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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 13, 1998
REGISTRATION NO. 333-47497
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 1
to
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
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......... $100,000,000 100% $100,000,000 $29,500
- --------------------------------------------------------------------------------------------------------------------
10 3/8% Senior Notes Due 2005......... $175,000,000 100% $175,000,000 $51,625
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act.
(2) A registration fee of $36,875, representing the difference between the
amount previously paid in connection with the registration of $150,000,000
aggregate principal amount of 13 1/2% Senior Notes Due 2004 (the "1997
Notes") ($44,250) and the total amount due hereunder ($81,120), is paid
herewith. A registration fee of $44,250 was paid on March 6, 1998, in
connection with the registration of $150,000,000 1997 Notes. The aggregate
principal amount of 1997 Notes to be registered hereby has been reduced to
$100,000,000, and the registration fee payable in connection with such 1997
Notes is $29,500. The registration fee for the $175,000,000 10 3/8% Senior
Notes due 2005 (the "1998 Notes") registered hereby is $51,625, for a total
fee due in connection herewith of $81,125.
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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 APRIL 13, 1998
PROSPECTUS
VERIO INC.
OFFER TO EXCHANGE ALL OUTSTANDING
13 1/2% SENIOR NOTES DUE 2004
FOR 13 1/2% SENIOR NOTES DUE 2004
AND
OFFER TO EXCHANGE ALL OUTSTANDING
0 3/8 SENIOR NOTES DUE 2005
FOR 10 3/8% SENIOR NOTES DUE 2005
THE EXCHANGE OFFERS 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 Offers") to exchange up to (i) $100,000,000 aggregate
principal amount of its 13 1/2% Senior Notes Due 2004 (the "New 1997 Notes") for
a like aggregate principal amount of the issued and outstanding 13 1/2% Senior
Notes Due 2004 (the "Old 1997 Notes," and collectively with the New 1997 Notes,
the "1997 Notes"), of which $100,000,000 aggregate principal amount remains
outstanding following the Refinancing (as defined), and (ii) $175,000,000
aggregate principal amount of its 10 3/8% Senior Notes Due 2005 (the "New 1998
Notes") for a like aggregate principal amount of the issued and outstanding
10 3/8% Senior Notes Due 2005 (the "Old 1998 Notes," and collectively with the
New 1998 Notes, the "1998 Notes"), of which $175,000,000 aggregate principal
amount is outstanding. For purposes hereof, the New 1997 Notes and the New 1998
Notes are collectively referred to as the "New Notes," the Old 1997 Notes and
the Old 1998 Notes are collectively referred to as the "Old Notes," and the 1997
Notes and the 1998 Notes are collectively referred to as the "Notes." See "The
Exchange Offers."
The Issuer will accept for exchange any and all Old Notes which are
properly tendered in the Exchange Offers and not withdrawn on or prior to 5:00
p.m., New York City time, on , 1998, unless the Exchange Offers are
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 Offers are not conditioned upon any minimum principal amount
of Old Notes being tendered for exchange. However, the Exchange Offers are
subject to certain customary conditions which may be waived by the Issuer. The
Issuer has agreed to pay the expenses of the Exchange Offers. See "The Exchange
Offers." There will be no cash proceeds to the Issuer from the Exchange Offers.
See "Use of Proceeds."
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offers must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "The Exchange
Offers -- 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 1997 Notes were originally issued and sold (the "Initial 1997 Notes
Offering") to Merrill Lynch, Pierce, Fenner & Smith Incorporated and Lazard
Freres & Co. LLC. (the "Initial 1997 Notes Purchasers") pursuant to a Purchase
Agreement, dated June 17, 1997 (the "1997 Notes Purchase Agreement"), among the
Issuer and the Initial 1997 Notes Purchasers, pursuant to which the Issuer sold
150,000 Units consisting of the Old 1997 Notes and Warrants to purchase
2,112,480 shares of Common Stock. The Initial 1997 Notes Purchasers subsequently
resold the Old 1997 Notes in reliance on Rule 144A of the
(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 13 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS IN EVALUATING THE EXCHANGE OFFERS.
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.
<PAGE> 3
Securities Act. The Issuer and the Initial 1997 Notes Purchasers also entered
into a 1997 Notes Registration Rights Agreement, dated June 17, 1997 (the "1997
Notes Registration Rights Agreement"), pursuant to which the Issuer granted
certain registration rights for the benefit of the holders of the Old 1997
Notes. The New 1997 Notes are being offered for exchange in order to satisfy
certain obligations of the Issuer under such 1997 Registration Rights Agreement.
The New 1997 Notes will be obligations of the Issuer evidencing the same
indebtedness as the Old 1997 Notes and will be issued under and entitled to the
benefits of the Indenture, dated as of June 24, 1997 (the "1997 Indenture"),
between the Issuer and First Trust National Association, as trustee (in such
capacity, the "Trustee"). The form and terms of the New 1997 Notes are identical
in all material respects to the Old 1997 Notes, except that the offer and
exchange of the New 1997 Notes will be registered under the Securities Act, and
therefore such New 1997 Notes will not be subject to certain transfer
restrictions and registration rights provisions applicable to the Old 1997
Notes. See "The Exchange Offers -- Purpose and Effect."
