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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 7, 1998
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): July 6, 1998
VERIO INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
(State or Other Jurisdiction of Incorporation)
0-24219 84-1339720
(Commission File Number) (I.R.S. Employer Identification No.)
8005 SOUTH CHESTER STREET, SUITE 200, 80112
ENGLEWOOD, COLORADO (Zip Code)
(Address of Principal Executive Offices)
(303) 645-1900
(Registrant's Telephone Number, Including Area Code)
With a copy to:
Gavin B. Grover, Esq.
Morrison & Foerster LLP
425 Market Street
San Francisco, CA 94105
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ITEM 5. OTHER EVENTS.
RISK FACTORS
Verio Inc. ("Verio," the "Registrant" or the "Company") is a leading
provider of Internet connectivity and enhanced Internet services to small and
medium sized businesses. From time to time the Registrant may report through
its press releases and/or Securities and Exchange Commission filings, certain
matters that would be characterized as forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act") that are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Certain of these risks and
uncertainties are beyond management's control. This report contains statements
which constitute forward-looking statements. These statements appear in a
number of places in this report 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.
Readers 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 report 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. Investors have limited
operating and financial data about the Company upon which to base an evaluation
of the Company's performance. For the period from inception to December 31,
1996 (the "1996 Period"), the year ended December 31, 1997, and the three-month
period ended March 31, 1998, the Company reported net losses of $5.1 million,
$46.3 million, and $28.4 million, respectively. From inception through March
31, 1998, the Company reported cumulative cash used by operating activities of
$52.4 million. The Company expects to generate negative operating cash flow
for at least the next several years while it continues to acquire, invest in
and integrate the operations of Internet service providers ("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 expenses and time required to effectively integrate acquired operations and
capture operating efficiency, the ability to generate increasing revenues and
cash flow, the amount of expenditures incurred at the corporate and national
level, and any potential adverse regulatory developments. The Company will be
dependent on various financing sources to fund its growth as well as continued
losses from operations. There can be no assurance that the Company will achieve
or sustain positive operating cash flow or generate net income in the future.
To achieve profitability, the Company must, among other things, develop and
market products and services which are accepted on a broad commercial basis.
Given the Company's limited operating history, there can be no assurance that
the Company will ever achieve broad commercial acceptance or profitability. See
"-- Competition; Pricing Fluctuation" and "-- Dependence on the Internet;
Uncertain Adoption of Internet as Medium of Commerce and Communications." The
Company's profitability also will be affected as a result of the Company's
recording of compensation expense in an aggregate amount of approximately $10.6
million in connection with the granting of options subsequent to February 28,
1998, which compensation expense will be recorded over the forty- eight month
vesting period of those options.
SUBSTANTIAL INDEBTEDNESS; EFFECT OF FINANCIAL LEVERAGE
The Company has indebtedness that is substantial in relation to its
stockholders' equity and cash flow. As of March 31, 1998, the Company had an
aggregate of approximately $272.0 million of long-term indebtedness
outstanding, representing 82% of total capitalization. After giving effect to
the Company's initial public offering in May 1998 and the concurrent investment
in the Company by Nippon Telegraph & Telephone Corporation ("NTT"), long-term
indebtedness was reduced to approximately 49% of total capitalization. In
addition, the Company recently signed a credit agreement providing for a $57.5
million revolving credit facility (the "Bank Facility"). See "-- Requirements
for Additional Capital." As a result of the substantial indebtedness of the
Company, fixed charges of the Company are expected to exceed its
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earnings for the foreseeable future. Substantial leverage poses the risk that
the Company may not be able to generate sufficient cash flow to service its
indebtedness, or to adequately fund its operations. The Company has experienced
a substantial decrease in EBITDA, from negative $5.6 million in the 1996 Period
to negative $29.7 million in 1997. EBITDA as a percentage of revenue improved
from negative 237% to negative 83% from the 1996 Period to the year ended
December 31, 1997. However, there can be no assurance that this trend will
continue, or that the Company will be able to increase its revenue and leverage
the investments it has made in national services and systems, the national
network, and the operating overhead of the Verio ISPs, to achieve sufficient
cash flow to meet its debt service obligations. In particular, there can be no
assurance that the Company's operating cash flow will be sufficient to pay the
$13.5 million in annual interest (beginning in June 2000 following the
termination of the interest escrow arrangement for the $100 million principal
amount outstanding of the Company's 13-1/2% Senior Notes due 2004 (the "1997
Notes"), to pay the $18.2 million in annual interest on the Company's $175
million principal amount of 10-3/8% Senior Notes due 2005 (the "1998 Notes"),
or to meet its debt service obligations under the Bank Facility, if drawn upon.
