hereunder shall be made by certified or
registered airmail, return receipt requested, by recognized overnight
courier, by confirmed telex or facsimile or confirmed electronic mail,
in each case if sent during normal business hours of the recipient,
and if not, then on the next business day, shall be deemed complete
upon receipt, and shall be sent to the Parties at the following
addresses (or at such other address for a Party as shall be specified
by like notice; provided that notices of a change of address shall be
effective only upon receipt thereof).
Notices to Verio: Verio, Inc.
8005 South Chester Street
Suite 200
Englewood, Colorado 80112
Attention: Mr. Sean Brophy
Telephone: 303-645-1906
Facsimile: 303-708-2494
Copy to the General Counsel of Verio at the address set forth
above.
Notices to NTT America: NTT America, Inc.
101 Park Avenue, 41st Floor
New York, NY 10178
Attention: Mr. Richard Nohe, Vice
President
Telephone: 212 808 2203
Facsimile: 212 661 1078
Copy to: Nippon Telegraph and Telephone
Corporation
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<PAGE> 22
Global Communications Headquarters
Tokyo Opera City Tower
20-2 Nishi-shinjuku 3-chome
Shinjuku-ku,
Tokyo 163-14 Japan
Attention: Mr. Tatsuo Kawasaki, Vice
President
Telephone: 81 3 5353 5361
Facsimile: 81 3 5353 5753
17.7. Waiver. Any waiver of any right or default hereunder shall be
effective only in the instance given and shall not operate as or imply
a waiver of any similar right or default on any subsequent occasion.
17.8. Severability. No determination by a court of competent jurisdiction
that any term or provision of this Agreement is invalid or otherwise
unenforceable shall operate to invalidate or render unenforceable any
other term or provision of this Agreement and all remaining provisions
shall be enforced in accordance with their terms.
17.9. Governing Law. This Agreement shall be governed by the laws of the
State of New York (exclusive of the choice of law rules thereof).
17.10. Entire Agreement; Headings. This Agreement, the Attachments and the
Investment Agreements hereto constitute the entire agreement between
the Parties pertaining to the subject matter hereof and supersede all
prior and contemporaneous agreements, negotiations and understandings,
oral or written. This Agreement may be modified only by an instrument
in writing duly executed by both Parties. The Article and Section
headings in this Agreement are inserted for convenience of reference
only and shall not be used in interpreting this Agreement.
17.11. Attorney's Fees. In any arbitration all costs of arbitration
including reasonable attorney fees shall be allocated to such Party as
designated by the arbitrators.
17.12. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same document.
17.13 Performance by Affiliates. In the event that a Party's performance of
its obligations under this Agreement requires the cooperation or
performance of an Affiliate of such Party, such Party shall procure
the cooperation or performance of its Affiliate.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the Parties hereto have signed and sealed this
Agreement on the date first set forth above.
VERIO, INC. NTT AMERICA, INC.
By: /s/ JUSTIN L. JASCHKE By: /s/ KEISUKE NAKASAKI
------------------------------- --------------------------------------
Print Name: Justin L. Jaschke Print Name: Keisuke Nakasaki
----------------------- ------------------------------
Title: President Title: President & CEO
---------------------------- -----------------------------------
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
ATTACHMENT A
SERVICES
1. RESELL SERVICES
The Resell Services that Verio shall provide to the NTT
America Group members and their customers are as follows:
1. Normal commercial dedicated and dial-up access
connection to Verio's network
2. Web-hosting and Co-location
3. Network Security Services
4. E-Commerce
5. Consulting services
6. Additional services as may be included herein by
mutual agreement of the Parties pursuant to Section
2.2.
2. JOINTLY DEVELOPED SERVICES
The Jointly Developed Services are those services that Verio and NTT
America may jointly develop in accordance with Article 6 through
Working Groups which Verio shall provide to members of the NTT America
Group and their respective customers upon mutual agreement. After such
services have been developed for commercial use, such services shall,
upon the mutual agreement of Verio and NTT America, be included among
the other Resell Services defined above.
The Jointly Developed Services are as follows:
1. (*)
2. Such other services as the Parties may mutually agree.
3. (***)
3.1 Verio acknowledges and agrees that: (a) (***)
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(***).
3.2 Verio may provision (***).
3.3 Verio will provide the (***).
4. CUSTOMER CARE
4.1 Verio shall provide the Resell Services and the
technical support for the Resell Services to members of the NTT
America Group for their customers.
4.2 Verio shall be responsible for responding to
technical issues relating to network connectivity and trouble
shooting, as appropriate, after being notified by members of the NTT
America Group or their customers of problems with the Resell Services.
Verio will provide outside assistance as and when necessary in
accordance with its standard technical support practices. If an NTT
America customer's equipment is provided and managed by Verio, Verio
shall be responsible for on site maintenance and trouble shooting for
that equipment. Verio shall promptly notify NTT America of any
problems or difficulties that have the potential to adversely impact,
or are having an adverse impact on, the Resell Services provided to
NTT America's customers.
4.3 A toll-free number shall be provided by Verio to NTT
America, at NTT America's expense, for NTT America's customers and
shall be used as the method for such customers to reach the Japanese
speaking customer support personnel.
4.4 In an area where NTT America does not have a POP
and/or a sales and support team, Verio shall provide the local
customer support but only after being requested to do so in writing by
NTT America, subject to NTT America and Verio having developed a
mutually agreeable local customer support mechanism and work flow
process, which mechanism and
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process NTT America and Verio shall work together to develop.
4.5 Verio shall contact customers of a member of the NTT
America Group only at the request of a member of the NTT America
Group, unless the Parties mutually agree otherwise.
4.6 NTT America shall be responsible for all costs
associated with setting up and maintaining the customer care/technical
support center developed for the sole purpose of supporting the NTT
America customer base, including direct payment and reimbursement of
all expenses associated with the same, including without limitation
salaries and pro-rata facilities expenses as agreed upon by the
relevant Working Group.
5. TRAINING
Verio shall provide comprehensive training to employees of
members of the NTT America Group on Verio's services, the underlying
internetworking technologies, and relevant Internet-related protocols
in conjunction with Verio's standard customary training programs.
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ATTACHMENT B
SERVICE LEVEL COMMITMENTS
SERVICE LEVELS.
Verio and NTT America shall create a Working Group in accordance with Section
6.2 of the Agreement to identify appropriate technical measurements of Verio's
provisioning of Resell Services to NTT America's customers, including service
outages, which measurements shall be set forth in this Attachment B by the
mutual agreement of the Parties.
SERVICE LEVEL FAILURES.
The Working Group shall address outages and down time. Subject to the
provisions of the last sentence of this paragraph, the Parties acknowledge that
it is appropriate for Verio to provide members of the NTT America Group with an
outage credit with respect to down time incurred by their customers as a result
of any failure of Verio's network in an amount equal to the outage credit which
a member of the NTT America Group is required to provide to its customers as a
result of the same. The Working Group shall evaluate and agree upon the
appropriate outage measurements for the determination of such outage credit.
The outage credit to be offered to NTT America Group member customers, when
mutually agreed upon by the Parties, shall be reimbursed by Verio to the extent
paid by members of the NTT America Group to their respective customers.
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<PAGE> 28
ATTACHMENT C
MARKETING PLAN
1. BRANDING
NTT America shall have the right to market the Resell Services under a
brand name to be determined by NTT America.
2. MARKETING MATERIALS
Verio and NTT America will coordinate the development and production
of marketing materials. The Parties shall combine their efforts and resources
and share costs with respect to product advertising, technical pre-sales
support, and other promotional activities, provided any such cooperative
efforts shall be subject to mutual agreement by the Parties.
3. SALES AND PROMOTION / SALES PROCESSES
3.1 Sales Force. NTT America shall maintain a sales force that
shall serve as the single contact point for all NTT America customers.
3.2 Promotion. NTT America shall be solely responsible for
promoting the sale of the Resell Services in the United States to NTT America's
customers; provided, however, that the foregoing shall not be construed to
limit Verio's ability to sell its services to third parties including NTT
America customers. Verio shall provide NTT America with technical information,
marketing assistance, technical sales support and marketing tools as shall be
determined by the relevant Working Group in order to market the Resell
Services.
3.3 Account Representative. Verio shall assign to an NTT America
designated account representative such support responsibilities as shall be
determined by the relevant Working Group. Such account representative will
assist NTT America and NTT America customers throughout the term of this
Agreement.
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<PAGE> 29
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
ATTACHMENT D
VERIO'S PRICING SCHEDULE
Verio shall extend to members of the NTT America Group (***) certain
indicated discounts off of Verio's local, regional, and national prices (to the
extent such pricing structures have been developed by Verio) but the prices
charged to members of the NTT America Group (***) shall be at least as favorable
as the prices offered to any other strategic partner of Verio. In the event that
Verio has no other strategic partners, Verio shall extend to members of the NTT
America Group (***) prices at least as favorable as the prices offered by Verio
to any other reseller for similar products or services requiring comparable
levels of support and other services by Verio (regardless of volume), reflecting
appropriately the nature of the strategic relationship between NTT and NTT
America and Verio.
