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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 6, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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VERIO INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 7375 84-1339720
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) Number)
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VERIO INC.
8005 SOUTH CHESTER STREET, SUITE 200
ENGLEWOOD, COLORADO 80112
(303) 645-1900
(Address, including zip code, and telephone number, including area code
of Registrant's principal executive offices)
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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)
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Copies to:
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GAVIN B. GROVER, ESQ. CARLA HAMRE DONELSON
MORRISON & FOERSTER LLP GENERAL COUNSEL
425 MARKET STREET VERIO INC.
SAN FRANCISCO, CALIFORNIA 94105 8005 SOUTH CHESTER STREET, SUITE 200
(415) 268-7000 ENGLEWOOD, COLORADO 80112
(303) 645-1900
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
general Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933 (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. [ ] ______________
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE OFFERING PRICE(1) REGISTRATION FEE
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13 1/2% Senior Notes due 2004..... $150,000,000 100% $150,000,000 $44,250
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act.
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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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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 MARCH 6, 1998
PROSPECTUS
VERIO INC.
OFFER TO EXCHANGE ALL OUTSTANDING
13 1/2% SENIOR SUBORDINATED NOTES DUE 2004
FOR 13 1/2% SENIOR SUBORDINATED NOTES DUE 2004
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
TIME,
ON , 1998, UNLESS EXTENDED.
Verio Inc., a Delaware corporation (the "Issuer"), hereby offers, upon the
terms and conditions set forth in this Prospectus and the accompanying letter of
transmittal (the "Letter of Transmittal," which, together with this Prospectus,
constitutes the "Exchange Offer") to exchange up to $150,000,000 aggregate
principal amount of its 13 1/2% Senior Subordinated Notes Due 2004 (the "New
Notes") for a like aggregate principal amount of the issued and outstanding
13 1/2% Senior Subordinated Notes Due 2004 (the "Old Notes," and collectively
with the New Notes, the "Notes"), of which $150,000,000 aggregate principal
amount is outstanding. See "The Exchange Offer."
The Issuer will accept for exchange any and all Old Notes which are
properly tendered in the Exchange Offer and not withdrawn on or prior to 5:00
p.m., New York City time, on , 1998, unless the Exchange Offer is
extended by the Issuer (the "Expiration Date"). Tenders of Old Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date. The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange. However, the Exchange Offer is subject to
certain customary conditions which may be waived by the Issuer. The Issuer has
agreed to pay the expenses of the Exchange Offer. See "The Exchange Offer."
There will be no cash proceeds to the Issuer from the Exchange Offer. See "Use
of Proceeds."
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "The Exchange Offer -- Resales
of the New Notes" and "Plan of Distribution." The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"). This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities. The Issuer has agreed
that, starting on the Expiration Date and ending on the close of business on the
180th day following the Expiration Date, it will make this Prospectus available
to any broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
The Old Notes were originally issued and sold (the "Initial Offering") to
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Lazard Freres & Co. LLC.
(the "Initial Purchasers") pursuant to a Purchase Agreement, dated June 17, 1997
(the "Purchase Agreement"), among the Issuer and the Initial Purchasers,
pursuant to which the Issuer sold 150,000 Units consisting of the Old Notes and
Warrants to purchase 2,112,480 shares of Common Stock. The Initial Purchasers
subsequently resold the Old Notes in reliance on Rule 144A of the Securities
Act. The Issuer and the Initial Purchasers also entered into a Notes
Registration Rights Agreement, dated June 17, 1997 (the "Registration Rights
Agreement"), pursuant to which the Issuer granted certain registration rights
for the benefit of the holders of the Old Notes. The New Notes are being offered
for exchange in order to satisfy certain obligations of the Issuer under such
Registration Rights Agreement. The New Notes will be obligations of the Issuer
evidencing the same indebtedness as the Old Notes and will be issued under and
entitled to the benefits of the Indenture, dated as of June 24, 1997 (the
"Indenture"), between the Issuer and First Trust National Association, as
trustee (in such capacity, the "Trustee"). The form and terms of the New Notes
are identical in all material respects to the Old Notes, except that the offer
and exchange of the New Notes will be registered under the Securities Act, and
therefore such New Notes will not be subject to certain transfer restrictions
and registration rights provisions applicable to the Old Notes. See "The
Exchange Offer -- Purpose and Effect."
(Continued on next page)
This Prospectus and the Letter of Transmittal are first being mailed to
holders of the Old Notes on , 1998.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS IN EVALUATING THE EXCHANGE OFFER.
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.
The date of this Prospectus is , 1998.
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The New Notes will mature on June 15, 2004. Interest on the New Notes will
be payable semi-annually on June 15 and December 15 of each year commencing June
15, 1998. Holders whose Old Notes are accepted for exchange will have the right
to receive interest accrued thereon from the date of original issuance to the
date of issuance of the New Notes, such interest to be payable with the first
interest payment on the New Notes. Interest on the Old Notes accepted for
exchange will cease to accrue on the day prior to the issuance of the New Notes.
See "Description of the Notes." The New Notes will be redeemable at the option
of the Issuer, in whole or in part, at any time on or after June 15, 2002, at
the redemption prices set forth herein, plus accrued and unpaid interest, if
any, to the date of redemption. See "Description of the Notes -- Redemption."
The New Notes are senior unsecured obligations of the Issuer, ranking pari
passu in right of payment with all existing and future unsecured and
unsubordinated indebtedness of the Issuer and senior in right of payment to all
existing and future subordinated indebtedness of the Issuer. The Notes are
effectively subordinated to all indebtedness of the Issuer to the extent of the
value of the assets securing such indebtedness and to all indebtedness of
subsidiaries of the Issuer. As of December 31, 1997, on a pro forma basis after
giving effect to the 1998 Notes Offering (as defined), there would have been
approximately $9.6 million of secured long-term indebtedness outstanding to
which holders of Notes would have been effectively subordinated in right of
payment and approximately $9.6 million of subsidiary indebtedness to which
holders of Notes would have been structurally subordinated.
The Issuer is making the Exchange Offer in reliance on the position of the
staff of the Securities and Exchange Commission (the "Commission") as set forth
in certain interpretive letters issued to third parties in other transactions.
However, the Issuer has not sought its own interpretive letter, and there can be
no assurance that the Commission would make a similar determination with respect
to the Exchange Offer. Based on the Commission's interpretations, the Issuer
believes that New Notes issued pursuant to the Exchange Offer to any holder of
Old Notes in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by such holder (other than a broker-dealer who purchased
Old Notes directly from the Issuer for resale pursuant to Rule 144A under the
Securities Act or any other available exemption under the Securities Act)
without further compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such holder is not an
"affiliate" of the Issuer (within the meaning of Rule 405 under the Securities
Act), is acquiring the New Notes in the ordinary course of business and is not
participating, and has no arrangement or understanding with any person to
participate, in the distribution of the New Notes. Holders wishing to accept the
Exchange Offer must represent to the Issuer that such conditions have been met.
In addition, if such holder is not a broker-dealer, it must represent that it is
not engaged in, and does not intend to engage in, a distribution of the New
Notes. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Notes were acquired by such broker-dealer as
a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. See "The Exchange Offer -- Resales of the New Notes" and "Plan
of Distribution." This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of New
Notes received in exchange for Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making or other trading activities.
There has previously been only a limited secondary market, and no public
market, for the Old Notes. The Old Notes are eligible for trading in the Private
Offering, Resales and Trading through Automatic Linkages ("PORTAL") market. In
addition, the Initial Purchasers have advised the Issuer that they currently
intend to make a market in the New Notes; however, the Initial Purchasers are
not obligated to do so and any market making activities may be discontinued by
the Initial Purchasers at any time. Therefore, there can be no assurance that an
active market for the New Notes will develop. If such a trading market develops
for the New Notes, future trading prices will depend on many factors, including,
among other things, prevailing interest rates, the Issuer's results of
operations and the market for similar securities. Depending on such factors, the
New Notes may trade at a discount from their face value. See "Risk
Factors -- Lack of Public Market."
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the same rights and will be subject to
the same limitations applicable thereto under the
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Indenture (except for those rights which terminate upon consummation of the
Exchange Offer). Following consummation of the Exchange Offer, the holders of
the Old Notes will continue to be subject to the existing restrictions upon
transfer thereof and the Issuer will have no further obligation to such holders
(other than to the Initial Purchasers under certain limited circumstances) to
provide for registration under the Securities Act of the Old Notes held by them.
To the extent that Old Notes are tendered and accepted in the Exchange Offer, a
holder's ability to sell untendered Old Notes could be adversely affected. See
"Risk Factors -- Consequences of Failure to Exchange."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE ISSUER ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
The Old Notes were issued originally in global form (the "Global Old
Note"). The Global Old Note was deposited with, or on behalf of, The Depository
Trust Company ("DTC"), as the initial depository with respect to the Old Notes
(in such capacity, the "Depositary"). The Global Old Note is registered in the
name of Cede & Co. ("Cede"), as nominee of DTC, and beneficial interests in the
Global Old Note are shown on, and transfers thereof are effected only through,
records maintained by the Depositary and its participants. The use of the Global
Old Note to represent certain of the Old Notes permits the Depositary's
participants, and anyone holding a beneficial interest in an Old Note registered
in the name of such a participant, to transfer interests in the Old Notes
electronically in accordance with the Depositary's established procedures
without the need to transfer a physical certificate. New Notes issued in
exchange for the Global Old Note will also be issued initially as a note in
global form (the "Global New Note," and, together with the Global Old Note, the
"Global Notes") and deposited with, or on behalf of, the Depositary. After the
initial issuance of the Global New Note, New Notes in certificated form will be
issued in exchange for a holder's proportionate interest in the Global New Note
only as set forth in the Indenture.
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TABLE OF CONTENTS
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PAGE
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Available Information....................................... v
Prospectus Summary.......................................... 1
Risk Factors................................................ 10
The Exchange Offer.......................................... 19
Use of Proceeds............................................. 26
Dividend Policy............................................. 26
Capitalization.............................................. 27
Selected Consolidated Financial Data........................ 28
Management's Discussion and Analysis of Financial
Information and Results of Operations..................... 30
Business.................................................... 36
Management.................................................. 50
Certain Transactions........................................ 64
Principal Stockholders...................................... 66
Description of the Notes.................................... 68
Book-Entry, Delivery and Form............................... 93
Certain Federal Income Tax Considerations................... 94
Plan of Distribution........................................ 97
Legal Matters............................................... 98
Experts..................................................... 98
Glossary.................................................... 99
Index to Financial Statements............................... F-1
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AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-4 (together with
any amendments thereto, the "Registration Statement") with the Commission under
the Securities Act with respect to the New Notes. This Prospectus, which
constitutes a part of the Registration Statement, omits certain information
contained in the Registration Statement and reference is made to the
Registration Statement and the exhibits and schedules thereto for further
information with respect to the Company and the New Notes offered for exchange
hereby. This Prospectus contains summaries of the material terms and provisions
of certain documents and in each instance reference is made to the copy of such
document filed as an exhibit to the Registration Statement. Each such summary is
qualified in its entirety by such reference.
The Registration Statement may be inspected without charge at the office of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the
Registration Statement 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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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 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, (ii) the "Issuer" are to Verio Inc. and
(iii) 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 or making significant investments in over 30 ISPs
that provide a comprehensive range of Internet connectivity and enhanced
products and services to over 80,000 accounts in 33 of the top 50 Metropolitan
Statistical Areas ("MSAs") in the country, with total combined annualized
revenues of approximately $90.4 million based on the three months ended December
31, 1997. The Company integrates and optimizes the operations of these 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 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
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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 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. Verio believes that independent regional and local ISPs,
facing these competitive pressures, will continue to be attracted to and benefit
from the consolidation opportunity provided by Verio.
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. 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 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. Verio's
national infrastructure also 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 30 Verio ISPs, 14
now invoice their customers through Verio's national billing service, 19 take
advantage of Verio's customer technical support, 20 are linked to Verio's
national backbone, 15 utilize Verio's national accounting system, and the
network operations of 17 Verio 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 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.
RECENT DEVELOPMENTS
Since December 31, 1997, the Company has completed the acquisition of all
of the remaining equity (each, a "Buyout") of 7 of the Verio ISPs. Verio is in
the process of integrating the operations of the Verio ISPs in each region into
regional operating units.
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The Company continues to evaluate additional ISPs for investment or
acquisition, and has executed a non-binding letter of intent to acquire 100% of
the stock of an additional ISP. The annualized revenue attributable to this
proposed ISP acquisition is estimated to be approximately $5.3 million, based
solely on preliminary information provided by this ISP. These revenues are not
reflected in the pro forma financial information contained herein. The Company
is in the process of conducting due diligence and negotiating the definitive
terms and documentation for this additional acquisition. There can be no
assurance that the Company will be able to reach final agreement on acceptable
terms and conditions with respect to the proposed acquisition or that this
acquisition can be completed.
Verio has 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 "Bank Facility"). The Company
is in the process of negotiating the definitive terms and conditions and final
documentation for the Bank Facility. Chase Manhattan Bank has committed to serve
as agent for the lenders in the Bank Facility. There can be no assurance that
the Company will be able to complete the Bank Facility on terms acceptable to
the Company.
The Company has signed a non-binding memorandum of understanding for a
$100.0 million, seven year commitment with a provider of long haul
telecommunications services in order to reduce the per unit costs of such
services. The Company will have the right to prepay its commitment under the
proposed agreement. The Company is in the process of negotiating the definitive
terms and conditions for the provision of these services. However, there can be
no assurance that the Company will be able to reach final agreement on
acceptable terms and conditions with respect to the proposed commitment.
Verio also is currently considering the private placement of approximately
$100.0 million in additional Senior Notes (the "1998 Notes Offering"). There can
be no assurance that the 1998 Notes Offering will be consummated or, if
consummated, that the amount of proceeds received will be in the amount
currently contemplated.
On February 27, 1998, Verio filed a registration statement on Form S-1 with
respect to the proposed initial public offering of its Common Stock (the "IPO")
in an initial amount of $100.0 million. No assurance can be given that the IPO
will be consummated or, if consummated, that the amount of proceeds received or
amount of Common Stock sold by the Company will be in the amounts currently
contemplated.
The Company's headquarters is currently located at 8005 South Chester
Street, Suite 200, Englewood, Colorado 80112. The Company's phone number is
(303) 645-1900.
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THE EXCHANGE OFFER
Securities Offered......... Up to $150.0 million principal amount of 13 1/2%
Senior Subordinated Notes Due 2004, which will be
registered under the Securities Act. The form and
term of the New Notes are substantially identical
to the Old Notes in all material respects, except
that the New Notes will be registered under the
Securities Act, and therefore will not be subject
to certain transfer restrictions and registration
rights provisions applicable to the Old Notes.
The Exchange Offer......... $1,000 principal amount of New Notes in exchange
for each $1,000 principal amount of Old Notes. The
New Notes are being offered in exchange for up to
$150.0 million principal amount of Old Notes. The
issuance of the New Notes is intended to satisfy
certain obligations of the Issuer contained in the
Registration Rights Agreement. See "The Exchange
Offer -- Terms of the Exchange Offer."
Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New
York City time, on , 1998, or such
later date and time to which it is extended. See
"The Exchange Offer -- Terms of the Exchange
Offer."
Withdrawal................. Tenders of Old Notes pursuant to the Exchange Offer
may be withdrawn at any time prior to 5:00 p.m. New
York City time, on the Expiration Date. See "The
Exchange Offer -- Expiration Date; Extensions;
Amendments."
Conditions of the Exchange
Offer...................... The Exchange Offer is not conditioned upon any
minimum principal amount of Old Notes being
tendered for exchange. The only condition to the
Exchange Offer is the declaration by the Commission
of the effectiveness of the Registration Statement
of which this Prospectus constitutes a part. See
"The Exchange Offer -- Conditions of the Exchange
Offer."
Procedures for Tendering
Old Notes.................. Each holder of Old Notes desiring to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal according to the instructions
contained herein and therein, and mail or otherwise
deliver the Letter of Transmittal, together with
the Old Notes and any other required documents, to
the Exchange Agent (as defined herein) at the
address set forth herein prior to 5:00 p.m., New
York City time, on the Expiration Date. Any
beneficial owner whose Old Notes are registered in
the name of a broker, dealer, commercial bank trust
company or other nominee and who wishes to tender
such Old Notes in the Exchange Offer should
instruct such entity or person to promptly tender
on such beneficial owner's behalf.
Guaranteed Delivery
Procedures................. Holders of Old Notes who wish to tender their Old
Notes and (i) whose Old Notes are not immediately
available or (ii) who cannot deliver their Old
Notes together with the Letter of Transmittal to
the Exchange Agent prior to the Expiration Date may
tender their Old Notes according to the guaranteed
delivery procedures set forth in the Letter of
Transmittal. See "The Exchange Offer -- Guaranteed
Delivery Procedures."
4
<PAGE> 11
Acceptance of Old Notes and
Delivery of New Notes.... Upon effectiveness of the Registration Statement of
which this Prospectus constitutes a part and
consummation of the Exchange Offer, the Issuer will
accept any and all Old Notes that are properly
tendered in the Exchange Offer prior to 5:00 p.m.,
New York City time, on the Expiration Date. The New
Notes issued pursuant to the Exchange Offer will be
delivered promptly after acceptance of the Old
Notes. See "The Exchange Offer -- Acceptance of Old
Notes for Exchange; Delivery of New Notes."
The Exchange Agent......... First Trust National Association has agreed to
serve as the exchange agent (in such capacity, the
"Exchange Agent") in connection with the Exchange
Offer. See "The Exchange Offer -- Acceptance of Old
Notes for Exchange; Delivery of New Notes."
Certain Federal Income Tax
Considerations........... See "Certain Federal Income Tax Considerations."
Use of Proceeds............ There will be no proceeds to the Issuer from the
exchange pursuant to the Exchange Offer. See "Use
of Proceeds."
Fees and Expenses.......... All expenses incident to the Issuer's consummation
of the Exchange Offer and compliance with the
Registration Rights Agreement will be borne by the
Issuer. The Issuer will also pay certain transfer
taxes applicable to the Exchange Offer. See "The
Exchange Offer -- Fees and Expenses."
Accrued Interest........... The New Notes will bear interest at a rate equal to
13 1/2% per annum from their date of issuance.
Holders whose Old Notes are accepted for exchange
will have the right to receive interest accrued
thereon from the date of original issuance or date
of the last interest payment, as applicable, to,
but not including, the date of issuance of the New
Notes, such interest to be payable with the first
interest payment date on the New Notes. Interest on
the Old Notes accepted for exchange will cease to
accrue on the day prior to the issuance of the New
Notes. See "Description of the Notes -- Maturity,
Interest and Principal."
Resales of New Notes....... Based on the position of the staff of the
Commission as set forth in certain interpretive
letters issued to third parties in other
transactions, the Issuer believes that the New
Notes issued pursuant to the Exchange Offer to any
holder of Old Notes in exchange for Old Notes may
be offered for resale, resold and otherwise
transferred by a holder (other than (i) a
broker-dealer who purchased the Old Notes directly
from the Issuer for resale pursuant to Rule 144A
under the Securities Act or (ii) a person that is
an affiliate of the Issuer within the meaning of
Rule 405 under the Securities Act), without further
compliance with the registration and prospectus
delivery provisions of the Securities Act, provided
that such holder is acquiring the New Notes in the
ordinary course of business and is not
participating, and has no arrangement or
understanding with any person to participate, in a
distribution of the New Notes. Each broker-dealer
that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were
acquired by such broker as a result of
market-making or other trading activities, must
acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See
"The Exchange Offer -- Resales of the New Notes"
and "Plan of Distribution."
5
<PAGE> 12
Effect of Not Tendering Old
Notes for Exchange....... Old Notes that are not tendered or that are not
properly tendered will, following the expiration of
the Exchange Offer, continue to be subject to the
existing restrictions upon transfer thereof. The
Issuer will have no further obligations to provide
for the registration under the Securities Act of
such Old Notes and such Old Notes will, following
the expiration of the Exchange Offer, bear interest
at the same rate as the New Notes.
DESCRIPTION OF NEW NOTES
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that the New Notes will
be registered under the Securities Act, and therefore will not be subject to
certain transfer restrictions, and registration rights provisions applicable to
the Old Notes. The Exchange Offer shall be deemed consummated upon the
occurrence of the delivery by the Issuer to the Exchange Agent of New Notes in
the same aggregate principal amount as the aggregate principal amount of Old
Notes that are validly tended by holders thereof pursuant to the Exchange Offer.
See "The Exchange Offer -- Procedures for Tendering Old Notes" and "Description
of the Notes."
Notes Offered.............. $150.0 million aggregate principal amount of
13 1/2% Senior Notes Due 2004.
Maturity................... June 15, 2004.
Interest Payment Dates..... June 15 and December 15, commencing December 15,
1997.
Escrow Proceeds............ Concurrently with the closing of the Initial
Offering, the Issuer deposited with the Escrow
Agent an amount of cash or U.S. Government
Securities (approximately $46.6 million), that,
together with the proceeds from the investment
thereof, will be sufficient to pay when due each of
the interest payments on the Notes through December
15, 1999, with any balance to be retained by the
Issuer. As of , 1998 approximately $
million remained in the Escrow Account. The Notes
are collateralized by a first priority security
interest in the Escrow Account (as defined). See
"Description of the Notes -- Disbursement of Funds;
Escrow Account."
Ranking.................... The Old Notes and the New Notes will be senior
unsecured obligations of the Issuer, ranking pari
passu in right of payment with all existing and
future unsecured and unsubordinated indebtedness of
the Issuer and senior in right of payment to all
existing and future subordinated indebtedness of
the Issuer. The Old Notes and the New Notes will be
effectively subordinated to all secured
indebtedness of the Issuer to the extent of the
value of the assets securing such indebtedness and
to indebtedness of subsidiaries of the Issuer. As
of December 31, 1997, on a pro forma basis after
giving effect to the 1998 Notes Offering there
would have been approximately $9.6 million of
secured long-term indebtedness outstanding to which
holders of Notes would have been effectively
subordinated in right of payment and approximately
$9.6 million of subsidiary indebtedness to which
holders of Notes would have been structurally
subordinated. See "Description of the Notes --
General."
6
<PAGE> 13
Sinking Fund............... None.
Optional Redemption........ The Notes will be redeemable at the option of the
Issuer, in whole or in part, at any time on or
after June 15, 2002, at the redemption prices set
forth herein, plus accrued interest to the date of
redemption. In addition, in the event that after
the Issue Date and prior to June 15, 1999 the
Issuer issues, in one or more transactions, Capital
Stock (other than Disqualified Stock) of the Issuer
to Brooks Fiber Properties, Inc., which was
recently acquired by WorldCom, Inc. ("Brooks"), or
one or more Strategic Equity Investors for
aggregate gross cash proceeds of $50.0 million or
more, the Issuer may redeem up to 33 1/3% of the
originally issued aggregate principal amount of
Notes with the net proceeds thereof at a redemption
price of 113.5% of the principal amount, together
with accrued and unpaid interest to the date of
redemption, provided that at least $100.0 million
aggregate principal amount of Notes are outstanding
following such redemption. See "Description of the
Notes -- Redemption -- Optional Redemption."
Change of Control.......... Following the occurrence of a Change of Control,
the Issuer will be required to make an offer to
purchase the Notes at a purchase price equal to
101% of the principal amount thereof plus accrued
and unpaid interest, if any, to the date of
purchase. The Issuer may not have available
sufficient funds or the financial resources
necessary to satisfy its obligations to repurchase
the Notes and other debt that may become repayable
upon a Change of Control. See "Description of the
Notes -- Certain Covenants -- Change of Control."
Certain Covenants.......... The Indenture contains certain covenants,
including, among others, covenants with respect to
the following matters: (i) limitation on additional
indebtedness, (ii) limitation on restricted
payments, (iii) limitation on liens securing
certain indebtedness, (iv) limitation on business,
(v) limitation on certain guarantees and
indebtedness of restricted subsidiaries, (vi)
change of control, (vii) limitation on dividends
and other payment restrictions affecting restricted
subsidiaries, (viii) disposition of proceeds of
asset sales, (ix) limitation on issuances and sales
of preferred stock by restricted subsidiaries, (x)
limitation on transactions with affiliates, (xi)
financial reports, (xii) limitation on designations
of unrestricted subsidiaries, (xiii) limitation on
status as investment company, (xiv) ratings of the
Notes and (xv) limitation on consolidation, merger
or sale of assets. These covenants are subject to
important exceptions and qualifications.
Exchange Rights............ Holders of the New Notes will not be entitled to
any exchange or registration rights with respect to
the New Notes. Holders of the Old Notes are
entitled to certain exchange rights pursuant to the
Registration Rights Agreement entered into
concurrently with the Initial Offering by and among
the Issuer and the Initial Purchasers. This
Exchange Offer is intended to satisfy the Issuer's
obligation under the Registration Rights Agreement.
Once the Exchange Offer is consummated, the Issuer
will have no further obligations to register any of
the Old Notes not tendered by the holders for
exchange. See "Risk Factors -- Consequences of
Failure to Exchange."
7
<PAGE> 14
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)
----------------------------------- ------------
PERIOD FROM
INCEPTION YEAR ENDED YEAR ENDED
(MARCH 1, 1996) TO DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1996 1997 1997
------------------ ------------ ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue.................................. $ 2,365 $ 35,692 $ 77,958
Total costs and expenses....................... 8,645 75,981 131,583
-------- -------- ----------
Loss from operations........................... $ (6,280) $(40,289) $ (53,625)
======== ======== ==========
Net loss attributable to common stockholders... $ (5,145) $(46,329) $ (59,972)
======== ======== ==========
Loss per common share -- basic and
diluted(2)................................... $ (5.29) $ (40.47) $ (52.39)
======== ======== ==========
Weighted average common shares outstanding --
basic and diluted(2)......................... 971,748 1,144,685 1,144,685
OTHER DATA:
EBITDA(3)...................................... $ (5,611) $(29,665) $ (31,106)
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
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
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>
8
<PAGE> 15
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
----------------------------------------
PRO FORMA
AS ADJUSTED
FOR PROPOSED
HISTORICAL PRO FORMA(1) IPO(5)
---------- ------------ ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 72,586 $ 52,139
Restricted cash and securities............................ 40,554 40,554
Goodwill, net............................................. 83,216 127,810
Total assets.............................................. 246,471 272,560
Long-term debt and capital lease obligations, net of
current portions........................................ 142,321 142,583
Redeemable preferred stock................................ 97,249 97,249
Stockholders' equity (deficit)............................ (27,001) (1,441)
</TABLE>
- ---------------
(1) Pro forma for the completed and proposed acquisitions and Buyouts as if they
had occurred on December 31, 1997 for balance sheet purposes and on January
1, 1997 for statement of operations data purposes. See "Unaudited Pro Forma
Condensed Combined Financial Statements."
(2) Excludes the effect of the conversion of Preferred Stock into Common Stock
upon completion of the Offering. Assuming the Preferred Stock had converted
to Common Stock as of January 1, 1997, historical and pro forma loss per
share of Common Stock for 1997 would have been $(2.26) and $(2.91) per
share, respectively, based on 20,496,220 weighted average shares of Common
Stock.
(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.
(4) Excludes equipment and leasehold improvements acquired in business
acquisitions.
(5) As adjusted to give effect to the proposed IPO after deducting the
Underwriters' discounts and commissions and estimated expenses, and
conversion of the preferred stock into common stock upon completion of the
proposed IPO.
9
<PAGE> 16
RISK FACTORS
Holders of the Old Notes should carefully consider the following risk
factors, as well as the other information contained in this Prospectus in
evaluating the Exchange Offer. This Prospectus contains statements which
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. 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. Holders of the
Old Notes 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 Notes 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, the timing
of the Buyouts 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 Fluctuations," "-- Dependence on the
Internet; Uncertain Adoption of Internet as a 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. Verio also is currently considering
the private placement of approximately $100 million in additional senior notes
pursuant to the proposed 1998 Notes Offering, and also currently is negotiating
the terms of a $57.5 million revolving credit facility pursuant to the proposed
Bank Facility. See "-- Requirements for Additional Capital." As a result of the
substantial current and anticipated future 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, including the Notes,
or to adequately fund its operations. In particular, there can be no assurance
that the Company's operating cash flow will be sufficient to pay interest on the
Notes following the termination of the escrow arrangement for the Notes, to pay
interest on the notes that may be issued pursuant to the 1998 Notes Offering, or
to meet its debt service obligations under the proposed Bank Facility, should
either of these financings be implemented. In addition, the
10
<PAGE> 17
Indenture relating to the Notes permits, and the indenture relating to the 1998
Notes Offering (the "1998 Indenture") and the credit agreement relating to the
Bank Facility are expected to permit, the Company to incur substantial
additional indebtedness under certain conditions. The leveraged nature of the
Company could limit the ability of the Company to effect future financings or
may otherwise restrict the Company's operations and growth. See "Description of
the Notes."
The Company's leverage could have important consequences to the holders of
the Notes, including the following: (i) the Company's ability to obtain
additional financing for working capital, capital expenditures, acquisitions,
general corporate purposes or other purposes may be impaired in the future; (ii)
a substantial portion of the Company's cash flow from operations must be
dedicated to the payment of principal of and interest on its indebtedness,
thereby reducing the funds available to the Company for other purposes; (iii)
the Company's leverage may hinder its ability to adjust rapidly to changing
market conditions; and (iv) the leverage could make the Company more vulnerable
in the event of a downturn in general economic conditions or its business.
HOLDING COMPANY STRUCTURE AND NEED TO ACCESS SUBSIDIARY CASH FLOWS
The Issuer is a holding company with limited assets that conducts
substantially all of its revenue producing operations through its ISPs. The
Verio ISPs include wholly owned subsidiaries, less than wholly owned
subsidiaries and entities in which the Issuer has a minority interest. Claims of
holders of the Notes will be effectively subordinated to the indebtedness and
other liabilities and commitments of the Company's subsidiaries, and claims by
the Issuer as an equity holder in its non-wholly owned subsidiaries and minority
interests will be limited to the extent of the Issuer's direct or indirect
investment in such entities. The ability of the Issuer's creditors, including
the holders of the Notes, to participate in the assets of any of the Verio ISPs
upon any liquidation or bankruptcy of any such entity will be subject to the
prior claims of that entity's creditors, including trade creditors, and any
prior or equal claim of any other equity holder. The claims of holders of Notes
would have been effectively subordinated to approximately $9.6 million of
indebtedness of the Issuer's subsidiaries as of December 31, 1997. In addition,
the ability of the Issuer's creditors, including the holders of Notes, to
participate in distributions of assets of the Verio ISPs will be limited to the
extent that the outstanding shares of any of its ISPs are either pledged to
secure other creditors (which is currently contemplated under the proposed Bank
Facility) or are not owned by the Issuer. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
The Notes will be obligations solely of the Issuer. The ability of the
Issuer to pay interest on the Notes or to repay the Notes at maturity or
otherwise will be dependent upon the cash flows of its ISPs and the payment of
funds by the Verio ISPs to the Issuer in the form of repayment of loans,
dividends, management fees or otherwise. The Verio ISPs have no obligation,
contingent or other, to pay amounts pursuant to the Notes or to make funds
available therefor, whether in the form of loans, dividends or other
distributions. Accordingly, the Issuer's ability to repay the Notes at maturity
or otherwise may be dependent upon the Issuer's ability to refinance the Notes
which will depend, in large part, upon factors beyond the control of the Issuer.
The agreements governing future indebtedness of the Verio ISPs may contain
covenants prohibiting them from distributing or advancing funds to the Issuer
under certain circumstances, including to fund interest payments in respect of
the Notes. In addition, the practical effect of the Issuer's status as a
minority shareholder of certain ISPs may limit the ability of those ISPs to make
funds available to the Issuer.
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. No
11
<PAGE> 18
assurance can be given that the Company will have sufficient cash flow available
to maintain its current or future growth plans or operations. 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, 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. Verio has received commitments from a group of commercial
lending institutions to provide an aggregate of up to $57.5 million pursuant to
the Bank Facility. The Company is in the process of negotiating the definitive
terms and conditions and final documentation for the Bank Facility. The Chase
Manhattan Bank has committed to serve as agent for the lenders in the Bank
Facility. In addition, Verio is currently considering the private placement of
approximately $100 million in additional senior notes pursuant to the proposed
1998 Notes Offering. There can be no assurance that the Company will negotiate
final terms and conditions that are acceptable to the Company with respect to,
or to consummate, either of such financing efforts or, if consummated, that the
amount of proceeds received will be in the amounts currently contemplated. If
the Bank Facility is consummated, the Company's ability to borrow thereunder
will be subject to limitations, including restrictions based on the Company's
overall indebtedness and the Company's ability to raise additional equity.
On February 27, 1998, Verio filed a registration statement on Form S-1 with
respect to the proposed IPO. No assurance can be given that the IPO will be
consummated or, if consummated, that the amount of proceeds received by the
Company, or the amount of Common Stock sold by the Company, will be in the
amounts currently contemplated.
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, 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'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
12
<PAGE> 19
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.
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 "-- Dependence on the Internet;
Uncertain Adoption of Internet as a Medium of Commerce and Communication,"
"-- Potential Liability for Information Disseminated Over Network; Regulatory
Matters" and "-- Fluctuations in Operating Results."
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 Verio ISPs, 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,
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there can be no assurance that the Company will be able to integrate the Verio
ISPs 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 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 the Verio ISPs. 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."
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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 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 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.
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."
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 would have a material adverse effect on
the Company. 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. 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
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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 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.
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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. 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 is also 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
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 COMPLETED AND PROBABLE 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 completed and
probable acquisitions for which audited financial statements are not presently
available. These companies are included in the "Pro Forma Financial Statements."
While the Company believes such information to be
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reliable, the Company has only recently acquired certain of the companies and is
still in the process of performing its due diligence investigations of the other
companies. There can be no assurance that the Company's due diligence
investigations and subsequent audit will not reveal matters of significance,
including with respect to liabilities, contingent or otherwise, of these
companies.
LACK OF PUBLIC MARKET
The New Notes constitute a new issue of securities, have no established
trading market and may not be widely distributed. The Initial Purchasers have
informed the Company that they currently intend to make a market in the New
Notes as permitted by applicable laws and regulations, however, the Initial
Purchasers are not obligated to do so and may discontinue market making at any
time without notice. In addition, such market-making will be subject to the
limits imposed by the Securities Act and the Exchange Act and may be limited
during the Exchange Offer and the pendency of any shelf registration statement.
There can be no assurance as to the development of any market or liquidity of
any market that may develop for the New Notes. If a market does develop, the New
Notes may trade at prices lower than the initial offering price thereof and
liquidity may be limited. If a market for the New Notes does not develop,
purchasers may be unable to resell such securities for an extended period of
time, if at all. Further, the liquidity of, and trading market for, the New
Notes may also be materially and adversely affected by declines in the market
for high-yield securities generally. Such a decline may materially and adversely
affect such liquidity and tracking independently of the financial performance
of, and prospects for, the Company. The Company does not intend to apply for
listing of the New Notes on any securities exchange or for quotation through the
Nasdaq National Market.
RESTRICTIONS ON EXCHANGE OFFER
Issuance of New Notes in exchange for Old Notes pursuant to the Exchange
Offer will be made only after timely receipt by the Exchange Agent of a properly
completed and duly executed Letter of Transmittal, including all other documents
required by such Letter of Transmittal. Therefore, holders of Old Notes desiring
to tender such Old Notes in exchange for New Notes should allow sufficient time
to ensure timely delivery. The Exchange Agent and the Company are under no duty
to give notification of defects or irregularities with respect to the tenders of
Old Notes for exchange. Each broker-dealer that receives New Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. See "The Exchange
Offer -- Resales of the New Notes" and "Plan of Distribution."
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register the Old Notes under the Securities Act. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Old Notes could be adversely affected.
Generally, the rights of holders of Old Notes under the Registration Rights
Agreement would also terminate with respect to Old Notes which are not exchanged
for New Notes in the Exchange Offer.
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.
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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.
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 Private
Securities Litigation Reform Act of 1995), 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. 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 assurances 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.
THE EXCHANGE OFFER
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and reference is made to the
provisions of the Registration Rights Agreement, which has been filed as an
exhibit to the Registration Rights Statement of which this Prospectus
constitutes a part, and a copy of which is available upon request to the
Company.
PURPOSE AND EFFECT
The Old Notes were sold by the Issuer to the Initial Purchasers on June 17,
1997. The Initial Purchasers subsequently resold the Old Notes in reliance on
Rule 144A under the Securities Act. The Issuer and the Initial Purchasers
entered into the Registration Rights Agreement, pursuant to which the Issuer
agreed, with respect to the Old Notes and subject to the Issuer's determination
that the Exchange Offer is permitted under applicable law, to (i) cause to be
filed, on or prior to March 24, 1998, a registration statement with the
Commission under the Securities Act concerning the Exchange Offer, and, (ii) use
its best efforts (a) to cause such registration statement to be declared
effective by the Commission on or prior to July 24, 1998, and (b) to consummate
the Exchange Offer on or prior to August 24, 1998. The Issuer will keep the
Exchange Offer open for a period of not less than 30 days (or longer if required
by applicable law) after the date the
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notice of the Exchange Offer is mailed to the holders of the Old Notes. This
Exchange Offer is intended to satisfy the Issuer's exchange offer obligations
under the Registration Rights Agreement.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Following the expiration of the Exchange Offer, holders of Old Notes not
tendered, or not properly tendered, will not have any further registration
rights and such Old Notes will continue to be subject to the existing
restrictions on transfer thereof. Accordingly, the liquidity of the market for a
holder's Old Notes could be adversely affected upon expiration of the Exchange
Offer if such holder elects not to participate in the Exchange Offer.
TERMS OF THE EXCHANGE OFFER
The Issuer hereby offers, upon the terms and subject to the conditions set
forth herein and in the accompanying Letter of Transmittal, to exchange up to
$150 million aggregate principal amount of New Notes for up to $150 million
aggregate principal amount of the outstanding Old Notes. The Issuer will accept
for exchange any and all Old Notes that are validly tendered on or prior to 5:00
p.m., New York City time, on the Expiration Date. The Issuer will issue $1,000
principal amount of New Note in exchange of each $1,000 principal amount of
outstanding Old Notes accepted in the Exchange Offer. Holders may tender some or
all of their Old Notes pursuant to the Exchange Offer. However, Old Notes may be
tendered only in integral multiples of $1,000. Tenders of the Old Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date. The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange. However, the Exchange Offer is subject to
the terms and provisions of the Registration Rights Agreement. See
" -- Conditions of the Exchange Offer."
As of the date of this Prospectus, $150.0 million in aggregate principal
amount of the Old Notes is outstanding, the maximum amount authorized by the
Indenture for all Notes. As of , there were registered
holders of the Old Notes, and DTC participants. Only a holder of the
Old Notes (or such holder's legal representative or attorney-in-fact) may
participate in the Exchange Offer. There will be no fixed record date for
determining holders of the Old Notes entitled to participate in the Exchange
Offer. The Issuer believes that, as of the date of this Prospectus, no holder of
Old Notes other than Brooks is an affiliate (as defined in Rule 405 under the
Securities Act) of the Issuer.
The Issuer shall be deemed to have accepted validly tendered Old Notes
when, as and if the Issuer has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Old Notes and for the purposes of receiving the New Notes from the Issuer.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Expiration Date shall be , 1998 at 5:00 p.m., New York City
time, unless the Issuer, in its sole discretion, extends the Exchange Offer, in
which case the Expiration Date shall be the latest date and time to which the
Exchange Offer is extended.
In order to extend the Exchange Offer, the Issuer will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
The Issuer reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, (ii) to extend the Exchange Offer, in which event the
term "Expiration Date" shall mean the latest time and date to which the Exchange
Offer is extended, and (iii) to amend the terms of the Exchange Offer in any
manner. If the Exchange Offer is amended in a manner determined by the Issuer to
constitute a material change, the Issuer will promptly disclose such amendments
by means of a prospectus supplement that will be distributed to the
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registered holders of the Old Notes. Modifications of the Exchange Offer,
including but not limited to extension of the period during which the Exchange
Offer is open, may require that at least five business days remain in the
Exchange Offer. In order to extend the Exchange Offer, the Issuer will notify
the Exchange Agent of any extension by oral or written notice and will make a
public announcement thereof, each prior to 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date.
CONDITIONS OF THE EXCHANGE OFFER
The Exchange Offer is not conditioned upon any minimum principal amount of
the Old Notes being tendered for exchange. However, the Exchange Offer is
conditioned upon the declaration by the Commission of the effectiveness of the
Registration Statement of which this Prospectus constitutes a part.
ACCRUED INTEREST
The New Notes will bear interest at a rate equal to 13 1/2% per annum from
and including their date of issuance. Holders whose Old Notes are accepted for
exchange will have the right to receive interest accrued thereon from the last
date on which interest was paid on the Old Notes, or if no interest had been
paid on such Old Notes, from the date of their original issue, to, but not
including, the date of issuance of the New Notes accepted for exchange, which
interest accrued at the rate of 13 1/2% per annum, and will cease to accrue on
the day prior to the issuance of the New Notes. See "Description of the
Notes -- Maturity, Interest and Principal."
PROCEDURES FOR TENDERING OLD NOTES
The tender of a holder's Old Notes as set forth below and the acceptance
thereof by the Issuer will constitute a binding agreement between the tendering
holder and the Issuer upon the terms and subject to the conditions set forth in
this Prospectus and in the accompanying Letter of Transmittal. Except as set
froth below, a holder who wishes to tender Old Notes for exchange pursuant to
the Exchange Offer must transmit such Old Notes, together with a properly
completed and duly executed Letter of Transmittal, including all other documents
required by such Letter of Transmittal, to the Exchange Agent at the address set
forth on the back cover page of this Prospectus prior to 5:00 p.m., New York
City time, on the Expiration Date. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS
OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF
THE HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY
MAIL, IT IS RECOMMENDED THAT THE HOLDER USE AN OVERNIGHT OR HAND DELIVERY
SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY
DELIVERY.
Any financial institution that is a participant in DTC's Book-Entry
Transfer Facility system may make book-entry delivery of the Old Notes by
causing DTC to transfer such Old Notes into the Exchange Agent's account in
accordance with DTC's procedures for such transfer. In connection with a
book-entry transfer, a Letter of Transmittal need not be transmitted to the
Exchange Agent, provided that the book-entry transfer procedure is made in
accordance with DTC's ATOP (as defined below) procedures for transfer and such
procedures are complied with prior to 5:00 p.m., New York City time, on the
Expiration Date.
DTC's Automated Tender Offer Program ("ATOP") is the only method of
processing exchange offers through DTC. To accept the Exchange Offer through
ATOP, participants in DTC must send electronic instructions to DTC through DTC's
communication system, prior to 5:00 p.m., New York City time, on the Expiration
Date, in place of sending a signed, hard copy Letter of Transmittal. DTC is
obligated to communicate those electronic instructions to the Exchange Agent by
an "Agent's Message." To tender Old Notes through ATOP, the electronic
instructions sent to DTC and transmitted by DTC to the Exchange Agent must
contain the participant's acknowledgement of its receipt of and agreement to be
bound by the Letter of Transmittal for such Old Notes.
21
<PAGE> 28
Each signature on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant hereto are tendered (i) by a registered holder of the Old Notes who has
not completed either the box entitled "Special Exchange Instructions" or the box
entitled "Special Delivery Instructions" in the Letter of Transmittal, or (ii)
by an Eligible Institution (as defined below). In the event that a signature on
a Letter of Transmittal or a notice of withdrawal, as the case may be, is
required to be guaranteed, such guarantee must be by a firm which is a member of
a registered national securities exchange or the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or otherwise be an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange Act
(collectively, "Eligible Institutions"). If the Letter of Transmittal is signed
by a person other than the registered holder of the Old Notes, the Old Notes
surrendered for exchange must either (i) be endorsed by the registered holder,
with the signature thereon guaranteed by an Eligible Institution or (ii) be
accompanied by a bond power, in satisfactory form as determined by the Issuer in
its sole discretion, duly executed by the registered holder, with the signature
thereon guaranteed by an Eligible Institution. The term "registered holder" as
used herein with respect to the Old Notes means any person in whose name the Old
Notes are registered on the books of the Registrar.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Old Notes tendered for exchange will be
determined by the Issuer in its sole discretion, which determination shall be
final and binding. The Issuer reserves the absolute right to reject any and all
Old Notes not properly tendered and to reject any Old Notes the Issuer's
acceptance of which might, in the judgment of the Issuer or its counsel, be
unlawful. The Issuer also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offer as to particular Old Notes
either before or after the Expiration Date (including the right to waive the
ineligibility of any holder who seeks to tender Old Notes in the Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offer
(including the Letter of Transmittal and the instructions thereto) by the Issuer
shall be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes for exchange must be
cured within such period of time as the Issuer shall determine. The Issuer will
use reasonable efforts to give notification of defects or irregularities with
respect to tenders of Old Notes for exchange but shall not incur any liability
for failure to give such notification. Tenders of the Old Notes will not be
deemed to have been made until such irregularities have been cured or waived.
If any Letter of Transmittal, endorsement, bond power, power of attorney or
any other document required by the Letter of Transmittal is signed by a trustee,
executor, corporation or other person acting in a fiduciary or representative
capacity, such person should so indicate when signing, and, unless waived by the
Issuer, proper evidence satisfactory to the Issuer, in its sole discretion, of
such person's authority to so act must be submitted.
Any beneficial owner of the Old Notes (a "Beneficial Owner") whose Old
Notes are registered in the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender Old Notes in the Exchange
Offer should contact such registered holder promptly and instruct such
registered holder to tender on such Beneficial Owner's behalf. If such
Beneficial Owner wishes to tender directly, such Beneficial Owner must, prior to
completing and executing the Letter of Transmittal and tendering Old Notes, make
appropriate arrangements to register ownership of the Old Notes in such
Beneficial Owner's name. Beneficial Owners should be aware that the transfer of
registered ownership may take considerable time.
By tendering, each registered holder will represent to the Issuer that,
among other things, (i) the New Notes to be acquired in connection with the
Exchange Offer by the holder and each Beneficial Owner of the Old Notes are
being acquired by the holder and each Beneficial Owner in the ordinary course of
business of the holder and each Beneficial Owner, (ii) the holder and each
Beneficial Owner are not participating, do not intend to participate, and have
no arrangement or understanding with any person to participate, in the
distribution of the New Notes, (iii) the holder and each Beneficial Owner
acknowledge and agree that any person participating in the Exchange Offer for
the purpose of distributing the New Notes must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction of the New Notes acquired by such person and cannot
rely on the position of the staff of the Commission set forth in no-action
letters that are discussed herein under "Resales of New Notes," (iv) that if
22
<PAGE> 29
the holder is a broker-dealer that acquired Old Notes as a result of market
making or other trading activities, it will deliver a prospectus in connection
with any resale of New Notes acquired in the Exchange Offer, (v) the holder and
each Beneficial Owner understand that a secondary resale transaction described
in clause (iii) above should be covered by an effective registration statement
containing the selling security holder information required by item 507 of
Regulation S-K of the Commission, and (vi) neither the holder nor any Beneficial
Owner is an "affiliate," as defined under Rule 405 of the Securities Act, of the
Issuer except as otherwise disclosed to the Issuer in writing. In connection
with a book-entry transfer, each participant will confirm that it makes the
representations and warranties contained in the Letter of Transmittal.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes or any other
documents required by the Letter of Transmittal to the Exchange Agent prior to
the Expiration Date (or complete the procedure for book-entry transfer on a
timely basis), may tender their Old Notes according to the guaranteed delivery
procedures set forth in the Letter of Transmittal. Pursuant to such procedures:
(i) such tender must be made by or through an Eligible Institution and a Notice
of Guaranteed Delivery (as defined in the Letter of Transmittal) must be signed
by such Holder, (ii) on or prior to the Expiration Date, the Exchange Agent must
have received from the Holder and the Eligible Institution a properly completed
and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail
or hand delivery) setting forth the name and address of the Holder, the
certificate number or numbers of the tendered Old Notes, and the principal
amount of tendered Old Notes, stating that the tender is being made thereby and
guaranteeing that, within five New York Stock Exchange trading days after the
date of delivery of the Notice of Guaranteed Delivery, the tendered Old Notes, a
duly executed Letter of Transmittal and any other required documents will be
deposited by the Eligible Institution with the Exchange Agent; and (iii) such
properly completed and executed documents required by the Letter of Transmittal
and the tendered Old Notes in proper form for transfer (or confirmation of a
book-entry transfer of such Old Notes into the Exchange Agent's account at DTC)
must be received by the Exchange Agent within five New York Stock Exchange
trading days after the Expiration Date. Any Holder who wishes to tender Old
Notes pursuant to the guaranteed delivery procedures described above must ensure
that the Exchange Agent receives the Notice of Guaranteed Delivery and Letter of
Transmittal relating to such Old Notes prior to 5:00 p.m., New York City time,
on the Expiration Date. DTC participants may also submit the Notice of
Guaranteed Delivery through ATOP.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all the conditions to the Exchange Offer,
the Issuer will accept any and all Old Notes that are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date.
The New Notes issued pursuant to the Exchange Offer will be delivered promptly
after acceptance of the Old Notes. For purposes of the Exchange Offer, the
Issuer shall be deemed to have accepted validly tendered Old Notes, when, as,
and if the Issuer has given oral or written notice thereof to the Exchange
Agent.
In all cases, issuances of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Notes, a properly completed and duly executed
Letter of Transmittal and all other required documents (or of confirmation of a
book-entry transfer of such Old Notes into the Exchange Agent's account at DTC);
provided, however, that the Issuer reserves the absolute right to waive any
defects or irregularities in the tender or conditions of the Exchange Offer. If
any tendered Old Notes are not accepted for any reason, such unaccepted Old
Notes will be returned without expense to the tendering Holder thereof as
promptly as practicable after the expiration or termination of the Exchange
Offer.