The Old 1998 Notes were originally issued and sold (the "Initial 1998 Notes
Offering") to Salomon Brothers Inc, Lazard Freres & Co. LLC, Chase Securities
Inc. and BancBoston Securities Inc. (the "Initial 1998 Notes Purchasers" and,
together with the Initial 1997 Notes Purchasers, the "Initial Purchasers")
pursuant to a Purchase Agreement, dated March 19, 1998 (the "1998 Notes Purchase
Agreement"), among the Issuer and the Initial 1998 Notes Purchasers, pursuant to
which the Issuer sold the Old 1998 Notes. The Initial 1998 Notes Purchasers
subsequently resold the Old 1998 Notes in reliance on Rule 144A of the
Securities Act. The Issuer and the Initial 1998 Notes Purchasers also entered
into a 1998 Notes Registration Rights Agreement, dated March 19, 1998 (the "1998
Notes Registration Rights Agreement"), pursuant to which the Issuer granted
certain registration rights for the benefit of the holders of the Old 1998
Notes. The New 1998 Notes are being offered for exchange in order to satisfy
certain obligations of the Issuer under such 1998 Registration Rights Agreement.
The New 1998 Notes will be obligations of the Issuer evidencing the same
indebtedness as the Old 1998 Notes and will be issued under and entitled to the
benefits of the Indenture, dated as of March 25, 1998 (the "1998 Indenture"),
between the Issuer and the Trustee. The form and terms of the New 1998 Notes are
identical in all material respects to the Old 1998 Notes, except that the offer
and exchange of the New 1998 Notes will be registered under the Securities Act,
and therefore such New 1998 Notes will not be subject to certain transfer
restrictions and registration rights provisions applicable to the Old 1998
Notes. See "The Exchange Offers -- Purpose and Effect."
The New 1997 Notes will mature on June 15, 2004. Interest on the New 1997
Notes will be payable semi-annually on June 15 and December 15 of each year
commencing June 15, 1998. Holders whose Old 1997 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 1997 Notes, such interest
to be payable with the first interest payment on the New 1997 Notes. Interest on
the Old 1997 Notes accepted for exchange will cease to accrue on the day prior
to the issuance of the New 1997 Notes. See "Description of the 1997 Notes." The
New 1997 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 1997 Notes -- Redemption."
The New 1998 Notes will mature on April 1, 2005. Interest on the New 1998
Notes will be payable semi-annually on April 1 and October 1 of each year
commencing October 1, 1998. Holders whose Old 1998 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 1998 Notes, such
interest to be payable with the first interest payment on the New 1998 Notes.
Interest on the Old 1998 Notes accepted for exchange will cease to accrue on the
day prior to the issuance of the New 1998 Notes. See "Description of the 1998
Notes." The New 1998 Notes will be redeemable at the option of the Issuer, in
whole or in part, at any time on or after April 1, 2002, at the redemption
prices set forth herein, plus accrued and unpaid interest, if any, to the date
of redemption. See "Description of the 1998 Notes -- Redemption."
The 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 Initial 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
ii
<PAGE> 4
payment and approximately $7.0 million of subsidiary indebtedness to which
holders of Notes would have been structurally subordinated.
The Issuer is making the Exchange Offers 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 Offers. Based on the Commission's interpretations, the Issuer
believes that New Notes issued pursuant to the Exchange Offers 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 Offers 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 Old 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 Offers -- 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 Offers will remain
outstanding and will be entitled to all the same rights and will be subject to
the same limitations applicable thereto under the 1997 Indenture or 1998
Indenture, as applicable (except for those rights which terminate upon
consummation of the Exchange Offers). Following consummation of the Exchange
Offers, 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 Offers, 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 OFFERS.
THE EXCHANGE OFFERS ARE NOT BEING MADE TO, NOR WILL THE ISSUER ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFERS OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH
THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
iii
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The Old 1997 Notes and the Old 1998 Notes were each issued originally in
global form (the "Global Old Notes"). The Global Old Notes were 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 Notes are registered in the name of Cede & Co. ("Cede"), as nominee of DTC,
and beneficial interests in the Global Old Notes are shown on, and transfers
thereof are effected only through, records maintained by the Depositary and its
participants. The use of the Global Old Notes 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 Notes will also be
issued initially as a note in global form (the "Global New Notes," and, together
with the Global Old Notes, the "Global Notes") and deposited with, or on behalf
of, the Depositary. After the initial issuance of the Global New Notes, New
Notes in certificated form will be issued in exchange for a holder's
proportionate interest in the appropriate Global New Note only as set forth in
the 1997 Indenture or 1998 Indenture, as applicable.
iv
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TABLE OF CONTENTS
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PAGE
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Available Information....................................... vi
Prospectus Summary.......................................... 1
Risk Factors................................................ 13
The Exchange Offers......................................... 22
Use of Proceeds............................................. 29
Dividend Policy............................................. 30
Capitalization.............................................. 31
Selected Consolidated Financial Data........................ 32
Management's Discussion and Analysis of Financial
Information and Results of Operations..................... 34
Business.................................................... 41
Management.................................................. 57
Certain Transactions........................................ 72
Principal Stockholders...................................... 75
Description of the 1997 Notes............................... 78
Description of the 1998 Notes............................... 104
Book-Entry, Delivery and Form............................... 128
Certain Federal Income Tax Considerations................... 129
Plan of Distribution........................................ 132
Legal Matters............................................... 133
Experts..................................................... 133
Glossary.................................................... 134
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.
vi
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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 solely 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 the stock or assets of, 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 customer accounts
in 33 of the top 50 Metropolitan Statistical Areas ("MSAs") in the country, with
combined revenues of approximately $23.2 million for the three months ended
December 31, 1997. The Company integrates and optimizes the operations of its
ISPs by consolidating their operations into regional operating units with
centralized regional management, connecting their local networks to Verio's
high-speed, highly reliable national backbone, and providing them with Verio's
integrated national support services.