SERVICE NON-RECURRING PORTION MONTHLY RECURRING
a. Resell Services (*)(1) (*)2
b. Telco Facilities (***) (***)
c. Equipment (***) (*)
d. Consulting (*) (***)
e. Transit ((***)) (***) (***)
(***)
f. Transit ((***)) (***) (***)
(not to exceed the price charged to other
Verio Affiliates or, in the event there are
no other Verio Affiliates, the most
favorable rates charged to other parties
with whom Verio is involved in a similar
strategic relationship)
Members of the NTT America Group, in their sole discretion, may supply their own
equipment for the above services.
- ----------
(1) x% off Regional list price or, if in effect, National List Price
(2) x% off Regional list price or, if in effect, National List Price
- 29 -
<PAGE> 30
Each Party shall provide consulting services to the other Party at the standard
hourly rate agreed to herein or based on a Custom Quote by either Party.
Legend
The terms used above shall have the following meanings:
National List Price: Prices for services that apply on a nationwide
basis, when available.
Custom Quote: The actual price for the service to be developed on a
case by case basis.
ICB: Individual case basis, which price is to be determined by Verio
based on a "most favored nation" basis.
RBOC Tariff: Prices which are established and published per Regional
Bell Operating Companies (RBOC) for a tariffed service, such as T1.
Standard Hourly Rate: The rate charged by Verio to its other resellers.
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<PAGE> 31
ATTACHMENT E
NTT AMERICA AFFILIATES
1. ntta.com, inc.
2. [OTHERS TO BE ADDED BY NTT AMERICA PURSUANT TO SECTION 1.22 ABOVE]
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<PAGE> 32
ATTACHMENT F
FIREWALL POLICY
The Parties agree that Verio and members of the NTT America Group will maintain
and abide by a formal Firewall Policy, which may be amended from time to time by
mutual agreement and as to which each Party will also develop more detailed
compliance rules, procedures, and methodologies. Each Party shall ensure that
each of their relevant employees is given a copy of this Policy and of any
amendment hereto and also a current copy of that Party's more detailed rules,
procedures, and methodologies. Such employees shall periodically certify in
writing that they have read this Policy and these materials and agree to abide
thereby. Each Party shall select an employee responsible for overseeing the
implementation of the Policy and for responding to questions from employees
regarding the Policy.
Under this Policy, each Party will erect and maintain "firewalls" at their
respective companies to ensure that if one Party's nonpublic, confidential, and
proprietary business information, particularly information relating to that
Party's specific customers and customer contracts or bids and its prices,
pricing plans and policies, and retail selling activities, is disclosed to the
other Party, that information will not be disclosed to any persons at the other
Party who are responsible for developing that other Party's own customer
contracts or bids, prices, pricing plans and policies, and retail selling
activities.
For example, if Verio performs billing services for NTT America, only the
persons at Verio with the need to have access to that NTT America customer
billing information in order to perform the billing service function for NTT
America shall have access to that information and that NTT America information
shall not be disclosed to other persons at Verio who price and sell Verio's
services to customers. A comparable approach shall obtain if, for example, one
Party performs maintenance, trouble ticketing, or technical assistance for the
other Party and necessarily will have access to that other Party's confidential
business information in order to perform the service.
Additionally, when the Parties jointly develop and produce general or brand
marketing and promotional materials, they shall ensure that that cooperative
effort does not involve the exchange of one or both Parties' nonpublic,
confidential, and proprietary information relating to specific customers,
customer contracts or bids, prices, pricing plans and policies, or retail
selling activities.
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<PAGE> 1
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
EXHIBIT 10.30
MASTER SERVICES AGREEMENT
This MCI Master Service Agreement, including the Schedules attached hereto
("Agreement") is made between MCI Telecommunications Corporation and its
affiliates ("MCI") and Verio, Incorporated ("Customer"), and shall be
binding when executed by both Parties and the conditions set forth in
paragraph 11(m) below (*) and paragraph 11(n) with respect to credit
approval have been satisfied.
The Term, rates, discounts and certain other provisions applicable to MCI
tariffed services ("Tariffed Services") are set forth in Schedule I and its
Attachments (hereby incorporated by reference) and shall be effective on
the Attachment Effective Date, as set forth in Attachment A to Schedule I.
The Term, rates, discounts and certain other provisions applicable to MCI
non-tariffed services ("Enhanced Services") are set forth in Schedule II
and its Attachments (hereby incorporated by reference) and shall be
effective on the Schedule Effective Date, as set forth in Schedule II. The
MCI Enhanced Services provided under Schedule II and its Attachments will
not receive the rates, discounts and credits provided under Schedule I, nor
will Enhanced Service usage be included in determining the rates, discounts
and credits provided under Schedule I.
For good and valuable consideration, the sufficiency of which is hereby
acknowledged, and intending to be legally bound, MCI and Customer (each a
"Party" and together, the "Parties") agree as follows:
1. Authority. Each Party represents and warrants that it has the full right,
power and authority to enter into this Agreement, to perform its
obligations hereunder and that the execution, delivery and performance of
this Agreement will not conflict with or constitute a default under any
contract, agreement or other obligation to which it is subject.
2. Confidential Information. The Parties agree that any confidential
information disclosed during performance of this Agreement shall be
governed by the Non-Disclosure Agreement ("NDA") between the Parties dated
May 19, 1997. The parties further agree that this Agreement, its Schedules
and Attachments are confidential information under the terms of the NDA and
that notwithstanding anything to the contrary, the term of the NDA is
hereby amended to be coterminous with this Agreement.
3. Termination of Schedules and Attachments. In addition to any other
termination rights identified in the attached Schedules, the Parties agree
that if all Schedules and Attachments hereto have been terminated in
accordance with the termination provisions set forth therein, then this
Agreement shall terminate, effective as of the termination date of the last
remaining Schedule or Attachment.
4. Provision of MCI Services.
(a) Pass-Through Charges. For all domestic and international access
services provided in conjunction with the MCI services provided under this
Agreement, MCI shall pass through to Customer and Customer shall pay any
charges, fees, taxes and otherwise be subject to terms and conditions of
service imposed by access suppliers, including those pertaining to rate
fluctuations in
MCI CONFIDENTIAL
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<PAGE> 2
telephone tariffs, and charges that are imposed or enacted by access
suppliers to MCI after the execution of this Agreement.
(b) Settlement Gains or Losses. If the charges of international
telecommunications operators (ITO's) or other third party service providers
are billed to Customer on a pass-through basis, the charges payable to the
ITO or third party service provider will be converted to U.S. Dollars at
the exchange rates applicable for billing in a foreign currency stated
above. The payments to the ITO's or third parties are generally made at the
end of the month. Any difference between the amount billed and the
equivalent U.S. Dollar amounts paid will be included in a subsequent
period's invoice as loss or gain on settlements.
5. MCI Invoices and Payment.
(a) Payment of MCI Invoices. All amounts due for MCI services provided
under this Agreement shall be billed and paid in U.S. Dollars. Customer
shall pay MCI for such services within thirty (30) calendar days after the
date of MCI's invoice. Independent of such payment obligation, Customer
shall make a separate claim in writing, with adequate support, for any
credit for service interruption to which Customer believes itself entitled
under this Agreement, and MCI and Customer will promptly address and
resolve the claim. Failure of MCI to invoice Customer in a timely manner
for any amounts due hereunder shall not be deemed a waiver by MCI of its
rights to payment therefor.
(b) Taxes. Except as otherwise indicated herein, the charges specified
in the Schedules or Attachments do not include, and Customer agrees to pay,
all taxes levied by any duly constituted taxing authority against or upon
MCI provided services or otherwise arising out of this Agreement
(including, without limitation, any sales, gross receipts or value-added
taxes), except any such income tax based on or measured in whole or in part
by gross or net income, gross or net payments, profits, or net worth of MCI
or its affiliates (the "Taxes"); so long as, in the case of foreign tax
withholdings, Customer shall agree to cooperate with MCI in providing
foreign tax receipts to MCI; utilize best efforts to comply with foreign
tax laws; and utilize best efforts to provide MCI and/or a foreign taxing
authority with additional information to support MCI's claim for foreign
tax credit(s), as requested in writing by MCI.
6. Customer Obligations.
(a) Customer-Obtained Equipment, Services and Interconnections. Unless
otherwise specified in this Agreement, Customer shall be responsible for
obtaining, installing, and maintaining all equipment, software and/or
communications services necessary for interconnection with MCI's network or
otherwise for use in conjunction with the applicable MCI provided service.