WITHDRAWAL RIGHTS
Tenders of the Old Notes may be withdrawn by delivery of a written notice
(or for DTC participants, transmission of notice through ATOP) to the Exchange
Agent, at its address set forth on the back cover page
23
<PAGE> 30
of this Prospectus, at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes, as applicable), (iii) be signed
by the Holder in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered (including any required
signature guarantees) or be accompanied by a bond power in the name of the
person withdrawing the tender, in satisfactory form as determined by the Issuer
in its sole discretion, duly executed by the registered holder, with the
signature thereon guaranteed by an Eligible Institution together with the other
documents required upon transfer by the Indenture, and (iv) specify the name in
which such Old Notes are to be re-registered, if different from the Depositor,
pursuant to such documents of transfer. Any questions as to the validity, form
and eligibility (including time of receipt) of such notices will be determined
by the Issuer, in its sole discretion. The Old Notes so withdrawn will be deemed
not to have been validly tendered for exchange for purposes of the Exchange
Offer. Any Old Notes which have been tendered for exchange but which are
withdrawn will be returned to the Holder thereof without cost to such Holder as
soon as practicable after withdrawal. Properly withdrawn Old Notes may be
retendered by following one of the procedures described under "The Exchange
Offer -- Procedure for Tendering Old Notes" at any time on or prior to the
Expiration Date.
THE EXCHANGE AGENT; ASSISTANCE
First Trust National Association is the Exchange Agent. All tendered Old
Notes, executed Letters of Transmittal and other related documents should be
directed to the Exchange Agent. Questions and requests for assistance and
requests for additional copies of the Prospectus, the Letter of Transmittal and
other related documents should be addressed to the Exchange Agent as follows:
By Hand, or Overnight Courier:
FIRST TRUST NATIONAL ASSOCIATION
180 East Fifth Street
St. Paul, MN 55101
Attn: Specialized Finance Department
Facsimile Transmissions (Eligible Institutions Only):
(612) 244-
To confirm by telephone or for information call:
(612) 244-
By Mail:
FIRST TRUST NATIONAL ASSOCIATION
180 East Fifth Street
St. Paul, MN 55101
Attn: Specialized Finance Department
FEES AND EXPENSES
All expenses incident to the Issuer's consummation of the Exchange Offer
and compliance with the Registration Rights Agreement will be borne by the
Issuer, including, without limitation: (i) all applicable Securities and
Exchange Commission, stock exchange or National Association of Securities
Dealers, Inc. ("NASD") registration and filing fees; (ii) all fees and expenses
incurred in connection with compliance with state securities or blue sky laws
(including reasonable fees and disbursements of one counsel for holders that are
Initial Purchasers in connection with blue sky qualifications of any of the New
Notes) and compliance with the rules of the NASD; (iii) all applicable expenses
incurred by the Issuer in preparing or assisting in
24
<PAGE> 31
preparing, word processing, printing and distributing any registration
statement, any prospectus and any amendments or supplements thereto, and in
preparing or assisting in preparing any other documents relating to the
performance of and compliance with the Registration Rights Agreement; (iv) all
rating agency fees, if any; and (v) the fees and disbursements of counsel for
the Issuer.
The Issuer has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers of others
soliciting acceptance of the Exchange Offer. The Issuer, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
as reflected in the Issuer's accounting records on the date of the exchange.
Accordingly, no gain or loss will be recognized by the Issuer for accounting
purposes. The expenses of the Exchange Offer will be amortized over the term of
the New Notes.
RESALES OF THE NEW NOTES
Based on the position of the staff of the Commission as set forth in
certain interpretive letters issued to third parties in other transactions, the
Issuer believes that the New Notes issued pursuant to the Exchange Offer to any
holder of Old Notes in exchange for Old Notes may be offered for resale, resold
and otherwise transferred by such holder (other than (i) a broker-dealer who
purchased Old Notes directly from the Issuer for resale pursuant to Rule 144A
under the Securities Act or any other available exemption under the Securities
Act, or (ii) a person that is an affiliate of the Issuer within the meaning of
Rule 405 under the Securities Act) without further compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such holder is acquiring the New Notes in the ordinary course of business
and is not participating, and has no arrangement or understanding with any
person to participate, in the distribution of the New Notes. However, the Issuer
has not sought its own interpretive letter and there can be no assurance that
the Commission would make a similar determination with respect to the Exchange
Offer. The Issuer and holders of Old Notes are not entitled to rely on
interpretive advice provided by the staff of other persons, which advice was
based on the facts and conditions represented in such letters. However, the
Exchange Offer is being conducted in a manner intended to be consistent with the
facts and conditions represented in such letters. If any holder acquires New
Notes in the Exchange Offer for the purpose of distributing or participating in
a distribution of the New Notes, such holder cannot rely on the position of the
staff of the Commission enunciated in Morgan Stanley & Co. Incorporated
(available June 5, 1991) and Exxon Capital Holdings Corporation (available May
13, 1989), or interpreted in the Commission's letter to Shearman and Sterling
(available July 2, 1993), or similar no-action or interpretive letters and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction, unless an
exemption from registration is otherwise available. Each broker-dealer that
receives New Notes for its own account in exchange for Old Notes, where such Old
Notes were acquired by such broker-dealer as a result of market making or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "Plan of Distribution."
It is expected that the New Notes will be freely transferable by the
holders thereof, subject to the limitations described in the immediately
preceding paragraph. Sales of New Notes acquired in the Exchange Offer by
holders who are "affiliates" of the Issuer within the meaning of the Securities
Act will be subject to certain limitations on resale under Rule 144 of the
Securities Act (if applicable). Such persons will only be
25
<PAGE> 32
entitled to sell New Notes in compliance with the volume limitations set forth
in Rule 144, and sales of New Notes by affiliates will be subject to certain
Rule 144 requirements as to the manner of sale, notice and the availability of
current public information regarding the Issuer. The foregoing is a summary only
of Rule 144 as it may apply to affiliates of the Issuer. Any such persons must
consult their own legal counsel for advice as to any restrictions that might
apply to the resale of their New Notes.
USE OF PROCEEDS
There will be no cash proceeds payable to the Company from the issuance of
the New Notes pursuant to the Exchange Offer.
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. In consideration for
issuing the New Notes as contemplated in this Prospectus, the Issuer will
receive in exchange Old Notes in like principal amount, the form and terms of
which are the same in all material respects as the form and terms of the New
Notes except that the New Notes will be registered under the Securities Act and
hence do not include certain rights to registration thereunder. The Old Notes
surrendered in exchange for New Notes will be retired and canceled and cannot be
reissued. Accordingly, issuance of the New Notes will not result in any increase
in the indebtedness of the Company.
Net proceeds from the Initial Offering (after deducting the Initial
Purchasers' discount and expenses payable by the Issuer) were approximately
$144.8 million. Approximately $46.6 million of such net proceeds were deposited
in an escrow account for the benefit of the holders of the Old Notes to fund
when due the first five scheduled interest payments on the Old Notes. Amounts on
deposit in the escrow account are held in cash or used to purchase U.S.
Government Securities, and, upon consummation of the Exchange Offer, will
continue to be held for the benefit of the holders of the New Notes to fund the
remaining scheduled interest payments on the New Notes through December 15,
1999. The balance of the net proceeds from the Initial Offering have been and
continue to be used to further the Company's ISP 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 support the Company's general working capital
purposes. Pending application of the proceeds as described above, the Company
has invested the net proceeds of the issuance of the Old Notes in short-term,
interest-bearing, investment-grade securities.
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 Indenture places, and the terms of
the 1998 Indenture and the proposed Bank Facility are expected to 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."
26
<PAGE> 33
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 and Proposed Acquisitions and Buyouts, and (iii) the pro forma
capitalization adjusted to reflect the proposed IPO and the conversion of all
the outstanding Preferred Stock only upon the completion of the proposed IPO.
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
AS ADJUSTED
FOR PROPOSED
HISTORICAL PRO FORMA(1) IPO(2)
---------- ------------ ------------
<S> <C> <C> <C>
Cash and cash equivalents................................. $ 72,586 $ 52,139
Restricted cash and securities............................ 40,554 40,554
======== ======== ========
Long-term debt and capital lease obligations, net of
current portions........................................ 142,321 142,583
-------- -------- --------
Redeemable preferred stock(3):
Series A, par value $0.001 per share; 6,100,000 shares
authorized: 6,033,333 shares outstanding............. 18,080 18,080
Series B, par value $0.001 per share; 10,117,000 shares
authorized: 10,028,334 shares outstanding............ 59,193 59,193
Series C, par value $0.001 per share; 2,500,000 shares
authorized and outstanding........................... 19,976 19,976
-------- -------- --------
97,249 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)(4).......... 10,200 35,760
Common stock, par value $0.001 per share; 35,133,000
shares authorized; 1,254,533 shares outstanding
actual and pro forma ( shares pro forma -- as
adjusted) and additional paid in capital(5).......... 1,598 1,598
Warrants................................................ 12,675 12,675
Accumulated deficit..................................... (51,474) (51,474)
-------- -------- --------
Total stockholders' equity (deficit)............ (27,001) (1,441)
-------- -------- --------
Total capitalization............................ $212,569 $238,391 $
======== ======== ========
</TABLE>
- ---------------
(1) Pro forma for the completed and proposed acquisitions and Buyouts as if they
had occurred on December 31, 1997. See "Unaudited Pro Forma Condensed
Combined Financial Statements."
(2) As adjusted to give effect to the proposed IPO after deducting the
Underwriter's discounts and commissions and estimated expenses and the
conversion of the Preferred Stock into Common Stock upon completion of the
proposed IPO.
(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, October 20, 2004 and
October 30, 2004, respectively, and are subject to mandatory conversion into
Common Stock upon consummation of an initial public offering of Common Stock
that meets certain criteria. See Note 5 to the Consolidated Financial
Statements.
(4) Pro forma for Series D-1 Preferred Stock includes 1,704,000 shares, which is
the approximate number of shares issued and proposed to be issued in
connection with acquisitions and Buyouts completed or proposed subsequent to
December 31, 1997 as if they had occurred on December 31, 1997. See
"Unaudited Pro Forma Condensed Combined Financial Statements." The shares of
Series D-1 Preferred Stock are not redeemable, and are subject to mandatory
conversion upon consummation of an initial public offering of Common Stock
that meets certain criteria or upon the election of holders of the Series A,
B, and C Preferred Stock to convert such shares into Common Stock. See Note
5 to the Consolidated Financial Statements.
(5) 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 issuable upon exercise of outstanding warrants.
27
<PAGE> 34
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)
-------------------------------- ------------
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:
Internet connectivity............................ $ 2,239 $ 23,476 $ 53,349
Enhanced services and other...................... 126 12,216 24,609
-------- ---------- ----------
Total revenue............................ 2,365 35,692 77,958
Costs and expenses:
Internet services operating costs................ 974 15,974 32,475
Selling, general and administrative and other.... 7,002 49,383 76,589
Depreciation and amortization.................... 669 10,624 22,519
-------- ---------- ----------
Total costs and expenses...................... 8,645 75,981 131,583
-------- ---------- ----------
Loss from operations.......................... (6,280) (40,289) (53,625)
Other income (expense):
Interest income.................................. 593 6,080 6,117
Interest expense................................. (115) (11,826) (12,204)
Equity in losses of affiliates................... -- (1,958) --
Minority interests................................. 680 1,924 --
-------- ---------- ----------
Net loss................................. (5,122) (46,069) (59,712)
Accretion of redeemable preferred stock to
liquidation value................................ (23) (260) (260)
-------- ---------- ----------
Net loss attributable to common
stockholders........................... $ (5,145) $ (46,329) $ (59,972)
======== ========== ==========
Loss per common share -- basic and diluted(2)(3)... $ (5.29) $ (40.47) $ (52.39)
======== ========== ==========
Weighted average common shares outstanding -- basic
and diluted...................................... 971,748 1,144,685 1,144,685
======== ========== ==========
OTHER DATA:
EBITDA(4).......................................... $ (5,611) $ (29,665) $ (31,106)
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>
28
<PAGE> 35
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
----------------------------------------
PRO FORMA
AS OF AS ADJUSTED
DECEMBER 31, FOR PROPOSED
1996 ACTUAL PRO FORMA(1) IPO(6)
------------ -------- ------------ --------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $66,467 $ 72,586 $ 52,139
Restricted cash and securities.............. -- 40,554 40,554
Goodwill, net............................... 8,736 83,216 127,810
Total assets................................ 82,628 246,471 272,560
Long-term debt and capital lease
obligations, net of discount.............. 106 142,321 142,583
Redeemable preferred stock.................. 76,877 97,249 97,249
Stockholders' equity (deficit).............. (4,055) (27,001) (1,441)
</TABLE>
- ---------------
(1) Pro forma for the completed and proposed acquisitions and Buyouts as if they
had occurred on December 31, 1997 for balance sheet purposes and on January
1, 1997 for statement of operations data purposes. See "Unaudited Pro Forma
Condensed Combined Financial Statements."
(2) Excludes the effect of the conversion of Preferred Stock into Common Stock
upon completion of the proposed IPO. Assuming the Preferred Stock had
converted to Common Stock as of January 1, 1997, historical and pro forma
loss per share of Common Stock for 1997 would have been $(2.26) and $(2.91)
per share, respectively, based on 20,496,200 weighted average shares of
Common Stock.
(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 GAAP, as an indicator
of operating performance or as an alternative to cash flows from operating
activities, determined in accordance with GAAP.
(5) Excludes equipment and leasehold improvements acquired in business
acquisitions.
(6) As adjusted to give effect to the proposed IPO after deducting underwriting
discounts and commissions and estimated offering expenses, and conversion of
the Preferred Stock into Common Stock upon completion of the proposed IPO.
29
<PAGE> 36
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 Private Securities
Litigation Reform Act of 1995. 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, holders of the Old Notes 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 or making
significant investments in over 30 ISPs that provide a comprehensive range of
Internet connectivity and enhanced products and services to over 80,000 accounts
in 33 of the top 50 MSAs in the country, with total combined annualized revenues
of approximately $90.4 million based on 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 two or more 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, 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.
As of December 31, 1997, the Company had completed the Buyout of four of
its initially non-wholly owned ISPs. In conjunction with the consolidation of
its regional operations, Verio is in the process of completing the Buyout of all
but two of the remaining ISPs in which it owns less than 100%. Verio expects to
incur aggregate costs of $45 to $50 million in connection with the acquisition
of the remaining interests in these ISPs, which will be paid with a combination
of cash and 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.
To fund its acquisitions and operations, Verio has raised approximately
$100.0 million of equity capital primarily from venture capital funds and Brooks
Fiber Properties, Inc. ("Brooks") (recently acquired by WorldCom). It has also
issued $150.0 million of Old Notes to a group of institutional investors.
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<PAGE> 37
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.
Year Ended December 31, 1997 Compared to the Period from Inception to December
31, 1996
Total consolidated revenues were $35.7 million for the year ended December
31, 1997, compared to $2.4 million for the period from inception (March 1, 1996)
to December 31, 1996 (the "1996 Period"). Internet connectivity represented 66%
and 95% of total revenue for the year ended December 31, 1997 and the 1996
Period, respectively, with the balance derived from enhanced services and other,
which included web hosting, consulting, sales of equipment and customer
circuits. The increase in revenues for the year ended December 31, 1997 compared
to the 1996 Period was primarily due to the acquisitions of ISPs subsequent to
December 31, 1996 and the longer period covered. 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. Three ISPs were included in the consolidated financial
statements at December 31, 1996. The increase in enhanced services as a
percentage of total revenue is due to acquisitions and increased sales of
enhanced services.
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 both the cost incurred
by the Company to transport its Internet traffic and the cost incurred by the
Company for its national network. In some instances the Company will also pay
for the local telecommunications line(s) from the customer's location to one of
the POPs. As of December 31, 1997, twenty 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 has signed a
non-binding memorandum of understanding for a $100.0 million, seven year
commitment with a provider of long haul telecommunications services in order to
reduce the per unit costs of such services. If the Company is successful in
consummating this agreement, there would not be a significant effect on the
results for 1998. However, the Company expects that the pricing advantages
provided by this agreement would substantially reduce the cost of these services
in future years. Additionally, the Company will have the right to fund its
commitment, which would allow the capitalization of costs (to the extent
prepaid) under this contract. Such capitalized costs will be amortized to
operations over the term of the agreement. The amount of the
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<PAGE> 38
prepayment is currently expected to 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.
Year Ended December 31, 1997 Compared to the Period from Inception to December
31, 1996
Internet services operating costs were 43% and 41% of total revenues for
the year ended December 31, 1997 and the 1996 Period, respectively. The Company
expects these costs as a percentage of total revenues to decrease over time as
additional ISP affiliates migrate onto Verio's national network. Additionally,
enhanced services, which typically have higher gross margins, are anticipated to
become a larger percentage of total revenues thereby resulting in lower costs as
a percentage of total revenues. 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 invests in additional
ISPs and continues with its growth strategy. The increases will be primarily due
to increased personnel resulting from the growth in the number of ISPs, 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. The significant increase in Internet services
operating costs and expenses and in selling, general and administrative and
other expenses, for the year ended December 31, 1997 compared to the 1996 Period
was primarily due to the acquisitions of ISPs subsequent to December 31, 1996
and the longer period covered. 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.
Three ISPs were included in the consolidated financial statements at December
31, 1996.
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 in 1997 primarily as a result of the completion of the placement of the
Old Notes on June 24, 1997.
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> 39
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
Web hosting and colocation................. 372 825 982 1,536
Consulting and other....................... 864 1,619 2,191 2,183
Equipment.................................. 118 389 493 644
------- ------- -------- --------
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 has also
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 has required and will continue to require
substantial capital for investments in ISP affiliates, the acquisition of
additional ISPs, the buyouts of remaining interests in ISPs, capital
expenditures for expansion of services, operating losses and working capital.
33
<PAGE> 40
Net cash used by operating activities was $35.3 million during the year
ended December 31, 1997, which includes a decrease of $913 thousand in working
capital. Net cash used by investing activities was $120.3 million during the
year ended December 31, 1997, primarily due to the restricted cash and
securities of $46.6 million from the proceeds of the Old 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 Old 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 affiliate. 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 of
the Old Notes and attached warrants (the "Warrants"). One hundred fifty thousand
units were issued, each consisting of $1,000 principal amount of the Old Notes
and 8 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 Old Notes were
separated on December 15, 1997. The Old Notes mature on June 15, 2004. Interest
on the Old Notes is payable semi-annually in arrears on June 15 and December 15
of each year, commencing December 15, 1997. Concurrent with the completion of
the Initial Offering, the Company was required to deposit funds into an escrow
account in an amount that together with interest will be sufficient to fund the
first five interest payments on the Old Notes. The Old Notes are redeemable on
or after June 15, 2002. The Old Notes are senior unsecured obligations of the
Company ranking pari passu in right of payment with all existing and future
unsecured and senior indebtedness.
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 assurances can be given as the
actual amounts of the Company's expenditures and additional capital
requirements.
The Company expects to meet its capital needs with cash on hand, the
proceeds from sale or issuances of capital stock, credit facilities, debt
financings and leasing. 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.
Subsequent to December 31, 1997, Verio has received commitments from a
group of commercial lending institutions to provide up to $57.5 million pursuant
to a two-year revolving credit facility secured by the stock
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<PAGE> 41
of the ISPs that Verio owns currently or in the future. The Chase Manhattan Bank
has committed to act as agent for the facility. Verio also is currently
considering the private placement of approximately $100.0 million of senior
notes. The Company is in the process of completing definitive documentation for
the Bank Facility. The terms of the Bank Facility would provide for borrowings
at LIBOR + 3%, with a 1% decrease in that rate subsequent to December 31, 1998
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 would be a 2% increase in the rate on each such date. There
would also be 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 would not be able to be drawn except for the
payment of interest. 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.
The term sheet for the Bank Facility sets forth covenants restricting,
among other things, the Company's ability to borrow, pay dividends and guarantee
the debt of others. The covenants under the Indenture for the Old Notes, the
proposed Bank Facility and the proposed 1998 Notes Offering would limit the
Company's ability to make borrowings under the Bank Facility at the subsidiary
level, enter into transactions with affiliates, create liens on its assets, and
make certain investments.
There can be no assurance that the Company will be able to complete the
Bank Facility on terms acceptable to the Company. Further, there can be no
assurance that the 1998 Notes Offering will be consummated or, if consummated,
that the amount of proceeds received will be in the amount currently
contemplated.
On February 27, 1998, Verio filed a registration statement on Form S-1 with
respect to its proposed IPO. No assurance can be given that the IPO will be
consummated or, if consummated, that the amount of proceeds received by the
Company, or the amount of Common Stock sold by the Company, will be in the
amounts currently contemplated.
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
Private Securities Litigation Reform Act of 1995), 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. 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 assurances 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.
35
<PAGE> 42
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 or making significant investments in over 30 ISPs
that provide a comprehensive range of Internet connectivity and enhanced
products and services to over 80,000 accounts in 33 of the top 50 MSAs in the
country, with total combined annualized revenues of approximately $90.4 million
based on the three months ended December 31, 1997. The Company integrates and
optimizes the operations of these 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. The Company
integrates and optimizes the operations of these 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 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. 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.
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
36
<PAGE> 43
are implementing secured virtual private networks ("VPNs") over the Internet as
a more economical option 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
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<PAGE> 44
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 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 dominant, 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 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 expects to effect the Buyouts of the
remaining non-wholly owned Verio ISPs during 1998. 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
and software providers. These providers view Verio's ISPs 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
obtained public and private peering arrangements with every major ISP other than
UUNet, including MCI, Sprint and GTE Internetworking, 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
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<PAGE> 45
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 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 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 February 27, 1998, the Company had acquired or invested in ISPs
in eight regions of the country, and now has substantial 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 Northeast, serving the major MSAs from New Jersey to Boston and
Upstate New York; the Mid-Atlantic, serving the Washington DC, Baltimore,
Richmond and the I-95 corridor; and the Midwest, serving Chicago, Detroit, Ann
Arbor, Kansas City, St. Louis, Omaha, Tulsa and Des Moines. 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. The Company is focusing its expansion efforts on the Southeast, as
well as seeking greater coverage in the Midwest. 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 geographic
regions.
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The following chart identifies the ISPs acquired by Verio to date, by
operating region, and provides certain summary information concerning Verio's
annualized revenues based on operating results for the three months ended
December 31, 1997:
<TABLE>
<CAPTION>
REVENUE FOR THE
THREE MONTHS ENDED ANNUALIZED
OPERATING REGION PRIMARY MSAS SERVED VERIO ISPS DECEMBER 31, 1997(1) REVENUE
---------------- ------------------- ---------- -------------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
VERIO NORTHWEST $5,667 $22,668
- Seattle, WA - NorthWestNet, Inc.(2)
- Portland, OR - AccessOne, Inc.
- RAINet, Inc.
- Internet Engineering
Associates, Inc.
- Pacific Rim Network, Inc.
- Structured Network
Systems, Inc.(3)
VERIO NORTHERN CALIFORNIA 2,411 9,644
- San Francisco - AimNet Corporation
- Sacramento - CCnet Inc.
- San Jose - West Coast Online, Inc.
- Oakland - NSNet, Inc.
VERIO SOUTHERN CALIFORNIA 2,892 11,568
- Los Angeles - Compute Intensive Inc.(4)
- San Diego - ATMnet, Inc.
- Riverside/San
Bernardino
- Orange County
VERIO TEXAS/GULF SOUTH 4,284 17,136
- 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 2,259 9,036
- Washington, DC - Clark Internet Services,
- Baltimore, MD Inc.
- Monumental Network
Systems, Inc.
- Internet Online, Inc.(5)
VERIO NORTHEAST 2,264 9,056
- 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
- Nassau/Suffolk, NY
- Bergen/Passaic, NJ
VERIO MIDWEST 1,628 6,512
- Chicago, IL - Verio Chicago(6)
- St. Louis, MO - Global Internet Network
- Detroit, MI Services, Inc.
- Kansas City, MO - RustNet, Inc.
- Branch Information
Services, Inc.
VERIO ROCKY MOUNTAIN 49 196
- Denver, CO - Verio Colorado(7)
- Salt Lake City, UT
VERIO WEB HOSTING 1,155 4,620
- National Product - Internet Servers, Inc.
Offering
-------
$90,436
=======
</TABLE>
- ---------------
40
<PAGE> 47
(1) These amounts reflect the full amount of revenues generated by all of the
ISPs in each region, including ISPs in which the Company has not yet
completed a Buyout, in which cases these amounts do not necessarily reflect
the Company's percentage interest in such ISP.
(2) Verio currently owns approximately 84% of the fully diluted equity of this
ISP, and has offered to Buyout all of the remaining fully diluted equity
interests not currently owned by Verio. Verio expects to consummate the
Buyout of the remaining equity interests prior to the consummation of the
Exchange Offer.
(3) Verio currently owns approximately 20% of the fully diluted equity of this
ISP.
(4) Verio has executed an Agreement and Plan of Reorganization with this ISP,
providing for the Buyout of all of the remaining fully diluted equity
interests not currently owned by Verio. The Buyout remains subject to
certain closing contingencies including receipt of the approval of the
ISP's stockholders.
(5) Verio currently owns approximately 33% of the fully diluted equity of this
ISP. Verio does not currently expect to effect the Buyout of the remaining
equity interests in this ISP prior to the consummation of the Exchange
Offer.
(6) Funded as a start up to oversee Midwest operations and initiate operations
in Chicago.
(7) Funded as a start up to oversee Rocky Mountain operations and initiate
operations in the primary Colorado business centers, Verio Rocky Mountain
(which does business as Verio Colorado) is owned 66% by Verio. Verio has
the right to acquire the remaining equity in this ISP beginning in August
1998 or upon the earlier consummation of a qualifying initial public
offering of the Company's Common Stock.
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 and dial-up connectivity. The Company is participating in trials for
the deployment of new access technologies, such as xDSL and 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 ("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 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 ISP POP for higher reliability. This
solution allows the customer to own its own Web server without having to
maintain and manage the
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<PAGE> 48
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,
firewall and service provider 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
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.
42
<PAGE> 49
- 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 data storage and retrieval, 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
companies in key areas. 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 and its ISPs have 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 80,000 accounts.
Over 5,000 of these accounts receive dedicated connectivity services from Verio,
and over 12,000 represent Web hosting or Web site server co-location services
provided by Verio. Through the Company's Web services, over 35,000 domains (i.e.
Verio.net) are hosted. The over 60,000 remaining accounts are provided dial-up
connectivity services, the majority of which are used for business purposes.
Direct Sales. Verio's ISPs have a direct sales force of more than 100
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 to assist in implementing customized solutions
such as Web page content development. 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
43
<PAGE> 50
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
is working 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 1,600 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 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's branding approach is intended to transfer Verio's
national strength to its ISPs while transferring each ISP's local presence and
support to the Verio brand. In conjunction with the consolidation of its ISPs
into integrated regional operating units, the Company is branding these regional
operations under the Verio name, with a regional or local geographical
identifier to emphasize its local presence. Additionally, the Company's national
public relations efforts serve to raise the awareness of Verio, which the
Company expects will continue to generate leads.
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 national network, peering relationships with other national ISPs,
sophisticated network management tools and engineering support services.
Network Infrastructure. As of February, 1998, the national network carried
traffic for 20 of the Verio ISPs and the remaining ISPs' traffic will be added
as growth drives the need for additional capacity, as private peering is
implemented and as their current transit contracts expire. It is currently
anticipated that by the end of the second quarter of 1998, five additional Verio
ISPs will deliver traffic to the Verio network.
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<PAGE> 51
Following is a diagram of the Company's national network as of February
1998:
[graphic to be inserted showing diagram of the Company's current national
network infrastructure]
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 February, 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) Asynchronous Transfer Mode ("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 second quarter 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 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. The Company has entered into a relationship with MCI as its
second carrier. This relationship provides access to MCI's high-speed and local
services for the Company's national network, as well as its regional networks.
The Company has signed a non-binding memorandum of understanding for a $100.0
million, seven year commitment with a provider of long haul telecommunications
services in order to reduce the per unit costs of such services. 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 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 control
and reliability of its network operations. Peering is the Internet practice
under which ISPs exchange
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<PAGE> 52
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 policy. 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 peering relationships with every major ISP
other than UUNet, including MCI, Sprint and GTE Internetworking (formerly BBN).
The Company also peers with over 90 smaller domestic and international networks
and is evaluating further private peering relationships with other national
ISPs. 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
point to a private peering location. 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."
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 15 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.
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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 18 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.
Financial Information Management. The Company is in the process of
converting all of its ISPs to the PeopleSoft(TM) financial reporting system and
the ADP payroll/human resources system, in order to provide a central,
standardized accounting system. Currently, 16 of the Verio ISPs are utilizing
the financial reporting system and eight are utilizing the payroll human
resources system. These systems which 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 14 of the Verio ISPs.
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.
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 is in the process of effecting the Buyouts of most of its
remaining non-wholly owned ISPs through the use of cash on hand and the issuance
of equity. As of February 27, 1998, Verio has consummated the Buyout of 11 ISPs.
Verio expects to consummate the Buyouts of all of its remaining non-wholly owned
ISPs, other than Internet Online, Inc. and Verio-Rocky Mountain, prior to the
consummation of the Exchange Offer. 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 a single, integrated regional operating subsidiary which
is wholly owned by the Company. In certain instances,
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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.
Verio also currently holds a 20% interest in Centennial International
Access, Inc. (which does business under the name V-I-A Internet), a start-up
company which was formed to pursue a consolidation strategy similar to that of
the Company in international markets. Other investors in that entity include
certain of Verio's current stockholders. Justin L. Jaschke, Chief Executive
Officer of the Company, currently serves as the Chairman of the Board of V-I-A
Internet, and Steven C. Halstedt, Chairman of the Board of the Company,
currently serves as the acting President of V-I-A Internet. See "Management."
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.
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, 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 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.
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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 12,600 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 February 26, 1998, the Company employed approximately 853 people,
including full-time and part-time employees at both its corporate headquarters
in Colorado and network operations and customer support center in Texas. 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 February 26, 1998, and
positions of the executive officers and the directors of the Company. Their
respective backgrounds are described below.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Steven C. Halstedt(3)(4)............................. 51 Chairman of the Board
Justin L. Jaschke(3)(4).............................. 40 Chief Executive Officer, Director
Mark D. Johnson(3)................................... 38 President and Chief Operating Officer,
Director
James C. Allen(2).................................... 51 Director
Trygve E. Myhren(1)(2)(4)............................ 60 Director
Paul J. Salem........................................ 34 Director
Stephen W. Schovee(1)(2)............................. 38 Director
George J. Still, Jr.(4).............................. 39 Director
Sean G. Brophy....................................... 39 Vice President of Corporate Development
James F. B. Browning................................. 43 Vice President of Operations
Chris J. DeMarche.................................... 41 Chief Technical Officer
Carla Hamre Donelson................................. 42 Vice President, General Counsel and
Secretary
Peter B. Fritzinger.................................. 39 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.
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 16 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 Centennial International
Access, Inc., doing business as "V-I-A Internet", where Mr. Halstedt also serves
as acting President. 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 was also the founding
President of the Colorado Venture Capital Association and has served as its
Chairman. 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 Connecticut School of Law. He was a Platoon Leader and Battalion
Operations Officer in a U.S. Army Combat Engineer Battalion in Vietnam. Mr.
Halstedt has taught computer programming at both the U.S. Army Engineering
School and Dartmouth College.
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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 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.
Mark D. Johnson has served as the President and Chief Operating Officer of
Verio since joining the Company in May 1997. He is also a member of the
Company's Board of Directors. Prior to joining Verio, Mr. Johnson was the
President -- Nextel Northern California, having been appointed to that position
following Nextel's merger with OneComm. With OneComm, Mr. Johnson was chief
operating officer in his role of Senior Vice President of Operations from
November 1994 until the Nextel/OneComm merger in the summer of 1995. He also
held positions as OneComm's Senior Vice President of Marketing and Vice
President of Marketing after joining OneComm in June 1993. Mr. Johnson spent the
first ten years of his career as a general management consultant. As a senior
partner of Gemini Consulting, he served as head of Gemini's San Francisco office
from 1990 to 1992, and was responsible for the firm's West Coast technology and
communications practice. Mr. Johnson also serves on the Board of Directors of
NewMonics, a company designing and producing PERC, a JAVA virtual machine for
the embedded applications market. Mr. Johnson holds a Bachelor of Science degree
summa cum laude in finance from Arizona State University and a Master of
Business Administration from Harvard Business School.
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. 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 is also a director of
MetroNet Communications Corp. ("MetroNet"), a local exchange carrier. Most
recently, he served as Chief Financial Officer and Chief Operating Officer of
David Lipscomb University from which he holds a Bachelor of Science degree in
business.
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
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Amos Tuck Graduate School at Dartmouth. He served three and one-half years as a
naval officer with the U.S. Pacific Fleet.
Paul J. Salem has served as a director of Verio since December 1996. Mr.
Salem is a Managing Director of Providence Equity Partners, Inc., and is a
partner of the general partner of Providence's private equity funds. Providence
manages over $500 million in equity and specializes in communications and media
investments. Mr. Salem has been responsible for many of Providence's investment
activities, including its investments in competitive local exchange companies,
enhanced specialized mobile radio, wireless data networks, radio representation,
telecommunications infrastructure and other areas. He is currently a director of
Interep National Radio Sales, Inc., MetroNet, Wired Ventures, Inc. and UniSite,
Inc. Prior to joining Providence, Mr. Salem worked for Morgan Stanley & Co. in
corporate finance and mergers and acquisitions. Previously, Mr. Salem spent four
years with Prudential Investment Corporation, an affiliate of Prudential
Insurance, where his responsibilities included private placement financings,
leveraged buyout transactions and establishing Prudential's European investment
office. Mr. Salem received a Bachelor of Arts in business from Brown University
and a Master of Business Administration from Harvard Business School.
Stephen W. Schovee has been a director of the Company since the Company's
inception in March 1996. Mr. Schovee serves as Managing General Partner of
Telecom Partners, 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 the Chairman of Product Partners, Inc., and a director of SMR Direct,
Intergram International, Formus Communications and Mercury Mail. 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
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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 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 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 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
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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 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. The Executive Committee is composed of Messrs. Halstedt,
Jaschke and Johnson. The Finance Committee is responsible for reviewing and,
where appropriate, authorizing certain corporate actions with respect to the
finances of the Company. Actions taken by the Finance Committee are regularly
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 Finance Committee. 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, and, after the effective date of the initial
registration of the Company's Common Stock under Section 12(g) of the Securities
Exchange Act of 1934 (the "Securities Exchange Act"), administering the
Company's 1998 Stock Incentive Plan and 1998 Employee Purchase Plan. See
"-- Stock Option and Incentive Plans." 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 proposed IPO, 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 proposed IPO, 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 IPO
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 vested options to
acquire an additional 3,000 shares
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of Common Stock at an exercise price equal to the fair market value of the
Common Stock at the date of grant.
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(3) 50,603 -- 200,000 --
President and Chief
Operating 1996 -- -- -- -- --
Officer
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) Reflects compensation paid to Mr. Johnson commencing with his appointment as
President and Chief Operating Officer in March 1997.
(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> 62
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 -- 20,000 160,000 -- --
Mark D. Johnson............ -- -- -- 200,000 -- --
Chris J. DeMarche.......... -- -- 14,000 76,000 -- --
Carla Hamre Donelson....... -- -- 12,000 68,000 -- --
Peter B. Fritzinger........ -- -- -- 75,000 -- --
</TABLE>
- ---------------
(1) The value of options at year-end is based on an assumed fair market value of
$ per share of Common Stock.
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 executive
officers. Rather, the employment relationships with each executive officer are
"at will." However, in connection with the initial employment of each executive
officer, the Company and the executive executed an offer letter, in which the
general compensation and benefits
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<PAGE> 63
provided to the executive are outlined, including base salary, targeted annual
bonus, option grants and employee benefits. The base salary and targeted bonus
levels for each of the executive officers remains the same in 1998 as in 1997.
However, upon consummation of the IPO, 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. In addition, Mr. Johnson's base
salary will be increased to $220,000, with a targeted annual bonus of up to
$150,000.
COMPENSATION PROTECTION AGREEMENTS
The Company intends in the near future to enter into compensation
protection agreements (the "Compensation Protection Agreements") with all of the
Named Executive Officers and certain additional officers (the "Protected
Officers") of the Company. Except as provided herein, each of the Compensation
Protection Agreements will contain substantially the same terms. The term of
each Compensation Protection Agreement will be three years from the date the
agreement is concluded by the Company and the Protected Officer (the "Effective
Date"). The term will thereafter be automatically extended for one year periods
unless either party provides the other with 90 days written notice in advance of
an anniversary of the Effective Date, and in no event will the Compensation
Protection Agreements terminate within twelve months of a Change of Control (as
will be defined in the Compensation Protection Agreements) of the Company. The
Compensation Protection Agreements will set forth severance benefits which are
payable if a Protected Officer is terminated for various reasons, including
termination by the Protected Officer following a Change in Control ("Severance
Payment"), as follows:
(i) If a Protected Officer is terminated within 12 months of a Change
of Control for: (A) Cause (as will be defined in the Compensation
Protection Agreements), (B) Disability (as will be defined in the
Compensation Protection Agreements), (C) death, (D) retirement pursuant to
the Company's policies applying to executive officers generally; or (E) by
the Protected Officer other than by Good Reason (as will be defined in the
Compensation Protection Agreements), then the Company shall pay to the
Protected Officer the accrued compensation (as defined below) due the
employee through the date of termination that will be specified in the
Compensation Protection Agreement (the "Termination Date"). Accrued
compensation will include (A) base salary, (B) 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 (C) vacation
pay (collectively "Accrued Compensation").
(ii) If a Protected Officer's employment is terminated within 12
months of a Change of Control for any other reason than specified in (i)
above, the Company will pay or provide the Protected Officer with the
following:
(A) Accrued Compensation;
(B) an amount which shall equal 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) multiplied by the
bonus amount, which will be the greater of (y) 100% of the last annual
incentive payment paid or payable to the Protected Officer prior to the
Termination Date under the Company's cash bonus incentive plan or (z)
the Protected Officer's incentive target for the fiscal year in which
the Change of Control occurs (the "Bonus Amount");
(C) as severance pay and in lieu of any further compensation for
periods subsequent to the Termination Date, an amount in cash equal to
two (2) times the sum of (y) the Protected Officer's annual base salary
at the rate in effect immediately prior to the Change in Control,
including all amounts of Protected Officer's base salary that are
deferred under the qualified and non-qualified employee benefit plans of
the Company or any other agreement or arrangement (the "Base Amount"),
plus (z) the Bonus Amount. However, the amount paid to Mr. Jaschke and
Mr. Johnson will be three (3) times the sum of (y) and (z).
(D) until the third anniversary of the Termination Date, the same
rights with respect to benefits provided by the Company, including
without limitation life insurance, disability, medical,
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<PAGE> 64
dental and hospitalization benefits and pension and retirement benefits
as were provided to the Protected Officer as of the Effective Date, or,
if greater, at any time within ninety (90) days preceding the date of
the Change of Control; and
(E) the removal of all restrictions on any outstanding incentive
awards (including restricted stock and granted performance shares or
units) granted to the Protected Officer under the Company's stock option
and other stock incentive plans or under any other incentive plan or
arrangement. Such restrictions will lapse and such incentive awards will
become 100% vested so that all stock options and stock appreciation
rights granted to the Protected Officer shall become immediately
exercisable and shall become 100% vested and all performance units
granted to the Protected Officer shall become 100% vested.
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 of 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. This amendment has been submitted to the Company's stockholders for
approval. As of February 26, 1998, options to purchase 79,600 shares of Common
Stock granted under the 1996 Stock Option Plan had been exercised, options to
purchase 2,125,700 shares of Common Stock were outstanding and no options to
purchase additional shares of Common Stock remained available for grant. The
outstanding options were held by 495 individuals and were exercisable at a
weighted average exercise price of $6.62 per share. Outstanding options to
purchase an aggregate of 1,480,700 shares were held by employees who are not
officers or directors of the Company. Of the 79,600 shares issued upon exercise
of options, a total of 47,500 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 Securities Exchange
Act of 1934 (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 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 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
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<PAGE> 65
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 February 27, 1998, no such below-market grants 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 725,000
shares of Common Stock for issuance under this plan. This amendment has been
submitted to the Company's stockholders for approval. As of January 26, 1998, no
options to purchase shares of Common Stock had been exercised under the 1997
California Plan, options to purchase 541,140 shares of Common Stock were
outstanding and options to purchase an additional 208,900 shares of Common Stock
remained available for grant. The outstanding options were held by 137
individuals and were exercisable at a weighted average exercise price of $7.56
per share. Outstanding options to purchase an aggregate of 341,140 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 "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 or Non-Qualified Stock Options. The 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
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<PAGE> 66
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 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")
was adopted by the Board of Directors in February 1998 and is anticipated to be
approved by the Company's stockholders prior to consummation of the IPO. From
and after the IPO, all further option grants will be made solely under the 1998
Stock Incentive Plan. The purpose of the 1998 Stock Incentive Plan is to attract
and retain the best available personnel for positions of substantial
responsibility, 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 ("Awards") to employees, directors and consultants of the
Company and its related entities. Initially, 165,000 shares of Series D-1
Preferred Stock and 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, are reserved for issuance under the 1998 Stock Incentive Plan.
Upon and after the IPO, 6,364,300 shares of Common Stock, reduced by the number
of shares of Common Stock subject to Awards under the 1998 Stock Incentive Plan
granted prior to the IPO, will be reserved for issuance under the 1998 Stock
Incentive Plan, together with any shares of Common Stock represented by Awards
under the 1996 Stock Option Plan and the 1997 California Stock Option Plan (the
"Prior Plans"), which are forfeited, expire or are cancelled following the IPO.
However, the number of shares of Common Stock available for issuance as
Incentive Stock Options will not include at any time the shares from the Prior
Plans which are forfeited, expire or cancelled. Furthermore, in connection with
the adoption of the 1998 Stock Incentive Plan, the Board determined that the
Company will limit the issuance of Awards under the 1998 Stock Incentive Plan
such that the aggregate number of shares subject to 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. To date, no Awards have been
granted under the 1998 Stock Incentive Plan.
With respect to 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 Awards to be
exempt from Section 16(b) of the Exchange Act in accordance with Rule 16b-3
thereunder. With respect to Awards granted to other participants, the 1998 Stock
Incentive Plan is administered by the Board of
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<PAGE> 67
Directors or a committee designated by the Board of Directors. In each case, the
Plan Administrator shall determine the provisions, terms and conditions of each
Award, including, but not limited to, the 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
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
Awards shall be transferable to the extent provided in the agreement evidencing
the 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 Awards will be determined by
the 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 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 an Award will be determined by the 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
Award.
Where the Award agreement permits the exercise or purchase of the Award for
a certain period of time following the recipient's termination of service with
the Company, disability, or death, the 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 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 Awards previously
granted under the 1998 Stock Incentive Plan.
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 is
anticipated to be approved by the Company's stockholders prior to consummation
of the IPO. 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, 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 IPO, 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
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<PAGE> 68
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 restrictions) and otherwise
to administer the Stock Purchase Plan and to resolve all questions relating to
the administration of the Stock Purchase Plan.
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
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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 ("Certificate of
Incorporation") and bylaws ("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 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.
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 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.
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, 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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<PAGE> 70
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."
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 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 of 1933, as
amended (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
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<PAGE> 71
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 against certain liabilities in
connection with any registration effected pursuant to the foregoing registration
rights agreement, including Securities Act liabilities.
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 are
also 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 a qualified public offering of the
Company's Common Stock.
TRANSACTIONS WITH MANAGEMENT
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.
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<PAGE> 72
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of February 26, 1998
with respect to the beneficial ownership of the Company's Common Stock on an
as-converted basis 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>
NUMBER OF
SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY
HOLDERS OWNED(1) OWNED
------- ------------ ------------
<S> <C> <C>
Brooks Fiber Properties..................................... 4,664,971 22.76%
425 Woods Mill Road South
Suite 300
Town & Country, Missouri 63017
Norwest Equity Partners..................................... 4,301,250 20.98%
245 Lytton Avenue
Palo Alto, California 94301
Providence Equity Partners.................................. 3,055,693 14.90%
50 Kennedy Plaza
Providence, Rhode Island 02903
Centennial Fund V, L.P...................................... 2,302,303 11.23%
1428 Fifteenth Street
Denver, Colorado 80202
Centennial Fund IV, L.P..................................... 2,159,105 10.53%
1428 Fifteenth Street
Denver, Colorado 80202
Steven C. Halstedt(2)....................................... -- --
Justin L. Jaschke(3)........................................ 205,834 1.00%
Mark D. Johnson............................................. 60,000 *
James C. Allen.............................................. 25,000 *
Trygve E. Myhren(4)......................................... 58,000 *
Paul J. Salem(5)............................................ -- --
Stephen W. Schovee.......................................... -- --
George J. Still, Jr.(6)..................................... -- --
Chris J. DeMarche(7)........................................ 74,833 *
Carla Hamre Donelson(8)..................................... 29,917 *
Peter B. Fritzinger......................................... 25,000 *
All executive officers and directors as a group (16
persons)(9)............................................... 618,265 3.00%
</TABLE>
- ---------------
* Less than 1%
(1) Includes shares of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock, all of which are convertible into shares of the
Company's Common Stock.
(2) The sole General Partner of Centennial Fund IV, L.P. ("Centennial IV") is
Centennial Holdings IV, L.P. ("Holdings IV") and the sole General Partner
of Centennial Fund V, L.P. ("Centennial V") is Centennial Holdings V, L.P.
("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
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<PAGE> 73
of the shares owned by Centennial IV and Centennial V. Mr. Halstedt
disclaims beneficial ownership of such shares.
(3) Includes options for 40,000 shares of Common Stock exercisable within 60
days.
(4) Includes options exercisable for 8,000 shares of Common Stock exercisable
within 60 days.
(5) The sole general partner of Providence Equity Partners ("Providence") is
Providence Equity Partners LLC ("PEPLLC"). Mr. Salem is a member of PEPLLC
and may be deemed to indirectly beneficially own the shares owned by
Providence. Mr. Salem disclaims beneficial ownership of these shares.
(6) The sole general partner of Norwest Equity Partners ("Norwest") is Itasca
Partners V. ("Itasca"). Mr. Still is a general partner of Itasca and may be
deemed to indirectly beneficially own the shares owned by Norwest. Mr.
Still disclaims beneficial ownership of these shares.
(7) Includes options exercisable for 14,000 shares of Common Stock exercisable
within 60 days.
(8) Includes options exercisable for 12,000 shares of Common Stock exercisable
within 60 days.
(9) Includes options exercisable for 100,000 shares of Common Stock exercisable
within 60 days.
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<PAGE> 74
DESCRIPTION OF THE NOTES
Set forth below is a summary of certain provisions of the New Notes. The
New Notes will be issued under the Indenture between the Issuer and the Trustee.
A copy of the Indenture may be obtained upon request from the Issuer, 8005 South
Chester Street, Suite 200, Englewood, Colorado 80112; attention: General
Counsel; telephone: (303) 645-1900.
Except as otherwise indicated below, the following summary applies to both
the Old Notes and the New Notes. As used herein, the term "Notes" means the Old
Notes and the New Notes, unless otherwise indicated.
The form and term of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that the New Notes will
be registered under the Securities Act, and therefore such New Notes will not be
subject to certain transfer restrictions and, registration rights applicable to
the Old Notes. See "The Exchange Offer."
The Notes are issued under the Indenture, a copy of the form of which is
available upon request. The Indenture is subject to and governed by the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The following
summary of certain provisions of the Indenture does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, the Trust
Indenture Act, and to all of the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part of the
Indenture by reference to the Trust Indenture Act, as in effect on the date of
the Indenture. The definitions of certain capitalized terms used in the
following summary are set forth below under "Certain Definitions."
GENERAL
The Notes are general senior obligations of the Issuer. The Notes are
collateralized by a first priority security interest in the Escrow Account
described under "-- Disbursement of Funds; Escrow Account." The Notes have been
issued only in fully registered form without coupons, in denominations of $1,000
principal amount and integral multiples thereof. Principal of, premium, if any,
and interest on the Notes are payable, and the Notes are exchangeable and
transferable, at the office or agency of the Issuer in the City of New York
maintained for such purposes (which initially will be the corporate trust office
of the Trustee). See "-- Book-Entry; Delivery and Form." No service charge will
be made for any registration of transfer, exchange or redemption of the Notes,
except in certain circumstances for any tax or other governmental charge that
may be imposed in connection therewith.
MATURITY, INTEREST AND PRINCIPAL
The Notes are limited to $150,000,000 aggregate principal amount and will
mature on June 15, 2004. Interest on the Notes will accrue at a rate of 13 1/2%
per annum and be payable in cash semi-annually in arrears on each June 15 and
December 15 (each, an "Interest Payment Date"), commencing December 15, 1997, to
registered holders of Notes, on the June 1 or December 1, as the case may be,
immediately preceding such Interest Payment Date. Interest on the Notes will
accrue from the most recent Interest Payment Date to which interest has been
paid or duly provided for or, if no interest has been paid or duly provided for,
from the Issue Date. Cash interest will be computed on the basis of a 360-day
year of twelve 30-day months. If the Issuer defaults on any payment of principal
and/or premium (whether upon redemption or otherwise), cash interest will accrue
on the amount in default at the rate of interest borne by the Notes. Interest on
overdue principal and premium and, to the extent permitted by law, on overdue
installments of interest will accrue at the rate of interest borne by the Notes.
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<PAGE> 75
REDEMPTION
Optional Redemption. The Notes are redeemable, at the option of the Issuer,
in whole or in part, on or after June 15, 2002 upon not less than 30 nor more
than 60 days' written notice at the redemption prices (expressed as percentages
of principal amount) set forth below, plus accrued and unpaid interest thereon,
if any, to the applicable redemption date, if redeemed during the twelve-month
period beginning on June 15 of each of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002........................................................ 106.75%
2003........................................................ 100.00%
</TABLE>
Notwithstanding the foregoing, in the event that after the Issue Date and
prior to June 15, 1999 the Issuer issues, in one or more transactions, Capital
Stock (other than Disqualified Stock) of the Issuer to Brooks or one or more
Strategic Equity Investors for aggregate gross cash proceeds of $50.0 million or
more (an "Equity Sale"), the Issuer may redeem, at its option, up to a maximum
of 33 1/3% of the initially outstanding aggregate principal amount of Notes from
the net proceeds thereof at a redemption price equal to 113.5% of the principal
amount of the Notes, together with accrued and unpaid interest to the date of
redemption; provided that not less than $100.0 million aggregate principal
amount of Notes is outstanding following such redemption. Any such redemption
may only be effected once and must be effected upon not less than 30 nor more
than 60 days' notice given within 30 days after such Equity Sale.