The leveraged nature of the Company also could limit the ability of the Company
to effect future financings or may otherwise restrict the Company's operations
and growth.
REQUIREMENTS FOR ADDITIONAL CAPITAL
The Company's operations have required and will continue to require
substantial capital for investments in ISP operations, including the
acquisition of or investments in additional ISPs, the deployment of the
Company's national network and infrastructure and the funding of capital
expenditures for expansion of services and operating losses. The Company may
need additional amounts to fund its operating losses and those of the Verio
ISPs, which amounts cannot be determined. Over the longer term, it is likely
that the Company will require substantial additional funds to continue to fund
the Company's investment and acquisition program as well as product
development, marketing, sales and customer support capabilities.
The Company expects to meet its additional capital needs with the proceeds
from sales or issuance of equity securities, credit facilities and other
borrowings, lease financings, and sales of additional debt securities. The
failure to raise and generate sufficient funds may require the Company to delay
or abandon some of its planned future expansion or expenditures, which could
have a material adverse effect on the Company's growth and its ability to
compete in the Internet industry. No assurance can be given that the Company
will have sufficient cash flow available to maintain its current or future
growth plans or operations.
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results have fluctuated in the past and may in the
future fluctuate significantly depending upon a variety of factors, including
the incurrence of capital costs and the introduction of value-added enhanced
services and new services by the Company. Additional factors that may
contribute to variability of operating results include: the pricing and mix of
services offered by the Company; the Company's customer retention rate; changes
in pricing policies and product offerings by the Company's competitors; growth
in demand for network and Internet access services; the incurrence of one-time
costs associated with regional consolidation; and general telecommunications
services' performance and availability. The Company has also experienced
seasonal variation in Internet use and, therefore, revenue streams may
fluctuate accordingly. In response to competitive pressures, the Company may
take certain pricing or marketing actions that could have a material adverse
effect on the Company's business, financial condition and results of
operations. 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.
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
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of the Internet access market has attracted many new start-ups as well as
existing businesses from different industries. Current and prospective
competitors include, in addition to other national, regional and local ISPs,
long distance and local exchange telecommunications companies, cable television
companies, direct broadcast satellite and wireless communications providers,
and on-line service providers. The Company believes that a reliable national
network, knowledgeable salespeople and the quality of technical support
currently are the primary competitive factors in the Company's targeted market,
and that price is usually secondary to these factors.
The Company's current primary competitors include other ISPs with a
significant national presence which focus on business customers, such as UUNet,
GTE Internetworking (formerly BBN), PSINet, Concentric Network and DIGEX. While
the Company believes that its level of local service and support and target
market focus distinguish it from these competitors, some of these competitors
have a significantly greater market presence, brand recognition, and financial,
technical and personnel resources than the Company, and have extensive
coast-to-coast Internet backbones. The Company also competes with unaffiliated
regional and local ISPs in its targeted geographic regions.
All of the major long distance companies (also known as interexchange
carriers or IXCs), including AT&T, MCI, and Sprint, offer Internet access
services and compete with the Company. The recent sweeping reforms in the
federal regulation of the telecommunications industry have created greater
opportunities for local exchange carriers ("LECs"), including the Regional Bell
Operating Companies ("RBOCs"), to enter the Internet connectivity market. In
order to address the Internet connectivity requirements of the current business
customers of long distance and local carriers, the Company believes that there
is a move toward horizontal integration through acquisitions of, joint ventures
with, and the wholesale purchase of connectivity from, ISPs. The
WorldCom/MFS/UUNet consolidation, the NETCOM/ICG merger, the Intermedia/DIGEX
merger and GTE's acquisition of BBN are indicative of this trend. Accordingly,
Verio expects that it will experience increased competition from the
traditional telecommunications carriers. Many of these telecommunications
carriers, in addition to their substantially greater network coverage, market
presence, and financial, technical and personnel resources, also have large
existing commercial customer bases. Furthermore, telecommunications providers
may have the ability to bundle Internet access with basic local and long
distance telecommunications services. Such bundling of services may have an
adverse effect on the Company's ability to compete effectively with the
telecommunications providers and may result in pricing pressure on the Company
that would have an adverse effect on the Company's business, financial
condition and results of operations.