MCI will provide Customer with manufacturer-provided technical information
concerning MCI provided equipment and standard configuration information
with respect to MCI's network to allow Customer to obtain, install and
maintain the equipment, software and/or communications services. Except for
any equipment specified by MCI, Customer shall have sole responsibility for
ensuring that such equipment, software and/or services are compatible with
MCI's requirements and that they continue to be compatible with subsequent
revision levels of
MCI CONFIDENTIAL
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<PAGE> 3
MCI provided equipment, software and services. Unless otherwise expressly
agreed in writing, MCI shall have no responsibility for the availability,
capacity and/or condition of any equipment, software or services not
provided by MCI under this Agreement. Should Customer undertake to connect
any MCI products or services to any third party service or network,
Customer shall indemnify and hold harmless MCI from any damages, costs,
liabilities and expenses resulting from such connection or attempted
connection, including but not limited to damages resulting from
unauthorized use of, or access to, MCI's network.
(b) Security. Customer shall, at its own expense, take all
commercially reasonable security measures with respect to physical and
information systems necessary to protect all equipment, software, data and
systems located on Customer's premises or otherwise in Customer's control
and used in connection with the MCI provided services, whether owned by
Customer, MCI, or MCI's subcontractors. Customer acknowledges and agrees
that MCI shall not be liable, either in contract or in tort, for any loss
resulting from any unauthorized access (other than that caused by MCI
agents, employees or subcontractors in performance of the Agreement) to,
or alteration, theft, destruction, corruption, or use of, equipment,
software, data, or systems used in connection with MCI services.
(c) Access to Customer Sites. Customer agrees to provide MCI and its
subcontractors and their respective employees and agents access to
Customer's sites where any MCI services are provided (including access to
associated equipment) as necessary for MCI and its subcontractors to
perform MCI services.
7. Services, Software and Documentation. MCI is not required to provide
software and/or documentation to the Customer under this Agreement.
However, if during the term of this Agreement the Parties determine
that software and/or documentation is to be provided to the Customer, then
the Parties agree to negotiate in good faith appropriate terms and
conditions associated with the rights to such software and/or
documentation.
8. Indemnify by Customer. Customer agrees to indemnify MCI and its affiliates
and their respective employees, officers, directors, agents and
subcontractors, and hold them harmless against any damages including those
for personal injury and property damage and expenses incurred by any of
them arising out of Customer's acts, omissions and/or breach of its
obligations hereunder, and/or Customer's use of MCI provided services in a
manner other than as contemplated herein, including without limitation use
that gives rise to claims for libel, slander, invasion of privacy, or
infringement of any patent, copyright, trademark, or other proprietary
right of a third party; provided, however, that Customer's obligations
hereunder shall not apply (i) to the extent the same arise out of or in
connection with MCI's modification of a program or a machine provided by
Customer or MCI's combination, operation or use of a program or machine
provided by Customer with devices, data or programs not furnished by
Customer or its subcontractors; or, (ii) to claims of infringement of any
patent, copyright, trademark or other proprietary right of a third party
arising from Customer's use of MCI provided software hardware. Customer's
obligations pursuant to this Section shall be subject to: (i) MCI notifying
Customer in writing as to any such claim, suit, action or other proceeding
promptly after MCI becomes or reasonably should have become aware of the
same; (ii) at the request of Customer,
MCI CONFIDENTIAL
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<PAGE> 4
providing to Customer all information and assistance reasonably necessary
to Customer in the settlement and/or defense of the same; and (iii)
affording Customer sole control of the settlement and/or defense of the
same.
9. Compliance. Customer is responsible for complying with all local license or
permit requirements, and all laws and regulations, including but not
limited to export, import and customs laws and regulations. MCI shall
provide reasonable assistance to Customer and its affiliates to facilitate
such compliance. Such assistance may include preparation of import and
customs forms and/or, where requested by Customer, acting as Customer's
agent in the import process.
10. Disclaimer of Certain Damages. EXCEPT AS AWARDED AS PART OF A JUDGMENT OR
SETTLEMENT FOR THIRD PARTY CLAIMS COVERED UNDER SECTION 8, NEITHER PARTY
SHALL BE LIABLE TO THE OTHER FOR ANY CONSEQUENTIAL, EXEMPLARY, SPECIAL,
INCIDENTAL OR PUNITIVE DAMAGES ARISING FROM THIS AGREEMENT, THE SCHEDULES
AND THE ATTACHMENTS, EVEN IF IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES.
11. Miscellaneous
(a) Assignment. Neither Party may assign this Agreement, or any of its
rights or obligations hereunder, without the prior written consent of the other
Party, which consent shall not be unreasonably withheld. Any attempted
assignment without such prior written consent shall be void. Notwithstanding the
foregoing, MCI may assign this Agreement, or any of its rights or obligations
thereunder, to its parent or any of its wholly-owned subsidiaries or affiliates.
(b) Project Management/Dispute Resolution. Project Management/Dispute
Resolution shall be as follows:
(1) Promptly following execution of this Agreement, each Party shall
name a Project Manager who shall be responsible for day-to-day
implementation and management of the project.
(2) Each Project Manager shall provide written notification to the
other in the event of any dispute arising from performance of
this Agreement, such notification to be tendered within a
reasonable time frame. Promptly following notification of any
such dispute, the Project Managers shall meet (if requested to do
so) and shall negotiate in good faith in an attempt to resolve
such dispute.
(3) If after good-faith negotiations the Project Managers shall be
unable to resolve any such dispute, then either Project Manager
may escalate resolution of the dispute to the following level of
personnel who, within ten (10) days of notice of such escalation,
shall meet (if requested to do so) and negotiate in good faith to
resolve such dispute:
MCI CONFIDENTIAL
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<PAGE> 5
For MCI: Jerry Edgerton
Vice President
MCI Telecommunications Corporation
8200 Greensboro Dr.
McLean, VA 22102
Fax: (703) 902-6101
For Customer: Chris DeMarche
Chief Technology Officer
Verio, Incorporated
9250 East Costilla Avenue
Suite 400
Englewood, CO 80112
Fax: (303) 792-3869
(4) If after good-faith negotiations the Parties still are unable to
resolve the dispute, then either Party may escalate resolution of
the dispute to the following who, within ten (10) days of notice
of such escalation, shall meet (if requested to do so) and
negotiate in good faith to resolve such dispute:
For MCI: Robert Hartnett
President
MCI Telecommunications Corporation
3 Ravinia Drive
Atlanta, GA 30346-2102
(770) 280-6113
For Customer: Justin Jaschke
Chief Executive Officer
Verio, Incorporated
9250 East Costilla, Avenue
Suite 400
Englewood, CO 80112
Fax: (303) 792-3869
(5) Any dispute arising out of or related to this Agreement, which
cannot be resolved by negotiation, shall be settled by binding
arbitration in accordance with the J.A.M.S/ENDISPUTE Arbitration
Rules and Procedures ("Endispute Rules"), as amended by this
Agreement. The costs of arbitration, including the fees and
expenses of the arbitrator, shall be shared equally by the
Parties unless the arbitration award provides otherwise. Each
Party shall bear the cost of preparing and presenting its case.
The Parties agree that this provision and the Arbitrator's
authority to grant relief shall be subject to the United States
Arbitration Act, 9 U.S.C. 1-16 et seq. ("USAA"), the provisions
of this Agreement, and the ABA-AAA
MCI CONFIDENTIAL
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Code of Ethics for Arbitrators in Commercial Disputes. The
Parties agree that the arbitrator shall have no power or
authority to make awards or issue orders of any kind except as
expressly permitted by this Agreement, and in no event shall the
arbitrator have the authority to make any award that provides for
punitive or exemplary damages. The Arbitrator's decision shall
follow the plain meaning of the relevant documents, and shall be
final and binding. The award may be confirmed and enforced in any
court of competent jurisdiction. All post-award proceedings shall
be governed by the USAA.
(c) No Waiver. Neither Party's failure, at any time, to enforce any right
or remedy available to under this Agreement shall be construed to be a waiver of
such Party's right to enforce each and every provision of this Agreement in the
future.
(d) Force Majeure. Any delay in or failure of performance by either Party
under this Agreement (other than a failure to comply with payment obligations)
shall not be considered a breach of this Agreement if and to the extent caused
by events without the fault and beyond the reasonable control of the Party
affected, including but not limited to acts of God, embargoes, governmental
restrictions, strikes (other than those affecting only Customer), subcontractor
failures or delays, riots, wars or other military action, civil disorders,
rebellion, vandalism, or sabotage. Market conditions and/or fluctuations
(including a downturn of Customer's business) shall not be deemed force majeure
events. The Party whose performance is affected by such events shall promptly
notify the other Party, giving details of the force majeure circumstances, and
the obligations of the Party giving such notice shall be suspended during but
not longer than the continuance of the force majeure, and the time for
performance of the affected obligation hereunder shall be extended by the time
of the delay caused by the force majeure event.