Mandatory Redemption. The Issuer is not required to make any mandatory
sinking fund payments in respect of the Notes. However, (i) following the
occurrence of a Change of Control, the Issuer is required to make an offer to
purchase all outstanding Notes at a price of 101% of the principal amount
thereof (determined at the date of purchase), plus accrued interest thereon, if
any, to the date of purchase, and (ii) upon the occurrence of an Asset Sale, the
Issuer may be obligated to make an offer to purchase all or a portion of the
outstanding Notes at a price of 100% of the principal amount, thereof
(determined at the date of purchase), plus accrued and unpaid interest, if any,
to the date of purchase. See "-- Certain Covenants -- Change of Control" and
"-- Certain Covenants -- Disposition of Proceeds of Asset Sales," respectively.
Selection; Effect of Redemption Notice. In the case of a partial
redemption, selection of the Notes for redemption will be made pro rata, by lot
or such other method as the Trustee in its sole discretion deems appropriate and
just; provided that any redemption pursuant to the provisions relating to an
Equity Sale shall be made on a pro rata basis or on as nearly a pro rata basis
as practicable (subject to DTC procedures). No Notes of a principal amount of
$1,000 or less shall be redeemed in part. Notice of redemption shall be mailed
by first-class mail at least 30 but not more than 60 days before the redemption
date to each holder of Notes to be redeemed at its registered address. If any
Note is to be redeemed in part only, the notice of redemption that relates to
such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in a principal amount equal to the unredeemed portion
thereof will be issued in the name of the holder thereof upon surrender for
cancellation of the original Note. Upon giving of a redemption notice, interest
on Notes called for redemption will cease to accrue from and after the date
fixed for redemption (unless the Issuer defaults in providing the funds for such
redemption) and such Notes will cease to be outstanding.
DISBURSEMENT OF FUNDS; ESCROW ACCOUNT
The Notes are collateralized, pending disbursement pursuant to the Escrow
and Security Agreement dated as of June 24, 1997, among the Issuer, the Trustee
and First Trust National Association, as Escrow Agent (the "Escrow Agreement"),
by a pledge of the Escrow Account (as defined in the Escrow Agreement). The
Issuer deposited approximately $46.6 million of the net proceeds from the sale
of the Old Notes issued pursuant to the Initial Offering (the "Escrow
Collateral"), representing funds that, together with the proceeds from the
investment thereof, were sufficient to pay interest on the Notes for five
scheduled interest payments through December 15, 1999 (but not any Additional
Interest (as defined) arising under the Registration Rights Agreement).
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<PAGE> 76
The Issuer entered into the Escrow Agreement providing for the grant by the
Issuer to the Trustee, for the ratable benefit of the holders of Old Notes and
New Notes, as the case may be, of security interests in the Escrow Collateral.
All such security interests will collateralize the payment and performance when
due of all obligations of the Issuer under the Indenture and the Notes, as
provided in the Escrow Agreement. The Liens created by the Escrow Agreement are
first priority security interests in the Escrow Collateral. The ability of
holders to realize upon any such funds or securities may be subject to certain
bankruptcy law limitations in the event of the bankruptcy of the Issuer.
Pursuant to the Escrow Agreement, funds may be disbursed from the Escrow
Account only to pay interest on the Notes (or, if a portion of the Notes has
been retired by the Issuer, funds representing the lesser of (i) the excess of
the amount sufficient to pay interest through and including December 15, 1999 on
the Notes not so retired and (ii) the interest payments which have not
previously been made on such retired Notes for each Interest Payment Date
through and including the Interest Payment Date to occur on December 15, 1999
shall be paid to the Issuer if no Default then exists under the Indenture). As
of , 1998, approximately $ million remained in the Escrow Account.
Pending such disbursements, all funds contained in the Escrow Account have
been invested in U.S. Government Securities. Interest earned on the U.S.
Government Securities have been and will be, when earned, placed in the Escrow
Account. Upon the acceleration of the maturity of the Notes, the Escrow
Agreement provides for the foreclosure by the Trustee upon the net proceeds of
the Escrow Account. Under the terms of the Indenture, the proceeds of the Escrow
Account shall be applied, first, to amounts owing to the Trustee in respect of
fees and expenses of the Trustee and, second, to all obligations under the Notes
and the Indenture. Under the Escrow Agreement, assuming that the Issuer makes
the first five scheduled interest payments on the Notes in a timely manner with
funds or U.S. Government Securities held in the Escrow Account, all of the U.S.
Government Securities will be released from the Escrow Account.
RANKING
The indebtedness of the Issuer evidenced by the Notes ranks senior in right
of payment to all subordinated indebtedness of the Issuer and pari passu in
right of payment with all other existing and future unsubordinated indebtedness
of the Issuer.
The Issuer is a holding company with limited assets and no business
operations of its own. The Issuer operates its business through its
subsidiaries. Any right of the Issuer and its creditors, including holders of
the Notes, to participate in the assets of any of the Issuer's subsidiaries upon
any liquidation or administration of any such subsidiary are subject to the
prior claims of the subsidiary's creditors, including trade creditors. For a
discussion of certain adverse consequences of the Issuer being a holding company
and of the terms of potential future indebtedness of the Issuer and its
subsidiaries, see "Risk Factors -- Holding Company Structure and Need to Access
Subsidiary Cash Flows."
CERTAIN COVENANTS
Set forth below are certain covenants that are contained in the Indenture.
Limitation on Additional Indebtedness. The Indenture provides that the
Issuer will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, create, incur, assume, issue, guarantee or in any manner become
directly or indirectly liable for or with respect to, contingently or otherwise,
the payment of (collectively, to "incur") any Indebtedness (including any
Acquired Indebtedness), except for Permitted Indebtedness (including Acquired
Indebtedness to the extent it would constitute Permitted Indebtedness); provided
that (i) the Issuer will be permitted to incur Indebtedness (including Acquired
Indebtedness) and (ii) a Restricted Subsidiary will be permitted to incur
Acquired Indebtedness, if, in either case, after giving pro forma effect to such
incurrence (including the application of the net proceeds therefrom), the
Consolidated Pro Forma Interest Coverage Ratio would be greater than or equal to
1.8 to 1.0 if such Indebtedness is incurred prior to June 30, 1999 or 2.5 to 1.0
if such Indebtedness is incurred on or after June 30, 1999.
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Limitation on Restricted Payments. The Indenture provides that the Issuer
will not, and will not permit any of the Restricted Subsidiaries to, make,
directly or indirectly, any Restricted Payment unless:
(i) no Default shall have occurred and be continuing at the time of or
upon giving effect to such Restricted Payment;
(ii) immediately after giving effect to such Restricted Payment, the
Issuer would be able to incur $1.00 of Indebtedness under the proviso of
the covenant "Limitation on Additional Indebtedness"; and
(iii) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments declared or made on or after
the Issue Date and all Designation Amounts does not exceed an amount equal
to the sum of, without duplication, (a) 50% of the Consolidated Net Income
of the Issuer accrued on a cumulative basis during the period beginning on
July 1, 1997 and ending on the last day of the fiscal quarter of the Issuer
immediately preceding the date of such proposed Restricted Payment (or, if
such cumulative Consolidated Net Income of the Issuer for such period is a
deficit, minus 100% of such deficit), plus (b) the aggregate net cash
proceeds received by the Issuer either (x) as capital contributions to the
Issuer after the Issue Date or (y) from the issue and sale (other than to a
Restricted Subsidiary of the Issuer) of its Capital Stock (other than
Disqualified Stock) on or after the Issue Date (including upon exercise of
warrants, options or rights), plus (c) the aggregate net proceeds received
by the Issuer from the issuance (other than to a Restricted Subsidiary of
the Issuer) on or after the Issue Date of its Capital Stock (other than
Disqualified Stock) upon the conversion of, or in exchange for,
Indebtedness of the Issuer, plus (d) in the case of the disposition or
repayment (in whole or in part) of any Investment constituting a Restricted
Payment made after the Issue Date (except for Investments made (1) pursuant
to clause (vii) of the second following paragraph that are not subject to
clause (e) or (f) of this paragraph below, and (2) pursuant to clauses
(viii) or (ix) of the second following paragraph), an amount equal to the
lesser of the return of capital with respect to the applicable portion of
such Investment and the cost of the applicable portion of such Investment,
in either case, less the cost of the disposition of such Investment, plus
(e) in the case of any Revocation with respect to a Subsidiary of the
Issuer that was made subject to a Designation after the Issue Date, an
amount equal to the lesser of the Designation Amount with respect to such
Subsidiary or the Fair Market Value of the Investment of the Issuer and the
Restricted Subsidiaries in such Subsidiary at the time of Revocation, plus
(f) an amount equal to the amount of any Investment constituting a
Restricted Payment made after the Issue Date in an ISP which has been
included as a Restricted Payment under this clause (iii) pursuant to the
last paragraph of this covenant to the extent such ISP thereafter (1)
becomes a Wholly Owned Restricted Subsidiary or is merged with the Issuer
or (2) is a New ISP that becomes a Restricted Subsidiary or is merged with
the Issuer, less, in either such case, any amounts credited pursuant to the
immediately preceding clause (d) in respect of any such Investment, minus
(g) 50% of the principal amount of any Indebtedness incurred pursuant to
clause (g) of the definition of "Permitted Indebtedness." For purposes of
the preceding clauses (b)(y) and (c), as applicable, the value of the
aggregate net proceeds received by the Issuer upon the issuance of Capital
Stock either upon the conversion of convertible Indebtedness or in exchange
for outstanding Indebtedness or upon the exercise of options, warrants or
rights will be the net cash proceeds received upon the issuance of such
Indebtedness, options, warrants or rights plus the incremental amount
received, if any, by the Issuer upon the conversion, exchange or exercise
thereof.
For purposes of determining the amount expended for Restricted Payments,
cash distributed shall be valued at the face amount thereof and property other
than cash shall be valued at its Fair Market Value.
The provisions of this covenant shall not prohibit the following (each of
which shall be given independent effect): (i) the payment of any dividend or
other distribution within 60 days after the date of declaration thereof if at
such date of declaration such payment would be permitted by the provisions of
the Indenture; (ii) the purchase, redemption, retirement or other acquisition of
any shares of Capital Stock of the Issuer in exchange for, or out of the net
cash proceeds of the substantially concurrent issue and sale (other than to a
Restricted Subsidiary of the Issuer) of, shares of Capital Stock of the Issuer
(other than Disqualified Stock); provided that any such net cash proceeds are
excluded from clause (iii)(b) of the second preceding
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paragraph; (iii) so long as no Default shall have occurred and be continuing,
the purchase, redemption, retirement, defeasance or other acquisition of
Subordinated Indebtedness made by exchange for, or out of the net cash proceeds
of, a substantially concurrent issue and sale (other than to a Restricted
Subsidiary of the Issuer) of (x) Capital Stock (other than Disqualified Stock)
of the Issuer or (y) other Subordinated Indebtedness to the extent that its
stated maturity for the payment of principal thereof is not prior to the 180th
day after the final stated maturity of the Notes; provided that any such net
cash proceeds are excluded from clause (iii)(b) of the second preceding
paragraph; (iv) (a) so long as no Default shall have occurred and be continuing,
Investments constituting Restricted Payments by the Issuer or any Restricted
Subsidiary in a New ISP or a person that becomes a New ISP as a result of such
Investment and (b) so long as no Default shall have occurred and be continuing,
Investments constituting Restricted Payments by the Issuer or any Restricted
Subsidiary in an Existing ISP (x) made out of the net cash proceeds of a
substantially concurrent sale of Capital Stock (other than Disqualified Stock)
of the Issuer (provided that any such proceeds are excluded from clause (iii)(b)
of the second preceding paragraph) or (y) such that the aggregate amount of all
Investments in Existing ISPs that are made after the Issue Date pursuant to this
subclause (b)(y) would not exceed $25.0 million in aggregate; (v) bonds, notes,
debentures or other securities received as a result of Asset Sales pursuant to
and in compliance with the covenant "Disposition of Proceeds of Asset Sales";
(vi) so long as no Default shall have occurred and be continuing, purchases or
redemptions of Capital Stock (including cash settlements of stock options) held
by employees, officers or directors upon or following termination of their
employment with the Issuer or one of its Subsidiaries; provided that payments
shall not exceed $2.0 million in any fiscal year in the aggregate or $4.0
million in the aggregate during the term of the Notes; (vii) so long as no
Default shall have occurred and be continuing, Investments in Unrestricted
Subsidiaries to the extent reasonably promptly made with the proceeds of a
substantially concurrent (1) capital contribution to the Issuer or (2) issue or
sale of Capital Stock (other than Disqualified Stock) of the Issuer (other than
to a Restricted Subsidiary of the Issuer); provided that any such proceeds are
excluded from clause (iii)(b) of the second preceding paragraph; (viii) loans or
advances to employees of the Issuer or any Restricted Subsidiary made in the
ordinary course of business, including to fund the purchase of Capital Stock of
the Issuer (provided that any proceeds from such purchase are excluded from
clause (iii)(b) of the second preceding paragraph to the extent such loan or
advance is not reimbursed) in an amount not to exceed $2.0 million at any time
outstanding; (ix) Investments constituting Restricted Payments in (1) joint
ventures formed to provide services in furtherance of an Internet Service
Business of the Issuer and the ISPs or (2) other persons engaged principally in
an Internet Service Business in an aggregate amount not to exceed $30.0 million
outstanding at any time, provided that no more than $15.0 million of Investments
made pursuant to the preceding clause (1) shall be outstanding at any time; and
(x) cash payments in lieu of fractional shares pursuant to any warrant, option
or other similar agreement.
In determining whether or not the net cash proceeds of a sale of Capital
Stock is "substantially concurrent" for purposes of clause (iv)(b)(x) of the
preceding paragraph, if such net cash proceeds are deposited in escrow with a
third party, free and clear of any Lien (other than the Lien of the escrow
agent), to be applied for purposes directed by the Issuer and such net cash
proceeds are excluded from clause (iii)(b) of the first paragraph above, then
the application of such net cash proceeds as set forth in such clause (iv)(b)(x)
shall be deemed "substantially concurrent" if they are subsequently released for
immediate application as contemplated by such clause (iv)(b)(x). In no event
shall a Restricted Payment made on the basis of consolidated financial
statements prepared in good faith in accordance with GAAP be subject to
rescission or constitute a Default by reason of any requisite subsequent
restatement of such financial statements which would have made such Restricted
Payment prohibited at the time that it was made.
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses (i), (iv)(a), (iv)(b)(y), (v),
(vi) and (ix) (to the extent remaining outstanding) above shall be included,
without duplication, as Restricted Payments.
Limitation on Liens Securing Certain Indebtedness. The Indenture provides
that the Issuer will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Liens of any kind against or upon
(i) any of property or assets of the Issuer or any Restricted Subsidiary,
whether now owned or hereafter acquired, or any proceeds therefrom, which secure
either (x) Subordinated Indebtedness unless the
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Notes are secured by a Lien on such property, assets or proceeds that is senior
in priority to the Liens securing such Subordinated Indebtedness or (y)
Indebtedness of the Issuer that is not Subordinated Indebtedness, unless the
Notes are equally and ratably secured with the Liens securing such other
Indebtedness, except, in the case of this clause (y), Permitted Liens, or (ii)
the Escrow Account.
Limitation on Business. The Indenture provides that the Issuer will not,
and will not permit any of the Restricted Subsidiaries to, engage in a business
which is not substantially an Internet Service Business.
Limitation on Certain Guarantees and Indebtedness of Restricted
Subsidiaries. The Indenture provides that the Issuer will not permit any
Restricted Subsidiary, directly or indirectly, to assume, guarantee or in any
other manner become liable with respect to (i) any Subordinated Indebtedness or
(ii) any Indebtedness of the Issuer that is not Subordinated Indebtedness (other
than, in the case of this clause (ii), Indebtedness under any Permitted Credit
Facility to the extent constituting Permitted Indebtedness), unless, in each
case, such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture providing for the guarantee of payment of the Notes by
such Restricted Subsidiary on a basis senior to any such Subordinated
Indebtedness or pari passu with any such other Indebtedness referred to in
clause (ii), as the case may be. Each guarantee created pursuant to such
provisions is referred to as a "Guarantee" and the issuer of each such
Guarantee, so long as the Guarantee remains outstanding, is referred to as a
"Guarantor."
Notwithstanding the foregoing, in the event of the unconditional release of
any Guarantor from its obligations in respect of the Indebtedness which gave
rise to the requirement that a Guarantee be given, such Guarantor shall be
released from all obligations under its Guarantee. In addition, upon any sale or
disposition (by merger or otherwise) of any Guarantor by the Issuer or a
Restricted Subsidiary of the Issuer to any person that is not an Affiliate of
the Issuer or any of its Restricted Subsidiaries which is otherwise in
compliance with the terms of the Indenture and as a result of which such
Guarantor ceases to be a Restricted Subsidiary of the Issuer, such Guarantor
will be deemed to be automatically and unconditionally released from all
obligations under its Guarantee; provided that each such Guarantor is sold or
disposed of in accordance with the "Disposition of Proceeds of Asset Sales"
covenant.
Change of Control. Upon the occurrence of a Change of Control (the date of
such occurrence being the "Change of Control Date"), the Issuer shall make an
offer to purchase (the "Change of Control Offer"), on a business day (the
"Change of Control Payment Date") not later than 60 days following the Change of
Control Date, all Notes then outstanding at a purchase price equal to 101% of
the principal amount thereof on any Change of Control Payment Date, plus accrued
and unpaid interest, if any, to such Change of Control Payment Date. Notice of a
Change of Control Offer shall be given to holders of Notes, not less than 25
days nor more than 45 days before the Change of Control Payment Date. The Change
of Control Offer is required to remain open for at least 20 business days and
until the close of business on the Change of Control Payment Date.
Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the holders of the Notes to
require that the Company repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar transaction which may be highly leveraged.
If a Change of Control Offer is made, there can be no assurance that the
Issuer will have available funds sufficient to pay for all of the Notes that
might be delivered by holders of Notes seeking to accept the Change of Control
Offer. The Issuer shall not be required to make a Change of Control Offer
following a Change of Control if a third party makes the Change of Control Offer
in the manner, at the times and otherwise in compliance with the requirements
applicable to a Change of Control Offer made by the Issuer and purchases all
Notes validly tendered and not withdrawn under such Change of Control Offer.
If the Issuer is required to make a Change of Control Offer, the Issuer
will comply with all applicable tender offer laws and regulations, including, to
the extent applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and
any other applicable securities laws and regulations.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture provides that the Issuer will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, create or otherwise
enter into or cause to become effective any consensual encumbrance or consensual
restriction of
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any kind on the ability of any Restricted Subsidiary to (a) pay dividends, in
cash or otherwise, or make any other distributions on its Capital Stock or any
other interest or participation in, or measured by, its profits to the extent
owned by the Issuer or any Restricted Subsidiary, (b) pay any Indebtedness owed
to the Issuer or any Restricted Subsidiary, (c) make any Investment in the
Issuer or any Restricted Subsidiary or (d) transfer any of its properties or
assets to the Issuer or to any Restricted Subsidiary, except for (in each case
except as otherwise noted in the following clause (ii)), (i) any encumbrance or
restriction in existence on the Issue Date, (ii) any encumbrance or restriction
existing under agreements relating to an Investment in an ISP (which in the case
of clause (a) and (b) shall not be permitted in the case of ISPs that are
Restricted Subsidiaries) to the extent consistent with past practice, (iii)
customary non-assignment provisions, (iv) any encumbrances or restriction
pertaining to an asset subject to a Lien to the extent set forth in the security
documentation governing such Lien, (v) any encumbrance or restriction applicable
to a Restricted Subsidiary at the time that it becomes a Restricted Subsidiary
that is not created in contemplation thereof, (vi) any encumbrance or
restriction existing under any agreement that refinances or replaces an
agreement containing a restriction permitted by clause (v) above; provided that
the terms and conditions of any such encumbrance or restriction are not
materially less favorable to the holders of Notes than those under or pursuant
to the agreement being replaced or the agreement evidencing the Indebtedness
refinanced, (vii) any encumbrance or restriction imposed upon a Restricted
Subsidiary pursuant to an agreement which has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of such
Restricted Subsidiary or any Asset Sale to the extent limited to the Capital
Stock or assets in question and (viii) any customary encumbrance or restriction
applicable to a Restricted Subsidiary that is contained in an agreement or
instrument governing or relating to Indebtedness contained in any Permitted
Credit Facility; provided that the provisions of such agreement permit the
payment of interest and principal and mandatory repurchases pursuant to the
terms of the Indenture and the Notes and other Indebtedness that is solely an
obligation of the Issuer, but, provided, further, that such agreement may
nevertheless contain customary net worth, leverage, invested capital and other
financial covenants, customary covenants regarding the merger of or sale of all
or any substantial part of the assets of the Issuer or any Restricted
Subsidiary, customary restrictions on transactions with affiliates, and
customary subordination provisions governing Indebtedness owed to the Issuer or
any Restricted Subsidiary.
Disposition of Proceeds of Asset Sales. The Indenture provides that the
Issuer will not, and will not permit any Restricted Subsidiary to, make any
Asset Sale unless (a) the Issuer or such Restricted Subsidiary, as the case may
be, receives consideration at the time of such Asset Sale at least equal to the
Fair Market Value of the shares or assets sold or otherwise disposed of and (b)
at least 75% of such consideration consists of cash or Cash Equivalents;
provided that the following shall be treated as cash for purposes of this
covenant: (x) the amount of any liabilities (other than Subordinated
Indebtedness or Indebtedness of a Restricted Subsidiary that would not
constitute Restricted Subsidiary Indebtedness) that are assumed by the
transferee of any such assets pursuant to an agreement that unconditionally
releases the Issuer or such Restricted Subsidiary from further liability
("assumed liabilities") and (y) the amount of any notes or other obligations
that within 30 days of receipt, are converted into cash (to the extent of the
cash received). The Issuer or the applicable Restricted Subsidiary, as the case
may be, may (i) apply the Net Cash Proceeds from such Asset Sale within 365 days
of the receipt thereof to repay an amount of Indebtedness (other than
Subordinated Indebtedness) of the Issuer in an amount not exceeding the Other
Senior Debt Pro Rata Share and elect to permanently reduce the amount of the
commitments thereunder by the amount of the Indebtedness so repaid, (ii) apply
the Net Cash Proceeds from such Asset Sale to repay any Restricted Subsidiary
Indebtedness and elect to permanently reduce the commitments thereunder by the
amount of the Indebtedness so repaid or (iii) apply such Net Cash Proceeds
within 365 days thereof, to an investment in properties and assets that will be
used in an Internet Service Business (or in Capital Stock and other securities
of any person that will become a Restricted Subsidiary as a result of such
investment to the extent such person owns properties and assets that will be
used in an Internet Service Business) of the Issuer or any Restricted Subsidiary
("Replacement Assets"). Any Net Cash Proceeds from any Asset Sale that are
neither used to repay, and permanently reduce the commitments under, any
Restricted Subsidiary Indebtedness as set forth in clause (ii) of the preceding
sentence or invested in Replacement Assets within the 365-day period as set
forth in
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clause (iii) shall constitute "Excess Proceeds." Any Excess Proceeds not used as
set forth in clause (i) of the second preceding sentence shall constitute "Offer
Excess Proceeds" subject to disposition as provided below.
When the aggregate amount of Offer Excess Proceeds equals or exceeds $10.0
million, the Issuer shall make an offer to purchase (an "Asset Sale Offer"),
from all holders of the Notes, that aggregate principal amount of Notes as can
be purchased by application of such Offer Excess Proceeds at a price in cash
equal to 100% of the principal amount thereof on any purchase date, plus accrued
and unpaid interest, if any, to any purchase date. Each Asset Sale Offer shall
remain open for a period of 20 business days or such longer period as may be
required by law. To the extent that the principal amount of Notes tendered
pursuant to an Asset Sale Offer is less than the Offer Excess Proceeds, the
Issuer or any Restricted Subsidiary may use such deficiency for general
corporate purposes. If the principal amount of Notes validly tendered and not
withdrawn by holders thereof exceeds the amount of Notes which can be purchased
with the Offer Excess Proceeds, Notes to be purchased will be selected on a pro
rata basis. Upon completion of such Asset Sale Offer, the amount of Offer Excess
Proceeds shall be reset to zero.
If the Issuer is required to make an Asset Sale Offer, the Issuer will
comply with all applicable tender offer rules, including, to the extent
applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any other
applicable securities laws and regulations.
Limitation on Issuances and Sales of Preferred Stock by Restricted
Subsidiaries. The Indenture provides that the Issuer (i) will not permit any
Restricted Subsidiary to issue any Preferred Stock (other than to the Issuer or
a Restricted Subsidiary) and (ii) will not permit any person (other than the
Issuer or a Restricted Subsidiary) to own any Preferred Stock of any Restricted
Subsidiary.
Limitation on Transactions with Affiliates. The Indenture provides that the
Issuer will not, and will not permit, cause or suffer any Restricted Subsidiary
to, conduct any business or enter into any transaction (or series of related
transactions which are similar or part of a common plan) with or for the benefit
of any of their respective Affiliates (other than Affiliates of a Restricted
Subsidiary that are not also Affiliates of the Issuer or any Wholly Owned
Restricted Subsidiary) or any beneficial holder of 10% or more of the Common
Stock of the Issuer or any officer or director of the Issuer (each, an
"Affiliate Transaction"), unless the terms of the Affiliate Transaction are set
forth in writing, and are fair and reasonable to the Issuer or such Restricted
Subsidiary, as the case may be. Each Affiliate Transaction involving aggregate
payments or other Fair Market Value in excess of $1.0 million shall be approved
by a majority of the Board, such approval to be evidenced by a Board Resolution
stating that the Board has determined that such transaction or transactions
comply with the foregoing provisions. In addition to the foregoing, each
Affiliate Transaction involving aggregate consideration of $5.0 million or more
shall be approved by a majority of the Disinterested Directors; provided that,
in lieu of such approval by the Disinterested Directors, the Issuer may obtain a
written opinion from an Independent Financial Advisor stating that the terms of
such Affiliate Transaction to the Issuer or the Restricted Subsidiary, as the
case may be, are fair from a financial point of view. For purposes of this
covenant, any Affiliate Transaction approved by a majority of the Disinterested
Directors or as to which a written opinion has been obtained from an Independent
Financial Advisor, on the basis set forth in the preceding sentence, shall be
deemed to be on terms that are fair and reasonable to the Issuer and the
Restricted Subsidiaries, as the case may be, and, therefore, shall be permitted
under this covenant.
Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to (i) transactions with or among, or solely for the benefit of,
the Issuer and/or any of the Restricted Subsidiaries, (ii) transactions pursuant
to agreements and arrangements existing on the Issue Date, (iii) transactions
among any of the Issuer or the Restricted Subsidiaries, on the one hand, and any
of the ISPs, on the other hand, provided that (a) such transactions are in the
ordinary course of business and are related to or in furtherance of an Internet
Service Business and (b) no 10% or more beneficial shareholder of Common Stock
of the Issuer or officer or director of the Issuer shall beneficially own any
Capital Stock of such ISP, (iv) dividends paid by the Issuer pursuant to and in
compliance with the covenant "Limitation on Restricted Payments," (v) customary
directors' fees, indemnification and similar arrangements, consulting fees,
employee salaries bonuses, employment agreements and arrangements, compensation
or employee benefit arrangements or legal fees, (vi) transactions contemplated
by any of the Permitted Affiliate Agreements as in
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effect on the Issue Date and (vii) grants of customary registration rights with
respect to securities of the Issuer.
The Issuer is required to use, or to cause each Restricted Subsidiary to
use, its commercially reasonable best efforts to ensure that each person in
which the Issuer or a Restricted Subsidiary makes an Investment that is an ISP
at the time of the Investment at all times thereafter continues to meet the
conditions and requirements of the definition of "ISP" in all material respects.
Reports. The Indenture provides that, for periods prior to the fiscal
quarter ending June 30, 1998, the Issuer shall furnish without cost to each
holder of Notes and file with the Trustee (i) within 135 days after the end of
each fiscal year of the Issuer, (x) audited year-end consolidated financial
statements (including a balance sheet, income statement and statement of changes
of cash flow) prepared in accordance with GAAP and substantially in the form
included in this Prospectus, (y) the information described in Item 303 of
Regulation S-K under the Securities Act with respect to such period and (z) all
pro forma and historical financial information in respect of any significant
transaction consummated more than 60 days prior to the date such information is
furnished (and any other transaction for which such information is available at
such time) to the extent such financial information would be required in a
filing on Form 10-K with the SEC at such time; and (ii) within 60 days after the
end of each of the first three fiscal quarters of each fiscal year of the
Issuer, (x) unaudited quarterly consolidated financial statements (including a
balance sheet, income statement and statement of changes of cash flows) prepared
in accordance with GAAP and substantially in the form included in this
Prospectus, (y) the information described in Item 303 of Regulation S-K under
the Securities Act with respect to such period and (z) all pro forma and
historical financial information in respect of any significant transaction
consummated more than 60 days prior to the date such information is furnished
(and any other transaction for which such information is available at such time)
to the extent such financial information would be required in a filing on Form
10-Q with the SEC at such time. Whether or not the Issuer has a class of
securities registered under the Exchange Act, the Issuer shall furnish without
cost to each holder of Notes and file with the Trustee and file with the SEC,
(a) beginning with the fiscal quarter ending June 30, 1998 (i) within the
applicable time period required under the Exchange Act, after the end of each
fiscal year of the Issuer, the information required by Form 10-K (or any
successor form thereto) under the Exchange Act with respect to such period and
(ii) within the applicable time period required under the Exchange Act after the
end of each of the first three fiscal quarters of each fiscal year of the
Issuer, the information required by Form 10-Q (or any successor form thereto)
under the Exchange Act with respect to such period and (b) from and after August
15, 1998, any current reports on Form 8-K (or any successor forms) required to
be filed under the Exchange Act. Prior to such time as the Issuer shall file
with the SEC its first report on either of Form 10-K or Form 10-Q under the
Exchange Act, the Issuer shall telephonically make its executive officers
available to holders of Notes upon 10-days advance written request of holders of
at least 10% of the aggregate principal amount of Notes outstanding at the time
of such request; provided that holders of Notes may make only one such request
per fiscal quarter.
Limitation on Designations of Unrestricted Subsidiaries. The Indenture
provides that the Issuer will not designate any Subsidiary of the Issuer (other
than a newly created Subsidiary in which no Investment has previously been made)
as an "Unrestricted Subsidiary" under the Indenture (a "Designation") unless:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation;
(b) except in the case of a Permitted Investment or an Investment made
pursuant to clause (vii) or (ix) of the third paragraph of the covenant
"Limitation on Restricted Payments," immediately after giving effect to
such Designation, the Issuer would be able to incur $1.00 of Indebtedness
under the proviso of the covenant "Limitation on Additional Indebtedness";
and
(c) the Issuer would not be prohibited under the Indenture from making
an Investment at the time of Designation (assuming the effectiveness of
such Designation) in an amount (the "Designation Amount") equal to the Fair
Market Value of the net Investment of the Issuer or any other Restricted
Subsidiary in such Restricted Subsidiary on such date.
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In the event of any such Designation, the Issuer shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
"Limitation on Restricted Payments" for all purposes of the Indenture in the
Designation Amount. The Indenture further provides that neither the Issuer nor
any Restricted Subsidiary shall at any time (x) provide a guarantee of, or
similar credit support to, any Indebtedness of any Unrestricted Subsidiary
(including of any undertaking, agreement or instrument evidencing such
Indebtedness); provided that the Issuer may pledge Capital Stock or Indebtedness
of any Unrestricted Subsidiary on a nonrecourse basis such that the pledgee has
no claim whatsoever against the Issuer other than to obtain such pledged
property, (y) be directly or indirectly liable for any Indebtedness of any
Unrestricted Subsidiary or (z) be directly or indirectly liable for any other
Indebtedness which provides that the holder thereof may (upon notice, lapse of
time or both) declare a default thereon (or cause the payment thereof to be
accelerated or payable prior to its final scheduled maturity) upon the
occurrence of a default with respect to any other Indebtedness that is
Indebtedness of an Unrestricted Subsidiary (including any corresponding right to
take enforcement action against such Unrestricted Subsidiary), except in the
case of clause (x) or (y) to the extent permitted under the covenants
"Limitation on Restricted Payments" and "Limitation on Transactions with
Affiliates."
The Indenture further provides that the Issuer will not revoke any
Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation")
unless:
(a) no Default shall have occurred and be continuing at the time of
and after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of the
Indenture.
All Designations and Revocations must be evidenced by Board Resolutions
delivered to the Trustee certifying compliance with the foregoing provisions.
Limitation on Status as Investment Company. The Indenture provides that the
Issuer will not, and will not permit any of its Subsidiaries or controlled
Affiliates to, conduct its business in a fashion that would cause the Issuer to
be required to register as an "investment company" (as that term is defined in
the Investment Company Act of 1940, as amended (the "Investment Company Act")),
or otherwise become subject to regulation under the Investment Company Act. For
purposes of establishing the Issuer's compliance with this provision, any
exemption which is or would become available under Section 3(c)(1) or Section
3(c)(7) of the Investment Company Act will be disregarded.
Ratings of the Notes. The Indenture provides that the Issuer will use its
best efforts to obtain a rating for the Notes from each of Moody's and S&P
within 18 months of the Issue Date. A rating, if obtained, is not a
recommendation to buy, sell or hold securities, is subject to revision or
withdrawal at any time by the assigning entity and should be evaluated
independently of any other rating.
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
The Indenture provides that the Issuer will not (i) consolidate or combine
with or merge with or into or, directly or indirectly, sell, assign, convey,
lease, transfer or otherwise dispose of all or substantially all of its
properties and assets to any person or persons in a single transaction or
through a series of transactions, or (ii) permit any of the Restricted
Subsidiaries to enter into any such transaction or series of transactions if it
would result in the disposition of all or substantially all of the properties or
assets of the Issuer and the Restricted Subsidiaries on a consolidated basis,
unless, in the case of either (i) or (ii), (a) the Issuer shall be the
continuing person or, if the Issuer is not the continuing person, the resulting,
surviving or transferee person (the "surviving entity") shall be a company
organized and existing under the laws of the United States or any State or
territory thereof; (b) the surviving entity shall expressly assume all of the
obligations of the Issuer under the Notes and the Indenture, and shall, if
required by law to effectuate such assumption, execute a supplemental indenture
to effect such assumption which supplemental indenture shall be delivered to the
Trustee and shall be in form and substance reasonably satisfactory to the
Trustee; (c) immediately after giving
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effect to such transaction or series of transactions on a pro forma basis
(including, without limitation, any Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction or series of
transactions), the Issuer or the surviving entity (assuming such surviving
entity's assumption of the Issuer's obligations under the Notes and the
Indenture), as the case may be, would be able to incur $1.00 of Indebtedness
under the proviso of the covenant "Limitation on Additional Indebtedness";
provided that, in the case of any transaction or series of transactions
comprised solely of one or more Rollups, this clause (c) shall be deemed
satisfied if the Issuer or the surviving entity and the Restricted Subsidiaries
would have been able to incur all of their outstanding Indebtedness as Permitted
Indebtedness; (d) immediately after giving effect to such transaction or series
of transactions on a pro forma basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions), no Default shall have
occurred and be continuing; and (e) the Issuer or the surviving entity, as the
case may be, shall have delivered to the Trustee an Officers' Certificate
stating that such transaction or series of transactions, and, if a supplemental
indenture is required in connection with such transaction or series of
transactions to effectuate such assumption, such supplemental indenture complies
with this covenant and that all conditions precedent in the Indenture relating
to the transaction or series of transactions have been satisfied.
Upon any consolidation or merger or any sale, assignment, conveyance,
lease, transfer or other disposition of all or substantially all of the assets
of the Issuer in accordance with the foregoing in which the Issuer or the
Restricted Subsidiary, as the case may be, is not the continuing corporation,
the successor corporation formed by such a consolidation or into which the
Issuer or such Restricted Subsidiary is merged or to which such transfer is
made, will succeed to, and be substituted for, and may exercise every right and
power of, the Issuer or such Restricted Subsidiary, as the case may be, under
the Indenture with the same effect as if such successor corporation had been
named as the Issuer or such Restricted Subsidiary therein; and thereafter,
except in the case of (i) any lease or (ii) any sale, assignment, conveyance,
transfer, lease or other disposition to a Restricted Subsidiary of the Issuer,
the Issuer shall be discharged from all obligations and covenants under the
Indenture and the Notes.
The Indenture provides that for all purposes of the Indenture and the Notes
(including the provision of this covenant and the covenants "Limitation on
Additional Indebtedness," "Limitation on Restricted Payments" and "Limitation on
Liens"), Subsidiaries of any surviving entity will, upon such transaction or
series of related transactions, become Restricted Subsidiaries or Unrestricted
Subsidiaries as provided pursuant to the covenant "Limitation on Designations of
Unrestricted Subsidiaries" and all Indebtedness, and all Liens on property or
assets, of the Issuer and the Restricted Subsidiaries in existence immediately
prior to such transaction or series of related transactions will be deemed to
have been incurred upon such transaction or series of related transactions.
EVENTS OF DEFAULT
The following are "Events of Default" under the Indenture:
(i) default in the payment of interest on the Notes when it becomes
due and payable and continuance of such default for a period of 30 days or
more (provided such 30 day grace period shall be inapplicable for the first
four interest payments due on the Notes); or
(ii) default in the payment of the principal of, or premium, if any,
on the Notes when due; or
(iii) default in the performance, or breach, of any covenant described
under "-- Certain Covenants -- Change of Control," "-- Certain
Covenants -- Disposition of Proceeds of Asset Sales" or "-- Consolidation,
Merger, Sale of Assets, Etc."; or
(iv) default in the performance, or breach, of any covenant in the
Indenture (other than defaults specified in clause (i), (ii) or (iii)
above) or the Escrow Agreement, and continuance of such default or breach
for a period of 30 days or more after written notice to the Issuer by the
Trustee or to the Issuer and the Trustee by the holders of at least 25% in
aggregate principal amount of the outstanding Notes (in each case, when
such notice is deemed received in accordance with the Indenture); or
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(v) failure to perform any term, covenant, condition or provision of
one or more classes or issues of Indebtedness in an aggregate principal
amount of $7.5 million or more under which the Issuer or a Material
Restricted Subsidiary is obligated, and either (a) such Indebtedness is
already due and payable in full or (b) such failure results in the
acceleration of the maturity of such Indebtedness; or
(vi) any holder of at least $7.5 million in aggregate principal amount
of Indebtedness of the Issuer or any Material Restricted Subsidiary shall
commence judicial proceedings or take any other action to foreclose upon,
or dispose of assets of the Issuer or any Material Restricted Subsidiary
having an aggregate Fair Market Value, individually or in the aggregate, of
$7.5 million or more or shall have exercised any right under applicable law
or applicable security documents to take ownership of any such assets in
lieu of foreclosure; provided that, in any such case, the Issuer or any
Material Restricted Subsidiary shall not have obtained, prior to any such
foreclosure or disposition of assets, a stay of all such actions that
remains in effect; or
(vii) one or more judgments, orders or decrees for the payment of
money of $7.5 million or more, either individually or in the aggregate,
shall be entered into against the Issuer or any Material Restricted
Subsidiary or any of their respective properties and shall not be
discharged and there shall have been a period of 60 days or more during
which a stay of enforcement of such judgment or order, by reason of pending
appeal or otherwise, shall not be in effect; or
(viii) certain events of bankruptcy, insolvency, reorganization,
administration or similar proceedings with respect to the Issuer or any
Material Restricted Subsidiary shall have occurred; or
(ix) the Issuer shall assert or acknowledge in writing that the Escrow
Agreement is invalid or unenforceable.
If an Event of Default (other than an Event of Default specified in clause
(viii) above with respect to the Issuer) occurs and is continuing, then the
Trustee or the holders of at least 25% in principal amount of the outstanding
Notes may, by written notice, and the Trustee upon the request of the holders of
not less than 25% in principal amount of the outstanding Notes shall, declare
the principal amount of, premium (if any) on, and any accrued and unpaid
interest on, all outstanding Notes to be immediately due and payable and upon
any such declaration such amounts shall become immediately due and payable. If
an Event of Default specified in clause (viii) above with respect to the Issuer
occurs and is continuing, then the principal amount of, premium (if any) on, and
any accrued and unpaid interest on, all outstanding Notes shall ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holder.
After a declaration of acceleration, the holders of a majority in aggregate
principal amount of outstanding Notes may, by notice to the Trustee, rescind
such declaration of acceleration if all existing Events of Default, other than
nonpayment of the principal of, premium (if any) on, and any accrued and unpaid
interest on, the Notes that has become due solely as a result of such
acceleration, have been cured or waived and if the rescission of acceleration
would not conflict with any judgment or decree. The holders of a majority in
principal amount of the outstanding Notes also have the right to waive past
defaults under the Indenture, except a default in the payment of principal of,
premium (if any) on, or any interest on, any outstanding Note, or in respect of
certain covenants or a provisions that cannot be modified or amended without the
consent of all holders of Notes.
No holder of any of the Notes has any right to institute any proceeding
with respect to the Indenture or any remedy thereunder, unless the holders of at
least 25% in principal amount of the outstanding Notes have made written
request, and offered reasonable security or indemnity, to the Trustee to
institute such proceeding as Trustee, the Trustee has failed to institute such
proceeding within 60 days after receipt of such notice and the Trustee has not
within such 60-day period received directions inconsistent with such written
request by holders of a majority in principal amount of the outstanding Notes.
Such limitations do not apply, however, to a suit instituted by a holder of a
Note for the enforcement of the payment of the principal of, premium (if any)
on, or any accrued and unpaid interest on, such Note on or after the respective
due dates expressed in such Note.
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During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default shall occur and be continuing, the Trustee is
not under any obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the holders unless such holders
shall have offered to such Trustee reasonable security or indemnity. Subject to
certain provisions concerning the rights of the Trustee, the holders of a
majority in principal amount of the outstanding Notes have the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the Trustee or exercising any trust or power conferred on the Trustee.
The Indenture provides that the Trustee will, within 45 days after the
occurrence of any Default, give to the holders of the Notes notice of such
Default known to it, unless such Default shall have been cured or waived;
provided that the Trustee shall be protected in withholding such notice if it
determines in good faith that the withholding of such notice is in the interest
of such holders.
The Issuer is required to furnish to the Trustee annually a statement as to
its compliance with all conditions and covenants under the Indenture.
DEFEASANCE
The Issuer may at any time terminate all of its obligations with respect to
the Notes ("defeasance"), except for certain obligations, including those
regarding any trust established for a defeasance and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes as required by the Indenture and to maintain agencies in respect of
Notes. The Issuer may at any time terminate its obligations under certain
covenants set forth in the Indenture, some of which are described under
"-- Certain Covenants" above, and any omission to comply with such obligations
shall not constitute a Default with respect to the Notes ("covenant
defeasance"). To exercise either defeasance or covenant defeasance, the Issuer
must irrevocably deposit in trust, for the benefit of the holders of the Notes,
with the Trustee money (in United States dollars) or U.S. government obligations
(denominated in United States dollars), or a combination thereof, in such
amounts as will be sufficient to pay the principal of, and premium, if any, and
interest on the Notes to redemption or maturity and comply with certain other
conditions, including the delivery of a legal opinion as to certain tax matters.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of Notes)
as to all outstanding Notes when either (a) all such Notes theretofore
authenticated and delivered (except lost, stolen or destroyed Notes that have
been replaced or paid and Notes for whose payment money has theretofore been
deposited in trust or segregated and held in trust by the Issuer and thereafter
repaid to the Issuer or discharged from such trust) have been delivered to the
Trustee for cancellation; or (b)(i) all such Notes not theretofore delivered to
the Trustee for cancellation have become due and payable and the Issuer has
irrevocably deposited or caused to be deposited with the Trustee as trust funds
in trust for the purpose an amount of money sufficient to pay and discharge the
entire indebtedness on the Notes not theretofore delivered to the Trustee for
cancellation, for principal amount, premium, if any, and accrued interest to the
date of such deposit; (ii) the Issuer has paid all sums payable by it under the
Indenture; and (iii) the Issuer has delivered irrevocable instructions to the
Trustee to apply the deposited money toward the payment of the Notes at maturity
or on the redemption date, as the case may be. In addition, the Issuer must
deliver an Officers' Certificate and an Opinion of Counsel stating that all
conditions precedent to satisfaction and discharge have been complied with.
AMENDMENT AND WAIVERS
From time to time, the Issuer, when authorized by resolutions of the Board,
and the Trustee, without the consent of the holders of the Notes, may amend,
waive or supplement the Indenture or the Notes for certain
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specified purposes, including, among other things, curing ambiguities, defects
or inconsistencies, maintaining the qualification of the Indenture under the
Trust Indenture Act or making any change that does not adversely affect the
rights of any holder. Other amendments and modifications of the Indenture and
the Notes may be made by the Issuer and the Trustee by supplemental indenture
with the consent of the holders of not less than a majority of the aggregate
principal amount of the outstanding Notes; provided that no such modification or
amendment may, without the consent of the holder of each outstanding Note
affected thereby, (i) reduce the principal amount of, change the fixed maturity
of, or alter the redemption provisions of, the Notes, (ii) change the currency
in which any Notes or amounts owing thereon is payable, (iii) reduce the
percentage of the aggregate principal amount outstanding of Notes which must
consent to an amendment, supplement or waiver or consent to take any action
under the Indenture or the Notes, (iv) impair the right to institute suit for
the enforcement of any payment on or with respect to the Notes, (v) waive a
default in payment with respect to the Notes, (vi) reduce the rate or change the
time for payment of interest on the Notes, (vii) following the occurrence of a
Change of Control or an Asset Sale, alter the Issuer's obligation to purchase
the Notes in accordance with the Indenture or waive any default in the
performance thereof, (viii) affect the ranking of the Notes in a manner adverse
to the holder of the Notes, (ix) release any Guarantee except in compliance with
the terms of the Indenture or (x) release any Liens created by the Escrow
Agreement except in accordance with the terms of the Escrow Agreement.
REGARDING THE TRUSTEE AND ESCROW AGENT
First Trust National Association will serve as Trustee under the Indenture
and Escrow Agent under the Escrow Agreement.
GOVERNING LAW
The Indenture and the Escrow Agreement provide that the Indenture and the
Notes and the Escrow Agreement, respectively, will be governed by and construed
in accordance with laws of the State of New York without giving effect to
principles of conflicts of law.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the Indenture
or the Escrow Agreement. Reference is made to the Indenture for the full
definition of all such terms, as well as any other capitalized terms used herein
for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a person existing at the time
such person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by such person and not incurred in connection with, or in
anticipation of, such person becoming a Restricted Subsidiary or such Asset
Acquisition; provided that Indebtedness of such person which is redeemed,
defeased, retired or otherwise repaid at the time of or immediately upon
consummation of the transactions by which such person becomes a Restricted
Subsidiary or such Asset Acquisition shall not constitute Acquired Indebtedness.
"Affiliate" of any specified person means any other person which, directly
or indirectly, controls, is controlled by or is under direct or indirect common
control with, such specified person. For the purposes of this definition,
"control" when used with respect to any person means the power to direct the
management and policies of such person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise, and the terms
"affiliated," "controlling" and "controlled" have meanings correlative to the
foregoing.
"Annualized ISP Revenues" means, with respect to any ISP at any date of
determination, the consolidated net revenues of such ISP and its Subsidiaries
for the most recent quarter for which financial information concerning such ISP
is available (and determined on a basis consistent with the Issuer's accounting
principles) multiplied by four.
"Asset Acquisition" means (i) any capital contribution (by means of
transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise) by the Issuer or
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any Restricted Subsidiary in any other person, or any acquisition or purchase of
Capital Stock of any other person by the Issuer or any Restricted Subsidiary, in
either case pursuant to which such person shall (a) become a Restricted
Subsidiary or (b) shall be merged with or into the Issuer or any Restricted
Subsidiary or (ii) any acquisition by the Issuer or any Restricted Subsidiary of
the assets of any person which constitute substantially all of an operating unit
or line of business of such person or which is otherwise outside of the ordinary
course of business.
"Asset Sale" means any direct or indirect sale, conveyance, transfer or
lease (that has the effect of a disposition and is not for security purposes) or
other disposition (that is not for security purposes) to any person other than
the Issuer or a Restricted Subsidiary, in one transaction or a series of related
transactions, of (i) any Capital Stock of any Restricted Subsidiary (other than
customary stock option programs), (ii) any assets of the Issuer or any
Restricted Subsidiary which constitute substantially all of an operating unit or
line of business of the Issuer and the Restricted Subsidiaries or (iii) any
other property or asset of the Issuer or any Restricted Subsidiary outside of
the ordinary course of business. For the purposes of this definition, the term
"Asset Sale" shall not include (i) any disposition of properties and assets of
the Issuer that is governed under "-- Consolidation, Merger, Sale of Assets,
Etc." above, (ii) sales of property or equipment that have become worn out,
obsolete or damaged or otherwise unsuitable for use in connection with the
business of the Issuer or any Restricted Subsidiary, as the case may be, and
(iii) for purposes of the covenant "Disposition of Proceeds of Asset Sales," any
sale, conveyance, transfer, lease or other disposition of any property or asset,
whether in one transaction or a series of related transactions occurring within
one year, either (x) involving assets with a Fair Market Value not in excess of
$500,000 or (y) which constitutes the incurrence of a Capitalized Lease
Obligation.
"Average Life to Stated Maturity" means, with respect to any Indebtedness,
as at any date of determination, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from such date to the date or dates
of each successive scheduled principal payment (including, without limitation,
any sinking fund requirements) of such Indebtedness multiplied by (b) the amount
of each such principal payment by (ii) the sum of all such principal payments;
provided that, in the case of any Capitalized Lease Obligation, all calculations
hereunder shall give effect to any applicable options to renew in favor of the
Issuer or any Restricted Subsidiary.