Total ISP revenues in the United States are projected to grow from $3.3
billion in 1996 to $18.3 billion in 2000, according to International Data
Corporation ("IDC"). Industry analysts have reported that small and medium sized
businesses represent a potential market of over seven million customers in the
United States, and use of the Internet by this market segment is expected to
grow substantially from its current low level of market penetration. IDC
predicts that dedicated connections to the Internet for small and medium sized
businesses will grow from approximately 90,000 in 1996 to just under 800,000 in
2000, representing a 73% compounded annual growth rate. Small and medium sized
businesses generally seek an ISP with locally based personnel who are readily
available to respond in-person to technical issues, who can assist in developing
and implementing the customer's effective use of the Internet, and with whom
they can establish a stable and 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
1
<PAGE> 9
example, IDC estimates Web hosting revenues from small and medium sized
businesses will grow from $84 million in 1996 to over $3.4 billion in 2000,
representing 95% of the total Web hosting market.
The rapid development and growth of the Internet has resulted in a highly
fragmented industry of over 4,000 national and local ISPs in the United States,
with no dominant ISP serving the needs of small and medium sized businesses.
Independent regional and local ISPs have successfully captured approximately
one-half of this market, despite the substantially greater resources of the
national providers. However, rising costs and increasing demands from business
customers have made it more difficult for the small ISP to meet its customer's
demands on a cost-effective basis. Facing these competitive pressures, Verio
believes that independent regional and local ISPs will continue to be attracted
to and benefit from the consolidation opportunity provided by Verio.
Internet connectivity and enhanced Internet services to small and medium
sized businesses. Key elements of the Company's strategy in accomplishing this
goal are to: (a) continue its role as the leading consolidator of independent
ISPs by acquiring additional local and regional ISPs focused on the Company's
target market; (b) integrate the operations of its ISPs and capture operational
economies of scale by leveraging its national infrastructure and support
services; (c) develop and offer additional high-margin enhanced services to
increase revenues from existing and future customers; and (d) build customer
loyalty and gain market share by expanding the Company's local technical,
distribution and service capabilities and establishing national Verio brand name
recognition.
Verio owns and operates a national network, providing a high bandwidth,
highly reliable data transmission path connecting Verio's customers to the
Internet. The Company's national network architecture is based on a combination
of Asynchronous Transfer Mode ("ATM") and clear channel circuits operating at
DS-3 and OC-3 speeds. The network interconnects more than 15 national nodes and
over 180 local points of presence ("POPs") across the United States. The Company
believes that aggregating the bandwidth and capacity requirements of each Verio
ISP onto one national network provides operational control and efficiency,
reduces costs, provides redundancy, and results in a higher quality service,
thereby addressing some of the most significant challenges that an ISP faces in
supporting its customers. The reliability of the national network is the result
of many factors, including redundant routers and other critical hardware,
carrier class facilities at POP locations (such as back up power, fire
suppression and climate control), and redundant telecommunications lines.
Verio's national infrastructure incorporates several other elements critical to
maintaining the highest quality Internet service, such as peering relationships
with other national ISPs, sophisticated network management tools, and a
comprehensive range of national services to support its regional operations.
These services include 7-day X 24-hour customer technical support, financial
information management through a central, standardized accounting system, a
sophisticated billing and collections system, and national marketing and product
development programs. The Company continues to rollout its national
infrastructure and support services to its ISPs. Of the over 30 ISPs acquired to
date, 16 now invoice their customers through Verio's national billing service,
21 take advantage of Verio's customer technical support, 25 are linked to
Verio's national backbone, 20 utilize Verio's national accounting system, and
the network operations of 17 of these ISPs are monitored by Verio's national
Network Operations Center ("NOC").
Verio believes that a critical factor in the successful implementation of
its business strategy is the quality of its management team and Board of
Directors. The Company's senior management team and Board of Directors have
previously successfully executed similar consolidation strategies and have
considerable experience in the management and growth of recurring revenue-based
telecommunications businesses. Management believes that its experience in the
deployment of similar systems and services in other emerging telecommunications
industries can be leveraged to significantly improve the quality of services
currently available in the Internet service industry.
RECENT DEVELOPMENTS
Since December 31, 1997, the Company has completed the acquisition of all
of the remaining equity (each, a "Buyout") of 8 of the Verio ISPs in which Verio
did not initially acquire 100% ownership. Verio is in the process of integrating
the Verio ISPs in each region into regional operating units to capture and
promote
2
<PAGE> 10
operational and management efficiencies and economies of scale. On March 12,
1998, the Company announced the consolidation of the Verio ISPs' operations and
marketing efforts under the Verio brand name.