Many of the major cable companies have announced that they are exploring the
possibility of offering Internet connectivity, relying on the viability of
cable modems and economical upgrades to their networks. MediaOne Group and TCI
have recently announced trials to provide Internet cable service to their
residential customers in select areas. Several announcements also have recently
been made by other alternative service companies approaching the Internet
connectivity market with various wireless terrestrial and satellite-based
service technologies. These include Hughes Network System's DirecPC that
provides high-speed data through direct broadcast satellite technology; CAI
Wireless System's announcement of an MMDS wireless cable operator launching
data services via 2.5 to 2.7 GHz and high-speed wireless modem technology;
Cellularvision's announcement that it is offering Internet access via
high-speed wireless LMDS technology; and Winstar, which currently offers
high-speed Internet access to business customers over the 38 GHz spectrum.
The predominant on-line service providers, including America Online,
CompuServe, Microsoft Network, and Prodigy, have all entered the Internet
access business by engineering their current proprietary networks to include
Internet access capabilities. The Company competes to a lesser extent with
these on-line service providers.
Recently, there have been several announcements regarding the planned
deployment of broadband services for high speed Internet access by cable and
telephone companies through new technologies such as cable modems and xDSL.
While these providers have initially targeted the residential consumer, it is
likely that their target markets will expand to encompass the Company's target
markets, which may significantly affect the pricing of the Company's service
offerings.
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.
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Advances in technology as well as changes in the marketplace and the regulatory
environment are constantly occurring, and the Company cannot predict the effect
that ongoing or future developments may have on the Company or the pricing of
its products and services. See "-- Fluctuations in Operating Results," "--
Dependence on the Internet; Uncertain Adoption of Internet as a Medium of
Commerce and Communications" and "-- Potential Liability for Information
Disseminated Over Network; Regulatory Matters."
In connection with a commercial services agreement entered into between Verio
and an affiliate of NTT, NTT is entitled to "most favored customer" status and
pricing concessions. NTT and the Company are continuing to negotiate the
specific terms of these arrangements.
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 generate internal growth from
previously acquired ISPs or integrate the ISPs it has acquired and continues to
acquire. In conjunction with its efforts to integrate the operations of its
acquired ISPs, the Company has recently effected the buyout of the remaining
equity of all but one of the ISPs in which it did not initially acquire a 100%
ownership interest. While the Company anticipates that it will recognize
various economies and efficiencies of scale as a result of the integration of
the operations of the ISPs it has acquired, the process of consolidating the
businesses and implementing the strategic integration of the Company and its
ISPs 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. The timing and amount of expenditures related
to the Company's cost-savings initiatives and integration of the operations of
the Company's ISPs may be difficult to predict. The Company may increase
near-term expenditures in order to accelerate the integration and consolidation
of acquired operations with the goal of achieving longer-term cost savings and
improved profitability. There can be no assurance that these projected
long-term cost savings and improvements in profitability can or will be
realized. As a result, there can be no assurance that the Company will be able
to integrate the ISPs it has acquired successfully or in a timely manner in
accordance with its strategic objectives. Failure to integrate its ISPs or to
manage effectively the growth of the Company would have a material adverse
effect on the Company's business, financial condition and results of
operations.
Furthermore, the Company's performance will depend on the internal growth
generated through ISP operations. The timing and sustainability of any such
internal growth from the Company's ISP operations is difficult to predict and
may depend upon a variety of factors including the Company's development of
necessary operating, administrative, financial and accounting systems and
controls and the Company's ability to attract and retain highly qualified
management, financial, technical, sales and marketing, and customer care
personnel. Failure by the Company to manage effectively these and other
factors affecting internally generated growth in its ISP operations could have
a material adverse effect on the Company's business, financial condition and
results of operation.
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
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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.
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 Verio. Although the Company's acquisitions to date have
been primarily smaller local and regional independent ISPs, the Company may in
the future target the acquisition of larger businesses such as its recent
acquisition of TABNet. The Company expects that competition for appropriate
acquisition candidates may be significant. 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.
Further, the Company's ability to consummate transactions with ISPs that it
identifies will require significant financial resources. Failure to raise and
generate sufficient funds may require the Company to delay or abandon some of
its planned future expansion or expenditures, which could have a material
adverse effect on the Company's growth. See "-- Requirements for Additional
Capital."