"Board" means the Board of Directors of the Issuer.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Issuer to have been duly adopted by the Board
and to be in full force and effect on the date of such certification, and
delivered to the Trustee.
"Brooks" means Brooks Fiber Properties, Inc. (and its successors by merger
or consolidation) and its controlled Affiliates.
"Capital Stock" means, with respect to any person, any and all shares,
interests, participations, rights in, or other equivalents (however designated
and whether voting and/or non-voting) of, such person's capital stock, whether
outstanding on the Issue Date or issued after the Issue Date, and any and all
rights (other than any evidence of Indebtedness), warrants or options
exchangeable for or convertible into such capital stock.
"Capitalized Lease Obligation" means any obligation to pay rent or other
amounts under a lease of (or other agreement conveying the right to use) any
property (whether real, personal or mixed, immovable or movable) that is
required to be classified and accounted for as a capitalized lease obligation
under GAAP, and, for the purpose of the Indenture, the amount of such obligation
at any date shall be the capitalized amount thereof at such date, determined in
accordance with GAAP.
"Cash Equivalents" means (i) any evidence of Indebtedness (with, for
purposes of the covenant "Disposition of Proceeds of Asset Sales" only, a
maturity of 365 days or less) issued or directly and fully guaranteed or insured
by the United States or any agency or instrumentality thereof (provided that the
full faith and credit of the United States is pledged in support thereof or such
Indebtedness constitutes a general obligation of such country); (ii) deposits,
certificates of deposit or acceptances (with, for purposes of the covenant
"Disposition of Proceeds of Asset Sales" only, a maturity of 365 days or less)
of any financial
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institution that is a member of the Federal Reserve System, in each case having
combined capital and surplus and undivided profits (or any similar capital
concept) of not less than $500.0 million and whose senior unsecured debt is
rated at least "A-1" by S&P or "P-1" by Moody's; (iii) commercial paper with a
maturity of 365 days or less issued by a corporation (other than an Affiliate of
the Issuer) organized under the laws of the United States or any State thereof
and rated at least "A-1" by S&P or "P-1" by Moody's; (iv) repurchase agreements
and reverse repurchase agreements relating to marketable direct obligations
issued or unconditionally guaranteed by the United States Government or issued
by any agency thereof and backed by the full faith and credit of the United
States Government maturing within 365 days from the date of acquisition; and (v)
money market funds which invest substantially all of their assets in securities
of the type described in the preceding clauses (i) through (iv).
"Change of Control" is defined to mean the occurrence of any of the
following events: (a) any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act), excluding Brooks, is or becomes
the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act, except that a person shall be deemed to have "beneficial ownership" of all
securities that such person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total Voting Stock of the Issuer; or (b) the
Issuer consolidates with, or merges with or into, another person or sells,
assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any person, or any person consolidates with,
or merges with or into, the Issuer, in any such event pursuant to a transaction
in which the outstanding Voting Stock of the Issuer is converted into or
exchanged for cash, securities or other property, other than any such
transaction where (i) the outstanding Voting Stock of the Issuer is converted
into or exchanged for (1) Voting Stock (other than Disqualified Stock) of the
surviving or transferee corporation or its parent corporation and/or (2) cash,
securities and other property in an amount which could be paid by the Issuer as
a Restricted Payment under the Indenture and (ii) immediately after such
transaction no "person" or "group" (as such terms are used in Sections 13(d) and
14(d) of the Exchange Act), excluding Brooks, is the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person
shall be deemed to have "beneficial ownership" of all securities that such
person has the right to acquire, whether such right is exercisable immediately
or only after the passage of time), directly or indirectly, of more than 50% of
the total Voting Stock of the surviving or transferee corporation or its parent
corporation, as applicable; or (c) during any consecutive two-year period,
individuals who at the beginning of such period constituted the Board (together
with any new directors whose election by the Board or whose nomination for
election by the stockholders of the Issuer was approved by a vote of a majority
of the directors then still in office who were either directors at the beginning
of such period or whose election or nomination for election was previously so
approved) cease for any reason (other than by action of Brooks) to constitute a
majority of the Board then in office. The good faith determination by the Board,
based upon advice of outside counsel, of the beneficial ownership of securities
of the Issuer within the meaning of Rules 13d-3 and 13d-5 under the Exchange Act
shall be conclusive, absent contrary controlling judicial precedent or contrary
written interpretation published by the SEC.
"Common Stock" means, with respect to any person, any and all shares,
interest or other participations in, and other equivalents (however designated
and whether voting or nonvoting) of such person's common stock whether
outstanding at the Issue Date, and includes, without limitation, all series and
classes of such common stock.
"Consolidated Income Tax Expense" means, with respect to any period, the
provision for United States corporation, local, foreign and other income taxes
of the Issuer and the Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any period, without
duplication, the sum of (i) the interest expense of the Issuer and the
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP, including, without limitation, (a) any amortization of
debt discount, (b) the net cost under Interest Rate Obligations (including any
amortization of discounts), (c) the interest portion of any deferred payment
obligation, (d) all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing and similar
transactions and (e) all accrued interest, (ii) the interest component of
Capitalized Lease Obligations paid, accrued and/or scheduled
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to be paid or accrued by the Issuer and the Restricted Subsidiaries during such
period as determined on a consolidated basis in accordance with GAAP and (iii)
the amount of dividends in respect of Disqualified Stock paid by the Issuer and
the Restricted Subsidiaries during such period; provided that Consolidated
Interest Expense shall exclude the amortization of fees related to the issuance
of the Notes and fees related to any Indebtedness under a Permitted Credit
Facility.
"Consolidated Net Income" means, with respect to any period, the
consolidated net income of the Issuer and the Restricted Subsidiaries for such
period, adjusted, to the extent included in calculating such consolidated net
income, by excluding, without duplication, (i) all extraordinary, unusual or
nonrecurring gains or losses of such person (net of fees and expenses relating
to the transaction giving rise thereto) for such period, (ii) income of the
Issuer and the Restricted Subsidiaries derived from or in respect of all
Investments in persons other than Restricted Subsidiaries, except to the extent
of any dividends or distributions actually received by the Issuer or any
Restricted Subsidiary, (iii) the portion of net income (or loss) of such person
allocable to minority interests in Restricted Subsidiaries for such period, (iv)
net income (or loss) of any other person combined with such person on a "pooling
of interests" basis attributable to any period prior to the date of combination,
(v) any gain or loss, net of taxes, realized by such person upon the termination
of any employee pension benefit plan during such period, (vi) gains or losses in
respect of any Asset Sales (net of fees and expenses relating to the transaction
giving rise thereto) during such period and (vii) except in the case of any
restriction or encumbrance permitted under clause (viii) of the covenant
"Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries," the net income of any Restricted Subsidiary for such period to
the extent that the declaration of dividends or similar distributions by that
Restricted Subsidiary of that income is not at the time permitted, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulations
applicable to that Restricted Subsidiary or its stockholders.
"Consolidated Net Worth" means, with respect to any person, the
consolidated stockholders' or partners' equity of such person reflected on the
most recent financial statements of such person, determined in accordance with
GAAP, less any amounts attributable to redeemable capital stock (as determined
under applicable accounting standards by the SEC) of such person.
"Consolidated Operating Cash Flow" means, with respect to any period, the
Consolidated Net Income of the Issuer and the Restricted Subsidiaries for such
period increased, to the extent deducted in arriving at Consolidated Net Income
for such period, by the sum of (i) the Consolidated Income Tax Expense of the
Issuer and the Restricted Subsidiaries accrued according to GAAP for such period
(other than taxes attributable to extraordinary gains or losses and gains and
losses from Asset Sales); (ii) Consolidated Interest Expense for such period;
(iii) depreciation of the Issuer and the Restricted Subsidiaries for such
period; (iv) amortization of the Issuer and the Restricted Subsidiaries for such
period, including, without limitation, amortization of capitalized debt issuance
costs for such period, all determined on a consolidated basis in accordance with
GAAP; and (v) other non-cash charges decreasing Consolidated Net Income.
"Consolidated Pro Forma Interest Coverage Ratio" means, as of any date of
determination, the ratio of (i) Consolidated Pro Forma Operating Cash Flow to
(ii) Consolidated Interest Expense for the four-quarter period immediately
preceding the date of determination for which consolidated financial statements
of the Issuer are available; provided that (1) if the Issuer or any of the
Restricted Subsidiaries has incurred any Indebtedness (whether through an Asset
Acquisition, Asset Sale or otherwise) since the beginning of such period and
through the date of determination that remains outstanding or if the transaction
or series of transactions giving rise to the need to calculate such ratio
involves an incurrence of Indebtedness, Consolidated Interest Expense for such
period shall be calculated after giving effect on a pro forma basis to (A) such
Indebtedness as if such Indebtedness had been incurred on the first day of such
period, except that if such Indebtedness is incurred under a revolving credit
facility (or similar arrangement or under any predecessor revolving credit or
similar arrangement) the amount of interest expense associated therewith shall
be the actual interest expense during the applicable four-quarter period, and
(B) the discharge of any other Indebtedness repaid, repurchased, defeased or
otherwise discharged with the proceeds of such new Indebtedness as if such
discharge had occurred on the first day of such period and (2) if, since the
beginning of such period, any Indebtedness of the Issuer or any of the
Restricted Subsidiaries has been repaid, repurchased,
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defeased or otherwise discharged (whether through an Asset Acquisition, Asset
Sale or otherwise) (other than Indebtedness under a revolving credit or similar
arrangement unless such revolving credit Indebtedness has been permanently
repaid and has not been replaced), Consolidated Interest Expense for such period
shall be calculated after giving pro forma effect thereto as if such
Indebtedness had been repaid, repurchased, defeased or otherwise discharged on
the first day of such period.
"Consolidated Pro Forma Operating Cash Flow" means, at any date of
determination, Consolidated Operating Cash Flow for the latest four fiscal
quarters for which consolidated financial statements of the Issuer are
available. For purposes of calculating "Consolidated Operating Cash Flow" for
any four fiscal quarter period for purposes of this definition, (i) any
Subsidiary of the Issuer that is a Restricted Subsidiary on the date of the
transaction (the "Transaction Date") giving rise to the need to calculate
"Consolidated Pro Forma Operating Cash Flow" shall be deemed to have been a
Restricted Subsidiary at all times during such four fiscal quarter period and
(ii) any Subsidiary of the Issuer that is not a Restricted Subsidiary on the
Transaction Date shall be deemed not to have been a Restricted Subsidiary at any
time during such four fiscal quarter period. In addition to and without
limitation of the foregoing, for purposes of this definition, "Consolidated
Operating Cash Flow" shall be calculated after giving effect on a pro forma
basis for the applicable four fiscal quarter period to, without duplication, any
Asset Sales or Asset Acquisitions (including, without limitation, any Asset
Acquisition giving rise to the need to make such calculation as a result of the
Issuer or one of the Restricted Subsidiaries (including any person who becomes a
Restricted Subsidiary as a result of the Asset Acquisition) incurring, assuming
or otherwise being liable for Acquired Indebtedness) occurring during the period
commencing on the first day of such four fiscal quarter period to and including
the Transaction Date (the "Reference Period"), as if such Asset Sale or Asset
Acquisition occurred on the first day of the Reference Period.
"consolidation" means, with respect to the Issuer, the consolidation of the
accounts of the Restricted Subsidiaries with those of the Issuer, all in
accordance with GAAP; provided that "consolidation" will not include
consolidation of the accounts of any Unrestricted Subsidiary with the accounts
of the Issuer. The term "consolidated" has a correlative meaning to the
foregoing.
"Debt Securities" means any debt securities issued by the Issuer in a
public offering or a private placement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designation" has the meaning set forth under "-- Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries."
"Disinterested Director" means, with respect to any transaction or series
of related transactions, a member of the Board of Directors of the Issuer other
than a director who (i) has any material direct or indirect financial interest
in or with respect to such transaction or series of related transactions or (ii)
is an employee or officer of the Issuer or an Affiliate that is itself a party
to such transaction or series of transactions or an Affiliate of a party to such
transaction or series of related transactions.
"Disqualified Stock" means, with respect to any person, any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or becomes mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or becomes exchangeable for Indebtedness at the option
of the holder thereof, or becomes redeemable at the option of the holder
thereof, in whole or in part, on or prior to the final maturity date of the
Notes; provided such Capital Stock shall only constitute Disqualified Stock to
the extent it so matures or becomes so redeemable or exchangeable on or prior to
the final maturity date of the Notes; provided, further, that any Capital Stock
that would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require such person to repurchase or redeem such
Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the final maturity date of the Notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in "-- Certain Covenants --
Disposition of Proceeds of Asset Sales" and "-- Certain Covenants -- Change of
Control" covenants described above and such Capital Stock specifically provides
that such person will not repurchase or redeem
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any such stock pursuant to such provision prior to the Issuer's repurchase of
such Notes as are required to be repurchased pursuant to the "Disposition of
Proceeds of Asset Sales" and "Change of Control" covenants described above.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated thereunder.
"Existing ISP" means any ISP in which the Issuer or a Subsidiary of the
Issuer has an Investment on the Issue Date.
"Fair Market Value" means, with respect to any asset or property, the price
that could be negotiated in an arms-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under pressure
or compulsion to complete the transaction. Unless otherwise specified in the
Indenture, Fair Market Value shall be determined by the Board acting in good
faith and shall be evidenced by a Board Resolution.
"GAAP" means, at any date of determination, generally accepted accounting
principles in effect in the United States and which are applicable as of the
date of determination and which are consistently applied for all applicable
periods.
"Guarantee" means, as applied to any obligation, (i) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner, of any part or all of
such obligation and (ii) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit.
"Indebtedness" means, with respect to any person, without duplication, (i)
any liability, contingent or otherwise, of such person (A) for borrowed money
(whether or not the recourse of the lender is to the whole of the assets of such
person or only to a portion thereof) or (B) evidenced by a note, debenture or
similar instrument or letter of credit (including a purchase money obligation)
or (C) for the payment of money relating to a Capitalized Lease Obligation or
other obligation relating to the deferred purchase price of property (except to
the extent representing funds deposited in escrow to secure the deferred
purchase price of an acquisition of, or an Investment in, an ISP) or (D) in
respect of an Interest Rate Obligation or currency agreement; or (ii) any
liability of others of the kind described in the preceding clause (i) which the
person has guaranteed or which is otherwise its legal liability; or (iii) any
obligation secured by a Lien (other than (x) Permitted Liens of the types
described in clauses (b), (d) or (e) of the definition of Permitted Liens;
provided that the obligations secured would not constitute Indebtedness under
clauses (i) or (ii) or (iii) of this definition, and (y) Liens on Capital Stock
or Indebtedness of any Unrestricted Subsidiary) to which the property or assets
of such person are subject, whether or not the obligations secured thereby shall
have been assumed by or shall otherwise be such person's legal liability (the
amount of such obligation being deemed to be the lesser of the value of such
property or asset or the amount of the obligation so secured); (iv) all
Disqualified Stock valued at the greater of its voluntary or involuntary maximum
fixed repurchase price plus accrued and unpaid dividends; and (v) any and all
deferrals, renewals, extensions and refundings of, or amendments, modifications
or supplements to, any liability of the kind described in any of the preceding
clauses (i), (ii), (iii) or (iv). In no event shall "Indebtedness" include trade
payables and accrued liabilities that are current liabilities incurred in the
ordinary course of business, excluding the current maturity of any obligation
which would otherwise constitute Indebtedness. For purposes of the covenants
"Limitation on Additional Indebtedness" and "Limitation on Restricted Payments"
and the definition of "Events of Default," in determining the principal amount
of any Indebtedness to be incurred by the Issuer or a Restricted Subsidiary or
which is outstanding at any date, (x) the principal amount of any Indebtedness
which provides that an amount less than the principal amount at maturity thereof
shall be due upon any declaration of acceleration thereof shall be the accreted
value thereof at the date of determination and (y) the principal amount of any
Indebtedness shall be reduced by any amount of cash or Cash Equivalent
collateral securing on a perfected basis, and dedicated for disbursement
exclusively to the payment of principal of and interest on,
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such Indebtedness. Indebtedness of any person that becomes a Restricted
Subsidiary shall be deemed incurred at the time that such person becomes a
Restricted Subsidiary.
"Independent Financial Advisor" means a United States investment banking
firm of national or regional standing in the United States (i) which does not,
and whose directors, officers and employees or Affiliates do not have, a direct
or indirect financial interest in the Issuer and (ii) which, in the judgment of
the Board, is otherwise independent and qualified to perform the task for which
it is to be engaged.
"Interest Rate Obligations" means the obligations of any person pursuant to
any arrangement with any other person whereby, directly or indirectly, such
person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount and shall include without limitation, interest rate swaps, caps, floors,
collars, forward interest rate agreements and similar agreements.
"Internet Service Business" means any business operating an internet
connectivity or internet enhancement service as it exists from time to time,
including, without limitation, dial up or dedicated internet service, web
hosting or collocation services, security solutions, the provision and
development of software in connection therewith configuration services,
electronic commerce, intranet solutions, data backup and restoral, business
content and collaboration, communications tools or network equipment products or
services (including, without limitation, any business conducted by the Issuer or
any Restricted Subsidiary on the Issue Date), and any business reasonably
related to the foregoing. A good faith determination by a majority of the Board
as to whether a business meets the requirements of this definition shall be
conclusive, absent manifest error.
"Investment" means, with respect to any person, any advance, loan, account
receivable (other than an account receivable arising in the ordinary course of
business), or other extension of credit (including, without limitation, by means
of any guarantee) or any capital contribution to (by means of transfers of
property to others, payments for property or services for the account or use of
others, or otherwise), or any purchase or ownership of any stocks, bonds, notes,
debentures or other securities of, any other person. Notwithstanding the
foregoing, in no event shall any issuance of Capital Stock (other than
Disqualified Stock) of the Issuer in exchange for Capital Stock, property or
assets of another person constitute an Investment by the Issuer in such other
person.
"ISP" means any person (a) engaged principally in an Internet Service
Business, (b) of which the Issuer and Wholly Owned Restricted Subsidiaries own
either (x) Qualifying Preferred Stock representing in aggregate from 20% to 50%
of such person's outstanding Capital Stock (on an economic basis) or (y) Common
Stock or Qualifying Preferred Stock representing in aggregate in excess of 50%
of such person's voting Capital Stock, (c) as to which the Issuer or a Wholly
Owned Restricted Subsidiary has an option, either immediately exercisable or
exercisable commencing after one year (subject to extension under limited
circumstances consistent with past practice) of the Investment made by the
Issuer or a Wholly Owned Restricted Subsidiary, to acquire all of such person's
outstanding Capital Stock, (d) as to which the Issuer or a Wholly Owned
Restricted Subsidiary is the beneficiary of a right of first refusal or other
transfer restrictions generally limiting transfers of such person's Capital
Stock by third parties, (e) as to which the Issuer or a Wholly Owned Restricted
Subsidiary has the right to appoint and has appointed at least one member of
such person's board of directors, in the case where such person would not be a
Subsidiary of the Issuer, or a majority of such person's board of directors, in
the case where such person would be a Subsidiary of the Issuer and (f) which has
no outstanding Capital Stock or Indebtedness other than (i) Common Stock or
options to acquire Common Stock, (ii) Qualifying Preferred Stock held by the
Issuer or a Wholly Owned Restricted Subsidiary, (iii) rights granted to other
stockholders to acquire Capital Stock of such person from the Issuer or its
affiliates in certain circumstances, (iv) preferred stock ranking junior in a
liquidation to any Qualifying Preferred Stock referred to in clause (ii), and
(v) Indebtedness of such person or preferred stock of such person ranking prior
in a liquidation or deemed liquidation to the Qualifying Preferred Stock
referred to in clause (ii) having an aggregate outstanding principal balance and
liquidation preference, respectively, that (x) in the case of a person that is a
Restricted Subsidiary, is permitted to be incurred under the covenant
"Limitation on Additional Indebtedness" and (y) in the case of a person that is
not a Restricted Subsidiary, does not at any time exceed 50% of Annualized ISP
Revenues.
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"Issue Date" means the original date of issuance of the Notes.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or preference
or priority or other encumbrance upon or with respect to any property of any
kind. A person shall be deemed to own subject to a Lien any property which such
person has acquired or holds subject to the interest of a vendor or lessor under
any conditional sale agreement, capital lease or other title retention
agreement.
"Market Capitalization" of any person means, as of any day of
determination, the average Closing Price of such person's Common Stock over the
20 consecutive trading days immediately preceding such day. "Closing Price" on
any trading day with respect to the per share price of any shares of Common
Stock means the last reported sale price regular way or, in case no such
reported sale takes place on such day, the average of the reported closing bid
and asked prices regular way, in either case on the New York Stock Exchange or,
if such shares of Common Stock are not listed or admitted to trading on such
exchange, on the principal national securities exchange on which such shares are
listed or admitted to trading or, if not listed or admitted to trading on any
national securities exchange, on the National Association of Securities Dealers
Automated Quotations National Market System or, if such shares are not listed or
admitted to trading on any national securities exchange or quoted on such
automated quotation system but the issuer is a Foreign Issuer (as defined in
Rule 3b-4(b) under the Exchange Act) and the principal securities exchange on
which such shares are listed or admitted to trading is a Designated Offshore
Securities Market (as defined in Rule 902(a) under the Securities Act), the
average of the reported closing bid and asked prices regular way on such
principal exchange, or, if such shares are not listed or admitted to trading on
any national securities exchange or quoted on such automated quotation system
and the issuer and principal securities exchange do not meet such requirements,
the average of the closing bid and asked prices in the over-the-counter marked
as furnished by any New York Stock Exchange member firm that is selected from
time to time by the Issuer for that purpose and is reasonably acceptable to the
Trustee.
"Material Restricted Subsidiary" means any Restricted Subsidiary of the
Issuer, which, at any date of determination, is a "Significant Subsidiary" (as
that term is defined in Regulation S-X issued under the Securities Act), but
shall, in any event, include (x) any Guarantor or (y) any Restricted Subsidiary
of the Issuer which, at any date of determination, is an obligor under any
Indebtedness in an aggregate principal amount equal to or exceeding $7.5
million.
"Maturity Date" means, with respect to any Note, the date specified in such
Note as the fixed date on which the principal of such Note is due and payable.
"Moody's" means Moody's Investors Service.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash (including assumed liabilities and other items
deemed to be cash under the proviso to the first sentence of the covenant
"Disposition of Proceeds of Asset Sales") or Cash Equivalents including payments
in respect of deferred payment obligations when received in the form of cash or
Cash Equivalents (except to the extent that such obligations are financed or
sold with recourse to the Issuer or any Restricted Subsidiary) net of (i)
brokerage commissions and other fees and expenses (including fees and expenses
of legal counsel and investment bankers) related to such Asset Sale, (ii)
provisions for all taxes payable as a result of such Asset Sale, (iii) amounts
required to be paid to any person (other than the Issuer or any Restricted
Subsidiary) owning a beneficial interest in or having a Permitted Lien on the
assets subject to the Asset Sale and (iv) appropriate amounts to be provided by
the Issuer or any Restricted Subsidiary, as the case may be, as a reserve
required in accordance with GAAP against any liabilities associated with such
Asset Sale and retained by the Issuer or any Restricted Subsidiary, as the case
may be, after such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as reflected in an Officers' Certificate delivered to the
Trustee.
"New ISP" means any ISP in which the Issuer or a Subsidiary of the Issuer
makes its first Investment after the Issue Date.
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"Other Senior Debt Pro Rata Share" means the amount of the applicable
Excess Proceeds obtained by multiplying the amount of such Excess Proceeds by a
fraction, (i) the numerator of which is the aggregate accreted value and/or
principal amount, as the case may be, of all Indebtedness (other than (x) the
Notes and (y) Subordinated Indebtedness) of the Issuer outstanding at the time
of the applicable Asset Sale with respect to which the Issuer is required to use
Excess Proceeds to repay or make an offer to purchase or repay and (ii) the
denominator of which is the sum of (a) the aggregate principal amount of all
Notes outstanding at the time of the applicable Asset Sale and (b) the aggregate
principal amount or the aggregate accreted value, as the case may be, of all
other Indebtedness (other than Subordinated Indebtedness) of the Issuer
outstanding at the time of the applicable Asset Sale Offer with respect to which
the Issuer is required to use the applicable Excess Proceeds to offer to repay
or make an offer to purchase or repay.
"Permitted Affiliate Agreement" means each of the Series A Purchase
Agreement, the Series B Purchase Agreement, the Series C Purchase Agreement and
the Shareholders Agreement, each as in effect on the Issue Date.
"Permitted Credit Facility" means any senior commercial term loan and/or
revolving credit facility (including any letter of credit subfacility) entered
into principally with commercial banks and/or other financial institutions
typically party to commercial loan agreements.
"Permitted Equipment Financing" means any credit facility or other
financing arrangement (including in the form of Capitalized Lease Obligations
and guarantees of Indebtedness of ISPs) entered into with any vendor or supplier
(or any financial institution acting on behalf of or for the purpose of directly
financing purchases from such vendor or supplier) to the extent the Indebtedness
thereunder is incurred for the purpose of financing the cost (including the cost
of design, development, site acquisition, construction, integration, manufacture
or acquisition) of real or personal property (tangible or intangible) used, or
to be used, in an Internet Service Business.
"Permitted Indebtedness" means the following Indebtedness (each of which
shall be given independent effect):
(a) Indebtedness under the Notes and the Indenture;
(b) Indebtedness of the Issuer and/or any Restricted Subsidiary
outstanding on the Issue Date;
(c) (i) Indebtedness of any Restricted Subsidiary owed to and held by
the Issuer or a Restricted Subsidiary and (ii) Indebtedness of the Issuer,
not secured by any Lien, owed to and held by any Restricted Subsidiary;
provided that an incurrence of Indebtedness shall be deemed to have
occurred upon (x) any sale or other disposition (excluding assignments as
security to financial institutions) of any Indebtedness of the Issuer or a
Restricted Subsidiary referred to in this clause (c) to a person (other
than the Issuer or a Restricted Subsidiary) or (y) any sale or other
disposition of Capital Stock of a Restricted Subsidiary, or Designation of
a Restricted Subsidiary, which holds Indebtedness of the Issuer or another
Restricted Subsidiary such that such Restricted Subsidiary, in any such
case, ceases to be a Restricted Subsidiary;
(d) Interest Rate Obligations of the Issuer and/or any Restricted
Subsidiary relating to Indebtedness of the Issuer and/or such Restricted
Subsidiary, as the case may be (which Indebtedness (x) bears interest at
fluctuating interest rates and (y) is otherwise permitted to be incurred
under the "Limitation on Additional Indebtedness" covenant), but only to
the extent that the notional principal amount of such Interest Rate
Obligations does not exceed the principal amount of the Indebtedness
(and/or Indebtedness subject to commitments) to which such Interest Rate
Obligations relate;
(e) Indebtedness of the Issuer and/or any Restricted Subsidiary in
respect of performance bonds of the Issuer or any Restricted Subsidiary or
surety bonds provided by the Issuer or any Restricted Subsidiary incurred
in the ordinary course of business;
(f) Indebtedness of the Issuer and/or any Restricted Subsidiary to the
extent it represents a replacement, renewal, refinancing or extension (a
"Refinancing") of outstanding Indebtedness of the Issuer and/or of any
Restricted Subsidiary incurred or outstanding pursuant to clause (a), (b),
(g),
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(h) or (i) of this definition or the proviso of the covenant "Limitation on
Additional Indebtedness"; provided that (1) Indebtedness of the Issuer may
not be Refinanced to such extent under this clause (f) with Indebtedness of
any Restricted Subsidiary and (2) any such Refinancing shall only be
permitted under this clause (f) to the extent that (x) it does not result
in a lower Average Life to Stated Maturity of such Indebtedness as compared
with the Indebtedness being Refinanced and (y) it does not exceed the sum
of the principal amount (or, if such Indebtedness provides for a lesser
amount to be due and payable upon a declaration of acceleration thereof, an
amount no greater than such lesser amount) of the Indebtedness being
Refinanced plus the amount of accrued interest thereon and the amount of
any reasonably determined prepayment premium necessary to accomplish such
Refinancing and such reasonable fees and expenses incurred in connection
therewith;
(g) Indebtedness of the Issuer such that, after giving effect to the
incurrence thereof, the total aggregate principal amount of Indebtedness
incurred under this clause (g) and any Refinancings thereof otherwise
incurred in compliance with the Indenture would not exceed 200% of Total
Incremental Equity;
(h) Indebtedness of the Issuer and/or any Restricted Subsidiary
incurred under any Permitted Credit Facility and/or Indebtedness of the
Issuer represented by Debt Securities of the Issuer, and any Refinancings
of the foregoing otherwise incurred in compliance with the Indenture, in an
aggregate principal amount not to exceed $70.0 million at any time
outstanding;
(i) Indebtedness of the Company and/or any Restricted Subsidiary
incurred under any Permitted Equipment Financing or as a result of any
Rollup of any ISP, and any Refinancings thereof otherwise incurred in
compliance with the Indenture, provided the aggregate principal amount of
all such Indebtedness does not exceed $30.0 million at any time
outstanding;
(j) Indebtedness of the Issuer representing the deferred purchase
price (whether or not subject to a contingency) of an acquisition of, or an
Investment in, a New ISP in an aggregate principal amount not to exceed
$15.0 million at any time outstanding; and
(k) in addition to the items referred to in clauses (a) through (j)
above, Indebtedness of the Issuer and/or the Restricted Subsidiaries having
an aggregate principal amount not to exceed $20.0 million at any time
outstanding.
"Permitted Investments" means (a) Cash Equivalents; (b) Investments in
prepaid expenses, negotiable instruments held for collection and lease, utility
and workers' compensation, performance and other similar deposits; (c) Interest
Rate Obligations incurred in compliance with the covenant "Limitation on
Additional Indebtedness"; and (d) the extension by the Issuer and the Restricted
Subsidiaries of (i) trade credit to Subsidiaries of the Issuer and ISPs,
represented by accounts receivable, extended on usual and customary terms in the
ordinary course of business or (ii) guarantees of commitments for the purchase
of goods or services by any ISP incurred in the ordinary course of business so
long as such guarantees to the extent constituting Indebtedness are permitted to
be incurred under the covenant "Limitation on Additional Indebtedness."
"Permitted Liens" means (a) Liens on property of a person existing at the
time such person is merged into or consolidated with the Issuer or any
Restricted Subsidiary or becomes a Restricted Subsidiary; provided that such
Liens were in existence prior to the contemplation of such merger, consolidation
or acquisition and do not secure any property or assets of the Issuer or any
Restricted Subsidiary other than the property or assets subject to the Liens
prior to such merger or consolidation or acquisition; (b) Liens imposed by law,
such as carriers', warehousemen's and mechanics' Liens and other similar Liens
arising in the ordinary course of business that secure payment of obligations
not more than 60 days past due or that are being contested in good faith and by
appropriate proceedings; (c) Liens existing on the Issue Date; (d) Liens for
taxes, assessments or governmental charges or claims that are not yet delinquent
or that are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted; provided that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (e) easements, rights of way, restrictions and other similar
easements, licenses, restrictions on the use of
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properties, or minor imperfections of title that, in the aggregate, are not
material in amount and do not in any case materially detract from the properties
subject thereto or interfere with the ordinary conduct of the business of the
Issuer or the Restricted Subsidiaries; (f) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business; (g)
Liens securing any Permitted Credit Facility or Permitted Equipment Financing;
(h) Liens to secure Indebtedness incurred in compliance with clause (j) of
"Permitted Indebtedness" to the extent relating to the asset subject of the
particular Asset Acquisition or Investment; (i) Liens to secure any Refinancing
of any Indebtedness secured by Liens referred to in the foregoing clauses (a) or
(c), but only to the extent that such Liens do not extend to any other property
or assets and the principal amount of the Indebtedness secured by such Liens is
not increased; (j) Liens to secure the Notes; and (k) Liens on real property
incurred in connection with the financing of the purchase of such real property
(or incurred within 60 days of purchase) by the Issuer or any Restricted
Subsidiary.
"Preferred Stock" means, with respect to any person, any and all shares,
interests, participations or other equivalents (however designated) of such
person's preferred or preference stock whether now outstanding, or issued after
the Issue Date, and including, without limitation, all classes and series of
preferred or preference stock of such person.
"Public Capital Stock" means any class of Capital Stock which is traded on
the New York Stock Exchange, the American Stock Exchange or the Nasdaq National
Market.
"Qualifying Preferred Stock" means preferred stock of an ISP (i) having a
liquidation and dividend preference at least equal to the amount of the
Investment made by the Issuer or a Restricted Subsidiary in such ISP, (ii) that,
in the case of ISPs not constituting Restricted Subsidiaries, is redeemable at
the option of the holder on a basis consistent with past practice and (iii) that
is convertible into shares of Common Stock of such ISP at the option of the
holder.
"Refinancing" has the meaning set forth in clause (f) of the definition of
"Permitted Indebtedness."
"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution on Capital Stock of the Issuer
or any payment made to the direct or indirect holders (in their capacities as
such) of Capital Stock of the Issuer (other than dividends or distributions
payable solely in Capital Stock (other than Disqualified Stock) of the Issuer or
in options, warrants or other rights to purchase Capital Stock (other than
Disqualified Stock) of the Issuer); (ii) the purchase, redemption or other
acquisition or retirement for value of any Capital Stock of the Issuer (other
than any such Capital Stock owned by the Issuer or a Wholly Owned Restricted
Subsidiary); (iii) the purchase, redemption, defeasance or other acquisition or
retirement for value prior to any scheduled repayment, sinking fund or maturity
of any Subordinated Indebtedness (other than any Subordinated Indebtedness held
by a Wholly Owned Restricted Subsidiary); (iv) the making of any payment
(whether of dividends or in respect of liquidation preference) in respect of the
Series A Preferred Stock, the Series B Preferred Stock or the Series C Preferred
Stock; or (v) the making by the Issuer or any Restricted Subsidiary of any
Investment (other than a Permitted Investment) in any person (other than an
Investment by a Restricted Subsidiary in the Issuer or an Investment by the
Issuer or a Restricted Subsidiary in (a) a Wholly Owned Restricted Subsidiary
engaged principally in an Internet Service Business; (b) a New ISP that is a
Restricted Subsidiary; (c) a person (other than an Existing ISP) engaged
principally in an Internet Service Business that becomes a Wholly Owned
Restricted Subsidiary as a result of such Investment; (d) a New ISP that becomes
a Restricted Subsidiary as a result of such Investment; or (e) a Restricted
Subsidiary (other than an Existing ISP) or a person (other than an Existing ISP)
that becomes a Restricted Subsidiary as a result of such Investment, provided
that, in either case, such Restricted Subsidiary would, but for failing to meet
the requirements of clauses (c) and (d) of the definition of "ISP," be a New
ISP).
"Restricted Subsidiary" means any Subsidiary of the Issuer that has not
been designated by the Board, by a Board Resolution delivered to the Trustee, as
an Unrestricted Subsidiary pursuant to and in compliance with the covenant
"Limitation on Designations of Unrestricted Subsidiaries." Any such designation
may be revoked by a Board Resolution delivered to the Trustee, subject to the
provisions of such covenant.
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"Restricted Subsidiary Indebtedness" means Indebtedness of any Restricted
Subsidiary (i) which is not subordinated to any other Indebtedness of such
Restricted Subsidiary and (ii) in respect of which the Issuer is not also
obligated (by means of a guarantee or otherwise) other than, in the case of this
clause (ii), Indebtedness under any Permitted Credit Facilities.
"Revocation" has the meaning set forth under "-- Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries."
"Rollup" means (i) an Investment in an Existing ISP or transaction or
series of related transactions as a result of which such Existing ISP becomes a
Wholly Owned Restricted Subsidiary or (ii) an Investment in a New ISP or
transaction or series of related transactions as a result of which such New ISP
becomes a Restricted Subsidiary or (iii) a merger or consolidation of any ISP
with the Issuer.
"S&P" means Standard & Poor's Corporation.
"Strategic Equity Investor" means any person engaged principally in one or
more communications businesses with a Market Capitalization or Consolidated Net
Worth of at least $1.0 billion.
"Subordinated Indebtedness" means any Indebtedness of the Issuer or any
Guarantor which is expressly subordinated in right of payment to any other
Indebtedness of the Issuer or such Guarantor.
"Subsidiary" means, with respect to any person, (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors shall at the time be owned,
directly or indirectly, by such person, or (ii) any other person of which at
least a majority of voting interest is at the time, directly or indirectly,
owned by such person.
"Total Consolidated Indebtedness" means, at any date of determination, an
amount equal to the aggregate amount of all Indebtedness of the Issuer and the
Restricted Subsidiaries outstanding as of the date of determination.
"Total Incremental Equity" means, at any time of determination, the sum of,
without duplication, (i) the aggregate cash proceeds received prior to June 24,
2000 by the Issuer from capital contributions in respect of existing Capital
Stock (other than Disqualified Capital Stock) or the issuance or sale of Capital
Stock (other than Disqualified Stock but including Capital Stock issued upon the
conversion of convertible Indebtedness or from the exercise of options, warrants
or rights to purchase Capital Stock (other than Disqualified Stock)) subsequent
to the Issue Date, other than to a Subsidiary of the Issuer, plus (ii) the Fair
Market Value (determined at the time of issuance) of any Capital Stock (other
than Disqualified Stock) of the Issuer issued prior to June 24, 2000 as
consideration for the acquisition of Capital Stock of an ISP (other than the
acquisition of Capital Stock of an Existing ISP), plus (iii) the Fair Market
Value (determined at the time of issuance) of any Capital Stock (other than
Disqualified Stock) of the Issuer issued prior to June 24, 2000 as consideration
for the acquisition of Capital Stock of an Existing ISP in a transaction as a
result of which the Existing ISP becomes a Wholly Owned Restricted Subsidiary,
plus (iv) the aggregate cash proceeds received by the Issuer or any Restricted
Subsidiary from the sale, disposition or repayment (in whole or in part) of any
Investment that is made after the Issue Date and that constitutes a Restricted
Payment that has been deducted from Total Incremental Equity pursuant to clause
(v) below in an amount equal to the lesser of (a) the return of capital with
respect to the applicable portion of such Investment and (b) the cost of the
applicable portion of such Investment, in either case, less the cost of the
disposition of such Investment, minus (v) the aggregate amount of all Restricted
Payments declared or made on and after the Issue Date (other than (1) a
Restricted Payment constituting an Investment in an ISP (other than the
acquisition of Capital Stock of an Existing ISP in a transaction as a result of
which the Existing ISP becomes a Wholly Owned Restricted Subsidiary) and (2) a
Restricted Payment made pursuant to clauses (iii), (viii) or (ix) (solely, in
the case of clause (ix), to the extent the Investment is made in a Restricted
Subsidiary) of the third paragraph of the covenant "Limitation on Restricted
Payments").
"Unrestricted Subsidiary" means any Subsidiary of the Issuer designated as
such pursuant to and in compliance with the covenant "Limitation on Designations
of Unrestricted Subsidiaries." Any such designa-
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tion may be revoked by a Board Resolution delivered to the Trustee, subject to
the provisions of such covenant.
"U.S. Government Securities" means securities that are direct obligations
of the United States of America for the payment of which its full faith and
credit is pledged.
"Voting Stock" means, with respect to any person, the Capital Stock of any
class or kind ordinarily having the power to vote for the election of directors
or other members of the governing body of such person.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of
which 99% or more of the outstanding Capital Stock is owned by the Issuer or
another Wholly Owned Restricted Subsidiary; provided NorthWestNet shall be
deemed a Wholly Owned Restricted Subsidiary notwithstanding its existing stock
option plan and any stock options issued thereunder. For the purposes of this
definition, any directors' qualifying shares or investments by foreign nationals
mandated by applicable law shall be disregarded in determining the ownership of
a Restricted Subsidiary.
BOOK-ENTRY; DELIVERY AND FORM
Except as set forth under "-- Certificated Securities," the New Notes will
be issued in the form of one Global New Note. The Global New Note will be
deposited with, or on behalf of, the Depository and registered in the name of
the Depository or its nominee. Except as set forth below, the Global New Note
may be transferred, in whole and not in part, only to the Depository or another
nominee of the Depository.
Investors may hold their beneficial interests in the Global New Note
directly through the Depository if they have an account with the Depository or
indirectly through organizations which have accounts with the Depository.
The Depository has advised the Issuer as follows: The Depository is a
limited purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code, and "a clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. The Depository
was created to hold securities of institutions that have accounts with the
Depository ("participants") and to facilitate the clearance and settlement of
securities transactions among its participants in such securities through
electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. The
Depository's participants include securities brokers and dealers (which may
include the Initial Purchasers), banks, trust companies, clearing corporations
and certain other organizations. Access to the Depository's book-entry system is
also available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a participant,
whether directly or indirectly.
Upon the issuance of the Global New Note, the Depository will credit, on
its book-entry registration and transfer system, the principal amount of the New
Notes represented by the Global New Note to the accounts of participants.
Ownership of beneficial interests in the Global New Note will be limited to
participants or persons that may hold interests through participants. Ownership
of beneficial interests in the Global New Note will be shown on, and the
transfer of those ownership interests will be effected only through records
maintained by the Depository (with respect to participants' interest) and such
participants (with respect to the owners of beneficial interests in the Global
New Note other than participants). The laws of some jurisdictions may require
that certain purchasers of securities take physical delivery of such securities
in definitive form. Such limits and laws may impair the ability to transfer or
pledge beneficial interests in the Global New Note.
So long as the Depository, or its nominee, is the registered holder and
owner of the Global New Note, the Depository or such nominee, as the case may
be, will be considered the sole legal owner and holder of the related New Notes
for all purposes of such New Notes and the Indenture. Except as set forth below,
owners of beneficial interests in the Global New Note will not be entitled to
have the New Notes represented by the Global New Note registered in their names,
will not receive or be entitled to receive physical delivery of
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certificated New Notes in definitive form and will not be considered to be the
owners or holders of any New Notes under the Global New Note. The Issuer
understands that under existing industry practice, in the event an owner of a
beneficial interest in the Global New Note desires to take any action that the
Depository, as the holder of the Global New Note is entitled to take, the
Depository would authorize the participants to take such action, and that the
participants would authorize beneficial owners owning through such participants
to take such action or would otherwise act upon the instructions of beneficial
owners owning through them.
Payment of principal of and interest on New Notes represented by the Global
New Note registered in the name of and held by the Depository or its nominee
will be made to the Depository or its nominee, as the case may be, as the
registered owner and holder of the Global New Note.
The Company expects that the Depository or its nominee, upon receipt of any
payment of principal of or interest on the Global New Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global New Note
as shown on the records of the Depository or its nominee. The Issuer also
expects that payments by participants to owners of beneficial interests in the
Global New Note held through such participants will be governed by standing
instructions and customary practices and will be the responsibility of such
participants. The Issuer will not have any responsibility or liability for any
aspect of the records relating to, or payments made on account of, beneficial
ownership interests in the Global New Note for any New Note or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests or for any other aspect of the relationship between the Depository and
its participants or the relationship between such participants and the owners of
beneficial interests in the Global New Note owning through such participants.
Unless and until it is exchanged in whole or in part for certificated New
Notes in definitive form, the Global New Note may not be transferred except as a
whole by the Depository to a nominee of such Depository or by a nominee of such
Depository to such Depository or another nominee of such Depository.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global New Note among participants of
the Depository, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. None of the
Trustee, the Issuer nor the Paying Agent will have any responsibility for the
performance by the Depository or its participants or indirect participants of
their respective obligations under the rules and procedures governing their
operations.
Certificated Securities. Interests in the Global New Note will be exchanged
for Certificated Securities if (i) DTC notifies the Issuer that it is unwilling
or unable to continue as depositary for the Global New Note, or DTC ceases to be
a "Clearing Agency" registered under the Exchange Act, and a successor
depositary is not appointed by the Issuer within 90 days, or (ii) an Event of
Default has occurred and is continuing with respect to the New Notes. Upon the
occurrence of any of the events described in the preceding sentence, the Issuer
will cause the appropriate Certificated Securities to be delivered.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material U.S. Federal income
tax considerations relevant to the exchange of Old Notes for New Notes pursuant
to the Exchange Offer and the ownership and disposition of the New Notes by
holders who acquire the New Notes pursuant to the Exchange Offer, but does not
purport to be a complete analysis of all potential tax effects. The discussion
is based upon the Internal Revenue Code of 1986, as amended (the "Code"), U.S.
Treasury Regulations (the "Regulations"), Internal Revenue Service ("IRS")
rulings and pronouncements and judicial decisions all in effect as of the date
hereof, all of which are subject to change at any time, and any such change may
be applied retroactively in a manner that could adversely affect a holder of the
New Notes. The discussion does not address all of the U.S. Federal income tax
consequences that may be relevant to a holder in light of such holder's
particular circumstances or to holders subject to special rules, such as certain
financial institutions, insurance companies, dealers in securities, tax-exempt
organizations and persons who hold the New Notes as part of a "straddle,"
"hedge" or "conversion transaction." In addition, this discussion is limited to
persons purchasing the Old
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Notes for cash at original issue. Moreover, the effect of any applicable state,
local or foreign tax laws is not discussed. The discussion deals only with New
Notes held as "capital assets" within the meaning of Section 1221 of the Code.
As used herein, "U.S. holder" means a beneficial owner of New Notes who or
that (i) is a citizen or resident of the United States, (ii) is a corporation,
partnership or other entity created or organized in or under the laws of the
United States or political subdivision thereof (unless, in the case of a
partnership, the IRS provides otherwise by Regulations), (iii) is an estate the
income of which is subject to U.S. Federal income taxation regardless of its
source, (iv) is a trust if (A) a U.S. court is able to exercise primary
supervision over the administration of the trust and (B) one or more U.S.
persons (within the meaning of Section 7701(c)(30) of the Code) have authority
to control all substantial decisions of the trust, or (v) is otherwise subject
to U.S. Federal income tax on a net income basis in respect of the New Notes. As
used herein, a "non-U.S. holder" means a holder who or that is not a U.S.
holder.
The Company has not sought and will not seek any rulings from the IRS with
respect to the matters discussed below. There can be no assurance that the IRS
will not take a different position concerning the tax consequences of the
exchange of Old Notes for New Notes and the ownership or disposition of the New
Notes by holders who acquire the New Notes pursuant to the Exchange Offer or
that any such position would not be sustained.
PROSPECTIVE HOLDERS OF THE NEW NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS
WITH REGARD TO THE APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO
THEIR PARTICULAR SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL,
FOREIGN OR OTHER TAX LAWS, INCLUDING GIFT AND ESTATE TAX LAWS.
EXCHANGE OFFER
The exchange of Old Notes for New Notes pursuant to the Exchange Offer will
not be treated as an exchange or other taxable event for U.S. Federal income tax
purposes because, under the Regulations, the New Notes do not differ materially
in kind or extent from the Old Notes. Rather, the New Notes received by a holder
will be treated as a continuation of the Old Notes in the hands of such holder.
As a result, there will be no U.S. Federal income tax consequences to holders
who exchange Old Notes for New Notes pursuant to the Exchange Offer and any such
holder will have the same tax basis and holding period in the New Notes as it
had in the Old Notes immediately before the exchange.
U.S. HOLDERS
Interest. The stated interest on the New Notes generally will be taxable to
a U.S. holder as ordinary income at that time that it is paid or accrued, in
accordance with the U.S. holder's method of accounting for federal income tax
purposes. The New Notes are not expected to give rise to "original issue
discount" income in the hands of U.S. holders.
Sale or Retirement of a Note. A U.S. holder of a New Note will recognize
gain or loss upon the sale, retirement, redemption or other taxable disposition
of such New Note in an amount equal to the difference between (a) the amount of
cash and the fair market value of other property received in exchange therefor
(other than amounts attributable to accrued but unpaid stated interest) and (b)
the U.S. holder's adjusted tax basis in such New Note. Subject to the market
discount rules discussed below, such gain or loss will be capital gain or loss.
The Taxpayer Relief Act of 1997 made certain changes to the Code with respect to
the taxation of capital gains of noncorporate taxpayers. In general, the maximum
tax rate for noncorporate taxpayers on long-term capital gains is 20% with
respect to capital assets (including the New Notes), but only if they have been
held for more than 18 months at the time of disposition. Gain realized by
noncorporate taxpayers on capital assets sold, having a holding period of more
than one year but not more than 18 months at the time of disposition, is taxed
as "mid-term" gain at a maximum 28% rate.
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U.S. holders should be aware that the resale of the New Notes may be
affected by the "market discount" rules of the Code under which a purchaser of a
New Note acquiring the New Note at a market discount generally would be required
to include as ordinary income a portion of the gain realized upon the
disposition or retirement of such New Note, to the extent of the market discount
that has accrued but not been included in income while the New Note was held by
such purchaser.
NON-U.S HOLDERS
U.S. Withholding Tax. Interest paid to non-U.S. holders of the New Notes will
not be subject to U.S. withholding tax, provided that (i) the non-U.S. holder
does not actually or constructively own 10 percent or more of the total combined
voting power of all classes of stock of the Company, (ii) the non-U.S. holder is
not (a) a controlled foreign corporation for U.S. Federal income tax purposes
that is related to the Company through stock ownership or (b) a bank that
received the New Note on an extension of credit made pursuant to a loan
agreement entered into in the ordinary course of its trade or business, and
(iii) the beneficial owner of the New Note provides a statement signed under
penalties of perjury that includes its name and address and certifies that it is
not a U.S. person in compliance with applicable Regulations or an exemption is
otherwise established. If these requirements cannot be made, a non-U.S. holder
will be subject to U.S. withholding tax at a rate of 30% (or lower treaty rate,
if applicable) on interest payments.
In general, any gain realized by any non-U.S. holder upon the sale,
exchange or redemption of a New Note will not be subject to United States
withholding tax. However, such gain will be subject to U.S. withholding tax if a
non-U.S. holder is an individual who is present in the United States for a total
of 183 days or more during the taxable year in which the gain is realized and
certain other conditions are satisfied.
U.S. Estate Tax. Notes owned or treated as owned by an individual who is
not a citizen or resident (as specially defined for U.S. Federal estate tax
purposes) of the United States at the time of death ("Nonresident Decedent")
will not be includible in the Nonresident Decedent's gross estate for U.S.