The Company continues to evaluate additional ISPs for investment or
acquisition. Since December 31, 1997, the Company has acquired an ISP in its
Northeast region, and has executed definitive agreements to acquire four
additional ISPs. Two of these ISPs will expand the Company's Midwest presence,
one will join the Northeast operations, and one is located in Florida and is the
Company's first acquisition in the Southeast region. With these four additional
ISPs, the Company will serve 36 of the top 50 MSAs in the U.S. The revenue
attributable to these four ISPs is estimated to be approximately $2.3 million
for the three months ended December 31, 1997, which would bring the Company's
total revenue for that three month period to $25.5 million. The Company believes
that consummation of each of these acquisitions is probable. Accordingly,
financial information for these acquisitions is reflected in the pro forma
financial statements contained herein. Nonetheless, there can be no assurance
that all of the closing conditions will be satisfied or that the Company will
consummate any or all of these acquisitions. In addition, the Company has
executed a non-binding letter of intent to acquire an additional ISP located in
Michigan which, if acquired, would further enhance the Company's market presence
in the Midwest region.
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.
Mark D. Johnson, who served as the Company's President, Chief Operating
Officer and a director of the Company, died on March 9, 1998. While Mr. Johnson
played an important role in overseeing the Company's operations, the Company
does not expect that his death will adversely affect the Company's operations,
growth or financial prospects because of the strength of the Company's core
management team. Justin Jaschke, Verio's Chief Executive Officer, has been
appointed to serve as President of the Company and has assumed Mr. Johnson's
responsibilities on behalf of the Company while Verio conducts an executive
search to fill the positions that were held by Mr. Johnson.
On March 25, 1998, the Company consummated the sale of the Old 1998 Notes.
In connection with the sale of the Old 1998 Notes, the Company repurchased the
$50.0 million principal amount of the Company's Old 1997 Notes held by Brooks
Fiber Properties, Inc. ("Brooks") (the "Refinancing") for an aggregate net
purchase price of approximately $54.5 million, plus accrued interest. See
"Certain Transactions."
On March 31, 1998, the Company signed a long-term agreement with Qwest
Communications Corporation ("Qwest") to purchase long haul capacity and
ancillary services on Qwest's planned 16,285 mile MacroCapacity(SM) Fiber
Network. Over the first seven years of the agreement, Verio has committed to
purchase, and Qwest has committed to provide, not less than $100.0 million of
capacity and services at agreed upon prices. See "Management's Discussion and
Analysis of Financial Condition and Result of Operations -- Costs and Expenses"
and "Business -- Verio National Network." The Company will have the right to
prepay its commitment under the agreement. The Company also may order capacity
and services in excess of the commitment level, and after the seven-year
commitment term, at the agreed upon prices.
On April 6, 1998, Verio signed a credit agreement providing for a $57.5
million revolving credit financing facility (the "Bank Facility"). The Chase
Manhattan Bank serves as agent for the lenders in the Bank Facility. The Company
has drawn no funds to date under the Bank Facility.
On April 7, 1998, the Company executed agreements establishing a strategic
relationship with NTT. These agreements provide for an investment by NTT or one
of its affiliates in the Company (the "NTT Investment"), concurrent with and
conditioned upon the consummation of the proposed IPO, for up to 12.5% of the
Company's fully diluted Common Stock (up to a maximum investment of $100.0
million) at a 3.25% discount to the price to public in the proposed IPO. Verio
also executed a commercial services agreement with NTT's U.S. affiliate, NTT
America, Inc. ("NTT America"), under which Verio is designated as the preferred
provider of Internet access and related services to customers of NTT America on
a reseller basis. Verio and
3
<PAGE> 11
NTT will connect their backbones and establish a peering and transit
relationship. In conjunction with its equity investment, NTT will be entitled to
designate one member to serve on the Company's Board of Directors. See
"Business -- NTT Strategic Relationship" and "Principal Stockholders -- NTT
Investment."
The Company's headquarters is located at 8005 South Chester Street, Suite
200, Englewood, Colorado 80112. The Company's phone number is (303) 645-1900.
4
<PAGE> 12
THE EXCHANGE OFFERS
Securities Offered......... Up to (i) $100.0 million principal amount of
13 1/2% Senior Notes Due 2004, which will be
registered under the Securities Act and (ii) $175.0
million principal amount of 10 3/8% Senior Notes
Due 2005, which will be registered under the
Securities Act. The form and terms of the New 1997
Notes are substantially identical to the Old 1997
Notes in all material respects, except that the New
1997 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 1997 Notes. The
form and terms of the New 1998 Notes are
substantially identical to the Old 1998 Notes in
all material respects, except that the New 1998
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 1998 Notes.
The 1997 Notes Exchange
Offer...................... $1,000 principal amount of New 1997 Notes in
exchange for each $1,000 principal amount of Old
1997 Notes. The New 1997 Notes are being offered in
exchange for up to $100.0 million principal amount
of Old 1997 Notes. The issuance of the New 1997
Notes is intended to satisfy certain obligations of
the Issuer contained in the 1997 Notes Registration
Rights Agreement. See "The Exchange Offers -- Terms
of the Exchange Offers."
The 1998 Notes Exchange
Offer...................... $1,000 principal amount of New 1998 Notes in
exchange for each $1,000 principal amount of Old
1998 Notes. The New 1998 Notes are being offered in
exchange for up to $175.0 million principal amount
of Old 1998 Notes. The issuance of the New 1998
Notes is intended to satisfy certain obligations of
the Issuer contained in the 1998 Notes Registration
Rights Agreement. See "The Exchange Offers -- Terms
of the Exchange Offers."
Expiration Date............ The Exchange Offers 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 Offers -- Terms of the Exchange
Offers."
Withdrawal................. Tenders of Old Notes pursuant to the Exchange
Offers may be withdrawn at any time prior to 5:00
p.m. New York City time, on the Expiration Date.