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent upon the efforts of its senior management
team, the loss of any of whom could impede the achievement of product
development and marketing objectives and could have a material adverse effect
on the Company. The Company 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.
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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 network operations center ("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
point of presence ("POP") would result in interruption of service to the
customers served by such POP until necessary repairs were effected or
replacement equipment were installed. Additionally, failure of the Company's
telecommunications providers to provide the data communications capacity
required by the Company as a result of natural disaster, operational disruption
or for any other reason could cause interruptions in the services provided by
the Company. Any damage or failure that causes interruptions in the Company's
operations could have a material adverse effect on the Company's business,
financial condition and results of operations.
SECURITY RISKS
Despite the implementation of security measures by the Company, networks are
vulnerable to unauthorized access, computer viruses and other disruptive
problems. ISPs have in the past experienced, and may in the future experience,
interruptions in service as a result of the accidental or intentional actions
of Internet users, current and former employees or others. Unauthorized access
could also potentially jeopardize the security of confidential information
stored in the computer systems of the Company and its customers, which may
result in liability of the Company to its customers and also may deter
potential subscribers. Although the Company intends generally to continue to
implement industry-standard security measures, such measures have been
circumvented in the past, and there can be no assurance that measures
implemented by the Company will not be circumvented in the future. Eliminating
computer viruses and alleviating other security problems may require
interruptions, delays or cessation of service to the Company's customers which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON THE INTERNET; UNCERTAIN ADOPTION OF INTERNET AS A MEDIUM OF
COMMERCE AND COMMUNICATIONS
The Company's products and services are targeted toward users of the
Internet, which has experienced rapid growth. As is typical in the case of a
new and rapidly evolving industry characterized by rapidly changing technology,
evolving industry standards and frequent new product and service introductions,
demand and market acceptance for recently introduced products and services are
subject to a high level of uncertainty. In addition, critical issues concerning
the commercial use of the Internet remain unresolved and may impact the growth
of Internet use, especially in the business market targeted by the Company.
Despite growing interest in the many commercial uses of the Internet, many
businesses have been deterred from purchasing Internet access services for a
number of reasons, including, among others, inconsistent quality of service,
lack of availability of cost-effective, high-speed options, a limited number of
local access points for corporate users, inability to integrate business
applications on the Internet, the need to deal with multiple and frequently
incompatible vendors, inadequate protection of the confidentiality of stored
data and information moving across the Internet, and a lack of tools to
simplify Internet access and use. In particular, numerous published reports
have indicated that a perceived lack of security of commercial data, such as
credit card numbers, has significantly impeded commercial exploitation of the
Internet to date, and there can be no assurance that encryption or other
technologies will be developed that satisfactorily address these security
concerns. Published reports have also indicated that capacity constraints
caused by growth in the use of the Internet may, unless resolved, impede
further development of the Internet to the extent that users experience delays,
transmission errors and other difficulties. Further, the adoption of the
Internet for commerce and communications, particularly by those individuals and
enterprises which have historically relied upon alternative means of commerce
and communication, generally requires the understanding and acceptance of a new
way of conducting business and exchanging information. In particular,
enterprises that have already invested substantial resources in other means of
conducting commerce and exchanging information may be particularly reluctant or
slow to adopt a new strategy that may make their existing personnel and
infrastructure obsolete.
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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.
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 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,
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are available only from limited sources. For example, the Company currently
relies on Cisco Systems to supply routers critical to the Company's network,
and the Company could be adversely affected if routers from Cisco were to
become unavailable on commercially reasonable terms. Qwest, Sprint, MCI and
MFS, which are competitors of the Company, are the Company's primary providers
of data communications facilities and network capacity. The Company also is
dependent upon LECs, which often are competitors of the Company, to provide
telecommunications services and lease physical space to the Company for
routers, modems and other equipment. The Company has from time to time
experienced delays in receiving telecommunications services, which can lead to
the loss of customers or prospective customers. There can be no assurance that,
on an ongoing basis, the Company will be able to obtain such services on the
scale and within the time frames required by the Company at a commercially
reasonable cost, or at all. Failure to obtain or to continue to make use of
such services would have a material adverse effect on the Company's business,
operating results and financial condition.