Federal estate tax purposes as a result of the Nonresident Decedent's death,
provided that, at the time of death, the Nonresident Decedent does not own,
actually or constructively, 10% or more of the total combined voting power of
all classes of stock of the Company and payments with respect to such Notes
would not have been effectively connected with the conduct of a trade or
business in the United States by the Nonresident Decedent. A Nonresident
Decedent's estate may be subject to U.S. Federal estate tax on property
includible in the estate for U.S. Federal estate tax purposes.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Certain noncorporate U.S. persons may be subject to information reporting
and backup withholding at a rate of 31% on payments of principal and interest on
the New Notes, and the proceeds from a disposition of the New Notes. Backup
withholding will only be imposed where the holder (i) fails to furnish its
taxpayer identification number ("TIN"), which, for an individual, would
ordinarily be his or her social security number, (ii) furnishes an incorrect
TIN, (iii) is notified by the IRS that it has failed to properly report payments
of interest or dividends, or (iv) under certain circumstances, fails to certify,
under penalties of perjury, that it has furnished a correct TIN and has not been
notified by the IRS that it is subject to backup withholding. The Company will
also institute backup withholding if instructed to do so by the IRS. Holders of
the New Notes should consult their own tax advisors regarding their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption, if applicable. However, interest paid with respect
to a New Note and received by a non-U.S. holder will not be subject to
information reporting or backup withholding if the payor has received
appropriate certification statements, provided that the payor does not have
actual knowledge that the holder is a U.S. person.
The payment of the proceeds from the disposition of New Notes to or through
the U.S. office of any broker, U.S. or foreign, will not be subject to
information reporting and possibly backup withholding if the owner certifies as
to its non-U.S. status under penalties of perjury or otherwise establishes an
exemption, provided that the broker does not have actual knowledge that the
holder is a U.S. person or that the conditions of any other exemption are not,
in fact, satisfied. The payment of the proceeds from the disposition of a New
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Note to or through a non-U.S. office of a non-U.S. broker that is not a U.S.
related person will not be subject to information reporting or backup
withholding. For this purpose, a "U.S. related person" is (i) a controlled
foreign corporation for U.S. Federal income tax purposes or (ii) a foreign
person 50% or more of whose gross income from all sources for the three-year
period ending with the close of its taxable year preceding the payment (or for
such part of the period that the broker has been in existence) is derived from
activities that are effectively connected with the conduct of a U.S. trade or
business.
In the case of the payment of proceeds from the disposition of New Notes to
or through a non-U.S. office of a broker that is a U.S. related person, the
Regulations require information reporting on the payment unless the broker has
documentary evidence in its files that the owner is a non-U.S. holder and the
broker has no knowledge to the contrary. Backup withholding will not apply to
payments made through foreign offices of a broker that is a U.S. person or a
U.S. related person (absent actual knowledge that the payee is a U.S. person).
Any amounts withheld under the backup withholding rates from a payment to a
non-U.S. holder will be allowed as a credit against such non-U.S. holder's U.S.
Federal income tax liability, if any, or otherwise will be refunded, provided
that the requisite procedures are followed.
PROSPECTIVE FINAL REGULATIONS
On October 6, 1997, new Regulations ("New Regulations") were issued that
modify the requirements imposed on a non-U.S. holder and certain intermediaries
for establishing the recipient's status as a non-U.S. holder eligible for
exemption from or reduction in U.S. withholding tax and backup withholding
described above. The New Regulations generally are effective for payments made
after December 31, 1998, subject to certain transition rules. (However, new
Temporary Regulations, effective for payments made after December 31, 1997,
require some non-U.S. holders to satisfy certain residency requirements when
claiming the benefits of an applicable income tax treaty.) In general, the New
Regulations do not significantly alter the substantive withholding and
information reporting requirements but rather unify current certification
procedures and forms and clarify reliance standards. In addition, the New
Regulations impose more stringent conditions on the ability of financial
intermediaries acting for non-U.S. holders to provide certifications on behalf
of non-U.S. holders, which may include entering into an agreement with the IRS
to audit certain documentation with respect to such certifications. Non-U.S.
holders should consult their own tax advisors to determine the effects of the
application of the New Regulations to their particular circumstances.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, starting on the Expiration Date
and ending on 180 days after the Expiration Date, it will make this Prospectus,
as amended or supplemented, available to any broker-dealer for use in connection
with any such resale. In addition, until such date, all dealers effecting
transactions in the New Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sales of New Notes by
broker-dealers or others. New Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such methods
of resale, at market prices prevailing at the time of resale, at prices related
to such prevailing market prices or negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such new Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes
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may be deemed to be an "underwriter" within the meaning of the Securities Act
and any profit from any such resale of New Notes and any commissions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
holders of the Notes) other than commissions or concessions of any brokers or
dealers and will indemnify the holders of the Notes (including any broker-
dealers) against certain liabilities, including liabilities under the Securities
Act.
LEGAL MATTERS
The validity of the New Notes will be passed upon for the Company by
Morrison & Foerster LLP, San Francisco, California.
EXPERTS
The consolidated financial statements of Verio Inc. 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, Northwest Academic Computing Consortium, Inc. as of and for the year
ended June 30, 1995, the six months ended December 31, 1995 and the eight months
ended February 28, 1997; Aimnet Corporation as of and for the year ended March
31, 1997 and the period ended May 19, 1997; Clark Internet Services, Inc. as of
and for the year ended September 30, 1997 and the period ended October 17, 1997;
ATMnet, Inc. as of and for the years ended October 31, 1996 and 1997; and Global
Internet Network Services, Inc. as of December 31, 1996 and November 26, 1997
and for the year and period then ended, have been included herein and in the
registration statement in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, to the extent and for the periods set
forth in their reports appearing elsewhere herein, and upon the authority of
said firm as experts in accounting and auditing.
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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.
Buyouts Verio's acquisition of the remaining interest in ISPs that
are not owned 100%.
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.
99
<PAGE> 106
K/bps Kilobits per second. A transmission rate. One kilobit equals
1,024 bits of information.
LAN Local Area Network. A data communications network designed
to interconnect personal computers, workstations,
minicomputers, file servers and other communications and
computing devices within a localized environment.
Leased Line Telecommunications line dedicated to a particular customer
along predetermined routes.
LEC Local Exchange Carrier. A telecommunications company that
provides telecommunications services in a geographic area in
which calls generally are transmitted without toll charges.
LECs include both RBOCs and competitive local exchange
carriers.
LMDS Local Multipoint Distribution Service. Two blocks of
spectrum with total bandwidth of 1150 MHz and 150 MHz to be
auctioned and used for various wireless services.
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.
100
<PAGE> 107
TCP/IP Transmission Control Protocol/Internet Protocol. A suite of
network protocols that allow computers with different
architectures and operating system software to communicate
with other computers on the Internet.
VPN Virtual Private Network. A network capable of providing the
tailored services of a private network (i.e. low latency,
high throughput, security and customization) while
maintaining the benefits of a public network (i.e. ubiquity
and economies of scale).
WAN Wide Area Network. A data communications network designed to
interconnect personal computers, workstations, mini
computers, file servers and other communications and
computing devices across a broad geographic region.
Web Site A server connected to the Internet from which Internet users
can obtain information.
World Wide Web or Web
A collection of computer systems supporting a communications
protocol that permits multi-media presentation of
information over the Internet.
xDSL A term referring to a variety of new Digital Subscriber Line
technologies. Some of these varieties are asymmetric with
different data rates in the downstream and upstream
directions. Others are symmetric. Downstream speeds range
from 384 kbps (or "SDSL") to 1.5-8 Mbps (or "ASDL").
101
<PAGE> 108
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. -- Consolidated Financial Statements:
Independent Auditors' Report.............................. F-12
Consolidated Balance Sheets as of December 31, 1996 and
1997................................................... F-13
Consolidated Statements of Operations for the Period from
Inception (March 1, 1996) to December 31, 1996 and the
Year Ended December 31, 1997........................... F-14
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-15
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-16
Notes to Consolidated Financial Statements................ F-17
On-Ramp Technologies, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-27
Balance Sheet as of July 31, 1996......................... F-28
Statement of Operations for the Nine Months Ended July 31,
1996................................................... F-29
Statement of Stockholders' Deficit for the Nine Months
Ended July 31, 1996.................................... F-30
Statement of Cash Flows for the Nine Months Ended July 31,
1996................................................... F-31
Notes to Financial Statements............................. F-32
Global Enterprises Services -- Network Division -- Financial
Statements:
Independent Auditors' Report.............................. F-35
Balance Sheets as of December 31, 1995 and 1996........... F-36
Statements of Operations and Owner's Deficit for the Years
Ended December 31, 1994, 1995, 1996 and Period Ended
January 17, 1997....................................... F-37
Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996 and Period Ended January 17,
1997................................................... F-38
Notes to Financial Statements............................. F-39
Compute Intensive Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-43
Balance Sheets as of December 31, 1995 and 1996........... F-44
Statements of Operations for the Years Ended December 31,
1995 and 1996 and Period Ended February 18, 1997....... F-45
Statements of Stockholders' Equity for the Years Ended
December 31, 1995 and 1996 and Period Ended February
18, 1997............................................... F-46
Statements of Cash Flows for the Years Ended December 31,
1995 and 1996 and Period Ended February 18, 1997....... F-47
Notes to Financial Statements............................. F-48
NorthWestNet, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-53
Balance Sheets as of June 30, 1995 and 1996............... F-54
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-55
Statements of Stockholders' Equity and Fund Balance for
the Year Ended June 30, 1995 and the Six Months Ended
December 31, 1995...................................... F-56
</TABLE>
F-1
<PAGE> 109
<TABLE>
<S> <C>
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-57
Notes to Financial Statements............................. F-58
Aimnet, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-65
Balance Sheet as of March 31, 1997........................ F-66
Statement of Operations for the Year Ended March 31, 1997
and Period Ended May 19, 1997.......................... F-67
Statements of Stockholders' Equity for the Year Ended
March 31, 1997 and Period Ended May 19, 1997........... F-68
Statements of Cash Flows for the Year Ended March 31, 1997
and Period Ended May 19, 1997.......................... F-69
Notes to Financial Statements............................. F-70
Clark Internet Services, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-73
Balance Sheet as of September 30, 1997.................... F-74
Statements of Operations and Retained Earnings for the
Year Ended September 30, 1997 and Period Ended October
17, 1997............................................... F-75
Statements of Cash Flows for the Year Ended September 30,
1997 and Period Ended October 17, 1997................. F-76
Notes to Financial Statements............................. F-77
ATMnet, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-79
Balance Sheets as of October 31, 1996 and 1997............ F-80
Statements of Operations for the Years Ended October 31,
1996 and 1997.......................................... F-81
Statements of Stockholders' Deficit for the Years Ended
October 31, 1996 and 1997.............................. F-82
Statements of Cash Flows for the Years Ended October 31,
1996 and 1997.......................................... F-83
Notes to Financial Statements............................. F-84
Global Internet Network Services, Inc. -- Financial
Statements:
Independent Auditors' Report.............................. F-88
Balance Sheets as of December 31, 1996 and November 26,
1997................................................... F-89
Statements of Operations for the Year Ended December 31,
1996 and the Period Ended November 26, 1997............ F-90
Statements of Stockholders' Equity for the Year Ended
December 31, 1996 and the Period Ended November 26,
1997................................................... F-91
Statements of Cash Flows for the Year Ended December 31,
1996 and the Period Ended November 26, 1997............ F-92
Notes to Financial Statements............................. F-93
</TABLE>
F-2
<PAGE> 110
VERIO INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
During the period from August 1, 1996 through February 27, 1998, 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"). In addition, the Company
has contractual rights to effect additional Buyouts which have not been
completed at the date of this Registration Statement but which, in the opinion
of management, are probable to be completed (the "Proposed 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 modified equity
method of accounting (see Note 1 to Consolidated Financial Statements). The
Completed Acquisitions and Proposed 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 is in
the process of effecting the Buyouts of its remaining non-wholly owned ISPs
through the use of cash on hand and the issuance of equity. As of February 27,
1998, Verio has consummated the Buyout of ten ISPs. Verio currently expects to
effect the remaining Buyouts during the remainder of 1998. With respect to those
Buyouts that have not yet been completed, 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. The acquisitions
of the remaining interests in existing consolidated subsidiaries or minority
owned affiliates which management currently believes to be probable are also
referred to as, and included in, Proposed Acquisitions, and are also described
in Note A to the accompanying pro forma condensed combined financial statements.
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 and the Proposed 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 and
the Proposed Acquisitions had occurred on January 1, 1997, and includes the
historical consolidated statements of operations of Verio and the Completed and
Proposed Acquisitions for the year ended December 31, 1997, adjusted for the pro
forma effects of the acquisitions.
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> 111
VERIO INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1997 (UNAUDITED)
AMOUNTS IN THOUSANDS
ASSETS
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------
COMPLETED PROPOSED PRO FORMA PRO FORMA
ACQUISITIONS ACQUISITIONS ADJUSTMENTS COMBINED
VERIO (NOTE B) (NOTE B) (NOTE D) VERIO
-------- --------------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents......... $ 72,586 $ 782 $ 27 $(21,256)(1) $ 52,139
Restricted cash and securities.... 21,015 -- -- -- 21,015
Receivables, net.................. 7,565 741 206 -- 8,512
Prepaid expenses and other........ 4,656 666 1 (534)(3) 4,789
-------- ------ ----- -------- --------
Total current assets...... 105,822 2,189 234 (21,790) 86,455
Investments in affiliates, at
cost.............................. 2,378 -- -- (1,128)(1) 1,250
Restricted cash and securities...... 19,539 -- -- -- 19,539
Equipment and leasehold
improvements, net................. 28,213 1,768 54 -- 30,035
Other assets:
Goodwill, net..................... 83,216 -- -- 44,594(1) 127,810
Other, net........................ 7,303 161 7 -- 7,471
-------- ------ ----- -------- --------
Total assets.............. $246,471 $4,118 $ 295 $ 21,676 $272,560
======== ====== ===== ======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued
expenses....................... $ 19,634 $1,490 $ 252 $ -- $ 21,376
Lines of credit, notes payable and
current portion of long-term
debt and capital lease
obligations.................... 4,326 1,048 70 (534)(3) 4,910
Deferred revenue.................. 7,177 690 16 -- 7,883
-------- ------ ----- -------- --------
Total current
liabilities............. 31,137 3,228 338 (534) 34,169
Long-term debt and capital lease
obligations, less current
portion........................... 142,321 247 15 -- 142,583
-------- ------ ----- -------- --------
Total liabilities......... 173,458 3,475 353 (534) 176,752
Minority interests in
subsidiaries...................... 2,765 -- -- (2,765)(5) --
Redeemable preferred stock.......... 97,249 2,566 150 (2,716)(2) 97,249
Stockholders' deficit:
Preferred stock................... 10,200 -- -- 25,560(1) 35,760
Common stock and additional
paid-in capital................ 1,598 507 1 (508)(2) 1,598
Warrants.......................... 12,675 -- -- -- 12,675
Retained earnings (deficit)....... (51,474) (2,430) (209) 2,639(2) (51,474)
-------- ------ ----- -------- --------
(27,001) (1,923) (208) 27,691 (1,441)
-------- ------ ----- -------- --------
Total liabilities and
stockholders' deficit... $246,471 $4,118 $ 295 $ 21,676 $272,560
======== ====== ===== ======== ========
</TABLE>
F-4
<PAGE> 112
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 PROPOSED PRO FORMA PRO FORMA
ACQUISITIONS ACQUISITIONS ADJUSTMENTS COMBINED
VERIO (NOTE C) (NOTE C) (NOTE D) VERIO
---------- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity...................... $ 23,476 $29,112 $ 859 $ (98)(3) $ 53,349
Enhanced services and other................ 12,216 12,366 27 -- 24,609
---------- ------- ------- -------- ----------
Total revenue....................... 35,692 41,478 886 (98) 77,958
---------- ------- ------- -------- ----------
Costs and expenses:
Internet services operating costs.......... 15,974 16,104 473 (76)(3) 32,475
Selling, general and administrative and
other.................................... 49,383 27,581 511 (886)(7) 76,589
Depreciation and amortization.............. 10,624 2,298 -- 9,597(4) 22,519
---------- ------- ------- -------- ----------
Total costs and expenses............ 75,981 45,983 984 8,635 131,583
---------- ------- ------- -------- ----------
Loss from operations..................... (40,289) (4,505) (98) (8,733) (53,625)
Other income (expense):
Interest income............................ 6,080 37 -- -- 6,117
Interest expense........................... (11,826) (361) (17) -- (12,204)
Equity in losses of affiliates............. (1,958) -- -- 1,958(5) --
---------- ------- ------- -------- ----------
Loss before minority interests and income
taxes.................................. (47,993) (4,829) (115) (6,775) (59,712)
Minority interests........................... 1,924 -- -- (1,924)(5) --
Income taxes................................. -- (1,355) -- 1,355(6) --
---------- ------- ------- -------- ----------
Net loss............................ (46,069) (6,184) (115) (7,344) (59,712)
Accretion of preferred stock to liquidation
value...................................... (260) -- -- -- (260)
---------- ------- ------- -------- ----------
Net loss attributable to common
stockholders............................... $ (46,329) $(6,184) $ (115) $ (7,344) $ (59,972)
========== ======= ======= ======== ==========
Weighted average shares outstanding -- basic
and diluted................................ 1,144,685 1,144,685
========== ==========
Loss per common share -- basic and diluted... $ (40.47) $ (52.39)
========== ==========
</TABLE>
F-5
<PAGE> 113
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(A) BASIS OF PRESENTATION
During the period from inception (March 1, 1996) to February 27, 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 (Completed Acquisitions). In addition, the
Company has contractual rights to effect certain additional Buyouts which have
not been completed at the date of this Registration Statement but which, in the
opinion of management, are probable to be completed. These transactions are
collectively referred to as the "Proposed Acquisitions." All of the acquisitions
have been or will be accounted for using the purchase method of accounting.
Summary information regarding the Completed and Proposed Acquisitions is as
follows:
<TABLE>
<CAPTION>
OWNERSHIP PERCENTAGE
--------------------------------------
COMPLETED
ACQUISITIONS
THROUGH
FEBRUARY 27, PROPOSED
ACQUISITION DATE(S) 1998 ACQUISITIONS(A) TOTAL
------------------- ------------ --------------- -----
<S> <C> <C> <C> <C>
On-Ramp Technologies, Inc................ August 1, 1996 51% 100%
October 4, 1996 4%
February 26, 1998 45%
National Knowledge Networks, Inc......... August 2, 1996 26% 100%
November 7, 1997 15%
February 27, 1998 59%
RAINet, Inc.............................. August 2, 1996 100% 100%
Access One, Inc.......................... December 12, 1996 20% 100%
February 27, 1998 80%
CCnet, Inc............................... December 19, 1996 100% 100%
Signet Partners, Inc..................... December 19, 1996 25% 100%
November 20, 1997 16%
February 26, 1998 59%
Global Enterprise Services -- Network
Division............................... January 17, 1997 100% 100%
Surf Network, Inc........................ January 31, 1997 25% 100%
December 22, 1997 75%
Pacific Rim Network, Inc................. February 4, 1997 27% 100%
February 16, 1998 73%
Pioneer Global Telecommunications,
Inc.................................... February 6, 1997 100% 100%
Compute Intensive Inc.................... February 18, 1997 55% 45% 100%
NorthWestNet, Inc........................ February 28, 1997 85% 15% 100%
Internet Engineering Associates, Inc..... March 4, 1997 20% 100%
February 25, 1998 80%
Internet Online, Inc..................... March 5, 1997 35% 35%
Structured Network Systems, Inc.......... March 6, 1997 20% 80% 100%
</TABLE>
F-6
<PAGE> 114
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OWNERSHIP PERCENTAGE
--------------------------------------
COMPLETED
ACQUISITIONS
THROUGH
FEBRUARY 27, PROPOSED
ACQUISITION DATE(S) 1998 ACQUISITIONS(A) TOTAL
------------------- ------------ --------------- -----
<S> <C> <C> <C> <C>
RustNet, Inc............................. March 14, 1997 100% 100%
AimNet Corporation....................... May 19, 1997 55% 100%
September 22, 1997 45%
West Coast Online, Inc................... July 26, 1996 20% 100%
April 29, 1997 12%
September 30, 1997 68%
ServiceTech, Inc......................... August 1, 1997 40% 100%
December 31, 1997 60%
Branch Information Services, Inc......... September 17, 1997 100% 100%
Communique, Inc.......................... October 2, 1997 100% 100%
Clark Internet Services, Inc............. October 17, 1997 51% 100%
February 25, 1998 49%
ATMnet, Inc.............................. November 5, 1997 100% 100%
Global Internet Network Services, Inc....
December 1, 1997 100% 100%
Sesquinet................................ December 24, 1997 100%(b) 100%
PREPnet.................................. December 24, 1997 100% 100%
Monumental Network Systems, Inc.......... December 31, 1997 100% 100%
Internet Servers, Inc.................... December 31, 1997 100% 100%
</TABLE>
- ---------------
(a) Acquisition to be completed, including the acquisitions of remaining
interests in consolidated subsidiaries and minority owned affiliates.
(b) Assets of this entity were purchased by On-Ramp Technologies, Inc.
The accompanying unaudited pro forma condensed combined balance sheet as of
December 31, 1997 includes historical balances of Verio and the businesses to be
acquired adjusted for the pro forma effects of the acquisitions completed
through February 27, 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 or to be 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-7
<PAGE> 115
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(B) HISTORICAL CONDENSED BALANCE SHEET INFORMATION -- COMPLETED AND PROPOSED
ACQUISITIONS
Historical condensed balance sheet information for the Completed
Acquisitions is as follows:
<TABLE>
<CAPTION>
INTERNET NATIONAL
PACIFIC RIM SIGNET ENGINEERING KNOWLEDGE ACCESS ONE,
NETWORK, INC. PARTNERS, INC. ASSOCIATES, INC. NSNET, INC. NETWORKS, INC. INC.
------------- -------------- ---------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents.............. $ -- $ 60 $271 $ 26 $ 166 $ 259
Receivables, net........... 46 112 106 60 73 344
Prepaid expenses and
other.................... 31 83 49 345 12 146
----- ----- ---- ---- ------- ------
Total current
assets............. 77 255 426 431 251 749
Equipment and leasehold
improvements, net.......... 181 238 191 387 92 679
Other assets............... -- 25 45 68 13 10
----- ----- ---- ---- ------- ------
Total assets......... 258 $ 518 $662 $886 $ 356 $1,438
===== ===== ==== ==== ======= ======
Current liabilities:
Accounts payable and
accrued expenses......... 366 $ 285 $119 $100 $ 70 $ 550
Lines of credit, notes
payable and current
portion of long-term debt
and capital lease
obligations.............. 100 35 32 339 89 453
Deferred revenue........... 12 88 157 27 112 294
----- ----- ---- ---- ------- ------
Total current
liabilities........ 478 408 308 466 271 1,297
Long-term debt and capital
lease obligations, less
current portion.......... 124 10 10 -- 65 38
----- ----- ---- ---- ------- ------
Total liabilities.... 602 418 318 466 336 1,335
Redeemable preferred stock... 150 802 206 -- 899 509
Stockholders' equity:
Common stock and additional
paid-in capital.......... 55 38 10 84 227 93
Retained earnings
(deficit)................ (549) (740) 128 336 (1,106) (499)
Total stockholders'
equity (deficit)... (494) (702) 138 420 (879) (406)
----- ----- ---- ---- ------- ------
Total liabilities and
stockholders'
equity (deficit)... $ 258 $ 518 $662 $886 $ 356 $1,438
===== ===== ==== ==== ======= ======
<CAPTION>
TOTAL
-------
<S> <C>
Current assets:
Cash and cash
equivalents.............. $ 782
Receivables, net........... 741
Prepaid expenses and
other.................... 666
-------
Total current
assets............. 2,189
Equipment and leasehold
improvements, net.......... 1,768
Other assets............... 161
-------
Total assets......... $ 4,118
=======
Current liabilities:
Accounts payable and
accrued expenses......... $ 1,490
Lines of credit, notes
payable and current
portion of long-term debt
and capital lease
obligations.............. 1,048
Deferred revenue........... 690
-------
Total current
liabilities........ 3,228
Long-term debt and capital
lease obligations, less
current portion.......... 247
-------
Total liabilities.... 3,475
Redeemable preferred stock... 2,566
Stockholders' equity:
Common stock and additional
paid-in capital.......... 507
Retained earnings
(deficit)................ (2,430)
Total stockholders'
equity (deficit)... (1,923)
-------
Total liabilities and
stockholders'
equity (deficit)... $ 4,118
=======
</TABLE>
Historical condensed balance sheet information for the Proposed
Acquisitions as of December 31, 1997 represents information for Structured
Network Systems, Inc. only.
F-8
<PAGE> 116
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(C) HISTORICAL CONDENSED STATEMENTS OF OPERATIONS INFORMATION -- COMPLETED AND
PROPOSED 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>
AIMNET PIONEER GLOBAL
CORPORATION RUSTNET, COMPUTE NORTHWEST TELECOMMUNICATIONS, WEST COAST
Year Ended December 31, 1997 (A) INC.(A) GES(A) INTENSIVE(A) NET(A) INC.(A) 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, SESQUINET ATMNET, SERVICES,
INC. INC.(A) Inc.(a) (A) INC.(A) INC.(A) PREPNET
----------- --------- -------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Internet connectivity................... $1,454 $2,582 $ 585 $1,124 $2,754 $2,555 $2,026
Enhanced services and other............. 764 562 190 -- 73 1,309 193
------ ------ ------ ------ ------- ------ ------
Total revenue..................... 2,218 3,144 775 1,124 2,827 3,864 2,219
Operating costs and expenses:
Internet services operating costs....... 690 1,394 431 538 2,976 2,288 811
Selling, general and administrative and
other................................. 1,159 1,784 981 367 1,786 1,309 827
Depreciation and amortization........... 5 116 76 54 40 314 26
------ ------ ------ ------ ------- ------ ------
Total costs and expenses.............. 1,854 3,294 1,488 959 4,802 3,911 1,664
------ ------ ------ ------ ------- ------ ------
Earnings (loss) from operations....... 364 (150) (713) 165 (1,975) (47) 555
Interest income........................... -- 2 -- -- -- -- --
Interest expense.......................... -- (25) (33) -- (171) (1) --
------ ------ ------ ------ ------- ------ ------
Earnings (loss) before income taxes... 364 (173) (746) 165 (2,146) (48) 555
Income taxes.............................. (127) -- -- (58) -- -- (194)
------ ------ ------ ------ ------- ------ ------
Net earnings (loss)............... $ 237 $ (173) $ (746) $ 107 $(2,146) $ (48) $ 361
====== ====== ====== ====== ======= ====== ======
</TABLE>
F-9
<PAGE> 117
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
INTERNET SERVICE PACIFIC RIM SIGNET
MONUMENTAL, SERVERS, TECH, NETWORK, PARTNERS, NSNET,
INC. INC. INC. INC. INC. INC.
----------- -------- ---------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity...................... $2,472 $ -- $ 1,536 $ 472 $1,133 $1,426
Enhanced services and other................ -- 4,496 627 337 518 331
------ ------ ------- ----- ------ ------
Total revenue.......................... 2,472 4,496 2,163 809 1,651 1,757
Operating costs and expenses:
Internet services operating costs.......... 362 400 1,229 385 336 481
Selling, general and administrative and
other.................................... 2,470 1,654 1,814 674 1,977 824
Depreciation and amortization.............. 172 240 197 69 10 116
------ ------ ------- ----- ------ ------
Total costs and expenses............... 3,004 2,294 3,240 1,128 2,323 1,421
------ ------ ------- ----- ------ ------
Earnings (loss) from operations.......... (532) 2,202 (1,077) (319) (672) 336
Interest income.............................. -- 13 -- -- -- --
Interest expense............................. -- -- (42) (15) (5) --
------ ------ ------- ----- ------ ------
Earnings (loss) before income taxes...... (532) 2,215 (1,119) (334) (677) 336
Income taxes................................. -- (856) 33 (15) -- (118)
------ ------ ------- ----- ------ ------
Net earnings (loss).................... $ (532) $1,359 $(1,086) $(349) $ (677) $ 218
====== ====== ======= ===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
INTERNET NATIONAL
ENGINEERING KNOWLEDGE
ASSOCIATES, ACCESSONE, NETWORKS,
INC. INC. INC. TOTAL
---------------- ---------- -------------- -------
<S> <C> <C> <C> <C>
Revenue:
Internet connectivity..................................... $ 831 $2,484 $1,169 $29,112
Enhanced services and other............................... 303 1,035 233 12,366
------ ------ ------ -------
Total revenue......................................... 1,134 3,519 1,402 41,478
Operating costs and expenses:
Internet services operating costs......................... 323 840 669 16,104
Selling, general and administrative and other............. 678 2,921 1,276 27,581
Depreciation and amortization............................. 63 245 55 2,298
------ ------ ------ -------
Total costs and expenses.............................. 1,064 4,006 2,000 45,983
------ ------ ------ -------
Earnings (loss) from operations......................... 70 (487) (598) (4,505)
Interest income............................................. 14 -- -- 37
Interest expense............................................ -- (26) (25) (361)
------ ------ ------ -------
Earnings (loss) before income taxes..................... 84......... (513) (623) (4,829)
Income taxes................................................ (29) -- (3) (1,355)
------ ------ ------ -------
Net earnings (loss)................................... $ 55 $ (513) $ (626) $(6,184)
====== ====== ====== =======
</TABLE>
- ---------------
(a) Represents operations prior to date of consolidation as described in Note A.
Historical condensed statement of operations information for the Proposed
Acquisitions for the year ended December 31, 1997 represents information for
Structured Network Systems, Inc. only.
F-10
<PAGE> 118
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 and 1,704,000 shares of preferred stock, which is
the approximate number of shares issued and proposed to be issued in
connection with the Completed and Proposed Acquisitions subsequent to
December 31, 1997, and the allocation of excess purchase price to goodwill
in the amount of $44,594,000 and to adjust investments in affiliates for
the proposed acquisitions of majority interests. In the opinion of
management, the historical balances of all other assets acquired and
liabilities assumed approximate fair value.
(2) To eliminate equity accounts of the Proposed 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.
(5) To eliminate minority interests share of equity and operations 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 adjust selling, general and administrative expense for
nonrecurring compensation expense relating to stock options and bonuses
issued to NorthWestNet employees prior to acquisition in the amount of
$885,000.
F-11
<PAGE> 119
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-12
<PAGE> 120
VERIO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
<S> <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.................................. -- 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
Additional paid-in capital................................ 1,089 14,272
Accumulated deficit....................................... (5,145) (51,474)
-------- --------
Total stockholders' equity (deficit)................ (4,055) (27,001)
-------- --------
Commitments (notes 2, 4 and 5)
Total liabilities and stockholders' deficit......... $ 82,628 $246,471
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE> 121
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..................................... $ 2,239 $ 23,476
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 stockholders...... $(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-14
<PAGE> 122
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-15
<PAGE> 123
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 preferred stock............................ $ -- $ 10,200
======= ========
Warrants issued in connection with debt offering.......... $ -- $ 12,675
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE> 124
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 stockholders 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, exercises significant control over the entities' operations, and
intends
F-17
<PAGE> 125
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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) 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.
(i) 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-18
<PAGE> 126
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(j) 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 stockholders 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 or at cost. 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>
OWNERSHIP
INTEREST TOTAL OWNERSHIP INTEREST AT
BUSINESS NAME ACQUISITION DATE PURCHASED(A) DECEMBER 31, 1996(A)
------------- ---------------- ------------ ---------------------------
<S> <C> <C> <C>
On-Ramp Technologies, Inc.... August 1, 1996 51%
October 4, 1996 4% 55%
RAINet, Inc.................. August 2, 1996 100% 100%
CCnet Inc.................... December 19, 1996 100% 100%
</TABLE>
The aggregate purchase price, including acquisition costs of $284,000, 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
INTEREST INTEREST AT
BUSINESS NAME ACQUISITION DATE PURCHASED(A) DECEMBER 31, 1996(A)
------------- ---------------- ------------ --------------------
<S> <C> <C> <C>
West Coast Online, Inc.......... July 26, 1996 20% 20%
National Knowledge Networks,
Inc........................... August 2, 1996 26% 26%
AccessOne, Inc.................. December 12, 1996 20% 20%
Signet Partners, Inc............ December 19, 1996 25% 25%
</TABLE>
The aggregate purchase price of the above investments, including acquisition
costs of $102,000, was $1,536,000.
F-19
<PAGE> 127
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the year ended December 31, 1997, the Company completed 23 business
combinations and investments for cash, notes payable and preferred stock. All of
the acquisitions were accounted for using the purchase method of accounting or
at cost. For those businesses acquired and consolidated, the results of
operations for the acquired businesses are included in the Company's
consolidated statement of operations from the dates of acquisition. Seventeen
subsidiaries were acquired and newly consolidated during 1997. In addition, the
Company formed two new start-up subsidiaries. Summary information regarding
these acquisitions is as follows:
Consolidated acquisitions in 1997:
<TABLE>
<CAPTION>
OWNERSHIP TOTAL OWNERSHIP
INTEREST INTEREST AT
BUSINESS NAME ACQUISITION DATE PURCHASED(A) DECEMBER 31, 1997(A)
------------- ---------------- ------------ --------------------
<S> <C> <C> <C>
Global Enterprise
Services -- Network Division.... January 17, 1997 100% 100%
Pioneer Global Telecommunications,
Inc. ........................... February 6, 1997 100% 100%
Compute Intensive Inc. ........... February 18, 1997 55% 55%
NorthWestNet, Inc. ............... February 28, 1997 85% 85%
RUSTnet, Inc. .................... March 14, 1997 100% 100%
Aimnet Corporation ............... May 19, 1997 55%
September 22, 1997 45% 100%
Branch Information Services,
Inc. ........................... September 17, 1997 100% 100%
West Coast Online, Inc. .......... April 29, 1997 12%
September 30, 1997 68% 100%
Communique, Inc. ................. October 2, 1997 100% 100%
Clark Internet Services, Inc. .... October 17, 1997 51% 51%
ATMnet, Inc. ..................... November 5, 1997 100% 100%
Global Internet Network Services,
Inc. ........................... December 1, 1997 100% 100%
Surf Network, Inc. ............... January 31, 1997 25%
December 22, 1997 75% 100%
PREPnet........................... December 24, 1997 100% 100%
Service Tech, Inc. ............... August 1, 1997 40%
December 31, 1997 60% 100%
Monumental Network Systems,
Inc. ........................... December 31, 1997 100% 100%
Internet Servers, Inc. ........... December 31, 1997 100% 100%
</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-20
<PAGE> 128
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unconsolidated investments in 1997:
<TABLE>
<CAPTION>
OWNERSHIP TOTAL OWNERSHIP
INTEREST INTEREST AT
BUSINESS NAME ACQUISITION DATE PURCHASED(A) DECEMBER 31, 1997(A)
------------- ---------------- ------------ --------------------
<S> <C> <C> <C>
Pacific Rim Network, Inc........ February 4, 1997 27% 27%
Internet Engineering Associates,
Inc........................... March 4, 1997 20% 20%
Internet Online, Inc............ March 5, 1997 35% 35%
Structured Network Systems,
Inc........................... March 6, 1997 20% 20%
National Knowledge Networks,
Inc........................... November 7, 1997 15% 41%
Signet Partners, Inc............ November 20, 1997 16% 41%
</TABLE>
The aggregate purchase price of the above investments, including acquisition
costs of $253,000, was $2,822,000.
- ---------------
(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.
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 stockholders................ (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 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, the Company, in conjunction with the
integration of its operations into regional operating units, has completed the
acquisition of the remaining ownership interests in 7 ISPs, and expects to
complete the Proposed Acquisitions, for total consideration of approximately
$25,500,000 in preferred stock and approximately $21,256,000 in cash and
options.
F-21
<PAGE> 129
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
\ (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. 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>
Subsequent to December 31, 1997, Verio 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. The 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
F-22
<PAGE> 130
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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........................................................ $ 2,142 $ 5,398
1999........................................................ 1,882 4,926
2000........................................................ 1,298 3,596
2001........................................................ 100 1,386
2002 and thereafter......................................... 9 194
------- -------
Total minimum payments............................ $ 5,431 $15,500
=======
Less amount representing interest........................... (911)
-------
Present value of net minimum lease payments....... 4,520
Less current portion........................................ (1,575)
-------
$ 2,945
=======
</TABLE>
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.
(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
F-23
<PAGE> 131
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 in February 1998 to
increase the number of shares reserved for issuance to 3,750,000. 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-24
<PAGE> 132
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
At December 31, 1997, the Company has a net operating loss carryforward for
federal income tax purposes of approximately $49.9 million which is available to
offset future federal taxable income, if any, through 2012. 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 relating to the net operating loss carryforward of $18.6
million. Net other temporary differences relating to differences in the carrying
amounts of assets and liabilities for financial statement and income tax
purposes are not significant.
(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
concentrations of credit risk in one financial institution in the approximate
amounts of $30,443,000 and $74,445,000, respectively. Concentrations of credit
risk with respect to trade receivables are limited due to the
F-25
<PAGE> 133
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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) 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-26
<PAGE> 134
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 presently
fairly, in all material respects, the financial position of OnRamp 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-27
<PAGE> 135
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-28
<PAGE> 136
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....................... 2,708,448
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-29
<PAGE> 137
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-30
<PAGE> 138
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-31
<PAGE> 139
ON-RAMP TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Basis of Presentation
OnRamp 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 exceed 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-32
<PAGE> 140
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 value of the Company's financial instruments
approximates their carrying value based on their terms and interest rates.
F-33
<PAGE> 141
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-34
<PAGE> 142
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-35
<PAGE> 143
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-36
<PAGE> 144
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-37
<PAGE> 145
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-38
<PAGE> 146
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-39
<PAGE> 147
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 value of the Network Division's financial
instruments approximates their carrying value 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-40
<PAGE> 148
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.
F-41
<PAGE> 149
GLOBAL ENTERPRISE SERVICES -- NETWORK DIVISION
(A DIVISION OF GLOBAL ENTERPRISE SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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-42
<PAGE> 150
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 presently
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-43
<PAGE> 151
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-44
<PAGE> 152
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-45
<PAGE> 153
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-46
<PAGE> 154
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 $ 7,254
========= ========= =========
Noncash investing and financing activities -- Equipment
acquired through capital lease obligations............ $ 158,006 232,089 $ --
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE> 155
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.
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 value of all
financial instruments as of December 31, 1995 and 1996 approximates their
carrying value 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-48
<PAGE> 156
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 exceed 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-49
<PAGE> 157
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-50
<PAGE> 158
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 stockholders 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. 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-51
<PAGE> 159
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-52
<PAGE> 160
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-53
<PAGE> 161
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-54
<PAGE> 162
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-55
<PAGE> 163
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-56
<PAGE> 164
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-57
<PAGE> 165
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-58
<PAGE> 166
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 exceed 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-59
<PAGE> 167
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-60
<PAGE> 168
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 .
(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-61
<PAGE> 169
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 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-62
<PAGE> 170
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-63
<PAGE> 171
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-64
<PAGE> 172
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-65
<PAGE> 173
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-66
<PAGE> 174
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....................... 2,524,253 437,292
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-67
<PAGE> 175
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-68
<PAGE> 176
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-69
<PAGE> 177
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-70
<PAGE> 178
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 value of all
financial instruments as of March 31, 1997 approximates their carrying value
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 exceed 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-71
<PAGE> 179
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-72
<PAGE> 180
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-73
<PAGE> 181
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-74
<PAGE> 182
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-75
<PAGE> 183
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-76
<PAGE> 184
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-77
<PAGE> 185
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 value of all
financial instruments as of September 30, 1997 approximates their carrying value
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>
<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-78
<PAGE> 186
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheets of ATMnet Corporation 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 Corporation 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-79
<PAGE> 187
ATMNET CORPORATION
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-80
<PAGE> 188
ATMNET CORPORATION
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
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-81
<PAGE> 189
ATMNET CORPORATION
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-82
<PAGE> 190
ATMNET CORPORATION
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-83
<PAGE> 191
ATMNET CORPORATION
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
ATMnet Corporation (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-84
<PAGE> 192
ATMNET CORPORATION
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 value of all
financial instruments as of October 31, 1997 and 1996 approximates their
carrying value 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-85
<PAGE> 193
ATMNET CORPORATION
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-86
<PAGE> 194
ATMNET CORPORATION
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-87
<PAGE> 195
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-88
<PAGE> 196
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-89
<PAGE> 197
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-90
<PAGE> 198
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-91
<PAGE> 199
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-92
<PAGE> 200
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-93
<PAGE> 201
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-94
<PAGE> 202
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-95
<PAGE> 203
======================================================
ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED
DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND REQUESTS FOR
ASSISTANCE AND REQUEST FOR ADDITIONAL COPIES OF THE PROSPECTUS, THE LETTER OF
TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE ADDRESSED TO THE EXCHANGE
AGENT AS FOLLOWS:
The Exchange Agent for the Exchange Offer is:
FIRST TRUST NATIONAL ASSOCIATION
180 East Fifth Street
St. Paul, MN 55101
Attn: Specialized Finance Department
Facsimile Transmissions
(Eligible Institutions Only)
(612) 244-
To confirm by telephone
or for information call:
(612) 244-
By mail
FIRST TRUST NATIONAL ASSOCIATION
180 East Fifth Street
St. Paul, MN 55101
Attn: Specialized Finance Department
(ORIGINALS OF ALL DOCUMENTS SUBMITTED BY FACSIMILE SHOULD BE SENT PROMPTLY BY
HAND, OVERNIGHT COURIER, OR REGISTERED OR CERTIFIED MAIL.)
---------------------
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. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY, 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.
---------------------
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW
NOTES, WHETHER OR NOT PARTICIPATING IN THIS EXCHANGE OFFER, MAY BE REQUIRED TO
DELIVER A PROSPECTUS.
======================================================
======================================================
OFFER TO EXCHANGE ALL OUTSTANDING
13 1/2% SENIOR SUBORDINATED
NOTES DUE 2004
FOR
13 1/2% SENIOR SUBORDINATED
NOTES DUE 2004
VERIO INC.
------------------------
PROSPECTUS
------------------------
Dated , 1998
======================================================
<PAGE> 204
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to Section 145 of the General Corporation Law of the
State of Delaware (the "DGCL"), which provides for indemnification of directors,
officers and other employees in certain circumstances, and to Section 102(b)(7)
of the DGCL, which provides for the elimination or limitation of the personal
liability for monetary damages of directors under certain circumstances. Article
Eight of the Certificate of Incorporation of the 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 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.1** -- Restated Certificate of Incorporation of the Registrant,
as amended.
3.2** -- Certificate of Amendment of Certificate of Incorporation
of the Registrant.
3.3** -- Certificate of Designation Establishing Series D
Preferred Stock of the Registrant.
3.4** -- Bylaws of the Registrant.
4.1* -- Form of Old Note.
4.2* -- Form of New Note.
4.3 -- Escrow Agreement, dated as of June 24, 1997, among First
Trust National Association (as escrow agent and trustee)
and the Registrant.
4.4** -- Indenture (See Exhibit 10.1).
4.5** -- Registration Rights Agreement (See Exhibit 10.4).
4.6 -- Purchase Agreement, dated as of June 17, 1997, by and
among Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner
& Smith Incorporated, and Lazard Freres & Co. LLC
(collectively, the "Initial Purchasers"), and the
Registrant.
5.1* -- 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 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.
</TABLE>
II-1
<PAGE> 205
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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.
10.10** -- The Registrant's 1997 California Stock Option Plan.
10.11** -- The Registrant's 1998 Employee Stock Purchase Plan.
10.12** -- The Registrant's 1998 Stock Incentive Plan.
10.13* -- Form of Executive Protection Agreement between the
Registrant and each of its executive 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.
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 (included on page II-4 hereof).
25.1 -- Form of T-1 Statement of Eligibility and Qualification
under the Trust Indenture Act of 1939 of First Trust
National Association.
27.1** -- Financial Data Schedule.
99.1 -- Form of Letter of Transmittal with respect to the
Exchange Offer.
99.2 -- Form of Notice of Guaranteed Delivery.
</TABLE>
- ---------------
* To be filed by amendment
** Incorporated by reference from the Registration Statement on Form S-1 of the
Registrant (Registration No. 333-47099) filed with the Commission on February
27, 1998
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>
II-2
<PAGE> 206
ITEM 22. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions described in
Item 20 above, or otherwise, the Registrant has been advised that in the opinion
of the Commission such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(2) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
(d) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-3
<PAGE> 207
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Englewood, Colorado on March 6, 1998.
VERIO INC.
By: /s/ JUSTIN L. JASCHKE
------------------------------------
Justin L. Jaschke
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Justin L. Jaschke, Peter B. Fritzinger and Carla
Hamre Donelson, and each of them, each with full power to act without the other,
his true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for such person and in his name, place and
stead, in any and all capacities, to sign any or all further amendments or
supplements (including post-effective amendments filed pursuant to Rule 462(b)
of the Securities Act of 1993) to this Form S-4 Registration Statement and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto each of
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully as to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that each of said attorneys-in-fact
and agents, or his substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement 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 March 6, 1998
- -----------------------------------------------------
Steven C. Halstedt
/s/ JUSTIN L. JASCHKE Chief Executive Officer and March 6, 1998
- ----------------------------------------------------- Director
Justin L. Jaschke
/s/ MARK D. JOHNSON President, Chief Operating March 6, 1998
- ----------------------------------------------------- Officer and Director
Mark D. Johnson
/s/ JAMES C. ALLEN Director March 6, 1998
- -----------------------------------------------------
James C. Allen
/s/ TRYGVE E. MYHREN Director March 6, 1998
- -----------------------------------------------------
Trygve E. Myhren
/s/ PAUL J. SALEM Director March 6, 1998
- -----------------------------------------------------
Paul J. Salem
</TABLE>
II-4
<PAGE> 208
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ STEVEN W. SCHOVEE Director March 6, 1998
- -----------------------------------------------------
Steven W. Schovee
/s/ GEORGE J. STILL, JR. Director March 6, 1998
- -----------------------------------------------------
George J. Still, Jr.
/s/ PETER B. FRITZINGER Chief Financial Officer March 6, 1998
- -----------------------------------------------------
Peter B. Fritzinger
/s/ DEB MAYFIELD GAHAN Vice President of Finance and March 6, 1998
- ----------------------------------------------------- Administration (Principal
Deb Mayfield Gahan Accounting Officer)
</TABLE>
II-5
<PAGE> 209
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> 210
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> 211
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.1** -- Restated Certificate of Incorporation of the Registrant,
as amended.
3.2** -- Certificate of Amendment of Certificate of Incorporation
of the Registrant.
3.3** -- Certificate of Designation Establishing Series D
Preferred Stock of the Registrant.
3.4** -- Bylaws of the Registrant.
4.1* -- Form of Old Note.
4.2* -- Form of New Note.
4.3 -- Escrow Agreement, dated as of June 24, 1997, among First
Trust National Association (as escrow agent and trustee)
and the Registrant.
4.4** -- Indenture (See Exhibit 10.1).
4.5** -- Registration Rights Agreement (See Exhibit 10.4).
4.6 -- Purchase Agreement, dated as of June 17, 1997, by and
among Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner
& Smith Incorporated, and Lazard Freres & Co. LLC
(collectively, the "Initial Purchasers"), and the
Registrant.
5.1* -- 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 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.
10.10** -- The Registrant's 1997 California Stock Option Plan.
10.11** -- The Registrant's 1998 Employee Stock Purchase Plan.
10.12** -- The Registrant's 1998 Stock Incentive Plan.
10.13* -- Form of Executive Protection Agreement between the
Registrant and each of its executive 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.
</TABLE>
<PAGE> 212
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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.
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 (included on page II-4 hereof).
25.1 -- Form of T-1 Statement of Eligibility and Qualification
under the Trust Indenture Act of 1939 of First Trust
National Association.
27.1** -- Financial Data Schedule.
99.1 -- Form of Letter of Transmittal with respect to the
Exchange Offer.
99.2 -- Form of Notice of Guaranteed Delivery.
</TABLE>
- ---------------
* To be filed by amendment
** Incorporated by reference from the Registration Statement on Form S-1 of the
Registrant (Registration No. 333-47099) filed with the Commission on February
27, 1998
<PAGE> 1
EXHIBIT 4.3
ESCROW AGREEMENT
This ESCROW AGREEMENT (this "Agreement"), dated as of June 24,
1997, among First Trust National Association, as escrow agent (in such
capacity, the "Escrow Agent"), First Trust National Association, as Trustee (in
such capacity, the "Trustee") under the Indenture (as defined herein), and
Verio Inc., a Delaware corporation (the "Company").
R E C I T A L S :
A. Pursuant to the Indenture, dated as of June 24, 1997
(the "Indenture"), between the Company and the Trustee, the Company is issuing
$150,000,000 aggregate principal amount of its 13 1/2% Senior Notes Due 2004
(the "Series A Securities") and authorizing the issuance of 13 1/2% Senior
Notes Due 2004, Series B (the "Series B" Securities," and together with the
Series A Securities, the "Securities").
B. As security for its obligations under the Securities
and the Indenture, the Company hereby grants to the Trustee, for the benefit of
the Trustee, any predecessor Trustee under the Indenture and the holders of the
Securities, a security interest in and lien upon the Escrow Account (as defined
herein).
C. The parties have entered into this Agreement in order
to set forth the conditions upon which, and the manner in which, funds will be
disbursed from the Escrow Account and released from the security interest and
lien described above.
A G R E E M E N T :
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. DEFINED TERMS. All capitalized terms used but not
defined herein shall have the meanings ascribed to them in the Indenture. In
addition to any other defined terms used herein, the following terms shall
constitute defined terms for purposes of this Agreement and shall have the
meanings set forth below:
<PAGE> 2
-2-
"AFFILIATE" of any specified person means any other person
which, directly or indirectly, controls, is controlled by or is under common
control with such specified person. For the purposes of this definition,
"control" when used with respect to any person means the power to direct the
management and policies of such person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise and the terms
"affiliated," "controlling" and "controlled" have meanings correlative to the
foregoing.
"APPLIED" means that disbursed funds have been applied (i) to
the payment of interest on the Securities, (ii) pursuant to Section 3(c) or
(iii) pursuant to Section 6(b)(iii).