See "The Exchange Offers -- Expiration Date;
Extensions; Amendments."
Conditions of the Exchange
Offers................... The Exchange Offers are not conditioned upon any
minimum principal amount of Old Notes being
tendered for exchange. The only condition to the
Exchange Offers is the declaration by the
Commission of the effectiveness of the Registration
Statement of which this Prospectus constitutes a
part. See "The Exchange Offers -- Conditions of the
Exchange Offers."
Procedures for Tendering
Old Notes.................. Each holder of Old Notes desiring to accept the
terms of the applicable 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
5
<PAGE> 13
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 Offers 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 Offers -- Guaranteed
Delivery Procedures."
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 Offers, the Issuer
will accept any and all Old Notes that are properly
tendered in the Exchange Offers prior to 5:00 p.m.,
New York City time, on the Expiration Date. The New
Notes issued pursuant to the Exchange Offers will
be delivered promptly after acceptance of the Old
Notes. See "The Exchange Offers -- 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
Offers. See "The Exchange Offers -- 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
exchanges pursuant to the Exchange Offers. See "Use
of Proceeds."
Fees and Expenses.......... All expenses incident to the Issuer's consummation
of the Exchange Offers and compliance with the 1997
Notes Registration Rights Agreement and 1998 Notes
Registration Rights Agreement will be borne by the
Issuer. The Issuer will also pay certain transfer
taxes applicable to the Exchange Offers. See "The
Exchange Offers -- Fees and Expenses."
Accrued Interest........... The New 1997 Notes will bear interest at a rate
equal to 13 1/2% per annum from their date of
issuance. The New 1998 Notes will bear interest at
a rate equal to 10 3/8% per annum from their date
of issuance. Holders whose Old Notes are accepted
for exchange will have the right to receive
interest accrued on their respective Old Notes from
the date of original issuance or date of the last
interest payment, as applicable, to, but not
including, the date of issuance of their respective
New Notes, such interest to be payable with the
first interest payment date on such 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
1997 Notes -- Maturity, Interest and Principal" and
"Description of the 1998 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 Offers to any
holder of Old Notes in exchange for Old Notes may
be offered for resale, resold and otherwise
transferred by a holder (other
6
<PAGE> 14
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 Offers -- Resales of the New Notes"
and "Plan of Distribution."
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 Offers, 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 Offers, bear
interest at the same rate as the New Notes.
DESCRIPTION OF NEW 1997 NOTES
The form and terms of the New 1997 Notes will be identical in all material
respects to the form and terms of the Old 1997 Notes, except that the New 1997
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 1997 Notes. The Exchange Offer with respect to the 1997
Notes shall be deemed consummated upon the occurrence of the delivery by the
Issuer to the Exchange Agent of New 1997 Notes in the same aggregate principal
amount as the aggregate principal amount of Old 1997 Notes that are validly
tended by holders thereof pursuant to such Exchange Offer. See "The Exchange
Offers -- Procedures for Tendering Old Notes" and "Description of the 1997
Notes."
Notes Offered.............. $100.0 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 1997
Notes 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 1997 Notes through
December 15, 1999, with any balance to be retained
by the Issuer. As a result of the Refinancing, the
Company was refunded approximately $13.3 million
from the escrow account for the 1997 Notes, of
which approximately $1.9 million was used to pay
accrued and unpaid interest on the $50.0 million
principal amount of Old 1997 Notes repurchased from
Brooks. As of , 1998 approximately $
million remained in the Escrow Account. The 1997
Notes are collateralized by a first priority
security interest in the Escrow Account (as
defined). See "Description of the 1997
Notes -- Disbursement of Funds; Escrow Account."
7
<PAGE> 15
Ranking.................... The Old 1997 Notes and the New 1997 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 1997 Notes and
the New 1997 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 Initial 1998 Notes
Offering there was approximately $9.6 million of
secured long-term indebtedness outstanding to which
holders of 1997 Notes were effectively subordinated
in right of payment and approximately $7.0 million
of subsidiary indebtedness to which holders of 1997
Notes were structurally subordinated. See
"Description of the 1997 Notes -- General."
Sinking Fund............... None.
Optional Redemption........ The 1997 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 thereon, if
any, 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, which
was recently acquired by WorldCom, Inc.
("WorldCom"), 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 1997 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 1997 Notes are outstanding following such
redemption. See "Description of the 1997
Notes -- Redemption -- Optional Redemption."
Change of Control.......... Following the occurrence of a Change of Control (as
defined in the 1997 Indenture), the Issuer will be
required to make an offer to purchase the 1997
Notes then outstanding at a purchase price equal to
101% of the principal amount thereof plus accrued
and unpaid interest, if any, to the date of
purchase. Furthermore, such a Change of Control
would constitute a default under the Bank Facility
requiring the Company to repay any funds drawn
thereunder. The Issuer may not have available
sufficient funds or the financial resources
necessary to satisfy its obligations to repurchase
the 1997 Notes, to repay any funds drawn under the
Bank Facility, or to repay any other debt the
Company may have outstanding that is repayable upon
a Change of Control, including the 1998 Notes. See
"Description of the 1997 Notes -- Certain
Covenants -- Change of Control" and "-- Certain
Definitions."