FINANCIAL INFORMATION CONCERNING ACQUISITIONS
The 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. Accordingly, the pro forma and other financial
information contained in the Company's periodic and other reports filed from
time to time with the Securities and Exchange Commission includes financial
information concerning certain recently completed acquisitions for which audited
financial statements may not be available. In particular, this is the case with
respect to the Company's recent acquisition of TABNet. There can be no assurance
that a subsequent audit by the Company will not reveal matters of significance,
including with respect to revenues, expenses and liabilities, contingent or
otherwise, of these companies. The Company's business strategy involves the
continued and potentially rapid acquisition of additional ISPs. The Company
expects that, from time to time in the future, it will enter into additional
acquisition agreements, the pro forma effect of which is not known and cannot be
predicted. The Company's completion of additional acquisitions may have a
material impact on the financial information set forth herein. There can be no
assurance as to the number, timing or size of future acquisitions, if any, or
the effect any such acquisitions would have on the Company's operating or
financial results.
ANTI-TAKEOVER PROVISIONS
Certain provisions of Delaware law and the Company's Certificate of
Incorporation, as amended and restated (the "Certificate of Incorporation"),
and Bylaws, as amended (the "Bylaws"), may have the effect of delaying,
deterring or preventing a future takeover or change in control of the Company
unless such takeover or change in control is approved by the Company's Board of
Directors. Such provisions also may render the removal of directors and
management more difficult. Such provisions could limit the price that certain
investors might be willing to pay in the future for shares of the Company's
Common Stock. These provisions of Delaware law and the Company's Certificate of
Incorporation and Bylaws may also have the effect of discouraging or preventing
certain types of transactions involving an actual or threatened change of
control of the Company (including unsolicited takeover attempts), even though
such a transaction may offer the Company's stockholders the opportunity to sell
their stock at a price above the prevailing market price. The Company's
Certificate of Incorporation places certain restrictions on who may call a
special meeting of stockholders. In addition, the Company's Board of Directors
has the authority to issue up to 12,500,000 shares of undesignated preferred
stock (the "Undesignated Preferred Stock") and to determine the price, rights,
preferences, and privileges of those shares without any further vote or actions
by the stockholders. The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any
Undesignated Preferred Stock that may be issued in the future. The issuance of
such shares of Undesignated Preferred Stock, while potentially providing
desirable flexibility in connection with possible acquisitions and serving
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or may discourage a third party from attempting to
acquire, a majority of the outstanding voting stock of the Company. In
addition, the Company is subject to the anti-takeover provisions of Section 203
of the Delaware General Corporation Law (the "DGCL"), which will prohibit the
Company from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder unless the business
combination is approved in a prescribed manner. The application of Section 203
of the DGCL also could have the effect of delaying or preventing a change of
control of the Company. In addition, the Company's Certificate of Incorporation
provides that the Board of Directors will be divided into three classes of
directors serving staggered terms and all stockholder actions must be effected
at a duly called
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meeting and not by a consent in writing. The classification provision and the
prohibition on stockholder action by written consent could have the effect of
discouraging a third party from making a tender offer or otherwise attempting
to gain control of the Company. Additionally, certain federal regulations
require prior approval of certain transfers of control which could also have
the effect of delaying, deferring or preventing a change of control.
In addition, the Company's Investment Agreement with NTT provides NTT with
the right to designate a member of the Board of Directors, and imposes certain
standstill and other limitations on NTT's ability to make further acquisitions
of the Company's stock, that could have the effect of delaying, deferring or
preventing a change of control.
DIVIDEND POLICY; RESTRICTION ON PAYMENT OF DIVIDENDS
The Company does not anticipate paying cash dividends in the foreseeable
future. The Company's ability to pay dividends is limited by covenants imposed
under the indenture, dated June 24, 1997, under which the 1997 Notes were
issued, the indenture, dated March 25, 1998, under which the 1998 Notes were
issued, and the Bank Facility.
YEAR 2000 COMPLIANCE
Currently, many computer systems and software products are coded to accept
only two digit entries in the date code field. These date code fields will need
to accept four digit entries to distinguish 21st century dates from 20th
century dates. As a result, many companies' software and computer systems may
need to be upgraded or replaced in order to comply with such "Year 2000"
requirements. The Company and third parties with which the Company does
business rely on numerous computer programs in their day to day operations. The
Company is evaluating the Year 2000 issue as it relates to the Company's
internal computer systems and third party computer systems with which the
Company interacts. The Company expects to incur internal staff costs as well as
consulting and other expenses related to these issues; these costs will be
expensed as incurred. In addition, the appropriate course of action may include
replacement or an upgrade of certain systems or equipment at a substantial cost
to the Company. There can be no assurance that the Year 2000 issues will be
resolved in 1998 or 1999. The Company may incur significant costs in resolving
its Year 2000 issues. If not resolved, this issue could have a significant
adverse impact on the Company's business, operating results and financial
condition.