"AVAILABLE FUNDS" means (A) the sum of (i) the Initial Escrow
Amount and (ii) interest earned or dividends paid on the funds in the Escrow
Account (including holdings of U.S. Government Securities), less (B) the
aggregate disbursements previously made pursuant to this Agreement.
"COLLATERAL" shall have the meaning given in Section 6(a)
hereof.
"ESCROW ACCOUNT" shall mean the escrow account established
pursuant to Section 2.
"ESCROW ACCOUNT STATEMENT" shall have the meaning given in
Section 2(f).
"INITIAL ESCROW AMOUNT" shall mean $46,582,824.49.
"INTEREST PAYMENT DATE" means June 15 and December 15 of each
year, commencing on December 15, 1997 until the Securities are paid in full.
"ISSUE DATE" has the meaning set forth in the Indenture.
"PAYMENT NOTICE AND DISBURSEMENT REQUEST" means a notice sent
by the Trustee to the Escrow Agent requesting a disbursement of funds from the
Escrow Account, in substantially the form of Exhibit A hereto. Each Payment
Notice and Disbursement Request shall be signed by an officer of the Trustee.
"U.S. GOVERNMENT SECURITIES" means securities that are direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged.
<PAGE> 3
-3-
2. ESCROW ACCOUNT; ESCROW AGENT.
(a) Appointment of Escrow Agent. The Company and the
Trustee hereby appoint the Escrow Agent, and the Escrow Agent hereby accepts
appointment, as escrow agent, under the terms and conditions of this Agreement.
(b) Establishment of Escrow Account.
(i) On the Issue Date, the Escrow Agent shall establish an
escrow account entitled the "Escrow Account pledged by Verio Inc. to First
Trust National Association, as Trustee" (the "Escrow Account") at its office
located at 180 East Fifth Street, St. Paul, Minnesota 55101. All funds
accepted by the Escrow Agent pursuant to this Agreement shall be held for the
exclusive benefit of the Trustee, any predecessor Trustee under the Indenture
and holders of the Securities, as secured parties hereunder (collectively, the
"Beneficiaries"). All such funds shall be held in the Escrow Account until
disbursed or paid in accordance with the terms hereof. The Escrow Account, the
funds held therein and any U.S. Government Securities held by the Escrow Agent
shall be under the sole dominion and control of the Escrow Agent for the
benefit of the Beneficiaries. On the Issue Date, the Company shall deliver the
Initial Escrow Amount to the Escrow Agent for deposit into the Escrow Account
against the Escrow Agent's written acknowledgment and receipt of the Initial
Escrow Amount.
(ii) Establishment of Securities Account. The Escrow
Agent hereby confirms that (A) the Escrow Agent has established an account for
the benefit of the Beneficiaries (such account and any successor account, the
"Securities Account") containing the Escrow Account and (B) the Securities
Account is a "securities account" as such term is defined in Section 8-501(a)
of the 1994 Official Text of Article 8 of the Uniform Commercial Code with
conforming amendments to Article 9 (the "Revised UCC").
(c) Escrow Agent Compensation. The Company shall pay to
the Escrow Agent such compensation for services to be performed by it under
this Agreement as the Company and the Escrow Agent may agree in writing from
time to time. The Escrow Agent shall be paid any compensation owed to it
directly by the Company and shall not disburse from the Escrow Account any such
amounts.
<PAGE> 4
-4-
The Company shall reimburse the Escrow Agent upon request for
all reasonable expenses, disbursements, and advances incurred or made by the
Escrow Agent in implementing any of the provisions of this Agreement, including
compensation and the reasonable expenses and disbursements of its counsel. The
Escrow Agent shall be paid any such expenses owed to it directly by the Company
and shall not disburse from the Escrow Account any such amounts.
(d) Investment of Funds in Escrow Account. Funds
deposited in the Escrow Account shall be invested and reinvested only upon the
following terms and conditions:
(i) Acceptable Investments. All funds deposited or held
in the Escrow Account at any time shall be invested by the Escrow
Agent in U.S. Government Securities in accordance with the Initial
Instructions annexed hereto as Schedule A and thereafter, if
necessary, the Company's written instructions from time to time to the
Escrow Agent; provided, however, that the Company shall only designate
investment of funds in U.S. Government Securities maturing in an
amount sufficient to and/or generating interest income sufficient to,
when added to the balance of funds held in the Escrow Account, provide
for the payment of interest on the outstanding Securities on each
Interest Payment Date beginning on and including December 15, 1997 and
through and including the Interest Payment Date on December 15, 1999;
provided, further, however, that any such written instruction shall
specify the particular investment to be made, shall state that such
investment is authorized to be made hereby and in particular satisfies
the requirements of the preceding proviso and Section 2(d)(v), shall
contain the certification referred to in Section 2(d)(ii), if
required, and shall be executed by an Officer of the Company. All
U.S. Government Securities shall be assigned to and held in the
possession of, or, in the case of U.S. Government Securities
maintained in book entry form with the Federal Reserve Bank (i.e.,
TRADES), transferred to a book entry account in the name of, the
Escrow Agent, for the benefit of the Beneficiaries, with such
guarantees as are customary, except that U.S. Government Securities
maintained in book entry form with the Federal Reserve Bank shall be
transferred to a book entry account in the name of the Escrow Agent at
the Federal Reserve Bank that includes only U.S. Government Securities
held by the Escrow Agent for its customers and segregated by separate
recordation in the books and records of the Escrow Agent. The Escrow
Agent shall not be liable for
<PAGE> 5
-5-
losses on any investments made by it pursuant to and in compliance
with such instructions. In the absence of qualifying instructions
from the Company that meet the requirements of this Section 2(d)(i),
the Escrow Agent shall have no obligation to invest funds held in the
Escrow Account.
(ii) Security Interest in Investments. No investment of
funds in the Escrow Account shall be made unless the Company has
certified to the Escrow Agent and the Trustee that, upon such
investment, the Trustee will have a first priority perfected security
interest in the applicable investment. If a certificate as to a class
of investments has been provided to the Escrow Agent, a certificate
need not be issued with respect to individual investments in
securities in that class if the certificate applicable to the class
remains accurate with respect to such individual investments, which
continued accuracy the Escrow Agent may conclusively assume. On the
Issue Date, and on each anniversary of the Issue Date thereafter until
the date upon which the balance of the Available Funds shall have been
reduced to zero, each of the Trustee and the Escrow Agent shall
receive an Opinion of Counsel to the Company, dated each such date as
applicable, which opinion shall meet the requirements of Section
314(b) of the Trust Indenture Act of 1939, as amended (the "TIA") and
shall comply with Section 13.02 of the Indenture.
(iii) Interest and Dividends. All interest earned and
dividends paid on funds invested in U.S. Government Securities shall
be deposited in the Escrow Account as additional Collateral for the
exclusive benefit of the Beneficiaries and, if not required to be
disbursed in accordance with the terms hereof, subject to subsections
6(b)(iii), 6(e) and 6(f) hereof, shall be reinvested in accordance
with the terms hereof at the Company's written instruction unless a
Default or Event of Default has occurred or the Trustee has notified
the Escrow Agent that it should only take direction from the Trustee
or should no longer take direction from the Company.
(iv) Limitation on Escrow Agent's Responsibilities. The
Escrow Agent's sole responsibilities under this Section 2 shall be (A)
to retain possession of certificated U.S. Government Securities
(except, however, that the Escrow Agent may surrender possession to
the issuer of any such U.S. Government Security for the purposes of
effecting assignment, crediting interest, or reinvesting such security
or reducing such
<PAGE> 6
-6-
security to cash) and to be the registered or designated owner of U.S.
Government Securities which are not certificated, (B) to follow the
Company's written instructions given in accordance with Section
2(d)(i), (C) to invest and reinvest funds pursuant to this Section
2(d) and (D) to use reasonable efforts to reduce to cash such U.S.
Government Securities as may be required to fund any disbursement or
payment in accordance with Section 3. In connection with clause (A)
above, the Escrow Agent will maintain continuous possession in the
jurisdiction of its principal place of business of certificated U.S.
Government Securities and cash included in the Collateral and will
cause uncertificated U.S. Government Securities to be registered in
the book-entry system of, and transferred to an account of the Escrow
Agent or a sub-agent of the Escrow Agent at, any Federal Reserve Bank.
Except as provided in Section 6, the Escrow Agent shall have no other
responsibilities with respect to perfecting or maintaining the
perfection of the Trustee's security interest in the Collateral and
shall not be required to file any instrument, document or notice in
any public office at any time or times. In connection with clause (D)
above and subject to the following sentence, the Escrow Agent shall
not be required to reduce to cash any U.S. Government Securities to
fund any disbursement or payment in accordance with Section 3 in the
absence of written instructions signed by an Officer of the Company
specifying the particular investment to liquidate. If no such written
instructions are received, the Escrow Agent may liquidate those U.S.
Government Securities having the lowest interest rate per annum or if
none such exist, those having the nearest maturity.
(v) Manner of Investment. Funds deposited in the Escrow
Account shall initially be invested in accordance with the Initial
Instructions (attached hereto as Schedule A), which is in a manner
such that there will be sufficient funds available without any further
investment by the Company to cover all interest due on the outstanding
Securities, as such interest becomes due, for each Interest Payment
Date occurring from the Issue Date and ending on (and including)
December 15, 1999, provided that such investments shall have such
maturities and/or interest payment dates such that funds will be
available with respect to each such Interest Payment Date no later
than the time the Escrow Agent is required to disburse such funds to
the Trustee pursuant to Section 3(a). The Escrow Agent shall have no
responsibility for determining whether funds held in the Escrow
Account shall have been invested in such a manner so as to comply with
the requirements of this clause (v).
<PAGE> 7
-7-
(e) Substitution of Escrow Agent. The Escrow Agent may
resign by giving no less than 20 Business Days prior written notice to the
Company and the Trustee. Such resignation shall take effect upon the later to
occur of (i) delivery of all funds and U.S. Government Securities maintained by
the Escrow Agent hereunder and copies of all books, records, plans and other
documents in the Escrow Agent's possession relating to such funds or U.S.
Government Securities or this Agreement to a successor escrow agent mutually
approved by the Company and the Trustee (which approvals shall not be
unreasonably withheld or delayed) and (ii) the Company, the Trustee and such
successor escrow agent entering into this Agreement or any written successor
agreement no less favorable to the interests of the holders of the Securities
and the Trustee than this Agreement; and the Escrow Agent shall thereupon be
discharged of all obligations under this Agreement and shall have no further
duties, obligations or responsibilities in connection herewith, except as set
forth in Section 4. If a successor escrow agent has not been appointed or has
not accepted such appointment within 20 Business Days after notice of
resignation is given to the Company, the Escrow Agent may apply to a court of
competent jurisdiction for the appointment of a successor escrow agent.
(f) Escrow Account Statement. At least 30 days prior to
each Interest Payment Date, the Escrow Agent shall deliver to the Company and
the Trustee a statement setting forth with reasonable particularity the balance
of funds then in the Escrow Account and the manner in which such funds are
invested ("Escrow Account Statement"). The parties hereto irrevocably instruct
the Escrow Agent that on the first date upon which the balance in the Escrow
Account (including the holdings of all U.S. Government Securities) is reduced
to zero, the Escrow Agent shall deliver to the Company and to the Trustee a
notice that the balance in the Escrow Account has been reduced to zero.
3. DISBURSEMENTS.
(a) Payment Notice and Disbursement Request;
Disbursements. The Trustee shall, at least five business days prior to an
Interest Payment Date, submit to the Escrow Agent a completed Payment Notice
and Disbursement Request substantially in the form of Exhibit A hereto.
<PAGE> 8
-8-
The Escrow Agent's disbursement pursuant to any Payment Notice
and Disbursement Request shall be subject to the satisfaction of the applicable
conditions set forth in Section 3(b). Provided such Payment Notice and
Disbursement Request is not rejected by it, the Escrow Agent, as soon as
reasonably practicable on the Interest Payment Date, but in no event later than
12:00 Noon (New York City time) on the Interest Payment Date, shall disburse
the funds requested in such Payment Notice and Disbursement Request by wire or
book-entry transfer of immediately available funds to the account of the
Trustee for the benefit of the Beneficiaries. The Escrow Agent shall notify
the Trustee as soon as reasonably possible (but not later than two (2) business
days from the date of receipt of the Payment Notice and Disbursement Request)
if any Payment Notice and Disbursement Request is rejected and the reason(s)
therefor. In the event such rejection is based upon nonsatisfaction of the
condition in Section 3(b)(I) below, the Trustee shall thereupon resubmit the
Payment Notice and Disbursement Request with appropriate changes.
(b) Conditions Precedent to Disbursement. The Escrow
Agent's payment of any disbursement shall be made only if: (I) the Trustee
shall have submitted, in accordance with the provisions of Section 3(a) herein,
a completed Payment Notice and Disbursement Request to the Escrow Agent
substantially in the form of Exhibit A with blanks appropriately filled in and
(II) the Escrow Agent shall not have received any notice from the Trustee that
as a result of an Event of Default the indebtedness represented by the
Securities has been accelerated and has become due and payable (in which event
the Escrow Agent shall apply all Available Funds as required by Section
6(b)(iii)).
(c) Retired Securities. In the event a portion of the
Securities has been retired by the Company and submitted to the Trustee for
cancellation and there is no Default or Event of Default under the Indenture,
funds representing the lesser of (A) any funds remaining in the Escrow Account
that are in excess of the amount sufficient to pay interest through and
including December 15, 1999 on the Securities not so retired and (B) the
interest payments which have not previously been made on such retired
Securities for each Interest Payment Date through the Interest Payment Date to
occur on December 15, 1999 shall, upon the written request of the Company to
the Escrow Agent and the Trustee, be paid to the Company upon compliance with
the release of collateral provisions of the TIA and upon receipt by the Escrow
Agent of a notice relating thereto from the Trustee.
<PAGE> 9
-9-
4. ESCROW AGENT.
(a) Limitation of the Escrow Agent's Liability;
Responsibilities of the Escrow Agent. The Escrow Agent's responsibility and
liability under this Agreement shall be limited as follows: (i) the Escrow
Agent does not represent, warrant or guaranty to the holders of the Securities
from time to time the performance of the Company; (ii) the Escrow Agent shall
have no responsibility to the Company or the holders of the Securities or the
Trustee from time to time as a consequence of performance or non-performance by
the Escrow Agent hereunder, except for any gross negligence or willful
misconduct of the Escrow Agent; (iii) the Company shall remain solely
responsible for all aspects of the Company's business and conduct; and (iv) the
Escrow Agent is not obligated to supervise, inspect or inform the Company or
any third party of any matter referred to above.
No implied covenants or obligations shall be inferred from
this Agreement against the Escrow Agent, nor shall the Escrow Agent be bound by
the provisions of any agreement beyond the specific terms hereof. Specifically
and without limiting the foregoing, the Escrow Agent shall in no event have any
liability in connection with its investment, reinvestment or liquidation, in
good faith and in accordance with the terms hereof, of any funds or U.S.
Government Securities held by it hereunder, including without limitation any
liability for any delay not resulting from gross negligence or willful
misconduct in such investment, reinvestment or liquidation, or for any loss of
principal or income incident to any such delay.
The Escrow Agent shall be entitled to rely upon any judicial
order or judgment, upon any written opinion of counsel or upon any
certification, instruction, notice, or other writing delivered to it by the
Company or the Trustee in compliance with the provisions of this Agreement
without being required to determine the authenticity or the correctness of any
fact stated therein or the propriety or validity of service thereof. The
Escrow Agent may act in reliance upon any instrument comporting with the
provisions of this Agreement or signature believed by it to be genuine and may
assume that any person purporting to give notice or receipt or advice or make
any statement or execute any document in connection with the provisions hereof
has been duly authorized to do so.
<PAGE> 10
-10-
At any time the Escrow Agent may request in writing an
instruction in writing from the Company, and may at its own option include in
such request the course of action it proposes to take and the date on which it
proposes to act, regarding any matter arising in connection with its duties and
obligations hereunder; provided, however, that the Escrow Agent shall state in
such request that it believes in good faith that such proposed course of action
is consistent with another identified provision of this Agreement. The Escrow
Agent shall not be liable to the Company for acting without the Company's
consent in accordance with such a proposal on or after the date specified
therein if (i) the specified date is at least four Business Days after the
Company receives the Escrow Agent's request for instructions and its proposed
course of action, and (ii) prior to so acting, the Escrow Agent has not
received the written instructions requested from the Company.
The Escrow Agent may act pursuant to the written advice of
counsel chosen by it with respect to any matter relating to this Agreement and
(subject to clause (ii) of the first paragraph of this Section 4(a)) shall not
be liable for any action taken or omitted in accordance with such advice.
The Escrow Agent shall not be called upon to advise any party
as to selling or retaining, or taking or refraining from taking any action with
respect to, any securities or other property deposited hereunder.
In the event of any ambiguity in the provisions of this
Agreement with respect to any funds or property deposited hereunder, the Escrow
Agent shall be entitled to refuse to comply with any and all claims, demands or
instructions with respect to such funds or property, and the Escrow Agent shall
not be or become liable for its failure or refusal to comply with conflicting
claims, demands or instructions. The Escrow Agent shall be entitled to refuse
to act until either any conflicting or adverse claims or demands shall have
been finally determined by a court of competent jurisdiction or settled by
agreement between the conflicting claimants as evidenced in a writing,
satisfactory to the Escrow Agent, or the Escrow Agent shall have received
security or an indemnity satisfactory to the Escrow Agent sufficient to save
the Escrow Agent harmless from and against any and all loss, liability or
expense which the Escrow Agent may incur by reason of its acting. The Escrow
Agent may in addition elect in its sole option to commence an interpleader
action or seek other judicial relief or orders as the Escrow Agent may deem
necessary.
<PAGE> 11
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No provision of this Agreement shall require the Escrow Agent
to expend or risk its own funds or otherwise incur any financial liability in
the performance of any of its duties hereunder.
5. INDEMNITY. The Company shall indemnify, hold
harmless and defend the Escrow Agent and its directors, officers, agents,
employees and controlling persons, from and against any and all claims,
actions, obligations, liabilities and expenses, including defense costs,
investigative fees and costs, legal fees, and claims for damages, arising from
the Escrow Agent's performance or non-performance, or in connection with its
acceptance or appointment as Escrow Agent, under this Agreement, except to the
extent that such liability, expense or claim is solely and directly
attributable to the gross negligence or willful misconduct of any of the
foregoing persons. The provisions of this Section 5 shall survive any
termination, satisfaction or discharge of this Agreement as well as the
resignation or removal of the Escrow Agent.
6. GRANT OF SECURITY INTEREST;
INSTRUCTIONS TO ESCROW AGENT.
(a) The Company hereby irrevocably grants a first
priority security interest in and lien on, and pledges, assigns and sets over
to the Trustee for the ratable benefit of the Beneficiaries, all of the
Company's right, title and interest in the Escrow Account, and all property now
or hereafter placed or deposited in, or delivered to the Escrow Agent for
placement or deposit in, the Escrow Account, including, without limitation, all
funds held therein, all U.S. Government Securities held by (or otherwise
maintained in the name of) the Escrow Agent pursuant to Section 2, and all
proceeds thereof as well as all rights of the Company under this Agreement
(collectively, the "Collateral"), in order to secure all obligations and
indebtedness of the Company under the Indenture, the Securities and any other
obligation, now or hereafter arising, of every kind and nature, owed by the
Company under the Indenture to the holders of the Securities or to the Trustee
or any predecessor Trustee. The Escrow Agent hereby acknowledges the Trustee's
security interest and lien as set forth above. The Company shall take all
actions necessary on its part to insure the continuance of a first priority
security interest in the Collateral in favor of the Trustee in order to secure
all such obligations and indebtedness.
<PAGE> 12
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(b) The Company and the Trustee hereby irrevocably
instruct the Escrow Agent to, and the Escrow Agent shall: (i) (A) maintain
sole dominion and control over funds and U.S. Government Securities in the
Escrow Account for the benefit of the Trustee to the extent specifically
required herein, (B) maintain, or cause its agent within the jurisdiction of
its principal place of business to maintain, possession of all certificated
U.S. Government Securities purchased hereunder that are physically possessed by
the Escrow Agent in order for the Trustee to enjoy a continuous perfected first
priority security interest therein under the law of the State of Colorado (the
Company hereby agreeing that in the event any certificated U.S. Government
Securities are in the possession of the Company or a third party, the Company
shall use its best efforts to deliver all such certificates to the Escrow
Agent), (C) take all steps specified by the Company pursuant to paragraph (a)
of this Section 6 to cause the Trustee to enjoy a continuous perfected first
priority security interest under any applicable Federal and State of Colorado
law in all U.S. Government Securities purchased hereunder that are not
certificated and (D) maintain the Collateral free and clear of all liens,
security interests, safekeeping or other charges, demands and claims against
the Escrow Agent of any nature now or hereafter existing in favor of anyone
other than the Trustee; (ii) promptly notify the Trustee if the Escrow Agent
receives written notice that any Person other than the Trustee has a lien or
security interest upon any portion of the Collateral; and (iii) in addition to
disbursing amounts held in escrow pursuant to any Payment Notice and
Disbursement Requests given to it by the Trustee pursuant to Section 3, upon
receipt of written notice from the Trustee of the acceleration of the maturity
of the Securities, and direction from the Trustee to disburse all Available
Funds to the Trustee, as promptly as practicable, after following, if it so
chooses, the procedures set forth in the fourth paragraph of Section 4(a),
disburse all funds held in the Escrow Account to the Trustee and transfer title
to all U.S. Government Securities held by the Escrow Agent hereunder to the
Trustee. The lien and security interest provided for by this Section 6 shall
automatically terminate and cease as to, and shall not extend or apply to, and
the Trustee shall have no security interest in, any funds disbursed by the
Escrow Agent to the Company pursuant to this Agreement to the extent not
inconsistent with the terms hereof. Notwithstanding any other provision
contained in this Agreement, the Escrow Agent shall act solely as the Trustee's
agent in connection with its duties under this Section 6 or any other
<PAGE> 13
-13-
duties herein relating to the Escrow Account or any funds or U.S. Government
Securities held thereunder. The Escrow Agent shall not have any right to
receive compensation from the Trustee and shall have no authority to obligate
the Trustee or to compromise or pledge its security interest hereunder.
Accordingly, the Escrow Agent is hereby directed to cooperate with the Trustee
in the exercise of its rights in the Collateral provided for herein.
(c) Any money and U.S. Government Securities collected by
the Trustee pursuant to Section 6(b)(iii) shall be applied as provided in
Section 5.06 of the Indenture. Any surplus of such cash or cash proceeds held
by the Trustee and remaining after indefeasible payment in full of all the
obligations under the Indenture shall be paid over to the Company or to
whomsoever may be lawfully entitled to receive such surplus or as a court of
competent jurisdiction may direct.
(d) Upon demand, the Company will execute and deliver to
the Trustee such instruments and documents as the Trustee may deem necessary or
advisable to confirm or perfect the rights of the Trustee under this Agreement
and the Trustee's interest in the Collateral. The Trustee shall be entitled to
take all necessary action to preserve and protect the security interest created
hereby as a lien and encumbrance upon the Collateral.
(e) The Company hereby appoints the Trustee as its
attorney-in-fact with full power of substitution to do any act which the
Company is obligated hereto to do, and the Trustee may exercise such rights as
the Company might exercise with respect to the Collateral and take any action
in the Company's name to protect the Trustee's security interest hereunder. In
addition to the rights provided under Section 6(b)(iii) hereof, upon an Event
of Default as defined in the Indenture and for so long as such Event of Default
continues, the Trustee may exercise in respect of the Collateral, in addition
to other rights and remedies provided for herein or otherwise available to it,
all the rights and remedies of a secured party under the UCC or other
applicable law, and the Trustee may also upon obtaining possession of the
Collateral as set forth herein, without notice to the Company except as
specified below, sell the Collateral or any part thereof in one or more parcels
at public or private sale, at any exchange, broker's board or at any of the
Trustee's offices or elsewhere, for cash, on credit or for future delivery, and
upon such other terms as
<PAGE> 14
-14-
the Trustee may deem commercially reasonable. The Company acknowledges and
agrees that any such private sale may result in prices and other terms less
favorable to the seller than if such sale were a public sale. The Company
agrees that, to the extent notice of sale shall be required by law, at least
ten (10) days' notice to the Company of the time and place of any public sale
or the time after which any private sale is to be made shall constitute
reasonable notification. The Trustee shall not be obligated to make any sale
regardless of notice of sale having been given. The Trustee may adjourn any
public or private sale from time to time by announcement at the time and place
fixed therefor, and such sale may, without further notice, be made at the time
and place to which it was so adjourned.
(f) If at any time the Escrow Agent shall receive an
"entitlement order" (within the meaning of Section 8-102(a)(8) of the Revised
UCC) issued by the Trustee and relating to the Securities Account, the Escrow
Agent shall comply with such entitlement order without further consent by the
Company or any other person.
7. TERMINATION. This Agreement shall terminate
automatically ten (10) days following disbursement of all funds remaining in
the Escrow Account (including U.S. Government Securities), unless sooner
terminated by agreement of the parties hereto (in accordance with the terms
hereof and not in violation of the Indenture; provided, that the Trustee may
not agree to terminate unless it has received the consent of 100% of the
holders of all of the Securities outstanding); provided, however, that the
obligations of the Company under Section 2(c) and Section 5 (and any existing
claims thereunder) shall survive termination of this Agreement and the
resignation of the Escrow Agent; provided, further, however, that until such
tenth day, the Company will cause this Agreement (or any permitted successor
agreement) to remain in effect and will cause there to be an escrow agent
(including any permitted successor thereto) acting hereunder (or under any such
permitted successor agreement).
8. MISCELLANEOUS.
(a) Waiver. Any party hereto may specifically waive any
breach of this Agreement by any other party, but no such waiver shall be deemed
to have been given unless such waiver is in writing, signed by the waiving
party and specifically designating the breach waived, nor shall any such waiver
constitute a continuing waiver of similar or other breaches.
<PAGE> 15
-15-
(b) Invalidity. If for any reason whatsoever any one or
more of the provisions of this Agreement shall be held or deemed to be
inoperative, unenforceable or invalid in a particular case or in all cases,
such circumstances shall not have the effect of rendering any of the other
provisions of this Agreement inoperative, unenforceable or invalid, and the
inoperative, unenforceable or invalid provision shall be construed as if it
were written so as to effectuate, to the maximum extent possible, the parties'
intent.
(c) Assignment. This Agreement is personal to the
parties hereto, and the rights and duties of any party hereunder shall not be
assignable except with the prior written consent of the other parties.
Notwithstanding the foregoing, this Agreement shall inure to and be binding
upon the parties and their successors and permitted assigns.
(d) Benefit. The parties hereto and their successors and
permitted assigns, but no others, shall be bound hereby and entitled to the
benefits hereof; provided, however, that the Beneficiaries (including holders
of the Securities) and their assigns shall be entitled to the benefits hereof
and to enforce this Agreement.
(e) Time. Time is of the essence with respect to each
provision of this Agreement.
(f) Entire Agreement; Amendments. This Agreement and the
Indenture contain the entire agreement among the parties with respect to the
subject matter hereof and supersede any and all prior agreements,
understandings and commitments, whether oral or written. This Agreement may be
amended only in accordance with Article Nine of the Indenture and further by a
writing signed by a duly authorized representative of each party hereto.
(g) Notices. All notices and other communications
required or permitted to be given or made under this Agreement shall be in
writing and shall be deemed to have been duly given and received when actually
received, including: (a) on the day of hand delivery; (b) three business days
following the day sent, when sent by United States certified mail, postage and
certification fee prepaid, return receipt requested, addressed as set forth
below; (c) when
<PAGE> 16
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transmitted by telecopy with verbal confirmation of receipt by the telecopy
operator to the telecopy number set forth below; or (d) one business day
following the day timely delivered to a next-day air courier addressed as set
forth below:
To Escrow Agent:
First Trust National Association
180 East Fifth Street
St. Paul, Minnesota 55101
Attention: Corporate Trust Department
Telecopy: (612) 244-0711
Telephone: (612) 244-0721
Delivery Instructions:
First Bank National Association
Cash Wire: ABA #091-000-022
For Further Credit to:
First Trust National Association
Account #180121167365
Corporate Trust #47300017
Attn: Sue Dignan
Re: 33-357210 Verio Inc.
To Trustee:
First Trust National Association
180 East Fifth Street
St. Paul, Minnesota 55101
Attention: Corporate Trust Department
Telecopy: (612) 244-0711
Telephone: (612) 244-0721
To the Company:
Verio Inc.
9250 East Costilla Avenue, Suite 400
Englewood, Colorado 80112
Attention: Chief Executive Officer
Telecopy: (303) 792-3869
Telephone: (303) 645-1900
<PAGE> 17
-17-
or at such other address as the specified entity most recently may have
designated in writing in accordance with this Section.
(h) Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument.
(i) Captions. Captions in this Agreement are for
convenience only and shall not be considered or referred to in resolving
questions of interpretation of this Agreement.
(j) Choice of Law. The existence, validity,
construction, operation and effect of any and all terms and provisions of this
Agreement shall be determined in accordance with and governed by the laws of
the State of Colorado, without regard to principles of conflicts of laws,
except to the extent United States federal law is applicable to the perfection
and priority of security interests in U.S. Government Securities. The parties
to this Agreement hereby agree that jurisdiction over such parties and over the
subject matter of any action or proceeding arising under this Agreement may be
exercised by a competent Court of the State of Colorado, or by a United States
Court, sitting in Colorado. The Company hereby submits to the personal
jurisdiction of such courts, hereby waives personal service of process upon it
and consents that any such service of process may be made by certified or
registered mail, return-receipt requested, directed to the Company at its
address last specified for notices hereunder, and service so made shall be
deemed completed five (5) days after the same shall have been so mailed, and
hereby waives the right to a trial by jury in any action or proceeding with the
Escrow Agent. All actions and proceedings brought by the Company against the
Escrow Agent relating to or arising from, directly or indirectly, this
Agreement shall be litigated only in courts within the State of Colorado.
(k) Representations and Warranties. (i) The Company
hereby represents and warrants that this Agreement has been duly authorized,
executed and delivered on its behalf and constitutes the legal, valid and
binding obligation of the Company. The execution, delivery and performance of
this Agreement by the Company does not violate any applicable law or regulation
to which the Company is subject and does not require the consent of any
governmental or other regulatory body to which the Company is subject, except
for such consents and approvals as have been obtained and are in full force and
effect.
<PAGE> 18
-18-
(ii) Each of the Escrow Agent and the Trustee hereby
represents and warrants that this Agreement has been duly authorized, executed
and delivered on its behalf and constitutes its legal, valid and binding
obligation.
<PAGE> 19
IN WITNESS WHEREOF, the parties have executed and delivered
this Escrow Agreement as of the day first above written.
ESCROW AGENT: FIRST TRUST NATIONAL ASSOCIATION,
as Escrow Agent
By: /s/ Richard H. Prokosch
---------------------------------------
Name: Richard H. Prokosch
Title: Trust Officer
TRUSTEE: FIRST TRUST NATIONAL ASSOCIATION,
as Trustee
By: /s/ Richard H. Prokosch
---------------------------------------
Name: Richard H. Prokosch
Title: Trust Officer
COMPANY: VERIO INC.
By: /s/ Carla H. Donelson
---------------------------------------
Name: Carla Hamre Donelson
Title: Vice President, General
Counsel and Secretary
<PAGE> 1
EXHIBIT 4.6
===============================================================================
VERIO INC.
150,000 Units
consisting of
$150,000,000
13 1/2% Senior Notes due 2004
and
Warrants to purchase
2,112,480 shares of the Company's Common Stock
PURCHASE AGREEMENT
Dated as of June 17, 1997
===============================================================================
<PAGE> 2
VERIO INC.
150,000 Units
consisting of
$150,000,000
13 1/2% Senior Notes due 2004
and
Warrants to purchase
2,112,480 shares of the Company's Common Stock
PURCHASE AGREEMENT
New York, New York
June 17, 1997
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
LAZARD FRERES & CO. LLC
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1305
Ladies and Gentlemen:
Verio Inc., a Delaware corporation (the "Company"), confirms
its agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and Lazard Freres & Co. LLC ("Lazard," and together with Merrill Lynch,
the "Initial Purchasers") with respect to the issue and sale by the Company (the
"Offering") and the purchase by the Initial Purchasers, acting severally and not
jointly, of the respective numbers set forth in Schedule A of Units (the
"Units") consisting of $150,000,000 aggregate principal amount of the Company's
13 1/2% Senior Notes due 2004 (the "Notes") and Warrants (the "Warrants") to
purchase 2,112,480 shares of the Company's Common Stock, par value $.001 per
share (the "Warrant Shares" and, together with the Warrants, the Notes and the
Units, the "Secu-
<PAGE> 3
-2-
rities"), determined on a fully diluted basis as of the Closing Time (as defined
herein).
The Notes are to be issued under an Indenture to be dated as
of June 24, 1997 (the "Indenture") between the Company and First Trust National
Association, as trustee (the "Trustee"). The holders of Notes, including the
Initial Purchasers, will be entitled to the benefits of a Registration Rights
Agreement (the "Registration Rights Agreement"), dated as of June 17, 1997,
between the Company and the Initial Purchasers. Pursuant to the Registration
Rights Agreement, the Company will agree to file with the Securities and
Exchange Commission (the "Commission") under the circumstances set forth therein
either (i) a registration statement under the Act registering the Exchange Notes
(as defined in the Registration Rights Agreement) to be offered in exchange for
the Notes and to use its best efforts to cause such registration statement to be
declared effective and (ii) under certain circumstances set forth therein, to
file with the Commission a shelf registration statement pursuant to Rule 415
under the Securities Act of 1933, as amended (the "Act") relating to the resale
of the Notes by holders thereof or, if applicable, relating to the resale of
Private Exchange Notes (as defined in the Registration Rights Agreement) by the
Initial Purchasers pursuant to an exchange of the Notes for Private Exchange
Notes, and to use its best efforts to cause such shelf registration statement to
be declared effective.
The Company will issue the Warrants under a Warrant Agreement
to be dated as of June 24, 1997 (the "Warrant Agreement") between the Company
and First Trust National Association, as Warrant Agent (the "Warrant Agent").
The holders of Warrants, including the Initial Purchasers, will be entitled to
the benefit of a Common Stock Registration Rights Agreement (the "Common Stock
Registration Rights Agreement"), dated as of June 17, 1997, between the Company
and the Initial Purchasers.
This agreement (this "Agreement" or the "Purchase Agreement"),
the Securities, the Exchange Notes (as defined in the Registration Rights
Agreement), the Private Exchange Notes (as defined in the Registration Rights
Agreement), the Indenture, the Warrant Agreement, the Escrow Agreement (as
defined below), the Common Stock Registration Rights Agreement and the
Registration Rights Agreement are referred to collectively as the "Operative
Documents."
<PAGE> 4
-3-
Capitalized terms used herein without definition have the
respective meanings specified in the Offering Memorandum referred to below.
Approximately $46.6 million of the net proceeds from the sale
of the Units (the "Initial Escrow Amount"), representing funds that, together
with the proceeds from the investment thereof, will be sufficient to pay the
first five interest payments on the Notes, are to be placed in a collateral
account and pledged to the Trustee, for the benefit of the holders of the Notes
and the Trustee (in its capacity as such under the Indenture) pursuant to the
Escrow Agreement, dated as of June 24, 1997 (the "Escrow Agreement") among the
Company, First Trust National Association, as Escrow Agent (the "Escrow Agent"),
and the Trustee.
The Units will be offered and sold to the Initial Purchasers
without registration under the Act, in reliance upon an exemption from the
registration requirements of the Act. The Company has prepared and delivered to
each Initial Purchaser copies of a preliminary offering memorandum dated May 27,
1997 (the "Preliminary Offering Memorandum") and has prepared and will deliver
to each Initial Purchaser, on the date hereof, copies of a final offering
memorandum dated June 17, 1997 (the "Final Offering Memorandum"), each to be
used by such Initial Purchaser in connection with its solicitation of purchases
of, or offering of, the Units. "Offering Memorandum" means, with respect to any
date or time referred to in this Agreement, the most recent offering memorandum
(whether the Preliminary Offering Memorandum or the Final Offering Memorandum,
together with any amendment or supplement to either such document), which have
been prepared and delivered by the Company to the Initial Purchasers in
connection with their solicitation of purchases of, or offering of, the Units.
The Company hereby confirms that it has authorized the use of the Preliminary
Offering Memorandum and the Final Offering Memorandum in connection with the
offer and resale of the Units by the Initial Purchasers.
The Company understands that the Initial Purchasers propose to
make an offering of the Units only on the terms and in the manner set forth in
the Offering Memorandum and Section 4 hereof, as soon as the Initial Purchasers
deem advisable after this Agreement has been executed and delivered, (i) to
persons in the United States whom the Initial Purchasers reasonably believe to
be qualified institutional buyers ("Qualified Institutional Buyers") as defined
in Rule 144A under the Act, as amended ("Rule 144A"), in transactions under Rule
144A, (ii)
<PAGE> 5
-4-
to a limited number of other institutional "accredited investors" (as defined in
Rule 501(a)(1), (2), (3) and (7) under the Act ("Accredited Investors")) in
private sales exempt from registration under the Act or (iii) pursuant to offers
and sales to non-U.S. persons that occur outside the United States within the
meaning of Regulation S under the Act ("Regulation S"), pursuant to Rule 904 of
Regulation S.
SECTION 1. Representations and Warranties. (a) The Company
represents and warrants to each Initial Purchaser as of the date hereof and as
of the Closing Time (as defined in Section 3 hereof) that:
(i) As of their respective dates, none of the Offering
Memorandum nor any amendment or supplement thereto, and at all times
subsequent thereto up to and as of the Closing Time, as amended or
supplemented to such time, contained or will contain an untrue
statement of a material fact or omitted or will omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided that this representation and warranty does not apply to
statements or omissions made in reliance upon and in conformity with
information relating to the Initial Purchasers furnished in writing by
the Initial Purchasers to the Company expressly for use in the Offering
Memorandum or any amendment or supplement thereto.
(ii) The Company has been advised that the Units (and,
following separation of the Units, the Notes and the Warrants) have
been designated PORTAL eligible securities in accordance with the rules
and regulations of the National Association of Securities Dealers, Inc.
(the "NASD").
(iii) None of the Company, nor any of its Affiliates (as
defined in Rule 501(b) under the Act) has, directly or through any
agent, sold, offered for sale, solicited offers to buy or otherwise
negotiated in respect of, any security (as defined in the Act) which
could be integrated with the sale of the Securities in a manner that
would require the registration of the Securities under the Act.
(iv) None of the Company nor any of its Affiliates (as defined
in Rule 501(b) under the Act) or any person (other than the Initial
Purchasers, as to whom the Company makes no representation) acting at
the request of the Company has engaged, in connection with the offering
of the
<PAGE> 6
-5-
Securities, (A) in any form of general solicitation or general
advertising within the meaning of Rule 502(c) under the Act, (B) in any
directed selling efforts within the meaning of Rule 902 under the Act
in the United States in connection with the Securities being offered
and sold pursuant to Regulation S under the Act, (C) in any manner
involving a public offering within the meaning of Section 4(2) of the
Act or (D) in any action which would require the registration of the
offering and sale of the Securities pursuant to this Agreement or which
would violate applicable state securities or "blue sky" laws.
(v) Assuming that the representations and warranties of the
Initial Purchasers contained in Section 4 are true, correct and
complete, and assuming compliance by the Initial Purchasers with their
covenants in Section 4, and assuming that the representations and
warranties contained in the Accredited Investor Letter of
Representations (the "Accredited Investor Letter") (substantially in
the form of Appendix A to the Offering Memorandum) completed by
Accredited Investors or deemed to be made by non-U.S. persons and
Qualified Institutional Buyers purchasing Units are true and correct as
of the Closing Time, and assuming compliance by such Accredited
Investors, as the case may be, with the agreements in the Accredited
Investor Letters, it is not necessary in connection with the offer,
sale and delivery of the Units to the Initial Purchasers in the manner
contemplated by, or in connection with the initial resale of such Units
by the Initial Purchasers in accordance with, this Agreement to
register the Units under the Act or to qualify any indenture in respect
of the Units under the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act").
(vi) The subsidiaries of the Company listed on Schedule B
hereto (also referred to herein as the "Subsidiaries") are the only
subsidiaries of the Company that constitute "significant subsidiaries"
within the meaning of Rule 1-02(w) of Regulation S-X under the Act.
Each of the Company and the Subsidiaries has been duly organized or
incorporated, as the case may be, and is validly existing and in good
standing under the laws of its jurisdiction of incorporation, with all
requisite power and authority under such laws (a) to own, lease and
operate their respective properties and to conduct their respective
businesses as now conducted and as described in the Offering Memorandum
and (b) to enter into, deliver, incur and perform their respective
obligations under the Operative Docu-
<PAGE> 7
-6-
ments, except, in the case of the foregoing subclause (a) for
authorizations, approvals, orders, leases, certificates and permits,
the failure of which to possess could not reasonably be expected to
have a Material Adverse Effect (as defined below); and are all duly
qualified to do business as foreign corporations in good standing in
all other jurisdictions where the ownership or leasing of their
respective properties or the conduct of their respective businesses
requires such qualification, except where the failure to be so
qualified could not reasonably be expected to have a material adverse
effect (i) on the business, condition (financial or otherwise), results
of operations, business affairs or business prospects of the Company
and the Subsidiaries taken as a whole or (ii) on the ability of the
Company to perform any of its obligations under the Operative Documents
or to consummate any of the transactions contemplated hereby or thereby
(a "Material Adverse Effect"). The Company has no ISP affiliates (other
than the Subsidiaries) that would individually constitute a
"significant subsidiary" of the Company within the meaning of Rule
1-02(w) of Regulation S-X under the Act, if any such ISP affiliate were
a subsidiary of the Company.
(vii) The Units, the Exchange Notes and the Private Exchange
Notes have been duly authorized by the Company, and the Company has all
requisite corporate power and authority to execute, issue and deliver
the Units, the Exchange Notes and the Private Exchange Notes and to
incur and perform its obligations provided for therein.
(viii) The Notes, when executed, authenticated and issued in
accordance with the terms of the Indenture (assuming the due
authorization, execution and delivery of the Indenture by the Trustee)
and when delivered against payment of the purchase price therefor as
provided in this Agreement, will constitute valid and binding
obligations of the Company, entitled to the benefits of the Indenture
and enforceable against the Company in accordance with the terms
thereof; and the Exchange Notes and the Private Exchange Notes, if any,
when executed, authenticated, issued and delivered by the Company in
exchange for the Notes in accordance with the terms of the Registration
Rights Agreement, will constitute valid and binding obligations of the
Company, entitled to the benefits of the Indenture and enforceable
against the Company in accordance with the terms thereof; subject, in
the case of each of the foregoing, to (a) applicable bankruptcy,
insolvency, reorganiza-
<PAGE> 8
-7-
tion, moratorium and similar laws affecting creditors' rights and
remedies generally, (b) general principles of equity (regardless of
whether enforcement is sought in a proceeding in equity or at law) and
(c) the discretion of the court before which any proceeding therefor
may be brought (clauses (a), (b) and (c) being referred to herein as
the "Enforceability Limitations") and except that the waiver of stay or
extension laws contained in Section 5.15 of the Indenture may be
unenforceable.
(ix) The Warrants and the Warrant Shares have been duly
authorized by the Company, and the Company has all requisite corporate
power and authority to execute, issue and deliver the Warrants and
Warrant Shares and to incur and perform its obligations provided for
therein. The Warrants, when executed by the Company and countersigned
by the Warrant Agent, will be entitled to the benefits of the Warrant
Agreement and will constitute valid and binding obligations of the
Company enforceable in accordance with their terms subject only to the
Enforceability Limitations. When issued in accordance with the terms
and conditions contained in the Warrant Agreement, upon exercise of the
Warrants, the Warrant Shares will be duly authorized, validly issued,
fully paid and nonassessable and will not be subject to any preemptive
or similar rights. The Warrant Shares have been duly reserved for
issuance in accordance with the terms of the Warrants and the Warrant
Agreement.
(x) This Agreement has been, and, as of the Closing Date, the
Indenture, the Warrant Agreement, the Escrow Agreement, the Common
Stock Registration Rights Agreement and the Registration Rights
Agreement will have been, duly authorized, executed and delivered by
the Company, and upon such execution by the Company (assuming the due
authorization, execution and delivery by parties thereto other than the
Company), as of the Closing Date, the Indenture, the Escrow Agreement,
the Warrant Agreement, the Common Stock Registration Rights Agreement
and the Registration Rights Agreement will constitute, the valid and
binding obligations of the Company, enforceable against the Company in
accordance with the terms hereof or thereof, subject only to the
Enforceability Limitations.
(xi) At the time of deposit with the Escrow Agent of the
Initial Escrow Amount (as such term is defined in the Escrow Agreement)
no Lien (as such term is
<PAGE> 9
-8-
defined in the Indenture) exists upon such Collateral (as such term is
defined in the Escrow Agreement) and no right or option to acquire the
same exists in favor of any other person or entity, except for the
pledge and security interest in favor of the Trustee for the benefit of
the holders of the Notes and the Trustee (in its capacity as such under
the Indenture) to be created or provided for in the Escrow Agreement,
which pledge and security interest shall constitute a first priority
perfected pledge and security interest in and to all of the Collateral.
(xii) No consent, waiver, authorization, approval, license,
qualification or order of, or filing or registration with, any court or
governmental or regulatory agency or body, domestic or foreign, is
required for the issue and sale of the Securities or the Exchange Notes
or the Private Exchange Notes, if any, the performance by the Company
of its obligations under the Operative Documents, or for the
consummation of any of the transactions contemplated hereby or thereby,
including, without limitation, the issuance and sale of the Securities
hereunder, except, such as may be required (A) in connection with the
registration under the Act of the Warrants or the Warrant Shares
(including any filing with the NASD), (B) in connection with the
registration under the Act of the Exchange Notes or the Private
Exchange Notes, if any, under the Registration Rights Agreement
(including any filing with the NASD), (C) in order to qualify the
Indenture under the Trust Indenture Act or (D) by state securities or
"blue sky" laws in connection with the offer and sale of the Securities
or the registration thereof or of the Exchange Notes or the Private
Exchange Notes pursuant to the Registration Rights Agreement.
(xiii) The issuance, sale and delivery of the Securities, the
Exchange Notes and the Private Exchange Notes, if any, the execution,
delivery and performance by the Company of this Agreement, the
Indenture, the Warrant Agreement, the Escrow Agreement, the Common
Stock Registration Rights Agreement and the Registration Rights
Agreement, and the consummation by the Company of the transactions
contemplated hereby, thereby and in the Offering Memorandum and the
compliance by the Company with the terms of the foregoing do not, and,
at the Closing Time, will not conflict with or constitute or result in
a breach or violation by the Company or any of the Subsidiaries of (A)
any of the terms or provisions of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a
default) by any of the
<PAGE> 10
-9-
Company or the Subsidiaries or give rise to any right to accelerate the
maturity or require the prepayment of any indebtedness under, or result
in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company or the Subsidiaries under any
contract, indenture, mortgage, deed of trust, loan agreement, note,
lease, license, franchise agreement, authorization, permit, certificate
or other agreement or document to which any of the Company or the
Subsidiaries is a party or by which any of them may be bound, or to
which any of them or any of their respective assets or businesses is
subject (collectively, "Contracts") (and the Company has no knowledge
of any conflict, breach or violation of such terms or provisions or of
any such default, in any such case, which has occurred or will so
result) which would have a Material Adverse Effect, (B) the articles or
by-laws (each, an "Organizational Document") of each of the Company and
the Subsidiaries or (C) any law, statute, rule or regulation, or any
judgment, decree or order, in any such case, of any domestic or foreign
court or governmental or regulatory agency or other body having
jurisdiction over the Company or any of the Subsidiaries or any of
their respective properties or assets. Schedule C hereto lists each
Contract with respect to which any conflict, breach or violation of the
terms or provisions thereof or any default with respect thereto could
have a Material Adverse Effect (each such Contract being referred to
herein as a "Material Contract").
(xiv) The Securities, the Exchange Notes, the Private Exchange
Notes, the Indenture, the Warrant Agreement, the Escrow Agreement, the
Common Stock Registration Rights Agreement and the Registration Rights
Agreement will each conform in all material respects to the
descriptions thereof in the Offering Memorandum.
(xv) The audited consolidated financial statements included in
the Offering Memorandum, including the notes thereto, present fairly
the financial position of the Company and its consolidated subsidiaries
at the dates indicated, and the statement of operations, stockholders'
deficit and cash flows of the Company and its consolidated subsidiaries
for the periods have been prepared in conformity with United States
generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods involved. The selected
financial data and the summary financial information included in the
Offering Memorandum present fairly the information shown
<PAGE> 11
-10-
therein and have been compiled on a basis consistent with that of the
financial statements included in the Offering Memorandum. KPMG Peat
Marwick LLP, which has examined certain of such financial statements as
set forth in its report included in the Offering Memorandum, is an
independent public accounting firm with respect to the Company and its
Subsidiaries within the meaning of Regulation S-X under the Act. The
pro forma financial information relating to the Company and its
Subsidiaries and the related notes thereto included in the Offering
Memorandum present fairly the information shown therein, have been
prepared in all material respects in accordance with the Commission's
rules and guidelines with respect to pro forma financial adjustments
and have been properly computed on the bases described therein, and the
assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the
transactions and circumstances referred to therein.
(xvi) Since the respective dates as of which information is
given in the Offering Memorandum, except as otherwise specifically
stated therein, there has been no (A) material adverse change in the
business, condition (financial or otherwise), results of operations,
business affairs or business prospects of the Company and the
Subsidiaries taken as a whole, whether or not arising in the ordinary
course of business (a "Material Adverse Change"), (B) transaction
entered into by any of the Company or the Subsidiaries, other than in
the ordinary course of business, that is material to the Company and
the Subsidiaries taken as a whole or (C) dividend or distribution of
any kind declared, paid or made by the Company on its capital stock.