Certain Covenants.......... The 1997 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
8
<PAGE> 16
transactions with affiliates; (xi) financial
reports; (xii) limitation on designations of
unrestricted subsidiaries; (xiii) limitation on
status as investment company; (xiv) ratings of the
1997 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 1997 Notes will not be entitled
to any exchange or registration rights with respect
to the New 1997 Notes. Holders of the Old 1997
Notes are entitled to certain exchange rights
pursuant to the 1997 Notes Registration Rights
Agreement entered into concurrently with the
Initial 1997 Notes Offering by and among the Issuer
and the Initial 1997 Notes Purchasers. This
Exchange Offer is intended to satisfy the Issuer's
obligation under the 1997 Notes Registration Rights
Agreement. Once such Exchange Offer is consummated,
the Issuer will have no further obligations to
register any of the Old 1997 Notes not tendered by
the holders for exchange. See "Risk
Factors -- Consequences of Failure to Exchange."
DESCRIPTION OF NEW 1998 NOTES
The form and terms of the New 1998 Notes will be identical in all material
respects to the form and terms of the Old 1998 Notes, except that the New 1998
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 1998 Notes. The Exchange Offer with respect to the 1998
Notes shall be deemed consummated upon the occurrence of the delivery by the
Issuer to the Exchange Agent of New 1998 Notes in the same aggregate principal
amount as the aggregate principal amount of Old 1998 Notes that are validly
tended by holders thereof pursuant to such Exchange Offer. See "The Exchange
Offers -- Procedures for Tendering Old Notes" and "Description of the 1998
Notes."
Notes...................... $175,000,000 aggregate principal amount of 10 3/8%
Senior Notes Due 2005 of Verio Inc.
Maturity................... April 1, 2005.
Interest Payment Dates..... April 1 and October 1, commencing October 1, 1998.
Ranking.................... The Old 1998 Notes and the New 1998 Notes will be
general 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, including the 1997
Notes, and senior in right of payment to all
existing and future subordinated indebtedness of
the Issuer. The Old 1998 Notes and the New 1998
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 structurally subordinated to indebtedness of
subsidiaries of the Issuer. As of December 31,
1997, on a pro forma basis, after giving effect to
the Initial 1998 Notes Offering, there would have
been approximately $9.6 million of secured
long-term indebtedness outstanding to which holders
of 1998 Notes would have been effectively
subordinated in right of payment and approximately
$7.0 million of subsidiary indebtedness to which
holders of 1998 Notes would have been structurally
subordinated. See "Description of the 1998
Notes -- General."
Sinking Fund............... None.
Optional Redemption........ The 1998 Notes will be redeemable, at the option of
the Issuer, in whole or in part, at any time on or
after April 1, 2002, at the redemption prices set
forth herein, plus accrued interest thereon, if
any, to the date of redemption. In addition, in the
event that after the issue date and prior to April
1, 2001 the Issuer issues, in one or more
transactions, Capital Stock (other than
Disqualified Stock) of the Issuer to WorldCom or
one
9
<PAGE> 17
or more Strategic Equity Investors or in any Public
Equity Offering for aggregate gross cash proceeds
of $50.0 million or more, the Issuer may redeem, at
its option, up to 35% of the initially outstanding
aggregate principal amount of 1998 Notes with the
net proceeds thereof at a redemption price equal to
110.375% of the principal amount of the 1998 Notes,
together with accrued and unpaid interest thereon,
if any, to the date of redemption; provided that
not less than $113.75 million aggregate principal
amount of 1998 Notes is outstanding following such
redemption. See "Description of the 1998
Notes -- Redemption -- Optional Redemption."
Change of Control.......... Following the occurrence of a Change of Control (as
defined in the 1998 Indenture), the Issuer will be
required to make an offer to purchase all 1998
Notes then outstanding at a purchase price equal to
101% of the principal amount thereof plus accrued
and unpaid interest thereon, if any, to the date of
purchase. Furthermore, such a Change of Control
would constitute a default tender the Bank Facility
requiring the Company to repay any funds drawn
thereunder. The Issuer may not have available
sufficient funds or the financial resources
necessary to satisfy its obligations to repurchase
the 1998 Notes, to repay any funds drawn under the
Bank Facility, or to repay any other debt the
Company may have outstanding that is repayable upon
a Change of Control, including the 1997 Notes. See
"Description of the 1998 Notes -- Certain
Covenants -- Change of Control" and "-- Certain
Definitions."
Certain Covenants.......... The 1998 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)
limitation on dividends and other payment
restrictions affecting restricted subsidiaries;
(vii) disposition of proceeds of asset sales;
(viii) limitation on issuances and sales of
preferred stock by restricted subsidiaries; (ix)
limitation on transactions with affiliates; (x)
reports; (xi) limitation on designations of
unrestricted subsidiaries; and (xii) limitation on
consolidation, merger or sale of assets. These
covenants are subject to important exceptions and
qualifications. See "Description of the 1998
Notes -- Certain Covenants" and "-- Consolidation,
Merger, Sale of Assets, Etc."
Exchange Rights............ Holders of the New 1998 Notes will not be entitled
to any exchange or registration rights with respect
to the New 1998 Notes. Holders of the Old 1998
Notes are entitled to certain exchange rights
pursuant to the 1998 Notes Registration Rights
Agreement entered into concurrently with the
Initial 1998 Notes Offering by and among the Issuer
and the Initial 1998 Notes Purchasers. This
Exchange Offer is intended to satisfy the Issuer's
obligation under the 1998 Notes Registration Rights
Agreement. Once such Exchange Offer is consummated,
the Issuer will have no further obligations to
register any of the Old 1998 Notes not tendered by
the holders for exchange. See "Risk
Factors -- Consequences of Failure to Exchange."