(e) Trademarks. Except as otherwise expressly provided in this Agreement,
nothing in this Agreement shall create in either Party any rights in any
trademark, trade name, service mark, insignia, symbol, identification and/or
logotype of the other Party. Before either Party uses any such mark of the other
Party, it shall obtain the prior written consent of the other Party.
(f) Export Controls. The Parties acknowledge that certain equipment,
software and technical data which may be provided hereunder may be subject to
export and re-export controls under the U.S. Administration Regulations and/or
similar regulations of the U.S. or any other country. No Party shall export or
re-export any such equipment, software, technical data or any direct product
thereof in violation of any such laws.
(g) Foreign Corrupt Practices. Customer agrees that neither it nor any of
its directors, officers, employees, subcontractors or agents will make any
offer, payment, promise to pay or authorization of the payment of any money,
offer, gift, promise to give, or authorization of the giving of anything value
to any official, political party, party official or political candidate or any
person, knowing that all or a portion of such money or thing of value will be
offered, given or promised, directly or indirectly to any official, political
party, party official or political candidate, for the purpose of retaining
business for or with, or directing business to Customer or MCI. As used in this
Section the term "official" refers to any officer or employee in private or
public
MCI CONFIDENTIAL
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service and includes any officer or employee of a government, or any department,
agency or instrumentality thereof, or any person acting in such an official
capacity for or on behalf of any such government or department, agency or
instrumentality thereof.
(h) Governing Law. This Agreement, and all causes of action arising out of
this Agreement, shall be subject to the Communications Act of 1934, as amended
or succeeded (the "Act"), or, to the extent that any part of this Agreement is
not governed by the Act, by the domestic law of the State of New York without
regard to its choice of law principles. In the event of a conflict between this
Agreement and any subsequent translations, this English language version shall
prevail.
(i) Notices. Any notice or other communication required to be given to the
other Party under this Agreement shall be given in writing, in the English
language and either (1) delivered in person, (2) sent by United States certified
or registered mail, postage prepaid, or (3) sent by an overnight courier
service, to the following addresses:
If to MCI:
MCI Telecommunications Corporation
8200 Greensboro Drive
McLean, VA 22102
Attn: Jerry A. Edgerton, Vice President
With a Copy To: Law and Public Policy (same MCI
address as above)
If to Customer:
Verio, Incorporated
9250 East Costilla Avenue
Suite 400
Englewood, CO 80112
Attn: Mr. Chris DeMarche,
Chief Technical Officer
The name and address for notice may be changed by giving written notice in
accordance with this Section. If mailed in accordance with this Section, notice
shall be deemed given three (3) days after mailing. If sent by an overnight
courier service, notice shall be deemed given one (1) day after deposit with the
courier service.
j) Severability. All provisions of this Agreement are severable, and the
unenforceability or invalidity of any of the provisions shall not affect the
validity or enforceability of the remaining provisions. The remaining provisions
will be construed in such a manner as to carry out the full
MCI CONFIDENTIAL
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
intention of the Parties. Section titles or references used in this Agreement
shall not have substantive meaning or content and are not a part of this
Agreement.
(k) Verio Owned Subsidiaries. MCI will provide location-level billing for
services provided under this Agreement to affiliates specified by Verio,
provided that Verio shall own or control at least twenty-five percent (25%) of
the equity of each specified affiliate. Notwithstanding such location level
billing, Verio shall at all times remain responsible for payment of all charges
incurred by Verio affiliates purchasing services under this Agreement. In the
event that a specified Verio affiliate fails to make payment when due, MCI may
notify Verio and Verio shall make such payment within seven (7) calendar days.
(1) Entire Agreement. This Agreement, including the Schedules and their
Attachments, constitute the entire agreement between the Parties with respect to
its subject matter and the applicable MCI Tariffs and Tariff Option, and
supersedes all other representations, understandings or agreements which are not
fully expressed herein, whether oral or written offers, no amendment to this
Agreement shall be valid unless in writing and signed by both Parties.
(m) Signature Authorization. The Parties have duly executed and agreed to
be bound by this Agreement as evidenced by the signatures of their authorized
representatives below. Each Party represents and warrants to the other that the
signatory identified beneath its name below has full authority to execute this
Agreement on its behalf. This offer shall remain open and be capable of being
accepted by Customer until June 16, 1997. Notwithstanding the foregoing, (***)
(n) Credit Approval. As a condition to MCI's commencement of performance
under this Agreement, Customer shall provide to MCI's reasonable satisfaction
information regarding Customer's current financial status and credit-worthiness
within fourteen (14) calendar days of execution of this Agreement. Within
fourteen (14) business days of receipt thereof, MCI will complete its credit
review and may in its sole discretion request Customer to provide adequate
financial security, assurance of payment, or other payment terms acceptable to
MCI. MCI will base this credit review and any security or payment terms upon an
assumed monthly usage rate (for all MCI services) of (*) (*) the "Credit
Ceiling"). In the event that Verio refuses or otherwise fails to provide such
security, assurance of payment, or to agree to such payment terms within five
(5) business days after receiving MCI's request therefor, MCI may at its option
terminate this Agreement. Neither party shall have any liability to the other in
the event of MCI's termination of this Agreement under this section 11(n)
regardless of reason. This provision, together with paragraphs 11(o) and 11(p)
is intended to supersede any inconsistent provisions of MCI Tariff No. 1,
Section B.7.
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(o) MCI may request additional financial security, assurance of payment,
or other payment terms under this Agreement after satisfaction of the condition
in paragraph 11(n) in those situations in which MCI reasonably believes (i)
that Customer's financial circumstances have changed in a material and adverse
manner, provided that Customer shall inform MCI within thirty (30) business days
of its investment in any internet service provider or provider of voice or data
transmission services to whom Customer intends to provide services purchased
under this Agreement. or (ii) MCI reasonably believes that Verio's late payment
history under this Agreement justifies either an increase in the amount of any
financial security provided, or if none has been requested previously, the
provision of such financial security, assurance of payment, or other payment
terms. If Customer fails to provide such security within five (5) business days
of such request it shall be a material breach of this Agreement and MCI at its
sole discretion may notify Customer and immediately terminate provision of
service under this Agreement. The failure of Customer to provide security in
connection with a request under subparagraph (i) of this paragraph (o) shall not
be considered a breach of this Agreement entitling MCI to any termination
payments.
(p) If Customer's actual usage of MCI services exceeds the Credit Ceiling
set in paragraph 11 (n), then MCI, in its sole discretion, may request that
Customer pay the amount of usage exceeding the Credit Ceiling on an estimated
basis, subject to true-up against Customer's actual usage when billed or lower
its usage to a rate below the Credit Ceiling. For example, if based on MCI's
records of Customer's traffic, MCI estimates a Customer's usage for a month to
be $(*), then MCI may submit to Customer an estimated bill for such usage and
Customer shall either pay $(*) within ten (10) days of receipt MCI's estimated
bill ($(*) less $(*) Credit Ceiling), or, in the alternative, immediately
disconnect circuits or otherwise lower its usage to a level equal to or below
the Credit Ceiling. If Customer elects to pay the amount estimated to exceed the
Credit Ceiling, then when MCI submits its regular invoice covering Customer's
actual usage for that period, it shall credit Customer for amounts already paid
on account, refunding (or crediting against future bills) any overcharge or
billing Customer for any balance due. If Customer elects not to make the
estimated payment requested by MCI or fails to lower its usage to a level equal
to or lower than the Credit Ceiling, then notwithstanding anything in this
Agreement, MCI may terminate this Agreement in whole or in part without prior
notice to Customer or opportunity to cure.
12. Adjustments.
(***)
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(***)
MCI CONFIDENTIAL
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Any and all prior offers made to Customer, whether written or oral, shall be
superseded by this offer.
MCI TELECOMMUNICATIONS VERIO, INCORPORATED
CORPORATION
By: /s/ JERRY A. EDGERTON By: /s/ CHRIS DEMARCHE
------------------------------- ---------------------------
Name: Jerry A. Edgerton Name: Chris DeMarche
----------------------------- -------------------------
Title: Vice President Title: CTO
---------------------------- ------------------------
Date: 6/13/97 Date: 6/13/97
---------------------------- ------------------------
MCI CONFIDENTIAL
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
SCHEDULE I
SPECIAL CUSTOMER ARRANGEMENT
(***)
MCI CONFIDENTIAL
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(***)
MCI CONFIDENTIAL
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
ATTACHMENT A TO SCHEDULE I
This Attachment A to Schedule I contains the rates, discounts and certain
other provisions applicable to the Tariffed Services provided to Customer.
References in this Attachment to standard Tariffed rates and/or discounts
will include those standard rates and/or discounts in the Price Guide if
MCI voluntarily or involuntarily as a result of government or judicial
action cancels in whole or in part any Tariff on file with the FCC.