FORWARD-LOOKING STATEMENTS
The Company's news releases, public announcements and other dissemination of
information from time to time contain information that is not historical or
factual and such statements constitute "forward-looking statements" (as such
term is defined in the Reform Act), which can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy that involve risks and
uncertainties. Management wishes to caution 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 herein or therein from time to time regarding matters that are not
historical facts, are only predictions. No assurance can be given that the
future results indicated, whether expressed or implied, will be achieved. While
sometimes presented with numerical specificity, these projections and other
forward-looking statements are based upon a variety of assumptions relating to
the business of the Company, which, although considered reasonable by the
Company, may not be realized. Because of the number and range of the
assumptions underlying the Company's projections and forward-looking
statements, many of which are subject to significant uncertainties and
contingencies that are beyond the reasonable control of the Company, some of
the assumptions inevitably will not materialize and unanticipated events and
circumstances may occur subsequent to the date on which such statements are
initially issued or released. 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
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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.
ITEM 7. EXHIBITS.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
99(a) Press Release issued by the Registrant on July 7, 1998
</TABLE>
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
VERIO INC.
By: /s/ Justin L. Jaschke
------------------------
Justin L. Jaschke
Chief Executive Officer
Dated: July 7, 1998
<PAGE> 13
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
99(a) Press Release issued by the Registrant on July 7, 1998
</TABLE>
<PAGE> 1
EXHIBIT 99A
FOR IMMEDIATE RELEASE
VERIO CORPORATE CONTACT:
Steven Silvers, Clarus Public Relations, 303-296-0343
E-mail: [email protected]
Verio newsroom: [email protected]
VERIO INVESTOR CONTACT:
Whitney Fogt, 303-645-1900
E-mail: [email protected]
VERIO ACQUIRES TABNET, CREATING ONE OF THE
WORLD'S LARGEST WEB HOSTING COMPANIES
TABNet acquisition gives Verio a powerful direct marketing engine as one of the
world's largest registrars of Internet .com, .net, .org names
ENGLEWOOD, CO (JULY 7, 1998) -- Verio Inc. (NASDAQ: VRIO), a leading
full-service business Internet provider, has acquired California-based TABNet, a
move that makes Verio one of the world's largest and fastest-growing
domain-based Web site hosting companies. This acquisition increases Verio's base
of hosted Web sites to over 60,000, and significantly enhances the Company's
direct marketing capability through TABNet's preferential online advertising
placement agreements with Netscape, Yahoo!, AltaVista, HotBot and others, and
co-branding and revenue-sharing agreements with Excite, Infoseek and WhoWhere?.
The combination of TABNet's direct marketing approach and Verio's already strong
indirect distribution channels gives the Company a powerful marketing engine
targeted at small to medium-sized businesses.
TABNet became one of the world's largest Internet domain name registration and
Web hosting companies by pioneering domain name registration services and
establishing its strategic Web-based marketing relationships to guide business
customers to TABNet. Upon registering their domain names, the company then
offers a full range of Web services including Web site hosting, design,
promotion and electronic commerce, all designed to help businesses take full
advantage of the Internet. The TABNet family of products and services includes
NetPayment (sm), a leading turn-key online payment system with a 1,000-merchant
license from CyberCash's ICVerify (NASDAQ: CYCH); QuickTools (sm), a suite of
automated software tools for creating interactive Web sites; and NetAnnounce
(sm), a full-service Web site marketing and promotion service used by thousands
of online businesses. The company was founded in 1995 and currently hosts over
70,000 domain names, including over 20,000 Web sites.
"TABNet registers a new name onto the Internet every five minutes, bringing
hundreds of businesses on the Web each day, to whom Verio can market additional
Internet services with our unique brand of national strength and local,
personalized service," said Verio Chief Executive Officer Justin L. Jaschke.
"This is a strategic acquisition for Verio that substantially increases our
marketing power for reaching small and medium-sized business customers while
further expanding our enhanced services offerings."