(xvii) The Company has the authorized, issued and outstanding
capitalization set forth in the Offering Memorandum under the caption
"Description of Capital Stock;" all of the outstanding capital stock of
the Company has been duly authorized and validly issued, is fully paid
and nonassessable and was not issued in violation of any preemptive or
similar rights (whether provided contractually or pursuant to any
Organizational Document). Except as set forth in the Offering
Memorandum under the caption "Business -- Verio Group Network," the
Company does not own, directly or indirectly, any material amount of
shares, or any other material amount of equity or long-term debt
securities or have any material equity interest in any firm,
partnership, joint venture or other entity. Except as set
<PAGE> 12
-11-
forth in the Offering Memorandum under the caption "Certain
Transactions -- Stockholders Agreement," no holder of any securities of
the Company is entitled to have such securities (other than the
Securities, the Exchange Notes and the Private Exchange Notes, if any)
registered under any registration statement contemplated by the Common
Stock Registration Rights Agreement or the Registration Rights
Agreement. All of the outstanding capital stock of each of the
Subsidiaries has been duly authorized and validly issued, is fully paid
and nonassessable and was not issued in violation of any preemptive or
similar rights (whether provided contractually or pursuant to any
Organizational Document).
(xviii) None of the Company nor the Subsidiaries is (A) in
violation of its respective Organizational Documents, (B) in default
(or, with notice or lapse of time or both, would be in default) in the
performance or observance of any obligation, agreement, covenant or
condition contained in any Contract or (C) in violation of any law,
statute, judgment, decree, order, rule or regulation of any domestic or
foreign court with jurisdiction over the Company or the Subsidiaries or
any of their respective assets or properties, or other governmental or
regulatory authority, agency or other body, other than, in the case of
clause (B) or (C), such defaults or violations which could not,
individually or in the aggregate, reasonably be expected to have or
result in a Material Adverse Effect; and any real property and
buildings held under lease by the Company or the Subsidiaries are held
by the Company or such Subsidiary, as the case may be, under valid,
subsisting and enforceable leases with such exceptions which could not,
individually or in the aggregate, reasonably be expected to have or
result in a Material Adverse Effect.
(xix) Except as set forth in the Offering Memorandum, each of
the Company and the Subsidiaries owns or possesses, or can acquire on
reasonable terms, adequate patents, patent rights, licenses,
trademarks, service marks, trade names, copyrights and know-how
(including trade secrets and other proprietary or confidential
information, systems or procedures) (collectively, "intellectual
property") necessary to conduct the business now or proposed to be
operated by it as described in the Offering Memorandum, except where
the failure to own, possess or have the ability to acquire any such
intellectual property could not, individually or in the aggregate, be
reasonably expected to have a Material Adverse Effect; and none of the
<PAGE> 13
-12-
Company nor the Subsidiaries has received any notice of infringement of
or conflict with (nor knows of any such infringement of or conflict
with) asserted rights of others with respect to any of such
intellectual property.
(xx) Each of the Company and the Subsidiaries has obtained all
material consents, approvals, orders, certificates, licenses, permits,
franchises and other authorizations (collectively, the "Licenses") of
and from, and has made all declarations and filings with, all
governmental and regulatory authorities, all self-regulatory
organizations and all courts and other tribunals necessary to own,
lease, license and use its properties and assets and to conduct its
businesses in the manner described in the Offering Memorandum. None of
the Company or the Subsidiaries has received any notice of proceedings
relating to the revocation or modification of, or denial of any
application for, any License which, if the subject of any unfavorable
decision, ruling or finding, could, singly or in the aggregate,
reasonably be expected to have or result in a Material Adverse Effect;
and no event has occurred which allows, or after notice or lapse of
time, or both, would allow, revocation or termination thereof or result
in any other material impairment of the rights of the holder of any
such License, except where such revocation or termination could not,
singly or in the aggregate, reasonably be expected to have or result in
a Material Adverse Effect; and the Licenses referred to above place no
restrictions on the Company or any of the Subsidiaries that are not
described in the Offering Memorandum, except where such restrictions
could not, singly or in the aggregate, reasonably be expected to have
or result in a Material Adverse Effect.
(xxi) There is no legal action, suit, proceeding inquiry or
investigation before or by any court or governmental body or agency,
domestic or foreign, now pending or, to the best knowledge of the
Company, threatened against the Company or any of the Subsidiaries or
any of their respective properties which would be required to be
disclosed in a registration statement filed under the Act which could,
individually or in the aggregate, reasonably be expected to have or
result in a Material Adverse Effect.
(xxii) Each of the Company and the Subsidiaries has filed all
necessary federal, state and foreign income and franchise tax returns,
and has paid all taxes shown as due
<PAGE> 14
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thereon; and no tax deficiency that has been asserted against any of
the Company or the Subsidiaries.
(xxiii) Except as described in the Offering Memorandum, including
the financial statements and notes thereto included therein, each of
the Company and the Subsidiaries has good and marketable title to all
real and personal property described in the Offering Memorandum as
being owned by it and good and marketable title to a leasehold estate
in the real and personal property described in the Offering Memorandum
as being leased by it, free and clear of all liens, charges,
encumbrances or restrictions, except to the extent the failure to have
such title or the existence of such liens, charges, encumbrances or
restrictions could not, individually or in the aggregate, reasonably be
expected to have or result in a Material Adverse Effect.
(xxiv) None of the Company or any of the Subsidiaries is an
"investment company" or a company "controlled by" an "investment
company" as such terms are defined in the Investment Company Act of
1940, as amended, and the rules and regulations thereunder.
(xxv) None of the Company nor any of the Subsidiaries nor any
of their respective directors, officers or controlling persons has
taken, directly or indirectly, any action designed, or which might
reasonably be expected, to cause or result, under the Act or otherwise,
in, or which has constituted, stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale
of the Securities, the Exchange Notes or the Private Exchange Notes.
(xxvi) No strike, labor problem, dispute, slowdown, work
stoppage or disturbance with the employees of the Company or any of the
Subsidiaries exists or, to the best knowledge of the Company, is
threatened which could, individually or in the aggregate, reasonably be
expected to have or result in a Material Adverse Effect.
(xxvii) The Company has insurance in such amounts and covering
such risks and liabilities as are in accordance with normal industry
practice.
(xxviii) Other than as disclosed in the Offering Memorandum, none
of the Company nor any Subsidiary has any material profit sharing,
deferred compensation, stock option,
<PAGE> 15
-14-
stock purchase, phantom stock or similar plans, including agreements
evidencing rights to purchase securities or to share in the profits of
the Company or any Subsidiary.
(xxix) The statistical and market-related data included in the
Offering Memorandum are based on or derived from independent sources
which the Company believes to be reliable and accurate in all material
respects or represent the Company's good faith estimates that are made
on the basis of data derived from such sources.
(xxx) The Company is, and immediately after the Closing Time
will be, Solvent. As used herein, the term "Solvent" means, with
respect to the Company on a particular date, that on such date (A) the
fair market value of the assets of the Company exceeds its respective
liabilities (including without limitation, stated liabilities and
identified contingent liabilities), (B) the present fair salable value
of the assets of the Company will exceed its respective probable
liabilities on its debts (including without limitation, stated
liabilities and identified contingent liabilities), (C) the fair market
value of the Company's total assets exceeds its total liabilities,
including identified contingent liabilities, by an amount at least
equal to the total par value of its common stock both immediately prior
to and after the Offering, (D) the Company is and will be able to pay
its debts (including without limitation, stated liabilities and
identified contingent liabilities) as such debts mature and (E) the
Company will not have unreasonably small capital with which to conduct
its present and anticipated business.
(xxxi) Except as described in the Offering Memorandum or as
would not, individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect (A) to the Company's knowledge, each of
the Company and the Subsidiaries is in compliance with and not subject
to any known liability under applicable Environmental Laws (as defined
below), (B) to the Company's knowledge, each of the Company and the
Subsidiaries (i) has made all filings and provided all notices required
under any applicable Environmental Law, and (ii) has, and is in
compliance with, all Permits required under any applicable
Environmental Laws, and (iii) each of them is in full force and effect,
(C) to the Company's knowledge, there is no civil, criminal or
administrative action, or, investigation, notice or demand letter or
request for information pending or threatened against the Company or
any of the Subsidiar-
<PAGE> 16
-15-
ies under any Environmental Law, and (D) to the Company's knowledge, no
lien, charge, encumbrance or restriction has been recorded under any
Environmental Law with respect to any assets, facility or property
owned, operated, leased or controlled by the Company or any Subsidiary.
For purposes of this Agreement, "Environmental Laws" means the
common law and all applicable federal, state and local laws or regulations
relating to the protection of the environment, including, without limitation,
laws relating to emissions, discharges, releases or threatened releases of
"hazardous substances," as defined in the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended.
(xxxii) Except as described in the Offering Memorandum, none of
the Company nor any of the Subsidiaries has incurred any liability for
any prohibited transaction or funding deficiency or any complete or
partial withdrawal liability with respect to any pension, profit
sharing or other plan which is subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), to which the Company
or the Subsidiaries makes or ever has made a contribution and in which
any employee of the Company or any such Subsidiary is or has ever been
a participant, which, individually in the aggregate, could reasonably
be expected to have or result in a Material Adverse Effect. With
respect to such plans, each of the Company and the Subsidiaries is in
compliance in all respects with all applicable provisions of ERISA,
except where the failure to so comply could not, individually or in the
aggregate, reasonably be expected to have or a result in a Material
Adverse Effect.
(b) Any certificate signed by any officer of the Company and
delivered to the Initial Purchasers or to counsel for the Initial Purchasers
pursuant to the terms of this Agreement shall be deemed a representation and
warranty by the Company to the Initial Purchasers as to the matters covered
thereby.
SECTION 2. Purchase and Sale of the Units. On the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company agrees to sell to each Initial
Purchaser, severally and not jointly, and each Initial Purchaser, severally and
not jointly, agrees to purchase from the Company, at a purchase price of $965
per Unit to be resold as provided in Section 4(iii) of this Agreement and $985
per Unit to be resold to
<PAGE> 17
-16-
Brooks Fiber Properties, Inc., the number of Units set forth in Schedule A
attached hereto opposite the name of such Initial Purchaser.
SECTION 3. Delivery and Payment. Delivery of the Units, Notes
and Warrants and payment for the Units shall be made at 9:00 A.M., New York City
time, on June 24, 1997, or such later date and time not more than two (2)
business days thereafter as the Initial Purchasers and the Company shall agree
(such date and time of delivery and payment for the Units, Notes and Warrants
being herein called the "Closing Time"). Delivery of the Units, Notes and
Warrants shall be made to the Initial Purchasers for the respective accounts of
the Initial Purchasers against payment by the Initial Purchasers of the purchase
price thereof by wire transfer of immediately available funds in accordance with
the Escrow Agreement, as to the Initial Escrow Amount, and otherwise to the
order of the Company or as the Company may direct. Delivery of the Units, Notes
and the Warrants shall be made at the offices of Cahill Gordon & Reindel, 80
Pine Street, New York, New York 10005 or at such location as the Initial
Purchasers shall reasonably designate at least two business days in advance of
the Closing Time. Merrill Lynch, individually and not as representative of the
Initial Purchasers, may (but shall not be obligated to) make payment of the
purchase price for the Securities to be purchased by any Initial Purchaser whose
funds have not been received by the Closing Time, but such payment shall not
relieve such Initial Purchaser from its obligations hereunder. Certificates for
the Units, Notes and Warrants shall be registered in such names and in such
denominations as the Initial Purchasers may request not less than two (2) full
business days in advance of the Closing Time.
The Company agrees to have the Units, Notes and Warrants
available for inspection, checking and packaging by the Initial Purchasers in
New York, New York, not later than 10:00 A.M. on the business day prior to the
Closing Time.
SECTION 4. Resale of the Securities. The Initial Purchasers
have advised the Company that they propose to offer the Securities for resale
upon the terms and conditions set forth in this Agreement and in the Offering
Memorandum. Each Initial Purchaser hereby represents and warrants (as to itself
only) to, and agrees with, the Company that (i) it is purchasing the Securities
for its own account or an account with respect to which it exercises sole
investment discretion and that it and any such account is (a) a Qualified
Institutional Buyer and is aware that the sale to it is being made in reliance
on
<PAGE> 18
-17-
Rule 144A under the Act, (b) an institutional "accredited investor" within the
meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the Act (an
"Accredited Investor"), or (c) a person other than a U.S. person (a "foreign
purchaser"), which term shall include dealers or other professional fiduciaries
in the U.S. acting on a discretionary basis for foreign beneficial owners in
offshore transactions meeting the requirements of Rule 903 of Regulation S under
the Act; (ii) it acknowledges that the Securities have not been registered under
the Act and that none of the Securities may be offered or sold within the United
States or to, or for the account or benefit of, U.S. persons except as set forth
below; (iii) it shall not resell or otherwise transfer any of such Securities
prior to (a) the date which is two years (or such shorter period of time as
permitted by Rule 144(k) under the Act or any successor provision thereunder)
after the later of the date of original issuance of the Securities and (b) such
later date, if any, as may be required by applicable laws except (A) to the
Company or its Subsidiaries, (B) inside the United States to (1) an Accredited
Investor that, prior to such transfer, furnishes to the Trustee a signed letter
containing certain representations and agreements (the form of which letter can
be obtained from the Trustee), (2) a Qualified Institutional Buyer or (3) Brooks
Fiber Properties, Inc., (C) outside the United States to foreign purchasers in
offshore transactions meeting the requirements of Rule 904 of Regulation S, (D)
pursuant to the exemption from registration provided by Rule 144 under the Act
(if available), (E) pursuant to an effective registration statement under the
Act or (F) pursuant to another available exemption from the registration
requirements of the Act; (iv) it agrees that it will give to each person to whom
it transfers the Securities notice of any restrictions on transfer of such
Securities; (v) it understands that all of the Securities will bear a legend
substantially similar to that set forth in the Offering Memorandum under the
caption "Notice to Investors", unless otherwise agreed by the Company and the
Trustee; (vi) it acknowledges that the Trustee will not be required to accept
for registration of transfer any Securities acquired by it, except upon
presentation of evidence satisfactory to the Company and the Trustee that the
restrictions set forth herein have been complied with; and (vii) it acknowledges
that the Company, the Trustee, and others will rely upon the truth and accuracy
of the foregoing acknowledgments, representations and agreements and agrees that
if any of the acknowledgments, representations or agreements deemed to have been
made by its purchase of the Securities are no longer accurate, it shall promptly
notify the Company and the Trustee. If it is acquiring the Securities as a
fiduciary or agent for one or more investor accounts, it rep-
<PAGE> 19
-18-
resents that it has sole investment discretion with respect to each such account
and it has full power to make the foregoing acknowledgments, representations and
agreements on behalf of each account.
SECTION 5. Covenants of the Company. The Company
covenants with the Initial Purchasers as follows:
(a) The Company will furnish to the Initial Purchasers and
counsel for the Initial Purchasers, without charge, such number of
copies of the Preliminary Offering Memorandum and the Final Offering
Memorandum and any amendments or supplements thereto as the Initial
Purchasers and their counsel may reasonably request.
(b) The Company will not at any time make any amendment or
supplement to the Preliminary Offering Memorandum or the Final Offering
Memorandum without the prior written consent of the Initial Purchasers.
(c) The Company will immediately notify each Initial
Purchaser and confirm such notice in writing of (x) any filing made by
the Company relating to the offering of the Securities with any
securities exchange or any other regulatory body in the United States
or any other jurisdiction and (y) prior to the completion of the
placement of the Securities by the Initial Purchasers as evidenced by a
notice in writing from the Initial Purchasers to the Company, any
material changes in or affecting the earnings, business affairs or
business prospects of the Company and its Subsidiaries that (i) make
any statement in the Offering Memorandum false or misleading in any
material respect or (ii) are not disclosed in the Offering Memorandum.
In such event or if at any time prior to completion of the distribution
of the Securities by the Initial Purchasers to purchasers who are not
its affiliates (as determined by the Initial Purchasers) any other
event shall occur or condition shall exist as a result of which it is
necessary, in the opinion of the Initial Purchasers or counsel for the
Initial Purchasers, to amend or supplement the Offering Memorandum in
order that the Offering Memorandum, as then amended or supplemented,
will not include an untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time it is
delivered to a purchaser, not misleading or if in the opinion of the
Initial Purchasers or counsel to the Initial Purchasers, such amendment
or supplement is neces-
<PAGE> 20
-19-
sary to comply with applicable law, the Company will, subject to
paragraph (b) of this Section 5, promptly prepare, at its own expense,
such amendment or supplement as may be necessary to correct such untrue
statement or omission or to effect such compliance (in form and
substance agreed upon by the Initial Purchasers and counsel to the
Initial Purchasers), so that as so amended or supplemented, the
statements in the Offering Memorandum will not include an untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the
circumstances existing at the time it is delivered to a purchaser, not
misleading or so that such Offering Memorandum as so amended or
supplemented will comply with applicable law, as the case may be, and
furnish to the Initial Purchasers such number of copies of such
amendment or supplement as the Initial Purchasers may reasonably
request. The Company agrees to notify the Initial Purchasers in writing
to suspend use of the Offering Memorandum as promptly as practicable
after the occurrence of an event specified in this paragraph (c), and
the Initial Purchasers hereby agree upon receipt of such notice from
the Company to suspend use of the Offering Memorandum until the Company
has amended or supplemented the Offering Memorandum to correct such
misstatement or omission or to effect such compliance.
(d) Neither the Company nor any of its Affiliates (as
defined in Rule 501(b) under the Act) will solicit any offer to buy or
offer or sell the Securities, the Exchange Notes or the Private
Exchange Notes, if any, by means of any form of general solicitation or
general advertising (as such terms are used in Regulation D under the
Act), or by means of any directed selling efforts (as defined in Rule
902 under the Act) in the United States in connection with the
Securities being offered and sold pursuant to Regulation S or in any
manner involving a public offering within the meaning of Section 4(2)
of the Act prior to the effectiveness of a registration statement with
respect to the Securities, the Exchange Notes or the Private Exchange
Notes, as applicable.
(e) Neither the Company nor any of its Affiliates (as
defined in Rule 501(b) under the Act) will offer, sell or solicit
offers to buy or otherwise negotiate in respect of any security (as
defined in the Act) which could be integrated with the sale of the
Securities in a manner that would require the registration of the
Securities under the Act.
<PAGE> 21
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(f) The Company (A) will, so long as the Securities are
outstanding, furnish to the Trustee on a timely basis, pursuant to the
Indenture, whether or not the Company has a class of securities
registered under the Exchange Act, (i) within 135 days of the end of
each fiscal year, audited year-end consolidated financial statements of
the Company (including a balance sheet, income statement and statement
of changes of cash flow) prepared in accordance with GAAP and
substantially in the form required under Regulation S-X under the Act
and the information described in Item 303 of Regulation S-K under the
Act with respect to such period and (ii) within 60 days of the end of
each fiscal quarter, unaudited quarterly consolidated financial
statements of the Company (including a balance sheet, income statement
and statement of changes of cash flow) prepared in accordance with GAAP
and substantially in the form required by Regulation S-X under the Act
and the information described in Item 303 of Regulation S-K under the
Act with respect to such period, and (B) will furnish to the Initial
Purchasers copies of all such reports and information, together with
such other documents, reports and information as shall be furnished by
the Company to the holders of the Securities or to the Trustee. In the
event the Company is not subject to Section 13 or 15(d) of the Exchange
Act, the Company will furnish to holders of Securities and prospective
purchasers of Securities designated by such holders, upon request of
such holders or such prospective purchasers, the information required
to be delivered pursuant to Rule 144A(d)(4) under the Act to permit
compliance with Rule 144A in connection with resales of the Securities.
(g) The Company will use its reasonable best efforts in
cooperation with the Initial Purchasers to (i) permit the Securities to
be eligible for clearance and settlement through The Depository Trust
Company and (ii) permit the Units (and, following separation of the
Units, the Notes and the Warrants) to be designated as PORTAL
securities in accordance with the rules and regulations of the NASD.
(h) Prior to the Closing Time, the Company will furnish to
each Initial Purchaser, if and as soon as they have been prepared, a
copy of any unaudited interim consolidated financial statements of the
Company for any period subsequent to the period covered by the most
recent financial statements of the Company appearing in the Offering
Memorandum which have been prepared in the ordinary course of business.
<PAGE> 22
-21-
(i) The Company will arrange for the registration and
qualification of the Securities for offering and sale under the
applicable securities or "blue sky" laws of such states and other
jurisdictions as the Initial Purchasers may designate in connection
with the resale of the Securities as contemplated by this Agreement and
the Offering Memorandum and will continue such qualifications in effect
for as long as may be necessary to complete the distribution of the
Securities; provided that in no event shall the Company be obligated to
(i) qualify as a foreign corporation or as a dealer in securities in
any jurisdiction where it would not otherwise be required to so qualify
but for this Section 5(i), (ii) file any general consent to service of
process in any jurisdiction where it is not at the Closing Time then so
subject or (iii) subject itself to taxation in any such jurisdiction if
it is not so subject. The Company will file such statements and reports
as may be required by the laws of each jurisdiction in which the
Securities have been qualified as above provided. The Company shall
promptly advise the Initial Purchasers of the receipt by the Company of
any notification with respect to the suspension of the qualification or
exemption from qualification of the Securities for offering or sale in
any jurisdiction or the institution, threatening or contemplation of
any proceeding for such purpose.
(j) The Company will use the proceeds received from the
Offering in the manner specified in the Offering Memorandum under the
heading "Use of Proceeds."
(k) The Company will not, and will not permit any of its
Affiliates (as defined in Rule 501(b) under the Act to, resell any
Securities that have been acquired by any of them.
(l) Pursuant to the Escrow Agreement, the Company will
deposit the Initial Escrow Amount into a collateral account,
representing funds that together with the proceeds from the investment
thereof will be sufficient to pay the first five interest payments on
the Notes, and will take all actions necessary to pledge, assign and
set over to the Trustee, for the benefit of the holders of the Notes
and the Trustee (in its capacity as such under the Indenture), and
irrevocably grant to the Trustee for the benefit of the holders of the
Notes and the Trustee (in its capacity as such under the Indenture) a
first priority perfected security interest in, all of its respective
right, title and interest in such collateral account, all
<PAGE> 23
-22-
funds held therein and all other Collateral (as such term is defined in
the Escrow Agreement) held by the Escrow Agent or on its behalf, in
order to secure the obligations and indebtedness of the Company under
the Indenture, the Escrow Agreement and the Notes.
SECTION 6. Payment of Expenses. (a) Whether or not any sale of
the Securities is consummated, the Company agrees to pay and bear all costs and
expenses incident to the performance of all of its obligations under this
Agreement, including (i) the preparation and printing of the Preliminary
Offering Memorandum, the Offering Memorandum and any amendments or supplements
thereto and the cost of furnishing copies thereof to the Initial Purchasers,
(ii) the preparation, issuance, printing and distribution of the Securities, the
Exchange Notes, the Private Exchange Notes, if any, and any survey of state
securities or "blue sky" laws or legal investment memoranda, (iii) the delivery
to the Initial Purchasers of the Securities, the Exchange Notes or the Private
Exchange Notes, (iv) the fees and disbursements of the Company's counsel and
accountants, (v) the qualification of the Securities under the applicable state
securities or "blue sky" laws in accordance with the provisions of Section 5(i)
hereof and any filing for review of the offering with the NASD, if required,
including filing fees and reasonable fees and disbursements of counsel to the
Initial Purchasers in connection therewith and in connection with the
preparation of any survey of state securities or "blue sky" laws or legal
investment memoranda, (vi) any fees charged by rating agencies for rating the
Securities, the Exchange Notes and the Private Exchange Notes, if any, (vii) the
fees and expenses of the Trustee, including the fees and disbursements of
counsel for the Trustee, (viii) all expenses (including travel expenses) of the
Company and the Initial Purchasers in connection with any meetings with
prospective investors in the Units and (ix) all expenses and listing fees in
connection with the application for designation of the Notes as PORTAL
securities and to permit the Securities, the Exchange Notes and the Private
Exchange Notes, as applicable, to be eligible for clearance through The
Depository Trust Company.
(b) If the sale of the Units provided for herein is not
consummated because any condition to the obligations of the Initial Purchasers
set forth in Section 7 hereof is not satisfied, because this Agreement is
terminated pursuant to Section 11 hereof or because of any failure, refusal or
inability on the part of the Company to perform all obligations and satisfy all
conditions on its part to be performed or satisfied hereunder other than by
reason of a default by an Initial Pur-
<PAGE> 24
-23-
chaser in payment for the Units at the Closing Time, the Company agrees to
reimburse the Initial Purchasers promptly upon demand for all reasonable
out-of-pocket expenses (including reasonable fees and disbursements of their
counsel) that shall have been incurred by them in connection with the proposed
purchase and sale of the Units.
SECTION 7. Conditions of the Initial Purchasers' Obligations.
The obligations of the Initial Purchasers to purchase and pay for the Units are
subject to the continued accuracy, as of the Closing Time, of the
representations and warranties of the Company herein contained, to the accuracy
of the statements of the Company and officers of the Company made in any
certificate pursuant to the provisions hereof, to the performance by the Company
of its obligations hereunder, and to the following further conditions:
(a)(i) At the Closing Time, the Initial Purchasers shall have
received the opinion of Morrison & Foerster LLP, counsel to the
Company, dated as of the Closing Time, in the form set forth below and
otherwise reasonably satisfactory to the Initial Purchasers and counsel
for the Initial Purchasers, to the effect that:
(1) The Company has been duly incorporated and is
validly existing under the laws of the State of Delaware, with
corporate power and authority to own, lease and operate its
assets and properties and conduct its business as described in
the Offering Memorandum and to enter into and perform its
obligations under this Agreement and each of the other
Operative Documents; to the best knowledge of such counsel the
Company is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which
such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business,
except where the failure so to qualify or to be in good
standing would not result in a Material Adverse Effect;
(2) The authorized, issued and outstanding capital
stock of the Company is as set forth in the Offering
Memorandum under the caption "Description of Capital Stock";
(3) Each of the Subsidiaries has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction
<PAGE> 25
-24-
of its incorporation, has corporate power and authority to
own, lease and operate its properties and to conduct its
business as described in the Offering Memorandum and to the
best knowledge of such counsel is duly qualified as a foreign
corporation to transact business and is in good standing in
each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or
the conduct of business, except where the failure so to
qualify or to be in good standing individually or in the
aggregate would not result in a Material Adverse Effect; all
of the issued and outstanding capital stock of each of the
Subsidiaries has been duly authorized and validly issued, is
fully paid and non-assessable and, to such counsel's knowledge
and information, except as set forth in the Offering
Memorandum under the caption "Business -- Verio Group
Network," is owned by the Company directly, free and clear of
any security interest, mortgage, pledge, lien, encumbrance,
claim or equity;
(4) The Company has the requisite corporate power and
authority to execute, deliver and perform its obligations
under this Agreement, the Securities, the Exchange Notes, the
Private Exchange Notes, the Indenture, the Warrant Agreement,
the Escrow Agreement, the Common Stock Registration Rights
Agreement and the Registration Rights Agreement; and each of
this Agreement, the Securities, the Exchange Notes, the
Private Exchange Notes, the Indenture, the Warrant Agreement,
the Escrow Agreement, the Common Stock Registration Rights
Agreement and the Registration Rights Agreement has been duly
authorized by the Company;
(5) No consent, waiver, approval, authorization,
license, qualification or order of or filing or registration
with any court or governmental or regulatory agency or body is
required for the execution and delivery by the Company of this
Agreement, the Indenture, the Warrant Agreement, the Escrow
Agreement, the Common Stock Registration Rights Agreement or
the Registration Rights Agreement or for the issue and sale of
the Securities, the Exchange Notes or the Private Exchange
Notes, if any, or the performance by the Company of its
obligations under the Operative Documents, or for the
consummation of any of the transactions contemplated hereby or
thereby, except
<PAGE> 26
-25-
such as may be required (A) in connection with the
registration under the Act of the Warrants and the Warrant
Shares (including any filing with the NASD), (B) in connection
with the registration under the Act of the Exchange Notes or
the Private Exchange Notes, if any, under the Registration
Rights Agreement, (C) in order to qualify the Indenture under
the Trust Indenture Act and (D) by state securities or "blue
sky" laws in connection with the purchase and distribution of
the Units by the Initial Purchasers (as to which such counsel
need express no opinion);
(6) The issuance, sale and delivery of the
Securities, the Exchange Notes and the Private Exchange Notes,
if any, the execution, delivery and performance by the Company
of this Agreement, the Indenture, the Warrant Agreement, the
Escrow Agreement, the Common Stock Registration Rights
Agreement and the Registration Rights Agreement (in each case
assuming due authorization and execution by each party other
than the Company), and the consummation by the Company of the
transactions contemplated hereby and thereby and the
compliance by the Company with the terms of the foregoing do
not, and, at the Closing Time, will not, conflict with or
constitute or result in a breach or violation by the Company
or any of the Subsidiaries of (A) any provision of the
Certificate of Incorporation or By-laws of the Company, (B)
any of the terms or provisions of, or constitute a default (or
an event which, with notice or lapse of time or both, would
constitute a default) by the Company, or give rise to any
right to accelerate the maturity or require the prepayment of
any indebtedness under, or result in the creation or
imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any Subsidiary under any
Material Contract identified in Schedule C hereto or (C) any
law, statute, rule, or regulation or any order, decree or
judgment known to such counsel to be applicable to the Company
or any Subsidiary, of any court or governmental or regulatory
agency or body or arbitrator known to such counsel to have
jurisdiction over the Company or any of the Subsidiaries or
any of their respective properties or assets;
(7) The Purchase Agreement has been duly authorized,
executed and delivered by the Company;
<PAGE> 27
-26-
(8) The statements in the Offering Memorandum under
the headings "Summary The Offering," "Description of Capital
Stock," "Description of the Units," "Description of the
Notes," "Exchange Offer; Notes Registration Rights,"
"Description of the Warrants," and "Description of Common
Stock Registration and Other Rights" insofar as such
statements purport to summarize certain provisions of the
Securities, the Exchange Notes, the Indenture, the Warrant
Agreement, the Escrow Agreement, the Common Stock Registration
Rights Agreement and the Registration Rights Agreement,
provide a fair summary of such provisions of such agreements
and instruments;
(9) The statements in the Offering Memorandum under
the caption "Certain Federal Income Tax Considerations" fairly
and accurately summarize the material United States federal
tax consequences of owning the Securities;
(10) Each of the Indenture, the Warrant Agreement,
the Escrow Agreement, the Common Stock Registration Rights
Agreement and the Registration Rights Agreement has been duly
authorized, executed and delivered by the Company and
(assuming due authorization and execution by each party
thereto other than the Company) constitutes a valid and
binding agreement of the Company, enforceable against the
Company in accordance with its terms, except as such
enforceability may be limited by (a) with respect to the
Indenture, the Warrant Agreement, the Common Stock
Registration Rights Agreement and the Registration Rights
Agreement, the Enforceability Limitations, including the
waiver contained in Section 5.15 of the Indenture and (b) with
respect to the Escrow Agreement, the Common Stock Registration
Rights Agreement and the Registration Rights Agreement, as to
rights of indemnification and contribution, principles of
public policy or federal or state securities laws relating
thereto;
(11) Each of the Notes, when executed and
authenticated in accordance with the provisions of the
Indenture and delivered and paid for in accordance with the
terms of this Agreement, and the Exchange Notes and the
Private Exchange Notes, if any, when executed, authenticated
and delivered in exchange for the Notes in accordance with the
terms of
<PAGE> 28
-27-
the Registration Rights Agreement, will be entitled to the
benefits of the Indenture and will be valid and binding
obligations of the Company, enforceable in accordance with its
terms except as the enforceability thereof may be limited by
the Enforceability Limitations; each of the Warrants, executed
by the Company and authenticated in accordance with the
provisions of the Warrant Agreement and the Warrant Shares,
when executed, authenticated and delivered in exchange for the
Warrants in accordance with the terms thereof, will be
entitled to the benefits of the Warrant Agreement and will be
valid and binding obligations of the Company, enforceable in
accordance with their terms except as the enforceability
thereof may be limited by the Enforceability Limitations;
(12) The Warrant Shares have been duly reserved by
the Company for issuance upon exercise of the Warrants in
sufficient number to cover the exercise of all of the
Warrants, and the issuance of the Warrant Shares upon exercise
of the Warrants has been duly and validly authorized, and the
Warrant Shares, when paid for and delivered in accordance with
the terms of the Warrants and the Warrant Agreement, will be
validly issued, fully paid and nonassessable, and no holder of
any securities of the Company has preemptive or similar rights
to purchase any Common Stock of the Company arising by
operation of the General Corporation law of the State of
Delaware or under the Certificate of Incorporation or By-laws
of the Company or under any Material Contract set forth in
Schedule C hereto, in any such case that are applicable to the
Warrants or the Warrant Shares;
(13) The Escrow Agreement creates a valid security
interest in favor of the Trustee in all right, title and
interest of the Company in and to the Escrow Account and the
Collateral (such counsel need not express an opinion as to the
perfection or priority of the security interest in the
Collateral created by the Escrow Agreement);
(14) To the knowledge of such counsel, other than as
described in the Offering Memorandum, no legal, regulatory or
governmental proceedings are pending to which the Company is a
party or to which the property or assets of the Company are
subject which, individually or in the aggregate, could
reasonably be
<PAGE> 29
-28-
expected to have a Material Adverse Effect or which,
individually or in the aggregate, could have a material
adverse effect on the power or ability of the Company to
perform its obligations under the Operative Documents or to
consummate the transactions contemplated thereby or by the
Offering Memorandum and to the knowledge of such counsel, no
such material proceedings have been threatened against the
Company or with respect to any of its respective assets or
properties;
(15) Assuming (a) the accuracy of, and compliance
with, the representations, warranties and covenants of the
Company in subsections 1(iii) and 1(iv) of the Purchase
Agreement, (b) the accuracy of, and compliance with, the
representations, warranties and covenants of the Initial
Purchasers in Section 4 of the Purchase Agreement, (c) the
accuracy of the representations and warranties of each of the
purchasers to whom the Initial Purchasers initially resell the
Securities as specified in the Accredited Investor Letter, (d)
the compliance by the Initial Purchasers with the offering and
transfer procedures and restrictions described in the Offering
Memorandum and (e) receipt by the purchasers to whom the
Initial Purchasers initially resell the Securities of a copy
of the Offering Memorandum prior to such sale, it is not
necessary in connection with the offer, sale and delivery of
the Securities or in connection with the initial resale of
such Securities in the manner contemplated by the Purchase
Agreement and the Offering Memorandum to register the
Securities under the Act or to qualify the Indenture under the
Trust Indenture Act, it being understood that no opinion is
expressed as to any subsequent resale of any Securities;
(16) None of the Company nor any of the Subsidiaries
is an "investment company" or a company "controlled by" or
required to register as an investment company as such terms
are defined in the Investment Company Act of 1940, as amended,
and the rules and regulations thereunder;
(17) When the Units are issued and delivered pursuant
to this Agreement, such Units will not be of the same class
(within the meaning of Rule 144A) as securities of the Company
which are listed on a national securities exchange registered
under Section 6
<PAGE> 30
-29-
of the Exchange Act or quoted in a U.S. automated inter-dealer
quotation system; and
(18) Neither the consummation of the transactions
contemplated hereby nor the sale, issuance, execution or
delivery of the Units will violate Regulation G, T, U or X of
the Board of Governors of the Federal Reserve System.
In addition such counsel shall state that such counsel has
participated in conferences with representatives of the Initial
Purchasers, officers and other representatives of the Company and
representatives of the independent certified accountants of the
Company, at which conferences the contents of the Offering Memorandum
and the business and affairs of the Company and the Subsidiaries were
discussed, and although such counsel has not independently verified and
does not pass upon or assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Offering
Memorandum (except and only to the extent set forth in subclauses (8)
and (9) above), on the basis of the foregoing (relying as to
materiality to the extent such counsel deemed appropriate upon the
representations and opinions of officers and other representatives of
the Company), no facts have come to the attention of such counsel which
lead such counsel to believe that the Offering Memorandum at the date
thereof or as of the Closing Time, contained or contains an untrue
statement of a material fact or omitted or omits to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading (it being
understood that such counsel need not express any comment with respect
to the financial statements, including the notes thereto and supporting
schedules, or any other financial data set forth or referred to in the
Offering Memorandum).
In rendering such opinions, such counsel (A) need not express
any opinion with regard to the application of laws of any jurisdiction
other than the Federal law of the United States, the General
Corporation Law of the State of Delaware and the laws of the States of
Colorado and New York and (B) may rely, as to matters of fact, to the
extent they deem proper on representations or certificates of
responsible officers of the Company and certificates of public
officials.
<PAGE> 31
-30-
References to the Offering Memorandum in this subsection
(a)(i) include any supplements thereto at or prior to the Closing Time.
(ii) At the Closing Time, the Initial Purchasers shall have
received the opinion of Carla Hamre Donelson, Esq., General Counsel to
the Company, dated as of the Closing Time, in the form set forth below
and otherwise reasonably satisfactory to the Initial Purchasers and
counsel for the Initial Purchasers, to the effect that:
(1) To the knowledge of such counsel, other than as
described in the Offering Memorandum, no legal, regulatory or
governmental proceedings are pending to which the Subsidiaries
is a party or to which the property or assets of the
Subsidiaries are subject which, individually or in the
aggregate, could reasonably be expected to have a Material
Adverse Effect or which, individually or in the aggregate,
could have a material adverse effect on the power or ability
of the Company to perform its obligations under the Operative
Documents or to consummate the transactions contemplated
thereby or by the Offering Memorandum and to the knowledge of
such counsel, no such material proceedings have been
threatened against the Subsidiaries or with respect to any of
their respective assets or properties; and
(2) None of the Company or the Subsidiaries is in
violation of its respective Organizational Documents; to the
knowledge of such counsel, no default by the Company or any of
the Subsidiaries exists in the due performance or observance
of any material obligation, agreement, covenant or condition
contained in any Material Contract which could reasonably be
expected to have a Material Adverse Effect; and to the
knowledge of such counsel, none of the Company nor the
Subsidiaries is in breach or violation of any law, statute,
rule or regulation, or any judgment, decree or order of any
governmental or regulatory agency or other body having
jurisdiction over the Company or any of the Subsidiaries or
any of their respective properties or assets such that any
such breach or violation could reasonably be expected to have
a Material Adverse Effect.
In addition such counsel shall state that such counsel has
participated in conferences with representatives
<PAGE> 32
-31-
of the Initial Purchasers, officers and other representatives of the
Company and representatives of the independent certified accountants of
the Company, at which conferences the contents of the Offering
Memorandum and the business and affairs of the Company and the
Subsidiaries were discussed, and although such counsel has not
independently verified and does not pass upon or assume any
responsibility for the accuracy, completeness or fairness of the
statements contained in the Offering Memorandum, on the basis of the
foregoing (relying as to materiality to the extent such counsel deemed
appropriate upon the representations and opinions of officers and other
representatives of the Company), no facts have come to the attention of
such counsel which lead such counsel to believe that the Offering
Memorandum at the date thereof or as of the Closing Time, contained or
contains an untrue statement of a material fact or omitted or omits to
state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading
(it being understood that such counsel need not express any comment
with respect to the financial statements, including the notes thereto
and supporting schedules, or any other financial data set forth or
referred to in the Offering Memorandum).
In rendering such opinions, such counsel (A) need not express
any opinion with regard to the application of laws of any jurisdiction
other than the Federal law of the United States, the General
Corporation Law of the State of Delaware and the laws of the State of
Colorado and (B) may rely, as to matters of fact, to the extent she
deems proper on representations or certificates of responsible officers
of the Company and certificates of public officials.
References to the Offering Memorandum in this subsection
(a)(ii) include any supplements thereto at or prior to the Closing
Time.
(b) The Initial Purchasers shall have received the opinion,
dated as of the Closing Time, of Cahill Gordon & Reindel, counsel for
the Initial Purchasers, with respect to certain matters set forth in
clauses (8), (10) (assuming the due authorization, execution and
delivery of each of the Indenture, Warrant Agreement, Escrow Agreement,
Common Stock Registration Rights Agreement and Registra-
<PAGE> 33
-32-
tion Rights Agreement by each party thereto), (11) and (15) of
subsection (a) of this Section 7.
In rendering such opinions, such counsel (A) need not express
any opinion with regard to the application of laws of any jurisdiction
other than the Federal laws of the United States, the General
Corporation Law of the State of Delaware and the laws of the State of
New York and (B) may rely, as to matters of fact, to the extent they
deem proper on representations or certificates of responsible officers
of the Company and certificates of public officials.
In addition, such counsel shall additionally state that such
counsel has participated in conferences with officers and other
representatives of the Company and representatives of the independent
accountants for the Company at which conferences the contents of the
Offering Memorandum and related matters were discussed, and although
such counsel has not verified and does not pass upon and does not
assume any responsibility for the accuracy, completeness or fairness of
the statements contained in the Offering Memorandum, on the basis of
the foregoing (relying as to materiality to the extent such counsel
deemed appropriate upon the representations and opinions of officers
and other representatives of the Company), no facts have come to the
attention of such counsel which lead such counsel to believe that the
Offering Memorandum, at the date thereof or as of the Closing Time,
contained or contains an untrue statement of a material fact or omitted
to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no
comment with respect to the financial statements, including the notes
thereto, or any other financial or statistical data found in or derived
from the internal accounting and other records of the Company and its
subsidiaries set forth or referred to in the Offering Memorandum).
(c) The following conditions contained in clauses (i) and
(ii) of this subsection (c) shall have been satisfied at and as of the
Closing Time and the Company shall have furnished to the Initial
Purchasers a certificate, signed by the Chairman of the Board or the
President and the principal financial or accounting officer of the
Company, dated as of the Closing Time, to the effect that the signers
of such certificate have carefully examined the
<PAGE> 34
-33-
Offering Memorandum, any amendment or supplement to the Offering
Memorandum, and this Agreement and that:
(i) the representations and warranties of the
Company in this Agreement are true and correct in all material
respects on and as of the Closing Time with the same effect as
if made at the Closing Time and the Company has complied with
all the agreements and satisfied all the conditions under this
Agreement on its part to be performed or satisfied in all
material respects at or prior to the Closing Time; and
(ii) since the date of the most recent financial
statements included in the Offering Memorandum (exclusive of
any amendment or supplement thereto), there has been no
Material Adverse Change, whether or not arising in the
ordinary course of business. As used in this subparagraph, the
term "Offering Memorandum" means the Offering Memorandum in
the form first used to confirm sales of the Securities.
(d) At the time that this Agreement is signed and at the
Closing Time, KPMG Peat Marwick LLP shall have furnished to the Initial
Purchasers a letter or letters, dated respectively as of the date of
this Agreement and as of the Closing Time, in form and substance
satisfactory to the Initial Purchasers, confirming that they are
independent certified public accountants within the meaning of the Act
and the applicable published rules and regulations thereunder and
containing statements and information of the type ordinarily included
in accountants' "comfort letters" to Initial Purchasers with respect to
financial statements and certain financial information contained in the
Offering Memorandum, in form and substance satisfactory to counsel for
the Initial Purchasers.
(e) Subsequent to the date hereof or, if earlier, the dates
as of which information is given in the Offering Memorandum (exclusive
of any amendment or supplement thereto), there shall not have been any
change, or any development involving a prospective change, in or
affecting the business or properties of the Company and its
Subsidiaries the effect of which is, in the sole judgment of the
Initial Purchasers, so material and adverse as to make it impractical
or inadvisable to proceed with the purchase and the delivery of the
Units as contemplated by the Offering Memorandum (exclusive of any
amendment or supplement thereto).
<PAGE> 35
-34-
(f) At the Closing Time, counsel for the Initial Purchasers
shall have been furnished with such information, certificates and
documents as they may reasonably require for the purpose of enabling
them to pass upon the issuance and sale of the Units as contemplated
herein and related proceedings, or in order to evidence the accuracy of
any of the representations or warranties, or the fulfillment of any of
the conditions, herein contained; and all opinions and certificates
mentioned above or elsewhere in this Agreement shall be reasonably
satisfactory in form and substance to the Initial Purchasers and
counsel for the Initial Purchasers.
(g) The Company and the Trustee shall have entered into the
Indenture.
(h) The Company and the Warrant Agent shall have entered
into the Warrant Agreement.
(i) The Company and the Initial Purchasers shall have
entered into the Registration Rights Agreement.
(j) The Company, the Trustee and the Escrow Agent shall have
entered into the Escrow Agreement.
(k) The Company and the Initial Purchasers shall have
entered into the Common Stock Registration Rights Agreement.
(l) Brooks Fiber Properties, Inc. shall have purchased
50,000 Units as provided in the Offering Memorandum under the caption
"Plan of Distribution."
(m) Brooks Fiber Properties, Inc. shall have agreed in
writing, to the satisfaction of Merrill Lynch, not to, directly or
indirectly, offer, sell, grant any option to purchase or otherwise
dispose of any Securities or Exchange Notes (other than in connection
with the exchange of Notes for Exchange Notes provided for in the
Registration Rights Agreement).
If any condition specified in this Section 7 shall not have
been fulfilled when and as required to be fulfilled, this Agreement may be
terminated by the Initial Purchasers by notice to the Company, and such
termination shall be without liability of any party to any other party except as
provided in Section 6. Notwithstanding any such termination, the provisions of
Sections 8, 9, 13 and 16 shall remain in effect.
<PAGE> 36
-35-
Notice of such cancellation shall be given to the Company in writing or by
telephone, facsimile transmission or telegraph confirmed in writing. The Company
shall furnish to the Initial Purchasers such conformed copies of such opinions,
certificates, letters and documents in such quantities as the Initial Purchasers
and counsel for the Initial Purchasers shall reasonably request.
SECTION 8. Indemnification.
(a) The Company agrees to indemnify and hold harmless the
Initial Purchasers, their respective affiliates, and each person, if any, who
controls any Initial Purchaser or their respective affiliates within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act, and their respective
directors, officers, employees and agents, as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, joint or several, as incurred, arising out of any
untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Offering Memorandum or the Final Offering
Memorandum (or any amendment or supplement thereto), or the omission or
alleged omission therefrom of a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, joint or several, as incurred, to the extent of the
aggregate amount paid in settlement of any litigation, or any
investigation or proceeding by any governmental agency or body,
commenced or threatened, or of any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or
omission; provided that (subject to Sections 8(c) and 8(d) below) any
such settlement is effected with the written consent of the Company;
and
(iii) against any and all expenses whatsoever, as incurred
(including reasonable fees and disbursements of one counsel chosen by
Merrill Lynch (in addition to any local counsel)), reasonably incurred
in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under (i) or
(ii) above;
<PAGE> 37
-36-
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Initial Purchaser through Merrill Lynch expressly for use in the Preliminary
Offering Memorandum or the Final Offering Memorandum (or any amendment or
supplement thereto).
The foregoing indemnity with respect to any untrue statement
contained in or any omission from the Preliminary Offering Memorandum shall not
inure to the benefit of any Initial Purchaser (or any Affiliate or person who
controls such Initial Purchaser within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act) from whom the person asserting such loss,
liability, claim, damage or expense purchased any of the Securities that are the
subject thereof if such person was not sent or given a copy of the Final
Offering Memorandum (or any amendment or supplement thereto), if the Company
shall have previously furnished copies thereof to the Initial Purchaser in
accordance with this Agreement, at or prior to the written confirmation of the
sale of such Securities to such person and the untrue statement contained in or
the omission from the Preliminary Offering Memorandum was corrected in the Final
Offering Memorandum (or any amendment or supplement thereto).
(b) Each Initial Purchaser agrees, severally and not jointly,
to indemnify and hold harmless the Company, its directors and each person, if
any, who controls the Company within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act against any and all loss, liability, claim,
damage and expense described in the indemnity contained in subsection (a) of
this Section 8, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Preliminary
Offering Memorandum or Final Offering Memorandum (or any amendment or supplement
thereto) in reliance upon and in conformity with written information furnished
to the Company by such Initial Purchaser through Merrill Lynch expressly for use
in the Preliminary Offering Memorandum or Final Offering Memorandum (or any
amendment or supplement thereto).
(c) Each indemnified party shall give notice as promptly as
reasonably practicable to each indemnifying party of any action commenced
against it in respect of which indemnity may be sought hereunder, enclosing a
copy of all papers properly served on such indemnified party, but failure to so
notify an indemnifying party shall not relieve such indemnify-
<PAGE> 38
-37-
ing party from any liability hereunder to the extent it is not materially
prejudiced as a result thereof and in any event shall not relieve it from any
liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 8(a) above,
one counsel to the indemnified parties shall be selected by Merrill Lynch, and,
in the case of parties indemnified pursuant to Section 8(b) above, counsel to
the indemnified parties shall be selected by the Company. An indemnifying party
may participate at its own expense in the defense of any such action; provided,
that counsel to the indemnifying party shall not (except with the consent of the
indemnified party) also be counsel to the indemnified party. Notwithstanding the
foregoing, if it so elects within a reasonable time after receipt of such
notice, an indemnifying party, jointly with any other indemnifying parties
receiving such notice, may assume the defense of such action with counsel chosen
by it and approved by the indemnified parties defendant in such action (which
approval shall not be unreasonably withheld), unless such indemnified parties
reasonably object to such assumption on the ground that there may be legal
defenses available to them which are different from or in addition to those
available to such indemnifying party. If an indemnifying party assumes the
defense of such action, the indemnifying parties shall not be liable for any
fees and expenses of counsel for the indemnified parties incurred thereafter in
connection with such action. In no event shall the indemnifying parties be
liable for the fees and expenses of more than one counsel (in addition to local
counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances.
No indemnifying party shall, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification or contribution could be sought
under this Section 8 or Section 9 hereof (whether or not the indemnified parties
are actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
the offer and sale of any Securities and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
<PAGE> 39
-38-
(d) If at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as to which such indemnified party is liable pursuant to Section
8(a), (b) or (c), as the case may be, such indemnifying party agrees that it
shall be liable for any settlement of the nature contemplated by Section
8(a)(ii) effected without its written consent if (i) such settlement is entered
into more than 45 days after receipt by such indemnifying party of the aforesaid
request, (ii) such indemnifying party shall have received notice of the terms of
such settlement at least 30 days prior to such settlement being entered into and
(iii) such indemnifying party shall not have reimbursed such indemnified party
in accordance with such request prior to the date of such settlement.