1. Term and Termination.
1.1 Term. The term of service of this Attachment will begin on the Attachment
Effective Date and end upon the completion of sixty (60) months thereafter
("Term") or earlier provided the terms and conditions of Section 3.1 of this
Attachment ("Minimum Volume Commitment") have been fully met. The Attachment
Effective Date ("Attachment Effective Date") shall be one (1) month from the
first day of the billing cycle following Customer's signature date.
1.2 Discontinuation of Business; Bankruptcy. Either Party may terminate this
Attachment immediately upon notice to the other Party if: (i) such other
Party dissolves, discontinues or terminates its business operations to which
the Attachment pertains; (ii) any bankruptcy, reorganization, insolvency,
dissolution or similar proceeding is instituted by or against such other
Party, or (iii) such other Party makes any assignment for the benefit of
creditors.
1.3 Termination for Cause by Customer. Customer may terminate this Attachment
for Cause without Termination Liability or liability under Section 3.4 and
3.5. For purposes of this attachment, Cause shall mean:
(a) a failure of MCI to perform a material obligation under this
Attachment which failure is not remedied by MCI within thirty
(30) days after receipt of written notice; or
(b) Network Availability for any private line service provided under
this Attachment falling below (*) for (***) during the Term of
this Agreement or falls below (*) for any (***) during the term
of this Agreement. For purposes of this provision, Network
Availability means the monthly average of the ratio of actual
service time to scheduled service time. Actual service time is
defined as the time period during which connectivity is granted.
Only outages or service degradation caused by the network are
considered in measuring Network Availability. CPE related
disruptions, local access, and scheduled maintenance will be
excluded from Network Availability measurements. Customer's
termination rights under paragraph(b) are limited to termination
of the affected circuit, port or route failing to meet
performance criteria.
1.4 Termination by MCI. MCI may terminate the Attachment in whole or in part
immediately upon notice to Customer if any of the following events occur:
MCI CONFIDENTIAL
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(a) A material breach of this Attachment by Customer (i.e., Customer
fails to meet any payment obligation hereunder and such failure
is not cured within ten (10) business days after Customer's
receipt of written notice from MCI notifying Customer of such
failure); or
(b) MCI determines in its sole discretion that continued provision of
any facility, equipment, or service would contravene any local,
state, national or international regulation, law, or tariff; or
(c) MCI determines that interruption or termination of a service
provided by MCI hereunder is necessary to prevent or protect
against fraud or otherwise protect its personnel, agents,
facilities, or services; or
(d) Any third-party subcontractor or vendor to MCI is unable to
continue to provide such facility, or component of equipment, or
service for any reason; provided, however, that where such third
party has ceased to provide any facility, equipment, or service,
MCI may, at its option, continue to provide to Customer a
comparable facility, equipment, or service by or through another
vendor under comparable terms and conditions.
MCI's termination rights under paragraphs (b), (c) and (d) are limited to
termination only of the affected services.
1.5 Termination Liability. If the Customer terminates service under this
Attachment before the expiration of the Term other than as set forth in
Schedule I Section 1.3 of this Attachment or to take service under another
arrangement with MCI having equal or greater term and volume requirements,
or if MCI terminates this Attachment pursuant to Section 1.4(a), Customer
will be required to: (i) repay all credits received under this Attachment;
and, (ii) pay an early termination charge calculated in accordance with
sections 3.4 and 3.5.
2. Services. Services may consist of any one or more of those telecommunications
services provided to Customer pursuant to the Tariffs. As such, the services
are subject to availability as determined by MCI.
3. Minimum Volume Commitments and Underutilization Charges.
3.1 Minimum Volume Commitment.
3.1.1 During the Term of this Agreement, Customer shall purchase MCI
Tariffed Service under this Attachment that equal or exceed (***), calculated
at Net Rates, as defined below in Section 3.3, (the "Tariffed Services
Minimum Volume Requirement or "Tariffed Services MVR").
3.1.2 If Customer satisfies the Tariffed Services MVR prior to the
completion of the Term, the Agreement shall continue for a supplemental
period of twelve (12) months ("Supplemental Period") from the date one which
the Customer has satisfied the Tariffed
MCI CONFIDENTIAL
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
Services MVR or until completion of the Term (i.e. 60 months), whichever
occurs first. During the Supplemental Period, the Customer must satisfy an
additional annual commitment, calculated at Net Rates, of (***) thereof
("Revised Tariffed Services MVR"). In the event less than twelve (12) months
remains in the service term, then this amount shall be pro-rated over such
remaining term.
3.1.3 If the Customer meets or exceeds (***) per month (at Net Rates) of MCI
Tariffed Services purchased under this Agreement for a period of three (3)
consecutive months, then the Parties shall to enter into good faith
negotiations aimed at conforming the rates, term and volume commitment to
customer's actual usage. Any failure of the Parties to reach a mutually
acceptable solution with regard to the rates and charges under this
Attachment shall not affect the requirement for the Customer to satisfy the
Tariffed Services MVR or any other term and condition of this Agreement.
3.2 Subminimum Volume Commitment. Notwithstanding anything to the contrary,
during the Term of this Agreement, Customer shall purchase from MCI Inter
Office Channel ("IOC") Services in an amount of at least for purchase of
(***). This IOC commitment is a portion of the commitment referred to in
section 3.1.1.
3.3 Net Rates. For purposes of this Attachment, "Net Rates" shall mean
Customer's monthly billing for MCI Tariffed Services at the rates for which
the Customer qualifies under this Agreement after application of any
applicable discounts. "Net Rates" shall be calculated by adding Customer's
usage charges for MCI Tariffed Services at the rates identified herein (after
application of any applicable discounts) and monthly recurring and usage
charges, based upon standard Tariffed rates for any combination of other
MCI Tariffed Services, including but not limited to, pass-through
access/egress (or related charges) imposed by third parties, any recurring
charges imposed in the Tariff, MCI Directory Assistance Charges, MCI
intrastate usage charges, MCI International Service(s) charges, and charges
under any Network Pricing Plan specified in the Tariff. Charges for the
following are excluded from the calculation of Net Rates: goods and services
that are not tariffed (including MCI Enhanced Services provided under
Schedule II), MCI charges for MCI operator services for pay phones or hotel
room phones under the control of Customer, non-recurring charges, and any
taxes or surcharges applicable to any MCI services.
3.4 Tariffed Services MVR Underutilization. If after the completion of the
Term of this Agreement, or early termination thereof by Customer, Customer's
usage charges, calculated at Net Rates, do not equal or exceed the Tariffed
Services MVR, Customer will pay, in addition to all accrued but unpaid usage
charges and other charges, an underutilization charge equal to (***) of the
difference between (a) the Tariffed Services MVR and (b) Customer's actual
purchase of MCI services under this agreement during the Term. Customer
agrees that such charges are reasonable.
MCI CONFIDENTIAL
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
3.5 Subminimum Underutilization. If after the completion of the Term of this
Agreement, or following early termination of this agreement Customer's
purchase of MCI-IOC services has not expired or exceeded the Subminimum
stated in Section 3.2 of this Attachment, Customer will pay, in addition to
all accrued but unpaid usage charges and other charges, an underutilization
charge equal to (***) of the difference between the Subminimum and (b)
Customer's usage charges for the MCI IOC Service. Customer agrees that such
charges are reasonable.
4. Rates and Discounts for the Services. Unless otherwise noted, the rates and
discounts provided for in this Attachment are in lieu of, and not in addition
to, any standard rates, discounts or commissions to which Customer is or
would otherwise be entitled to receive by application of any MCI Tariff.
Unless otherwise stated, the rates below will fluctuate with any changes in
the Tariff.
4.1 Interstate/Intrastate Voice Service. Rates and charges are per the
Tariff, except as stated below:
4.1.1 VNET Domestic
-----------------------
Ded/Ded $(*)/minute
Ded/Sw $(*)/minute
Sw/Ded $(*)/minute
Sw/Sw $(*)/minute
The rates above apply to interstate and intrastate calls and are subject to
increase or decrease over the life of the Term by the same percentage change
that occurs to the standard tariff rate.
4.1.2 MCI 800
-----------------------
DAL $(*)/minute
CBL $(*)/minute
The rates above apply to interstate and intrastate calls and are subject to
increase or decrease over the life of the Term by the same percentage change
that occurs to the standard tariff rate.
4.2 International Voice Service.
Rates and discounts are per the Tariff.