10
<PAGE> 18
SUMMARY CONSOLIDATED FINANCIAL DATA
(dollars in thousands, except per share amounts)
The summary historical consolidated financial data as of and for the period
from inception (March 1, 1996) to December 31, 1996 and as of and for the year
ended December 31, 1997 have been derived from the audited Consolidated
Financial Statements of the Company included elsewhere in this Prospectus.
The information set forth below should be read in conjunction with the
Unaudited Pro Forma Condensed Combined Financial Statements and the historical
Consolidated Financial Statements of the Company and the notes thereto included
elsewhere in this Prospectus. Results of operations for the year ended December
31, 1997 are not necessarily indicative of results of operations for future
periods. The Company's development and expansion activities, including
acquisitions, during the periods shown below may significantly affect the
comparability of this data from one period to another. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)(2)
----------------------------------- ---------------
PERIOD FROM
INCEPTION YEAR ENDED YEAR ENDED
(MARCH 1, 1996) TO DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1996 1997 1997
------------------ ------------ ---------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue............................... $ 2,365 $ 35,692 $ 88,265
Total costs and expenses.................... 8,645 75,981 146,126
-------- ---------- -----------
Loss from operations........................ $ (6,280) $ (40,289) $ (57,861)
======== ========== ===========
Net loss attributable to common
stockholders.............................. $ (5,145) $ (46,329) $ (64,131)
======== ========== ===========
Loss per common share -- basic and
diluted................................... $ (5.29) $ (40.47) $ (2.90)
======== ========== ===========
Weighted average common shares outstanding--
basic and diluted......................... 971,748 1,144,685 22,090,352
OTHER DATA:
EBITDA(3)................................... $ (5,611) $ (29,665) $ (31,950)
Capital expenditures(4)..................... 3,430 14,547 14,547
Ratio of earnings to fixed charges(5)....... -- -- --
</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>
11
<PAGE> 19
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
------------------------------------------
PRO FORMA
HISTORICAL PRO FORMA(1) AS ADJUSTED(6)
---------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 72,586 $ 27,299 $314,649
Restricted cash and securities.......................... 40,554 40,554 27,822
Goodwill, net........................................... 83,216 152,241 152,241
Total assets............................................ 246,471 276,058 555,888
Long-term debt and capital lease obligations, net of
current portions...................................... 142,321 143,651 272,694
Redeemable preferred stock.............................. 97,249 -- --
Stockholders' equity (deficit).......................... (27,001) 95,808 245,049
</TABLE>
- ---------------
(1) Pro forma for the Completed and Proposed Acquisitions (as defined in the
Company's Unaudited Pro Forma Condensed Combined Financial Statements) as if
they had occurred on December 31, 1997 for balance sheet purposes and on
January 1, 1997 for statement of operations data purposes and for the
conversion of the Preferred Stock into Common Stock upon completion of the
proposed IPO. See "Unaudited Pro Forma Condensed Combined Financial
Statements."
(2) Pro forma interest expense, including amortization of debt issuance costs,
assuming that the 1998 Notes had been issued on January 1, 1997 and after
giving effect to the Refinancing, totaled $27.3 million for the year ended
December 31, 1997.
(3) EBITDA represents earnings (loss) from operations before interest, taxes,
depreciation, amortization and provision for loss on write-offs of
investments in ISPs and fixed assets. The primary measure of operating
performance is net earnings (loss). Although EBITDA is a measure commonly
used in the Company's industry, it should not be construed as an alternative
to net earnings (loss), determined in accordance with generally accepted
accounting principles ("GAAP"), as an indicator of operating performance or
as an alternative to cash flows from operating activities, determined in
accordance with GAAP. In addition, the measure of EBITDA presented herein by
the Company may not be comparable to other similarly titled measures of
other companies.
(4) Excludes equipment and leasehold improvements acquired in business
acquisitions.
(5) For the period ended December 31, 1996 and the year ended December 31, 1997,
earnings were insufficient to cover combined fixed charges by $5.8 million
and $48.0 million, respectively. On a pro forma basis, giving effect to the
completed and proposed acquisitions and Buyouts, earnings would have been
insufficient to cover combined fixed charges by $64.1 million for the year
ended December 31, 1997. Combined fixed charges consist of interest expense
and that portion of rent expense the Company believes to be representative
of interest (i.e., one third of rent expense), adjusted for minority
interests.
(6) As adjusted (a) to give effect to (i) the proposed IPO after deducting the
discounts and commissions payable to the underwriters participating in the
proposed IPO (the "Underwriters") and estimated expenses, (ii) the proceeds
from the 1998 Notes and the application of the proceeds therefrom to effect
the Refinancing, and (iii) the sale of 4,638,727 shares of Common Stock to
NTT for approximately $78.5 million, (based upon an assumed initial public
offering of 5,000,000 shares of Common Stock at an assumed price to public
of $17.50 per share in the proposed IPO) concurrently with the proposed IPO
and (b) to reflect an extraordinary charge of approximately $10.1 million
for the loss on early extinguishment of $50.0 million of 1997 Notes,
representing the excess of the repurchase price over the carrying value of
such 1997 Notes as of December 31, 1997.