SECTION 9. Contribution. If the indemnification provided for
in Section 8 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Initial Purchasers on the other hand from the offering of the Units
pursuant to this Agreement or (ii) if the allocation provided by clause (i) is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company on the one hand and of the Initial Purchasers on
the other hand in connection with the statements or omissions which resulted in
such losses, liabilities, claims, damages or expenses, as well as any other
relevant equitable considerations.
The relative benefits received by the Company on the one hand
and the Initial Purchasers on the other hand in connection with the offering of
the Units pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the Units
pursuant to this Agreement (before deducting expenses) received by the Company
and the total underwriting discount received by the Initial Purchasers, bear to
the aggregate initial offering price of the Units.
The relative fault of the Company on the one hand and the
Initial Purchasers on the other hand shall be determined by reference to, among
other things, whether any such untrue or
<PAGE> 40
-39-
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact relates to information supplied by the Company or by the
Initial Purchasers and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Initial Purchasers agree that it would not
be just and equitable if contribution pursuant to this Section 9 were determined
by pro rata allocation (even if the Initial Purchasers were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
9. The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 9 shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 9, no Initial
Purchaser shall be required to contribute any amount in excess of the amount by
which the total price at which the Units purchased by it were offered to
subsequent purchasers exceeds the amount of any damages which such Initial
Purchaser 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 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 9, each person, if any, who
controls an Initial Purchaser within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act shall have the same rights to contribution as
such Initial Purchaser, and each director of the Company, each executive officer
of the Company and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act shall have
the same rights to contribution as the Company. The Initial Purchasers'
respective obligations to contribute pursuant to this Section 9 are several in
proportion to the number of Units set forth opposite their respective names in
Schedule A hereto and not joint.
<PAGE> 41
-40-
SECTION 10. Representations, Warranties and Agreements To
Survive Delivery. All representations, warranties, indemnities, agreements and
other statements of the Company and its officers and of the Initial Purchasers
contained in or made pursuant to this Agreement shall remain operative and in
full force and effect, regardless of any investigation made by or on behalf of
any Initial Purchaser or controlling person, or by or on behalf of the Company,
and shall survive delivery and payment for the Units to the Initial Purchasers.
SECTION 11. Termination of Agreement.
(a) Termination: General. (a) The Initial Purchasers may
terminate this Agreement, by notice to the Company, at any time at or prior to
the Closing Time if (i) there has been, since the time of execution of this
Agreement or since the respective dates as of which information is given in the
Offering Memorandum and on or prior to the Closing Time, any Material Adverse
Change with respect to the Company and the Subsidiaries, taken as a whole and
whether or not arising in the ordinary course of business, or (ii) since the
date of this Agreement and on or prior to the Closing Time, (A) there has
occurred any outbreak of hostilities or escalation of existing hostilities or
other national or international calamity or crisis or any change or development
involving a prospective change in national or international political, financial
or economic conditions, in each case, the effect of which on the financial
securities markets of the United States is such as to make it, in the judgment
of any Initial Purchaser, impracticable to market the Units or to enforce
contracts for the sale of the Units, or (B) trading in any securities of the
Company has been suspended or limited by the Commission or trading generally on
the New York Stock Exchange, the American Stock Exchange or the over-the-counter
market has been suspended, or minimum or maximum prices for trading have been
fixed, or maximum ranges for prices for securities generally have been required,
by any such exchange or by order of the Commission, the NASD or any other
governmental authority or (C) a general banking moratorium has been declared by
either Federal or New York authorities. As used in this Section 11(a), the term
"Offering Memorandum" means the Offering Memorandum in the form first used to
confirm sales of the Units.
(b) If this Agreement is terminated pursuant to this Section
11, such termination shall be without liability of any party to any other party
except as provided in Section 6 hereof, provided that Sections 1, 8, 9, 13 and
16 shall survive such termination and remain in full force and effect.
<PAGE> 42
-41-
(c) This Agreement may also terminate pursuant to the
provisions of Section 7, with the effect stated in such Section.
SECTION 12. Default by One of the Initial Purchasers. If one
of the Initial Purchasers shall fail at the Closing Time to purchase the Units
which it is obligated to purchase under this Agreement (the "Defaulted Units"),
the other Initial Purchasers shall have the right, but not the obligation,
within 24 hours thereafter, to make arrangements for the nondefaulting Initial
Purchasers, or any other Initial Purchasers, to purchase all, but not less than
all, of the Defaulted Units in such amounts as may be agreed upon and upon the
terms herein set forth; if, however, the other Initial Purchasers shall not have
completed such arrangements within such 24-hour period, then this Agreement
shall terminate without liability on the part of any nondefaulting Initial
Purchaser.
No action pursuant to this Section shall relieve any
defaulting Initial Purchaser from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement, either the non-defaulting Initial Purchasers or
the Company shall have the right to postpone the Closing Time for a period not
exceeding seven days in order to effect any required changes in the Offering
Memorandum or in any other documents or arrangement.
SECTION 13. Notices. All notices and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
mailed or transmitted by any standard form of telecommunication. Notices to the
Initial Purchasers shall be directed to the Initial Purchasers c/o Merrill Lynch
& Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, North Tower, World
Financial Center, New York, New York 10281-1305, attention: Robert Kramer,
Managing Director; and notices to the Company shall be directed to Verio Inc.,
9250 East Costilla Avenue, Suite 400, Englewood, Colorado 80112, attention:
Carla Hamre Donelson, Esq., with a copy to Morrison & Foerster LLP, 1290 Avenue
of the Americas, New York, New York 10104-0012, attention: Ira Greenstein, Esq.
SECTION 14. Information Supplied by the Initial Purchasers.
The statements set forth in the first two sentences of the last paragraph on the
front cover page and in the table and in the fifth paragraph under the heading
"Plan of Distribution" in the Offering Memorandum (to the extent such statements
<PAGE> 43
-42-
relate to the Initial Purchasers) constitute the only information furnished by
the Initial Purchasers to the Company for the purposes of Sections 1 and 8
hereof.
SECTION 15. Parties. This Agreement shall inure to the benefit
of and be binding upon the Initial Purchasers and the Company and its successors
and legal representatives. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person, firm or corporation, other
than the Initial Purchasers, their respective affiliates and the Company and its
successors and legal representatives and the controlling persons and officers,
directors, employees and agents referred to in Sections 8 and 9 and their heirs
and legal representatives, any legal or equitable right, remedy or claim under,
by virtue of or in respect of this Agreement or any provision herein contained.
This Agreement and all conditions and provisions hereof are intended to be for
the sole and exclusive benefit of the Initial Purchasers their respective
affiliates and the Company and its successors and legal representatives, and
said controlling persons and officers, directors, employees and agents and their
heirs and legal representatives, and said controlling persons and officers,
directors, employees and agents and their heirs and legal representatives, and
for the benefit of no other person, firm or corporation. No purchaser of Units
from any Initial Purchaser shall be deemed to be a successor by reason merely of
such purchase.
SECTION 16. Governing Law and Time. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK,
WITHOUT GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS. Specified
times of day refer to New York time.
SECTION 17. Counterparts. This Agreement may be executed in
one or more counterparts and, when each party has executed a counterpart, all
such counterparts taken together shall constitute one and the same agreement.
<PAGE> 44
-43-
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement by and between the Initial Purchasers and the Company in accordance
with its terms.
Very truly yours,
VERIO INC.
By: /s/ Carla Hamre Donelson
------------------------------------
Name: Carla Hamre Donelson
Title: Vice President,
General Counsel and Secretary
Confirmed and accepted as of the date first above written:
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
LAZARD FRERES & CO. LLC
By: Merrill Lynch, Pierce,
Fenner & Smith Incorporated
By: /s/ M. Becker
----------------------------
Name: M. Becker
Title: Vice President
<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.
KPMG Peat Marwick LLP
Denver, Colorado
March 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.
KPMG Peat Marwick LLP
Seattle, Washington
March 6, 1998
<PAGE> 1
EXHIBIT 25.1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM T-1
Statement of Eligibility Under the
Trust Indenture Act of 1939 of a Corporation
Designated to Act as Trustee
FIRST TRUST NATIONAL ASSOCIATION
(Exact name of Trustee as specified in its charter)
United States 41-0257700
(State of Incorporation) (I.R.S. Employer
Identification No.)
First Trust Center
180 East Fifth Street
St. Paul, Minnesota 55101
(Address of Principal Executive Offices) (Zip Code)
VERIO INC.
(Exact name of Registrant as specified in its charter)
Delaware 84-1339720
(State of Incorporation) (I.R.S. Employer
Identification No.)
8005 South Chester Street, Suite 200
Englewood Colorado 80112
(Address of Principal Executive Offices) (Zip Code)
13 1/2% SENIOR NOTES DUE 2004
(Title of the Indenture Securities)
<PAGE> 2
GENERAL
1. General Information Furnish the following information as to the Trustee.
(a) Name and address of each examining or supervising authority to
which it is subject.
Comptroller of the Currency
Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Yes
2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS If the obligor or any
underwriter for the obligor is an affiliate of the Trustee, describe each
such affiliation.
None
See Note following Item 16.
Items 3-15 are not applicable because to the best of the Trustee's
knowledge the obligor is not in default under any Indenture for which the
Trustee acts as Trustee.
16. LIST OF EXHIBITS List below all exhibits filed as a part of this
statement of eligibility and qualification.
1. Copy of Articles of Association.*
2. Copy of Certificate of Authority to Commence Business.*
3. Authorization of the Trustee to exercise corporate trust powers
(included in Exhibits 1 and 2; no separate instrument).*
4. Copy of existing By-Laws.*
5. Copy of each Indenture referred to in Item 4. N/A.
6. The consents of the Trustee required by Section 321(b) of the act.
7. Copy of the latest report of condition of the Trustee published
pursuant to law or the requirements of its supervising or
examining authority is incorporated by reference to Registration
Number 333-42147.
* Incorporated by reference to Registration Number 22-27000.
<PAGE> 3
NOTE
The answers to this statement insofar as such answers relate to what
persons have been underwriters for any securities of the obligors within three
years prior to the date of filing this statement, or what persons are owners of
10% or more of the voting securities of the obligors, or affiliates, are based
upon information furnished to the Trustee by the obligors. While the Trustee has
no reason to doubt the accuracy of any such information, it cannot accept any
responsibility therefor.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
Trustee, First Trust National Association, an Association organized and existing
under the laws of the United States, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, and its seal to be hereunto affixed and attested, all
in the City of Saint Paul and State of Minnesota on the day of March, 1998.
FIRST TRUST NATIONAL ASSOCIATION
/s/ Christina M. Hatfield
--------------------------------
Christina M. Hatfield
Vice President
/s/ Kathe M. Barrett
- ---------------------------
Kathe M Barrett
Assistant Secretary
<PAGE> 4
EXHIBIT 6
CONSENT
In accordance with Section 321(b) of the Trust Indenture Act of 1939,
the undersigned, FIRST TRUST NATIONAL ASSOCIATION hereby consents that reports
of examination of the undersigned by Federal, State, Territorial or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon its request therefor.
Dated: March , 1998
FIRST TRUST NATIONAL ASSOCIATION
/s/ Christina M. Hatfield
--------------------------------
Christina M. Hatfield
Vice President
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
VERIO INC.
OFFER TO EXCHANGE ALL OUTSTANDING
13 1/2% SENIOR SUBORDINATED NOTES DUE 2004
FOR
13 1/2% SENIOR SUBORDINATED NOTES DUE 2004
PURSUANT TO THE PROSPECTUS DATED , 1998
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1998, UNLESS THE EXCHANGE OFFER IS EXTENDED (THE "EXPIRATION DATE").
TO: FIRST TRUST NATIONAL ASSOCIATION, EXCHANGE AGENT
<TABLE>
<S> <C>
By Mail: By Hand or Overnight Courier:
First Trust National Association First Trust National Association
180 East Fifth Street 180 East Fifth Street
St. Paul, MN 55101 St. Paul, MN 55101
Attn: Specialized Finance Department Attn: Specialized Finance Department
</TABLE>
By Facsimile (For Eligible Institutions Only):
(612) 244-
Confirm by Telephone:
(612) 244-
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION VIA
FACSIMILE, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF
TRANSMITTAL IS COMPLETED.
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE NEW NOTES FOR THEIR OLD NOTES
PURSUANT TO THE EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW) THEIR OLD
NOTES TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE.
By execution hereof, the undersigned acknowledges receipt of the Prospectus
dated , 1998 (the "Prospectus"), of Verio Inc., a Delaware
corporation (the "Company"), and this Letter of Transmittal and the instructions
hereto (the "Letter of Transmittal"), which together constitute the offer to
exchange (the "Exchange Offer") an aggregate principal amount of up to
$150,000,000 13 1/2% Senior Subordinated Notes Due 2004 (the "New Notes") for an
equal principal amount of the outstanding 13 1/2% Senior Subordinated Notes Due
2004 (the "Old Notes" and, together with the New Notes, the "Notes").
The Company reserves the right, at any time or from time to time, to extend
the Exchange Offer at its sole discretion, in which event the term "Expiration
Date" shall mean the latest time and date to which the Exchange Offer is
extended. The Company shall notify the holders of the Old Notes of any extension
by means of a press release or other public announcement prior to 9:00 a.m., New
York City time, on the next business day after the previously scheduled
Expiration Date.
This Letter is to be used: (i) by all Holders who are not members of the
Automated Tender Offering Program ("ATOP") at the Depository Trust Company
("DTC"); (ii) by Holders who are ATOP members but choose not to use ATOP; or
(iii) if the Old Notes are to be tendered in accordance with the guaranteed
delivery procedures set forth in "The Exchange Offer -- Guaranteed Delivery
Procedures" section of the Prospectus. See Instruction 1. Delivery of this
Letter to DTC does not constitute delivery to the Exchange Agent.
<PAGE> 2
All capitalized terms used herein and not defined herein shall have the
respective meanings given to them in the Prospectus.
HOLDERS WHO WISH TO ACCEPT THE EXCHANGE OFFER AND TENDER THEIR OLD NOTES
MUST COMPLETE THIS LETTER OF TRANSMITTAL IN ITS ENTIRETY.
List below the Old Notes to which this Letter of Transmittal relates. If
the space provided below is inadequate, list the certificate numbers and
principal amounts on a separately executed schedule and affix the schedule to
this Letter Of Transmittal.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES
- -----------------------------------------------------------------------------------------------------------------
AGGREGATE PRINCIPAL AMOUNT OF
NAME(S) AND ADDRESS(ES) OF HOLDER(S) CERTIFICATE OLD NOTES TENDERED
(PLEASE FILL IN, IF BLANK) NUMBER(S)* (IF LESS THAN ALL)**
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Total Principal Amount of Old Notes Tendered
- -----------------------------------------------------------------------------------------------------------------
* Need not be completed by holders tendering Old Notes by book-entry transfer.
** Need not be completed by holders who wish to tender with respect to all Old Notes listed. See Instruction 2.
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY DTC TO THE EXCHANGE
AGENT'S ACCOUNT AT DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:
- --------------------------------------------------------------------------------
DTC Book-Entry Account No.:
---------------------------------------------------------------------------
Transaction Code No.
---------------------------------------------------------------------------
If holders desire to tender Old Notes pursuant to the Exchange Offer and
(i) certificates representing such Old Notes are not lost but are not
immediately available, (ii) time will not permit this Letter of Transmittal,
certificates representing such Old Notes or other required documents to reach
the Exchange Agent prior to the Expiration Date or (iii) the procedures for
book-entry transfer cannot be completed prior to the Expiration Date, such
holders may effect a tender of such Old Notes in accordance with the guaranteed
delivery procedures set forth in the Prospectus under "The Exchange
Offer -- Guaranteed Delivery Procedures."
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT AND
COMPLETE THE FOLLOWING:
Name of Holder of Old Notes:
- --------------------------------------------------------------------------------
Window Ticket No. (if any):
- --------------------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
- ---------------------------------------------------------------
Name of Eligible Institution that Guaranteed Delivery:
------------------------------------------------------------------
If delivered by Book-Entry Transfer:
Name of Tendering Institution:
- --------------------------------------------------------------------------------
DTC Book-Entry Account No.:
---------------------------------------------------------------------------
Transaction Code No.:
---------------------------------------------------------------------------
<PAGE> 3
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER WHO HOLDS OLD NOTES ACQUIRED FOR YOUR
OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES AND
WISH TO RECEIVE COPIES OF THE PROSPECTUS AND COPIES OF ANY AMENDMENTS OR
SUPPLEMENTS THERETO FOR USE IN CONNECTION WITH RESALES OF NEW NOTES
RECEIVED FOR YOUR OWN ACCOUNT IN EXCHANGE FOR SUCH OLD NOTES.
Name:
- --------------------------------------------------------------------------------
Address:
--------------------------------------------------------------------------
Aggregate Principal Amount of Old Notes so held: $
-------------------------------------------------------------------
LADIES AND GENTLEMEN:
The undersigned hereby tenders to the Company the aggregate principal
amount of Old Notes indicated in this Letter of Transmittal, upon the terms and
subject to the conditions of the Exchange Offer. Subject to, and effective upon,
the acceptance for exchange of the Old Notes tendered hereby, the undersigned
hereby sells, assigns and transfers to, or upon the order of, the Company all
right, title and interest in and to such Old Notes as are being tendered hereby
and hereby irrevocably constitutes and appoints the Exchange Agent as
attorney-in-fact of the undersigned with respect to such Old Notes, with full
power of substitution (such power of attorney being an irrevocable power coupled
with an interest), to: (a) deliver such Old Notes in registered certificated
form, or transfer ownership of such Old Notes through book-entry transfer at the
Book-Entry Transfer Facility, to or upon the order of the Company, upon receipt
by the Exchange Agent, as the undersigned's agent, of the same aggregate
principal amount of New Notes; and (b) receive, for the account of the Company,
all benefits and otherwise exercise, for the account of the Company, all rights
of beneficial ownership of the Old Notes tendered hereby in accordance with the
terms of the Exchange Offer.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Old Notes
tendered hereby and that the Company will acquire good, marketable and
unencumbered title thereto, free and clear of all security interests, liens,
restrictions, charges, encumbrances, conditional sale agreements or other
obligations relating to their sale or transfer, and not subject to any adverse
claim when the same are accepted by the Company. The undersigned hereby further
represents that any New Notes acquired in exchange for Old Notes tendered hereby
will have been acquired in the ordinary course of business of the person
receiving such New Notes, whether or not such person is the undersigned, that
neither the holder of such Old Notes nor any such other person is engaged in, or
intends to engage in, a distribution of such New Notes, or has an arrangement or
understanding with any person to participate in the distribution of such New
Notes, and that neither the holder of such Old Notes nor any such other person
is an "affiliate," as defined in Rule 405 under the Securities Act of 1933, as
amended (the "Securities Act"), of the Company. The undersigned has read and
agrees to all of the terms of the Exchange Offer.
The undersigned also acknowledges that the Company is making this Exchange
Offer in reliance on the position of the staff of the Securities and Exchange
Commission (the "Commission"), as set forth in certain interpretive letters
issued to third parties in other transactions. Based on the Commission
interpretations, the Company believes that the New Notes issued in exchange for
the Old Notes pursuant to the Exchange Offer may be offered for resale, resold
and otherwise transferred by holders thereof (other than a broker-dealer who
purchased Old Notes directly from the Company for resale pursuant to Rule 144A
under the Securities Act or any other available exemption under the Securities
Act or any such holder that is an "affiliate" of the Company within the meaning
of Rule 405 under the provisions of the Securities Act) without further
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such holders' business and such holders are not engaged in, and do not intend
to engage in, a distribution of such New Notes and have no arrangement with any
person to participate in the distribution of such New Notes. However, the
Company does not intend to request the Commission to consider, and the
Commission has not considered, the Exchange Offer in the context of an
interpretive letter, and there can be no assurance that the staff of the
Commission would make a similar determination with respect to the Exchange Offer
as in other circumstances.
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of New
Notes and has no arrangement or understanding to participate in a distribution
of New Notes. If any holder is an affiliate of the Company, is engaged in or
intends to engage in or has any arrangement or understanding with respect to the
distribution of the New Notes to be acquired pursuant to the Exchange Offer,
such holder (i) could not rely on the applicable interpretations of the staff of
the Commission and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. If the undersigned is a broker-dealer that will receive New Notes
for its own account in exchange for Old Notes acquired as a result of
market-making or other trading activities (a "Participating Broker-Dealer"), it
represents that the Old Notes to be exchanged for the New Notes were acquired by
it as a result of market-making or other trading activities and acknowledges
that it will deliver a prospectus in connection with any resale of such New
Notes; however, by so acknowledging and by delivering a prospectus, such
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The Company has agreed that, subject to the provisions of the Registration
Agreement, the Prospectus, as it may be amended or supplemented from time to
time, may be used by a Participating Broker-Dealer in connection with resales of
New Notes received in exchange for Old Notes which were acquired by such
Participating Broker-Dealer for its own account as a result of market-making or
other trading activities, for a period ending 180 days after the Expiration
Date, or, if earlier, when all such New Notes have been disposed of by such
Participating Broker-Dealer. In that regard, each Participating Broker-Dealer by
tendering such Old Notes and executing this Letter of Transmittal, agrees that,
upon receipt of notice from the Company of the occurrence of any event or the
discovery of any fact which makes any statement contained or incorporated by
reference in the Prospectus untrue in any material respect or which causes the
Prospectus to omit to state a material fact necessary in order to make the
statements contained or incorporated by
<PAGE> 4
reference therein, in light of the circumstances under which they were made, not
misleading, such Participating Broker-Dealer will suspend the sale of New Notes
pursuant to the Prospectus until the Company has amended or supplemented the
Prospectus to correct such misstatement or omission and has furnished copies of
the amended or supplemented Prospectus to the Participating Broker-Dealer or the
Company has given notice that the sale of the New Notes may be resumed, as the
case may be. If the Company gives such notice to suspend the sale of the New
Notes, it shall extend the 180-day period referred to above during which
Participating Broker-Dealers are entitled to use the Prospectus in connection
with the resale of New Notes by the number of days during the period from and
including the date of the giving of such notice to and including the date when
Participating Broker-Dealers shall have received copies of the supplemented or
amended Prospectus necessary to permit resales of the New Notes or to and
including the date on which the Company has given notice that the sale of New
Notes may be resumed, as the case may be.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Old Notes tendered hereby. All authority
conferred or agreed to be conferred in this Letter of Transmittal and every
obligation of the undersigned hereunder shall be binding upon the successors,
assigns, heirs, executors, administrators, trustees in bankruptcy and legal
representatives of the undersigned and shall not be affected by, and shall
survive, the death or incapacity of the undersigned. This tender may be
withdrawn only in accordance with the procedures set forth in "The Exchange
Offer -- Withdrawal Rights" section of the Prospectus.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, please deliver the New Notes (and, if applicable,
substitute certificates representing Old Notes for any Old Notes not exchanged)
in the name of the undersigned or, in the case of a book-entry delivery of Old
Notes, please credit the account indicated above maintained at the Book-Entry
Transfer Facility. Similarly, unless otherwise indicated under the box entitled
"Special Delivery Instructions" below, please send the New Notes (and, if
applicable, substitute certificates representing Old Notes for any Old Notes not
exchanged) to the undersigned at the address shown above in the box entitled
"Description of Old Notes."
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
Unless otherwise indicated in the box entitled "Special Issuance
Instruction" or in the box entitled "Special Delivery Instructions" in this
Letter of Transmittal, certificates for New Notes delivered in exchange for
tendered Old Notes, and any Old Notes delivered herewith but not exchanged, will
be registered in the name of the undersigned and will be delivered to the
undersigned at the address shown below the signature of the undersigned. If a
New Note is to be mailed to someone other than the person(s) signing this Letter
of Transmittal or to person(s) signing this Letter of Transmittal at an address
different than the address shown on this Letter of Transmittal, the appropriate
boxes of this Letter of Transmittal should be completed. If Notes are
surrendered by Holder(s) that have completed either the box entitled "Special
Issuance Instruction" or the box entitled "Special Issuance Instruction" or the
box entitled "Special Delivery Instructions" in this Letter of Transmittal,
signature(s) on this Letter of Transmittal must be guaranteed by an Eligible
Institution (defined in Instruction 3).
To be completed ONLY if the New Notes issued in consideration of Old Notes
exchanged, or certificates for Old Notes in a principal amount not surrendered
for exchange, are to be mailed to someone other than the undersigned or to the
undersigned at an address other than that below.
============================================================
<TABLE>
<S> <C>
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
Issue and mail check to: Deliver New Notes to:
Name: ---------------------------------------------- Name: ----------------------------------------------
(Please Print: First, Middle & Last Name) (Please Print: First, Middle & Last Name)
Address: -------------------------------------------- Address: --------------------------------------------
(Number and Street) (Number and Street)
-------------------------------------------- --------------------------------------------
(City, State and Zip Code) (City, State and Zip Code)
--------------------------------------------
(Tax Identification or Social Security No.)
</TABLE>
============================================================
<PAGE> 5
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES"
ABOVE AND SIGNING THIS LETTER OF TRANSMITTAL, WILL BE DEEMED TO HAVE TENDERED
THE OLD NOTES AS SET FORTH IN SUCH BOX ABOVE.
IMPORTANT: THIS LETTER OF TRANSMITTAL OR, IF APPLICABLE, A FACSIMILE HEREOF
(TOGETHER WITH THE OLD NOTES OR A BOOK-ENTRY CONFIRMATION AND ALL OTHER REQUIRED
DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY THE EXCHANGE
AGENT PRIOR TO 5:00 PM., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
- --------------------------------------------------------------------------------
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS OF
OLD NOTES REGARDLESS OF WHETHER OLD NOTES ARE
BEING PHYSICALLY DELIVERED HEREWITH)
<TABLE>
<S> <C>
X Date:
------------------------------------------------------ --------------------------------------------------
X Date:
------------------------------------------------------ --------------------------------------------------
Signature of Owner
</TABLE>
If a holder is tendering any Old Notes, this Letter of Transmittal
must be signed by the holder(s) of Old Notes exactly as the name(s) of the
holder(s) appear(s) on the certificate(s) for the Old Notes or by any
person(s) authorized to become (a) holder(s) by endorsements and documents
transmitted herewith. If signature is by a trustee, executor
administrator, guardian, officer or other person acting in a fiduciary or
representative capacity, such person must provide the following
information:
<TABLE>
<S> <C>
Name(s): Address:
--------------------------------------------------------
- -------------------------------------------------------- (Include Zip Code)
(Please Print)
Capacity: Telephone Number:
-------------------------------------------------------
- -------------------------------------------------------- (Include Area Code)
</TABLE>
SIGNATURE GUARANTEE
(SEE INSTRUCTION 3 HEREIN)
CERTAIN SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION
Signature(s) Guaranteed by:
--------------------------------------------------------------------------
(Authorized Signature)
--------------------------------------------------------------------------
(Title of Officer Signing this Guarantee)
--------------------------------------------------------------------------
(Name of Eligible Institution Guaranteeing Signatures -- Please Print)
--------------------------------------------------------------------------
(Address and Telephone Number of Eligible Institution Guaranteeing
Signatures)
Date:
------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 6
<TABLE>
<C> <S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
PLEASE COMPLETE SUBSTITUTE FORM W-9
- --------------------------------------------------------------------------------------------------------------------------
PAYER'S NAME: STATE STREET BANK AND TRUST COMPANY
- --------------------------------------------------------------------------------------------------------------------------
Social security number
PART 1 -- PLEASE PROVIDE YOUR TIN IN THE BOX AT
SUBSTITUTE RIGHT AND CERTIFY BY SIGNING AND DATING BELOW OR --------------------------------------
FORM W-9 Employer Identification Number
------------------------------------------------------------------------------------------------
PART 2 -- CERTIFICATES -- Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting
for a number to be issued for me), and
DEPARTMENT OF THE (2) I am not subject to backup withholding because (a) I am exempt from backup withholding, or
TREASURY (b) I have not been notified by the Internal Revenue Service (the "IRS") that I am subject to
INTERNAL REVENUE backup (TIN) withholding as a result of a failure to report all interest or dividends, or (c)
SERVICE the IRS has notified me that I am no longer subject to backup withholding.
CERTIFICATION INSTRUCTIONS -- You must cross out item (2) above if you have been notified by
PAYER'S REQUEST the IRS that you are currently subject to backup withholding because of underreporting interest
FOR TAXPAYER or dividends on your tax return. However, if after being notified by the IRS that you were
subject to backup withholding you received another notification from the IRS that you are no
longer subject to backup withholding, do not cross out item (2).
------------------------------------------------------------------------------------------------
IDENTIFICATION PART 3 --
NUMBER SIGNATURE --------------------------------------- DATE---------------- Awaiting TIN [ ]
("TIN")
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENT (IF ANY) MADE TO YOU WITH RESPECT TO OLD NOTES
TENDERED IN CONNECTION WITH THE EXCHANGE OFFER. YOU MUST COMPLETE THE
FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF SUBSTITUTE FORM
W-9
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (a) I have mailed or
delivered an application to receive a taxpayer identification number to
the appropriate Internal Revenue Service Center or Social Security
Administration Office, or (b) I intend to mail or deliver an application
in the near future, I understand that because I have not provided a
taxpayer identification number, 31% of all reportable payments made to me
thereafter will be withheld until I provide a number. If I provide a
properly certified taxpayer identification number within 60 days, you will
refund the tax if I so request.
SIGNATURE ____________________ DATE __________
- --------------------------------------------------------------------------------
<PAGE> 7
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER OF VERIO INC. TO
EXCHANGE ITS 13 1/2% SENIOR SUBORDINATED NOTES DUE 2004 FOR 13 1/2% SENIOR
SUBORDINATED NOTES DUE 2004.
1. DELIVERY OF THIS LETTER AND OLD NOTES; GUARANTEED DELIVERY PROCEDURES.
This Letter of Transmittal is to be used: (i) by all Holders who are not
ATOP members, (ii) by Holders who are ATOP members but choose not to use ATOP or
(iii) if the Old Notes are to be tendered in accordance with the guaranteed
delivery procedures set forth in the Prospectus under "The Exchange
Offer -- Guaranteed Delivery Procedures." To validly tender Old Notes, a Holder
must physically deliver a properly completed and duly executed Letter of
Transmittal (or facsimile thereof) with any required signature guarantees and
all other required documents to the Exchange Agent at its address set forth on
the cover of this Letter of Transmittal prior to the Expiration Date (as defined
below) or the Holder must properly complete and duly execute an ATOP ticket in
accordance with DTC procedures. Otherwise, the Holder must comply with the
guaranteed delivery procedures set forth in the next paragraph. Notwithstanding
anything to the contrary in the Registration Rights Agreements, the term
"Expiration Date" means 5:00 p.m., New York City time, on , 1998 (or
such later date to which the Company may, in its sole discretion, extend the
Exchange Offer). If this Exchange Offer is extended, the term "Expiration Date"
shall mean the latest time and date to which the Exchange Offer is extended. The
Company expressly reserves the right, at any time or from time to time, to
extend the period of time during which the Exchange Offer is open by giving oral
(confirmed in writing) or written notice of such extension to the Exchange Agent
and by making a public announcement of such extension prior to 9:00 a.m., New
York City time, on the next business day after the previously scheduled
Expiration Date.
Holders whose certificates for Old Notes are not immediately available or
who cannot deliver their certificates for Old Notes and all other required
documents to the Exchange Agent on or prior to the Expiration Date, or who
cannot complete the procedure for book-entry transfer on a timely basis, may
tender their Old Notes pursuant to the guaranteed delivery procedures set forth
in "The Exchange Offer -- Guaranteed Delivery Procedures" section of the
Prospectus. Pursuant to such procedures: (i) such tender must be made by or
through an Eligible Institution, (ii) on or prior to the Expiration Date, the
Exchange Agent must have received from the holder and the Eligible Institution a
properly completed and duly executed Notice of Guaranteed Delivery (by facsimile
transmission, mail or hand delivery) setting forth the name and address of the
holder of Old Notes, the certificate number or numbers of the tendered Old
Notes, and the principal amount of tendered Old Notes, stating that the tender
is being made thereby and guaranteeing that, within five New York Stock Exchange
trading days after the Expiration Date, the certificates for the tendered Old
Notes, or a Book-Entry Confirmation of such Old Notes, a duly executed Letter of
Transmittal and any other required documents will be deposited by the Eligible
Institution with the Exchange Agent, and (iii) such properly completed and
executed documents required by the Letter of Transmittal, as well as the
certificates for the tendered Old Notes in proper form for transfer (or
Book-Entry Confirmation of such Old Notes into the Exchange Agent's account at
DTC) must be received by the Exchange Agent within five New York Stock Exchange
trading days after the Expiration Date. Any holder who wishes to tender Old
Notes pursuant to the guaranteed delivery procedures described above must ensure
that the Exchange Agent receives the Notice of Guaranteed Delivery and Letter of
Transmittal relating to such Old Notes prior to 5:00 p.m., New York City time,
on the Expiration Date.
THE METHOD OF DELIVERY OF THIS LETTER, THE OLD NOTES AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE ELECTION AND RISK OF THE TENDERING HOLDERS, BUT THE DELIVERY
WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED OR CONFIRMED BY THE EXCHANGE
AGENT. IF OLD NOTES ARE SENT BY MAIL, IT IS SUGGESTED THAT THE MAILING BE MADE
SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT DELIVERY TO THE
EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
See "The Exchange Offer" section of the Prospectus.
DO NOT SENT THIS LETTER OF TRANSMITTAL OR ANY OLD NOTES TO THE COMPANY.
2. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS OF OLD NOTES WHO TENDER BY
BOOK-ENTRY TRANSFER).
If less than the entire principal amount of any submitted Old Note is to be
tendered, the tendering holder(s) should fill in the aggregate principal amount
to be tendered in the box above entitled "Description of Old Notes -- Aggregate
Principal Amount of Old Notes Tendered." A reissued certificate representing the
balance of non-tendered principal of any submitted Old Notes will be sent to
such tendering holder, unless otherwise provided in the appropriate box of this
Letter of Transmittal, promptly after the Expiration Date. THE ENTIRE PRINCIPAL
AMOUNT OF ANY OLD NOTES DELIVERED TO THE EXCHANGE AGENT WILL BE DEEMED TO HAVE
BEEN TENDERED UNLESS OTHERWISE INDICATED.
3. SIGNATURES ON THIS LETTER; ASSIGNMENTS AND ENDORSEMENT; GUARANTEE OF
SIGNATURES.
If this Letter of Transmittal is signed by the registered holder of the Old
Notes tendered hereby, the signature must correspond exactly with the name as
written on the face of the Old Notes without any change whatsoever.
If any tendered Old Notes are owned or record by two or more joint owners,
all such owners must sign this letter of Transmittal.
If any tendered Old Notes are registered in different names on several Old
Notes, it will be necessary to complete, sign and submit as many separate copies
of this Letter of Transmittal as there are different registrations of Old Notes.
<PAGE> 8
When this Letter of Transmittal is signed by the registered holder(s) of
the Old Notes specified herein and tendered hereby, no endorsements of the
submitted Old Notes or separate instruments of assignment are required. If,
however, the New Notes are to be issued, or any untendered Old Notes are to be
reissued, to a person other than the registered holder(s), then endorsements of
any Old Notes transmitted hereby or separate instruments of assignment are
required. Signatures on such Old Notes must be guaranteed by an Eligible
Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of any Old Notes specified herein, such Old Notes must be
endorsed or accompanied by appropriate instruments of assignment, in either case
signed exactly as the name of the registered holder appears on the Old Notes and
the signatures of such Old Notes must be guaranteed by an Eligible Institution.
If this Letter of Transmittal or any Old Notes or instruments of assignment
are signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
Endorsements on Old Notes or signatures on instruments of assignment
required by this Instruction 3 must be guaranteed by a firm which is a member of
a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc., by a commercial bank or trust company
having an office or correspondent in the United States or by an "eligible
guarantor" institution within the meaning of Rule 17Ad-15 under the Securities
Exchange Act of 1934 (the "Eligible Institution").
Signatures of this Letter of Transmittal need not be guaranteed by a
Eligible Institution, provided the Old Notes are tendered: (i) by a registered
holder of Old Notes (which term, for purposes of the Exchange Offer, includes
any participant in the Book-Entry Transfer Facility system whose name appears on
a security position listing as the holder of such Old Notes) who has not
completed the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on this Letter of Transmittal, or (ii) for the account of an
Eligible Institution.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS.
Tendering holders of Old Notes should indicated in the applicable box the
name and address to which new Notes issued pursuant to the Exchange Offer and/or
substitute certificates evidencing Old Notes not exchanged are to be issued or
sent, if different from the name or address of the person signing this Letter of
Transmittal. In the case of Issuance in a different name, the Employer
Identification of Social Security Number of the person named must also be
indicated. A holder of Old Notes tendering Old Notes by book-entry transfer may
request that New Notes and Old Notes not exchanged be credited to such account
maintained at the Book-Entry Transfer Facility as such holder of Old Notes may
designate hereon. If no such instructions are given, such New Notes and Old
Notes not exchanged will be returned to the name or address of the person
signing this Letter of Transmittal or credited to the account listed beneath the
box entitled "Description of Old Notes," as the case may be.
5. TAX IDENTIFICATION NUMBER.
Federal income tax law generally requires that a tendering holder whose Old
Notes are accepted for exchange must provide the Company (as payor) with such
Holder's correct Taxpayer Identification Number ("TIN") on Substitute Form W-9
above, which, in the case of a tendering holder who is an individual, is his or
her Social Security Number. If the Company is not provided with the Current TIN
or an adequate basis for an exemption, such tendering holder may be subject to a
$50 penalty imposed by the Internal Revenue Service. In addition, delivery of
New Notes to such tendering holder may be subject to backup withholding in an
amount equal to 31% of all reportable payments made after the exchange. If
withholding results in an overpayment of taxes, a refund may be obtained.
Exempt holders of Old Notes (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. See the enclosed Guidelines of Certification of Taxpayer
Identification Number on Substitute Form W-9 (the "W-9 Guidelines") for
additional instructions.
To prevent backup withholding, each tendering holder of Old Notes must
provide its correct TIN by completing the "Substitute Form W-9" set forth above,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN) and that (i) the holder is exempt from backup withholding, (ii) the holder
has not been notified by the Internal Revenue Service that such holder is
subject to a backup withholding as a result of a failure to report all interest
or dividends or (iii) the Internal Revenue Service has notified the holder that
such holder is no longer subject to backup withholding. If the tendering holder
of Old Notes is a nonresident alien or foreign entity not subject to backup
withholding, such holder must give the Company a completed Form W-8, Notice of
Foreign Status. These forms may be obtained from the Exchange Agent. If the Old
Notes are in more than one name or are not in the name of the actual owner, such
holder should consult the W-9 Guidelines for Instructions on applying for a TIN,
check the box in Part 3 of the Substitute Form W-9 and write "applied for" in
lieu of its TIN. Note: checking this box and writing "applied for" on the form
means that such holder has already applied for a TIN or that such holder intends
to apply for one in the near future. If such holder does not provide its TIN to
the Company within 60 days, backup withholding will begin and continue until
such holder furnishes its TIN to the Company.
6. TRANSFER TAXES.
The Company will pay all transfer taxes, if any, applicable to the transfer
of Old Notes to it or its order pursuant to the Exchange Offer. If, however, New
Notes and/or substitute Old Notes not exchanges are to be delivered to, or are
to be registered or issued in the name of, any person other than the registered
holder of the Old Notes tendered hereby, or if tendered Old notes are registered
in the name of any person other than the person signing this Letter of
Transmittal, or if a transfer tax is imposed for any reason other than the
transfer of Old Notes to the Issuer or its order pursuant to the
<PAGE> 9
Exchange Offer, the amount of any such transfer taxes (whether imposed on the
registered holder or any other person) will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted herewith, the amount of such transfer taxes will be billed directly to
such tendering holder.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT IS NOT NECESSARY FOR TRANSFER
TAX STAMPS TO BE AFFIXED TO THE OLD NOTES SPECIFIED IN THIS LETTER OF
TRANSMITTAL.
7. DETERMINATION OF VALIDITY/WAIVER OF CONDITIONS.
The Company will determine, in its sole discretion, all questions as to the
form of documents, validity, eligibility (including time of receipt) and
acceptance for exchange of any tender of Old Notes, which determination shall be
final and binding on all parties. The Company reserves the absolute right to
reject any and all tenders determined by it not to be in proper form or the
acceptance of which, or exchange for which, may, in the view of counsel to the
Company, be unlawful. The Company also reserves the absolute right, subject to
applicable law, to waive any of the conditions of the Exchange Offer set forth
in the Prospectus under the caption "The Exchange Offer" or any conditions or
irregularity in any tender of Old Notes of any particular holder whether or not
similar conditions or irregularities are waived in the case of other holders.
The Company's interpretation of the terms and conditions of the Exchange
Offer (including this Letter of Transmittal and the instructions hereto) will be
final and binding. No tender or Old Notes will be deemed to have been validly
made until all irregularities with respect to such tender have been cured or
waived. Although the Company intends to notify holders of defects or
irregularities with respect to tenders of Old Notes, neither the Company, any
employees, agents, affiliates or assigns of the Company, the Exchange Agent, nor
any other person shall be under any duty to give notification of any
irregularities in tenders or incur any liability for failure to give such
notification.
8. NO CONDITIONAL TENDERS.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders of Old Notes, by execution of this Letter of
Transmittal, shall waive any right to receive notice of the acceptance of their
Old Notes for exchange.
Neither the Company, the Exchange Agent nor any other person is obligated
to give notice of any defect or irregularity with respect to any tender of Old
Notes nor shall any of them incur any liability for failure to give any such
notice.
9. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES.
Any holder whose Old Notes have been mutilated, lost, stolen or destroyed
should contact the Exchange Agent at the address indicated above for further
instructions.
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering, as well as requests for
additional copies of the Prospectus and this Letter of Transmittal, may be
directed to the Exchange Agent, at the address and telephone number indicated
above.
<PAGE> 1
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY FOR
VERIO INC.
WITH RESPECT TO
13 1/2% SENIOR SUBORDINATED NOTES DUE 2004
---------------------
PURSUANT TO THE PROSPECTUS DATED , 1998
---------------------
This form or one substantially equivalent hereto must be used by a holder
of the 13 1/2% Senior Subordinated Notes Due 2004 (the "Old Notes") of Verio
Inc., a Delaware corporation (the "Company") to accept the Company's Exchange
Offer made pursuant to the Prospectus, dated , 1998 (the
"Prospectus"), and the related Letter of Transmittal (the "Letter of
Transmittal") if certificates for the Old Notes are not immediately available or
if the procedure for book-entry transfer cannot be completed on a timely basis
or time will not permit all required documents to reach First Trust National
Association (the "Exchange Agent") prior to 5:00 P.M., New York City time, on
the Expiration Date of the Exchange Offer. This Notice of Guaranteed Delivery
may be delivered or transmitted by facsimile transmission, mail or hand delivery
to the Exchange Agent as set forth below. In addition, in order to utilize the
guaranteed delivery procedure to tender Old Notes pursuant to the Exchange
Offer, a completed, signed and dated Letter of Transmittal (or facsimile
thereof) must also be received by the Exchange Agent prior to 5:00 P.M., New
York City time, on the Expiration Date. Capitalized terms not defined herein
have the respective meanings given to them in the Prospectus or the Letter or
Transmittal.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1998,
UNLESS THE EXCHANGE OFFER IS EXTENDED (THE "EXPIRATION DATE").
TO: FIRST TRUST NATIONAL ASSOCIATION
<TABLE>
<S> <C>
By Mail: By Hand or Overnight Courier:
First Trust National Association First Trust National Association
180 East Fifth Street 180 East Fifth Street
St. Paul, MN 55101 St. Paul, MN 55101
Attn: Specialized Finance Department Attn: Specialized Finance Department
</TABLE>
By Facsimile (For Eligible Institutions Only):
(612) 244-
Confirm by Telephone
(612) 244-
<PAGE> 2
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION VIA FACSIMILE,
OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
This form is not to be used to guarantee signatures. If a signature on a
Letter of Transmittal is required to be guaranteed by an "Eligible Institution"
under the instructions thereto, such signature guarantee must appear in the
applicable space provided in the signature box on the Letter of Transmittal.
Ladies and Gentlemen:
The undersigned hereby tender(s) to the Company upon the terms and
conditions set forth in the Prospectus and the related Letter of Transmittal,
receipt of which is hereby acknowledged, the aggregate principal amount of Old
Notes set forth below pursuant to the guaranteed delivery procedures set forth
in the Prospectus and the Letter of Transmittal.
The undersigned hereby tenders the Old Notes listed below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
AGGREGATE PRINCIPAL AMOUNT OF
NAME(S) AND ADDRESS(ES) OF HOLDER(S) CERTIFICATE* OLD NOTES TENDERED
(PLEASE FILL IN, IF BLANK) NUMBER(S) (IF LESS THAN ALL)**
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
------------------------------------------
------------------------------------------
------------------------------------------
------------------------------------------
------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Total Principal Amount of Old Notes Tendered
- ---------------------------------------------------------------------------------------------------------
* Need not be completed by holders tendering Old Notes by book-entry transfer.
** Need not be completed by holders who wish to tender with respect to all Old Notes listed.
- ---------------------------------------------------------------------------------------------------------
</TABLE>
If Old Notes will be delivered by book-entry transfer to The Depository
Trust Company, provide account number. Account Number:
PLEASE SIGN HERE
<TABLE>
<S> <C>
X ------------------------------------------------ Date: -----------------------------------------------
X ------------------------------------------------ Date: -----------------------------------------------
SIGNATURE(S) OF OWNER OR AUTHORIZED SIGNATORY
</TABLE>
This Notice of Guaranteed Delivery must be signed by the holder(s) of Old
Notes exactly as the name(s) of the holder(s) appear(s) on the certificate(s)
for the Old Notes or by any person(s) authorized to become (a) holder(s) by
endorsements and documents transmitted herewith. If signature is by a trustee,
executor, administrator, guardian, officer or other person acting in a fiduciary
or representative capacity, such person must provide the following information.
<TABLE>
<S> <C>
Name(s): ------------------------------------------ Address: --------------------------------------------
(Please Print) (Include Zip Code)
Telephone Number: -------------------------------
Capacity: ------------------------------------------- (Include Area Code)
</TABLE>
THE ACCOMPANYING GUARANTEE MUST BE COMPLETED.
<PAGE> 3
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm that is a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office correspondent in the United
States or any "eligible guarantor institution" within the meaning of Rule
17Ad-15 of the Securities Exchange Act of 1934, as amended, hereby (a)
represents that each holder of Old Notes on whose behalf this tender is being
made "own(s)" the Old Notes covered hereby within the meaning of Rule 14e-4
under the Securities Exchange Act of 1934, as amended, (b) represents that such
tender of Old Notes complies with Rule 14e-4, and (c) guarantees to deliver to
the Exchange Agent, at its address set forth above, the Old Notes described
above, in proper form for transfer (or confirmation of the book-entry transfer
of such Old Notes into the Exchange Agent's account at The Depositary Trust
Company, pursuant to the procedure for book-entry transfer set forth in the
Prospectus), together with a properly completed and duly executed Letter of
Transmittal (or facsimile thereof), with any required signature guarantees, and
any other documents required by the Letter of Transmittal by 5:00 p.m., New York
City time, within five New York Stock Exchange trading days following the
Expiration Date.
The undersigned acknowledges that it must deliver the Letter of Transmittal
and Old Notes tendered hereby to the Exchange Agent within the time period set
forth above and that failure to do so could result in financial loss to the
undersigned.
Name of Firm:
- --------------------------------------------------------------------------------
By:
- --------------------------------------------------------------------------------
(Authorized Signature)
Name:
- --------------------------------------------------------------------------------
Title:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
Telephone Number:
- --------------------------------------------------------------------------------
(Include Area Code)
Date:
- --------------------------------------------------------------------------------
DO NOT SEND OLD NOTES WITH THIS FORM, ACTUAL SURRENDER OF OLD NOTES MUST BE
MADE PURSUANT TO, AND BE ACCOMPANIED BY, AN EXECUTED LETTER OF TRANSMITTAL.
<PAGE> 4
INSTRUCTIONS
1. DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY.
A properly completed and duly executed copy of this Notice of Guaranteed
Delivery and any other documents required by this Notice of Guaranteed Delivery
must be received by the Exchange Agent at its address set forth herein prior to
the Expiration Date. The method of delivery of this Notice of Guaranteed
Delivery and any other required documents to the Exchange Agent is at the
election and sole risk of the holder, and the delivery will be deemed made only
when actually received by the Exchange Agent. If delivery is by mail, registered
mail with return receipt requested, properly insured, is recommended. As an
alternative to delivery by mail, the holders may wish to consider using an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery.
2. SIGNATURES ON THIS NOTICE OF GUARANTEED DELIVERY.
If this Notice of Guaranteed Delivery is signed by the registered holder(s)
of the Notes referred to herein, the signature must correspond with the name(s)
written on the face of the Notes without alteration, enlargement, or any change
whatsoever. If this Notice of Guaranteed Delivery is signed by a participant of
the Book-Entry Transfer Facility whose name appears on a security position
listing as the owner of the Notes, the signature must correspond with the name
shown on the security position listing as the owner of the Notes.
If this Notice of Guaranteed Delivery is signed by a person other than the
registered holder(s) of any Notes listed or a participant of the Book-Entry
Transfer Facility, this Notice of Guaranteed Delivery must be accompanied by
appropriate bond powers, signed as the name of the registered holder(s) appears
on the Notes or signed as the name of the participant shown on the Book-Entry
Transfer Facility's security position listing.
If this Notice of Guaranteed Delivery is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation, or other
person acting in a fiduciary or representative capacity, such person should so
indicate when signing and submit with the Letter of Transmittal evidence
satisfactory to the Company of such person's authority to so act.
3. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions and requests for assistance and requests for additional copies of
the Prospectus may be directed to the Exchange Agent at the address specified in
the Prospectus. Holders may also contact their broker, dealer, commercial bank,
trust company, or other nominee for assistance concerning the Exchange Offer.