4.3 Dedicated Leased Line Service. Rates and charges are per the Tariff,
except as stated below:
Inter-Office Channel (IOC)
The following discounts apply to the following IOC service(s):
MCI CONFIDENTIAL
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
(a) TDS45 - IOC distance less than or equal to (*)
miles:_(*) plus (*) per mile_- IOC distance greater than (*) miles: (*)
off Tariff
(b) TDS 1.5 - (*) off Tariff 1
(c) Fract T1 - (*) off Tariff 1
(d) DDS 56/64 - (*) off Tariff 1
(e) DSO 56/64 - (*) off Tariff 1
4.4 Dedicated Access Services. Rates and charges are per the Tariff,
except as stated below:
4.4.1 The following discounts apply to dedicated access for TDS1.5,
DDS, DSO, and Fractional T1 service.
(a) Standard Five (5) Year APP discounts (Currently (*), for
T1, and (*) for DDS/DSO)
(b) Monthly Recurring Charges (M.R.C.) for Access
Coordination (A.C.) and Central Office Connection
(C.O.C.) are (*)
(c) Local loop, A.C. and C.O.C installation charges are (*).
4.4.2 The following discounts apply to dedicated access for MCI
Local Service (where offered by MCI).
(a) Standard Pricing (Currently (*) below MCI's Standard
rates)
(b) Standard Five (5) Year APP discounts (Currently
(*), for T1, and (*) for DDS/DSO)
(c) Monthly Recurring Charges (M.R.C.) for Access
Coordination (A.C.) and Central Office
Connection (C.O.C.) are (*).
(d) Loop, A.C. and C.O.C. installation charges are (*).
Customer agrees that within sixty (60) days of notice from MCI that MCI
dedicated access for Local Service(s) (as described in Section 4.4.2 above) is
available to Customer's facility, it will to (***). The rates and charges for
MCI Local Service(s) are listed above.
For access into each MCI Points of Presence ("MCI PoP"), the Customer hereby
grants to MCI (at MCI's discretion) the option for MCI to either (***). In the
case where access is provided (***), the Customer shall be charged and hereby
agrees to pay the following Monthly Recurring Charges (M.R.C.) for (*) connect:
<TABLE>
<CAPTION>
Monthly (*) Connect Charges
<S> <C>
TDS-45 $(*)
DS- 1 $(*)
DS-O/DDS $(*)
</TABLE>
4.4.3 Forced Local Loop Services
MCI CONFIDENTIAL
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
The following discounts apply when MCI (***), other than the POP
normally used in that location, in an effort to (***).
(a) Standard Five(5) Year APP discounts
(Currently (*), for T1, and (*) for DDS/DSO).
(b) Monthly Recurring Charges (M.R.C.) for Access
Coordination (A.C.) and Central Office
Connection (C.O.C.) are (***).
(c) Local loop, A.C. and C.O.C. installation
charges (***).
4.4.4 Dedicated access for TDS45 will be subject to its
availability and will be quoted to Customer on an individual case
basis.
4.5 Frame Relay Service. Rates and charges are per
the Tariff, except as stated below:
The standard tariff rates apply for Frame Relay service and
the standard 5 Year Term Discount on Port and PVC Charges (listed
below) apply as well. The rates and charges for Frame Relay shall
fluctuate with the Tariff.
<TABLE>
<CAPTION>
Current Discount Table:
-----------------------
Gross Monthly Revenue Discount
<S> <C>
$ (*) (*)
$ (*) (*)
$ (*) (*)
$ (*) (*)
$ (*) (*)
$ (*) (*)
$ (*) (*)
$ (*) (*)
$ (*) (*)
</TABLE>
4.6 Charges Not Eligible For Discount. The rates and
discounts set forth in this Section 4 do not apply to the following:
charges for MCI Services other than those described in Section 4;
non-Tariffed products; access or egress (or related) charges imposed
by third parties; standard Tariffed recurring charges; standard
Tariffed non-recurring charges and taxes or tax-like surcharges.
5. Tariffed Rates. If MCI offers, pursuant to a Tariff, discounts for
combination(s) of Services (as opposed to discounts on a particular
Service) and Customer has subscribed to such Services, than Customer
may elect to receive the benefits of such discounts in lieu of the
discounts set forth in Section 4 of this Attachment. If Customer
makes such an election, the new discounts will control for the
remainder of the Term.
MCI CONFIDENTIAL
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
6. Qualifying Conditions. The Customer must satisfy the following
conditions by the Effective Date of the Agreement between the Customer
and MCI:
6.1 Customer must qualify, as of the date of execution of
this Agreement, (***).
6.2 Customer must be (***).
Customer understands that MCI, in conducting its business in the
manner set forth herein, is subject to the Communications Act of 1934,
as amended or succeeded, and as interpreted and applied by the
FCC. The Master Agreement, Schedule I, and this Attachment A,
together with the appropriate MCI tariffs is the complete agreement of
the parties with respect to Tariffed Services and supersedes all other
prior agreements and representation concerning its subject matter.
MCI CONFIDENTIAL
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
SCHEDULE II
ENHANCED SERVICES AGREEMENT
Customer's use of MCI Enhanced Services and any additional products in
the Attachments to Schedule II will not receive the rates provided
under Schedule I and its Attachments nor will such usage be included
in determining the discounts or credits provided under Schedule I of
the Agreement.
1. Term and Termination
1.1 Term. The Term of this Schedule II shall begin on
the Schedule Effective Date and end upon the
completion of sixty (60) months thereafter ("Term").
The Schedule Effective Date ("Schedule Effective
Date") will begin one (1) month from the first day of
the billing cycle following Customer's signature
date.
1.2 Discontinuation of Business; Bankruptcy. Either
Party may terminate this Schedule immediately upon
notice to the other Party if: (i) such other Party
dissolves, discontinues or terminates its business
operations to which the Agreement pertains; (ii) any
bankruptcy, reorganization, insolvency, dissolution
or similar proceeding is instituted by or against
such other Party; or (iii) such other Party makes any
assignment for the benefit of creditors.
1.3 Termination for Cause by Customer. Customer may
terminate this Schedule for Cause without Termination
Liability or liability under Sections 1.5 or 2. For
purposes of this Attachment, Cause shall mean:
(a) a failure of MCI to perform a material
obligation under this Attachment which failure is not
remedied by MCI within thirty (3O) days after receipt
of written notice; or
(b) Network Availability for SMDS service
provided under this Attachment falls below (*)% for
six (6) consecutive months during the Term of this
Agreement. For purposes of this provision, Network
Availability means the monthly average of the ratio
of actual service time to scheduled service time.
Actual service time is defined as the time period
during which connectivity is granted. Only outages
or service degradation caused by the network are
considered in measuring Network Availability. CPE
related disruptions, local access, and scheduled
maintenance will be excluded from Network
Availability measurements.
(c) At this time there is no Service Level
Agreement for MCI Hyperstream ATM service. If at any
time during the term of this Agreement, MCI
implements a generally available Service Level
Agreement for MCI Hyperstream ATM service, then the
parties will amend this Agreement to include the
terms and conditions of such generally available
Service Level Agreement including any applicable
change in rates.
MCI CONFIDENTIAL
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<PAGE> 22
Customer's termination rights under paragraphs (b) and (c) are limited
to termination only of the affected services.
1.40 Termination by MCI. MCI may terminate the Schedule immediately upon
notice to Customer if any of the following events occur:
(a) A material breach of this Schedule by Customer (i.e., Customer
fails to meet any payment obligation hereunder and such failure is not
cured within ten (10) business days after Customer's receipt of
written notice from MCI notifying Customer of such failure); or
(b) MCI determines in its sole discretion that continued provision
of any facility, equipment, or service would contravene any local,
state, national or international regulation, law, or tariff; or
(c) MCI determines that interruption or termination of a service
provided by MCI hereunder is necessary to prevent or protect against
fraud or otherwise protect its personnel, agents, facilities, or
services; or
(d) Any third-party subcontractor or vendor to MCI is unable to
continue to provide such facility, or component of equipment, or
service for any reason; provided, however, that where such third party
has ceased to provide any facility, equipment, or service, MCI may, at
its option, continue to provide to Customer a comparable facility,
equipment, or service by or through another vendor under comparable
terms and conditions.
MCI's termination rights under paragraphs (b), (c) and (d) are limited
to termination of the affected services.
1.5 Termination Liability. If the Customer terminates service under this
Schedule before the expiration of the Term other than as set forth in
Section 1.3, or to take service under another arrangement with MCI
having equal or greater term and volume requirements, or if MCI
terminates this Schedule pursuant to Section 1.4(a), Customer will be
required to: (i) repay all credits received under this Schedule; and,
(ii) pay an early termination charge as calculated in Section 2.1 of
this Attachment for each monthly billing period remaining in the Term
or a pro rata portion thereof for any partial monthly billing period.
The Customer, however, will not be liable for termination charges if
the MCI Hyperstream ATM and/or MCI Hyperstream SMDS services are
converted to other MCI services of equal or greater value.