TABNet's numerous preferential marketing relationships and the resulting online
impressions, linkage and incentive campaigns create a multitude of new
opportunities for Verio to build brand recognition and market its full suite of
services to an expanded audience of small and medium-sized business customers.
"Netscape and TABNet have enjoyed a mutually beneficial relationship," said Mark
Evans, advertising sales manager, Web site business development at Netscape.
"TABNet has had a presence on the Home Page of Netscape since 1997, and has
provided users with the value-added service of domain name registration, Web
site hosting, and online commerce. In return, Netscape has been able to give
TABNet extremely broad exposure, which will now amplify Verio's market
potential."
<PAGE> 2
With the TABNet acquisition, Verio now hosts more than 125,000 domain names,
making it one of the single largest holders of all .com, .org and .net names
registered on the Internet. Verio previously hosted over 55,000 domain names.
The TABNet acquisition also increases Verio's growing reseller network by adding
more than 300 resellers to Verio's already strong base of 2,200 resellers.
TABNet will be combined with Verio's current Web hosting operations, leveraging
Verio's national network and operations infrastructure, and capitalizing on
Verio's industry-leading virtual server technology.
"Verio now acquires another major market channel from which to build brand
identity, establish new channels of lead generation and offer small and
medium-sized business customers the full range of connectivity and enhanced
Internet services," said TABNet founder and Chief Executive Officer Ken Leonard.
"With Verio's national network and operational strength, our customers can be
assured that Verio will continue to be there to support them every step of the
way."
Under the agreement, the Company initially will pay $45.5 million in cash to
TABNet shareholders, with additional contingent payments of up to a total of
$43.2 million if TABNet's recurring revenue and EBITDA grow at agreed-to amounts
through December 1998. TABNet recorded recurring revenues of approximately
$433,000, out of total revenues of approximately $925,000, for the month of May
1998, reflecting a growth rate in recurring revenues of over 12 percent per
month for the first five months of 1998. In order to receive the maximum
contingent purchase price amount of $43.2 million, TABNet must achieve during
the remainder of 1998 average month-over-month growth in recurring revenue of
approximately 37 percent and an average month-over-month increase in EBITDA of
approximately 42 percent. Absent an increase in recurring revenue of at least 15
percent per month, and in EBITDA of at least 20 percent per month, on average
through the end of the year, none of the contingent purchase price amounts will
be payable. At those minimum growth levels, the contingent purchase price would
total $10.8 million, with the contingent purchase price amount increasing to the
extent that TABNet's recurring revenue or EBITDA performance exceeds those
levels. While TABNet is currently profitable, Verio expects costs for system
upgrades and integration of TABNet's operations onto Verio's network, customer
care, billing and financial systems to offset TABNet's cash flow contribution
through the end of 1998. The conversion of TABNet's operations onto Verio's
systems will provide a solid infrastructure base to support the Company's
continued rapid growth and will allow Verio to capture significant operating
efficiencies in 1999 and beyond.
Daniels & Associates represented Verio in the transaction.
About Verio
Verio is a leading national provider of Internet connectivity, Web hosting and
enhanced Internet services to small and medium-sized businesses. Since its
inception in March 1996, Verio has rapidly established a national presence
through the acquisition, integration and growth of local and regional Internet
providers with a business customer focus that provide locally-based sales and
engineering support in 37 of the top 50 U.S. markets under the Verio brand name.
For more information on Verio, visit the company's Web site at www.verio.net or
call 1-888-GET-VERIO. The corporate headquarters are located in Englewood,
Colorado at 8005 S. Chester St., Suite 200, 80112, phone number 303-645-1900.
Except for the historical information contained herein, certain matters set
forth in this press release are forward-looking statements within the meaning of
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward looking statements are subject to risks and uncertainties,
including but not limited to fluctuations in operating results, additional
capital requirements, competition, integration of acquisitions and
implementation of network infrastructure. Readers are also encouraged to refer
to the Company's reports from time to time filed with the Securities and
Exchange Commission including the Company's Current Report on Form 8-K dated
July 7, 1998 for a further discussion of the Company's business and risk factors
that may affect operating results.
The TABNet revenue information provided in this release is based on TABNet's
unaudited financial information as of May 31, 1998. Verio expects to conduct an
audit of this information in the near future, which audit may reveal matters
that would result in adjustments to this information, which adjustments could be
significant.
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