MCI CONFIDENTIAL
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
2. Minimum Volume Requirements and Underutilization Charges.
2.1 Minimum Volume Requirement. During the Term of this Agreement,
Customer's Net Usage of MCI services purchased under this Schedule II
shall equal or exceed (*) Dollars ($(*)) (the "ESA MVR"). For purposes
of this Schedule II, "Net Usage" means recurring and usage charges
accruing to Customer's account, after application of all discounts and
credits, during each monthly billing period, including without
limitation charges for usage of all Enhanced Services provided by MCI
under this Schedule (as may be supplemented from time-to-time with the
addition of other enhanced services provided to Customer by MCI under
mutually agreed upon terms and conditions) and excluding without
limitation access charges, access coordination charges, network
management charges, all charges expressly excluded in the ESA
Attachments, CPE, all charges for Tariffed Services, and all taxes and
surcharges.
2.2 ESA MVR Underutilization Charge. If Customer does not satisfy
the ESA MVR over the Term, then Customer will pay to MCI (i) Customer's
actual combined monthly recurring and usage charges for MCI Enhanced
Service, plus (ii) an underutilization charge (which Customer agrees is
reasonable) equal to (*) percent ((*)%) of the difference between the
applicable ESA MVR and Customer's actual Net Usage over the life of the
Agreement. The Customer, however, will not be liable for
underutilization charges if the MCI Hyperstream ATM and/or MCI
Hyperstream SMDS services are converted to other MCI services equal to
or greater than the difference between the ESA MVR and the actual net
ESA usage for the month in question.
3. Provision of ESA Services.
3.1 MCI shall provide the following MCI Enhanced Services to
Customer under this Schedule:
MCI Hyperstream ATM
MCI Hyperstream SMDS
3.2 ESA Attachments. Each MCI Enhanced Service provided under
this Schedule shall have a corresponding ESA Attachment specifying the
applicable rates, discounts, and other terms and conditions on which
MCI will provide such MCI Enhanced Service. To the extent that the
terms and conditions of any ESA Attachment are inconsistent with the
terms and conditions of the Master Agreement and this Schedule, the
ESA Attachment shall govern with respect to the corresponding MCI
Enhanced Service.
3.3 Effect of Tariffing. If, at any time during the Term, MCI
tariffs any of the MCI Enhanced Services provided pursuant to the
Master Agreement and this Schedule (each a "Newly Tariffed Service"),
Customer agrees to promptly execute appropriate additional agreements
and amendments to the Master Agreement and its corresponding Schedules
and Attachments the effect of which shall be to eliminate the Newly
Tariffed Service from the MCI Enhanced Services portion of the Master
Agreement and to incorporate such Newly Tariffed Service into that
portion of the Master Agreement (or a separate agreement) which
governs MCI Tariffed Services. Such MCI Tariffed Services agreement
shall contain the same rates, charges, discounts, term commitment, and
MCI CONFIDENTIAL
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<PAGE> 24
volume commitment for the Newly Tariffed Service as set forth in that
portion of this Schedule which governs MCI Enhanced Services.
Customer acknowledges and agrees that MCI shall have no obligation to
include any equipment provided under the Master Agreement and this
Schedule or any charges payable for such equipment in any such
agreement for tariffed services. In the event that a Newly Tariffed
Service is eliminated from this Schedule, the ESA and SCA MVRs will be
adjusted accordingly.
4. Warranty. MCI's warranty obligations, if any, with respect to each
MCI Enhanced Service are set forth in the applicable Attachment.
EXCEPT AS SPECIFICALLY SET FORTH IN THE MASTER AGREEMENT, THIS
SCHEDULE AND THE ATTACHMENTS, MCI MAKES NO WARRANTIES, EXPRESS OR
IMPLIED, AS TO ANY MCI ENHANCED SERVICES. MCI SPECIFICALLY DISCLAIMS
ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING WITHOUT
LIMITATION ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE AND ANY INTELLECTUAL PROPERTY WARRANTIES Of ANY
TYPE.
5. Limitation of Liability. NOTWITHSTANDING THE FOREGOING, MCI'S TOTAL
LIABILITY TO CUSTOMER ARISING FROM THIS SCHEDULE AND THE ATTACHMENTS
SHALL BE LIMITED TO THE LESSER OF (A) CUSTOMER'S PROVEN DIRECT DAMAGES
OR (B) THE TOTAL AMOUNT PAID BY CUSTOMER TO MCI FOR THE SPECIFIC
ENHANCED SERVICE UPON WHICH THE CAUSE OF ACTION IS BASED DURING THE
ONE (1) MONTH PERIOD PRIOR TO THE EVENT GIVING RISE TO THE CAUSE OF
ACTION. THE FOREGOING LIMITATION APPLIES TO ALL CAUSES OF ACTIONS AND
CLAIMS, INCLUDING WITHOUT LIMITATION BREACH OF CONTRACT, BREACH OF
WARRANTY, NEGLIGENCE, STRICT LIABILITY, MISREPRESENTATION AND OTHER
TORTS. FURTHER, NO CAUSE OF ACTION WHICH AROSE MORE THAN ONE (1) YEAR
PRIOR TO THE INSTITUTION OF A LEGAL PROCEEDING ALLEGING SUCH CAUSE OF
ACTION MAY BE ASSERTED BY EITHER PARTY AGAINST THE OTHER.
MCI CONFIDENTIAL
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THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
ESA SCHEDULE ATTACHMENT NO. 2
MCI HyperStream ATM Service
A. Description: MCI HyperStream Asynchronous Transfer Mode (ATM) is a
connection oriented public/private network data service. HyperStream ATM is a
cell-based broadband technology which allows seamless high speed wide area and
local area network connections. A wide range of data applications connect with
HyperStream ATM including local area network (LAN) interconnections, high-speed
transmission of digitized medical imaging across the country and desktop
videoconferencing enabling users to share multimedia applications.
B. Rates & Charges
MCI's HyperStream ATM Service provides the most up to date pricing options in
the industry. The HyperStream ATM Service rate structure enables customers to
tailor their ATM service to meet changing business needs and compliments the
flexible nature of Asynchronous Transfer Mode service.
The HyperStream ATM Service rate structure has three components: Access, Port,
and Usage charges.
(1) Access:
Local loop and access coordination charges are based on standard tariff rates.
In the case of DS-3 and below the IOC and COC or backhaul portion of the
circuit charge is included in the ATM port charge. In the case of OC-3, the
backhaul portion is NOT included in the ATM port charge. For OC-3 ATM access,
the customer pays for an OC-3 facility from their location to the closest ATM
node site.
(2) Ports:
Port charges are based upon the selected bandwidth needed to connect to the
HyperStream ATM network. MCI currently offers DS-1, DS-3 and OC-3 ATM UNI
ports.
(3) Usage:
Usage charges are based upon the Service Class and associated traffic contract
parameters selected by the customer and are described as Fixed SCR charges
similar to Frame Relay "Fixed CIR PVC Rates".
Port Charges:
<TABLE>
<S> <C> <C>
ATM UNI DS-1 $ (*) per month per port
ATM UNI DS-3 $ (*) per month per port
</TABLE>
MCI CONFIDENTIAL
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<PAGE> 26
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
<TABLE>
<S> <C>
ATM UNI OC-3 $(*) per month per port
Port Reconfiguration Charge $(*)
Port Installation Charge $(*)
</TABLE>
Non Recurring PVC Charges:
<TABLE>
<S> <C>
PVC Installation Charge $(*)
PVC Reconfiguration Charge $(*)*
</TABLE>
* Applied every time the parameters of a VC within a VP are changed as well as
VP parameter changes.
ATM UNI SERVICE CLASSES: Variable Bit Rate - Non Real Time
<TABLE>
<CAPTION>
PCR kbps Fixed SCR
<S> <C> <C>
PCR=1.544 16 $(***)
PCR=1.544 32 $(***)
PCR=1.544 48 $(***)
PCR=1.544 64 $(***)
PCR=1.544 128 $(***)
PCR=1.544 192 $(***)
PCR=1.544 256 $(***)
PCR=1.544 320 $(***)
PCR=1.544 384 $(***)
PCR=1.544 448 $(***)
PCR=1.544 512 $(***)
PCR=1.544 576 $(***)
PCR=1.544 640 $(***)
PCR=1.544 704 $(***)
PCR=1.544 768 $(***)
PCR=1.544 832 $(***)
PCR=1.544 896 $(***)
PCR=1.544 960 $(***)
PCR=1.544 1,024 $(***)
PCR=1.544 1,088 $(***)
PCR=1.544 1,170 $(***)
PCR=1.544 1,216 $(***)
PCR=1.544 1,280 $(***)
PCR=1.544 1,344 $(***)
PCR=45 1,536 $(***)
PCR=45 4,608 $(***)
PCR=45 10,800 $(***)
</TABLE>
MCI CONFIDENTIAL
26
<PAGE> 27
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
<TABLE>
<S> <C> <C>
PCR=45 16,000 $(***)
PCR=45 25,000 $(***)
PCR=45 35,800 $(***)
PCR=155 101,900 $(***)
PCR=155 131,776 $(***)
</TABLE>
ATM UNI SERVICE CLASS: Constant Bit Rate
<TABLE>
<CAPTION>
Kbps Fixed PCR/SCR
CBR
<S> <C>
16 (***)
32 (***)
48 (***)
64 $(***)
128 $(***)
192 $(***)
256 $(***)
320 $(***)
384 $(***)
Kbps Fixed PCR/SCR
448 $(***)
512 $(***)
576 $(***)
640 $(***)
704 $(***)
768 $(***)
832 $(***)
896 $(***)
960 $(***)
1,024 $(***)
1,088 $(***)
1,170 $(***)
1,216 $(***)
1,280 $(***)
1,344 $(***)
1,536 $(***)
4,608 $(***)
10,800 $(***)
16,000 $(***)
25,000 $(***)
35,800 $(***)
101,900 $(***)
131,776 $(***)
</TABLE>
MCI CONFIDENTIAL
27
<PAGE> 28
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
Note: All PVC rates are simplex. Asymmetrical PVC's are allowed.
Discount: The Customer shall receive a (*) percent (*%) discount off of the
above listed Port and PVC charges. (*)
MCI CONFIDENTIAL
28
<PAGE> 29
ENHANCED SCHEDULE ATTACHMENT NO. I
SWITCHED MULTIMEGABIT DATA SERVICE
A. MCI ENHANCED SERVICE:
Name: Switched Multimegabit Data Service (SMDS)
Description: SMDS is available in the United States as a connectionless
packet-oriented data transport service, provided by MCI Telecommunications
Corporation ("MCIT"). At the originating customer premises the customer's
equipment places the data into packets and gives each packet an E.164 source
and destination customer address. Subject to certain restrictions, MCIT
routes the packets over the MCIT Network to the terminating E.164 address.
For purposes of this Agreement, the MCIT Network shall mean the integrated data
network system owned and operated by MCIT (which may be connected to services
provided by third parties) for general use by its customers to transmit and
receive data. SMDS is available at speeds up to 34Mbps.
Technical Description: SMDS operates at layers two and three of the OSI
model and is designed to conform to the IEEE 802.6 Metropolitan Area Networking
Standard and to the Bellcore Technical Reference TR-TSV-000772.
A. Access to SMDS: You shall obtain access to SMDS via dedicated
digital facilities (DXI-SMDS) or Local Exchange Carrier Interconnection
(XA-SMDS), only.
B. Availability: SMDS is available between cities listed in MCIT
Tariff FCC No. 1, Section C.12, Table IV, Part A, as amended from time to
time, or any successor tariff (the "Tariff ").
B. RATES AND CHARGES
HyperStream SMDS pricing is composed of three primary parts: (1) Access
charges , (2) Port charges, (3) Usage charges
(1) ACCESS CHARGES
Access charges are the charges the customer pays for access from the customer
location to the MCI POP.
(2) PORT CHARGES
Port charges are based upon the customers selected mode of connection (DXI or
XA) and applicable connection speeds (56kbps to 34Mbps).
MCI CONFIDENTIAL
29
<PAGE> 30
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
Port charges are based on the access method chosen to connect to the
HyperStream SMDS Network. The HyperStream SMDS Service provides two types:
XA-SMDS (eXchange Access) and DXI-SMDS (Data eXchange Interface). The access
rate includes backhaul from the MCI POP closest to the customers location to
the closest HyperStream SMDS gateway.
DXI-SMDS is the method used to gain direct access to HyperStream SMDS. The
customer connects directly to MCI's HyperStream SMDS Network. Monthly port and
usage charges for DXI-SMDS service are outlined below.
XA-SMDS is the method used to gain access to MCI's HyperStream SMDS via LEC
provided SMDS services. Customers connecting to a local LEC to obtain SMDS
access will be billed by the LEC for LEC-provided services and billed by MCI
for the IXC portion of the network. MCI charges are outlined below.
(3) USAGE CHARGES
DXI-SMDS customers connecting directly to MCI's SMDS network are charged for
usage based on megabytes delivered. These charges are based on Sustained
Information Rate (SIR) and are included in assessing all minimum and maximum
usage charges.
XA-SMDS customers using LEC access to get on to the HyperStream SMDS Network
and/or terminate traffic to a LEC-connected location are charged for access and
egress to/from the MCI HyperStream SMDS network as well as transport across the
network (access + transport + egress) based on the number megabytes delivered.
These charges are based on Sustained Information Rate (SIR) and are included in
assessing all minimums and maximums.
All DXI and XA usage charges can be combined to count towards satisfaction of
usage minimums and maximums. Port, access, and fee charges do not count
towards satisfaction of usage minimums and maximums.
DXI Port Charges (direct connection to MCI's HyperStream Network)
<TABLE>
<CAPTION>
Speeds Monthly Charge Installation
Available
<S> <C> <C>
56/64 K $(***) $(***)
112/128 $(***) $(***)
224/256 $(***) $(***)
336/384K $(***) $(***)
448/512K $(***) $(***)
672/768K $(***) $(***)
896/1024 K $(***) $(***)
</TABLE>
MCI CONFIDENTIAL
30
<PAGE> 31
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
<TABLE>
<S> <C> <C>
1344/1536 K $(***) $(***)
4.5Mbps $(***) $(***)
10.5Mbps $(***) $(***)
</TABLE>
DXI Usage Charges:
(per megabyte, end to end transport)
This is the charge for transporting the customers traffic across the MCI SMDS
network and is based on megabytes delivered.
<TABLE>
<S> <C>
<=T-1 >T-1
$(*) $(*)
</TABLE>
DXI-Usage Minimums and Maximums
<TABLE>
<CAPTION>
Speed Minimum Maximum
<S> <C> <C>
56/64K $(*) $(*)
112/128 K $(*) $(*)
<CAPTION>
Speed Minimum Maximum
<S> <C> <C>
224/256 K $(*) $(*)
336/384 K $(*) $(*)
448/512 K $(*) $(*)
672/768 K $(*) $(*)
896/1024 $(*) $(*)
1344/1536 K $(*) $(*)
4.5Mbps (Class 1) $(*) $(*)
10.5Mbps (Class 2) $(*) $(*)
</TABLE>
XA-SMDS Port (connection to MCI's HyperStream Network via a LEC)
<TABLE>
<CAPTION>
Speeds Monthly Installation
Available
<S> <C> <C>
DS-0 $(*) $(*)
DS-1 $(*) $(*)
4Mbps $(*) $(*)
10Mbps $(*) $(*)
16Mbps $(*) $(*)
25Mmbps $(*) $(*)
</TABLE>
MCI CONFIDENTIAL
31
<PAGE> 32
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
XA Usage Charge
(per megabyte)
<TABLE>
<CAPTION>
Access* Egress*
<S> <C>
$(*) $(*)
</TABLE>
Note: XA access and/or egress rates are combined with the DXI (or transport)
rate if the customer is sending traffic to or from an XA port to a DXI port.
Access and egress are charged if the customer is sending traffic to and from
XA ports.
XA-SMDS Usage Minimums and Maximums (based on SIR)
<TABLE>
<CAPTION>
Speed Minimum Maximum
<S> <C> <C>
DS-0 $(*) $(*)
DS-1 $(*) $(*)
4M $(*) $(*)
10m $(*) $(*)
16M $(*) $(*)
25M $(*) $(*)
</TABLE>
The Customer shall receive a (*) percent ((*)%) discount off of the above
port and usage charges for SMDS. In addition, (*)
- --------------------------------------------------------------------------------
FEES:
HyperStream SMDS offers additional features which have fees associated with
them.
Closed User Groups:
MCI's HyperStream SMDS Service offers customers the option to create closed
user groups (CUG). MCI can create Individual address screening tables which
can be used to define where traffic can be sent to and from which addresses
traffic can be received. These addresses can be within the customers
organization or other organizations the customer wishes to communicate with on
an authorized basis. Closed User Groups can also be used to segregate traffic
based on protocol type. For example, IPX users could be collected into one or
more Closed User Groups.
<TABLE>
<S> <C>
Address Screening (monthly) $(*)
Address Screening (install) $(*)
</TABLE>
MCI CONFIDENTIAL
32
<PAGE> 33
THE INFORMATION BELOW MARKED (*) OR (***) HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY
FILED WITH THE COMMISSION.
Multicasting:
MCI's HyperStream SMDS Service offers the customer the ability to multicast -
broadcast a single message to multiple recipients. This capability is unique
to SMDS technology. The customer creates a single packet and that packet is
replicated across the network by MCI to sites defined by the customer in a
closed user group.
<TABLE>
<S> <C>
Group Address (monthly) $(*)
Group Address (install) $(*)
</TABLE>
MCI CONFIDENTIAL
33
<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
May 6, 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
May 6, 1998