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<PAGE> 20
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 Offers. 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. After giving effect to the recent sale
of $175.0 million of the Company's Old 1998 Notes, the proposed IPO and the NTT
Investment, long term indebtedness would represent 53% of total capitalization.
If the proposed IPO and NTT Investment are not consummated, long term
indebtedness would represent 76% of total capitalization. In addition, the
Company recently signed the Bank Facility providing for $57.5 million of
revolving credit. See "-- Requirements for Additional Capital." As a result of
the substantial indebtedness of the Company, fixed charges of the Company are
expected to exceed its earnings for the foreseeable future. Substantial leverage
poses the risk that the Company may not be able to generate sufficient cash flow
to service its indebtedness, or to adequately fund its operations. The Company
has experienced a substantial decrease in EBITDA, from negative $5.6 million in
1996 to negative $29.7 million in 1997. Although EBITDA as a percentage of
revenue improved from negative 237% to negative 83%, there can be no assurance
that this trend will continue, or that
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<PAGE> 21
the Company will be able to increase its revenue and leverage the investments it
has made in national services and systems, the national network, and the
operating overhead of the Verio ISPs, to achieve sufficient cash flow to meet
its debt service obligations. In particular, there can be no assurance that the
Company's operating cash flow will be sufficient to pay the $13.5 million in
annual interest (beginning in June 2000 following the termination of the
interest escrow arrangement for the 1997 Notes) on the $100.0 million principal
amount of 1997 Notes outstanding after the Refinancing, to pay the $18.2 million
in annual interest on the 1998 Notes, or to meet its debt service obligations
under the Bank Facility, if drawn upon. The leveraged nature of the Company also
could limit the ability of the Company to effect future financings or may
otherwise restrict the Company's operations and growth.
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. 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
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<PAGE> 22
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.
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 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 markets, 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
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<PAGE> 23
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 "-- Fluctuations in Operating
Results," "-- Dependence on the Internet; Uncertain Adoption of Internet as a
Medium of Commerce and Communication" and "-- Potential Liability for
Information Disseminated Over Network; Regulatory Matters."
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, 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
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<PAGE> 24
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."
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
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<PAGE> 25
operations. See "-- Competition; Pricing Fluctuation." As a result, variations
in the timing and amounts of revenues could have a material adverse effect on
the Company's quarterly operating results. Due to the foregoing factors, the
Company believes that period-to-period comparisons of its operating results are
not necessarily meaningful and that such comparisons cannot be relied upon as
indicators of future performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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 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
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<PAGE> 26
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.
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
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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 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 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 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
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limited during the respective Exchange Offers 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 OFFERS
Issuance of New Notes in exchange for Old Notes pursuant to the Exchange
Offers 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 Offers must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
See "The Exchange Offers -- 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 Offers 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 Offers, 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 1997 Notes Registration
Rights Agreement or 1998 Notes Registration Rights Agreement, as the case may
be, would also terminate with respect to Old Notes which are not exchanged for
New Notes in the Exchange Offers.
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.
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FORWARD-LOOKING STATEMENTS
The statements contained in this Prospectus that are not historical fact
are "forward-looking statements" (as such term is defined in the Reform Act),
which can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should," or "anticipates" or the negative
thereof or 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 assurance can be
given that the future results indicated, whether expressed or implied, will be
achieved. While sometimes presented with numerical specificity, these
projections and other forward-looking statements are based upon a variety of
assumptions relating to the business of the Company, which, although considered
reasonable by the Company, may not be realized. Because of the number and range
of the assumptions underlying the Company's projections and forward-looking
statements, many of which are subject to significant uncertainties and
contingencies that are beyond the reasonable control of the Company, some of the
assumptions inevitably will not materialize and unanticipated events and
circumstances may occur subsequent to the date of this Prospectus. These
forward-looking statements are based on current expectations, and the Company
assumes no obligation to update this information. Therefore, the actual
experience of the Company and results achieved during the period covered by any
particular projections or forward-looking statements may differ substantially
from those projected. Consequently, the inclusion of projections and other
forward-looking statements should not be regarded as a representation by the
Company or any other person that these estimates and projections will be
realized, and actual results may vary materially. There can be no assurance that
any of these expectations will be realized or that any of the forward-looking
statements contained herein will prove to be accurate.
THE EXCHANGE OFFERS
The summary herein of certain provisions of the 1997 Notes Registration
Rights Agreement and the 1998 Notes Registration Rights Agreement, as the case
may be, does not purport to be complete and reference is made to the provisions
of the 1997 Notes Registration Rights Agreement and the 1998 Notes Registration
Rights Agreement, which have been filed as exhibits to the Registration
Statement of which this Prospectus constitutes a part, and copies of which are
available upon request to the Company.
PURPOSE AND EFFECT
1997 Notes
The Old 1997 Notes were sold by the Issuer to the Initial 1997 Notes
Purchasers on June 17, 1997. The Initial 1997 Notes Purchasers subsequently
resold the Old 1997 Notes in reliance on Rule 144A under the Securities Act. The
Issuer and the Initial 1997 Notes Purchasers entered into the 1997 Notes
Registration Rights Agreement, pursuant to which the Issuer agreed, with respect
to the Old 1997 Notes and subject to the Issuer's determination that the
Exchange Offer with respect to the 1997 Notes 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 with respect to the 1997 Notes, 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 with respect to
the 1997 Notes on or prior to August 24, 1998. The Issuer will keep the Exchange
Offer with respect to the 1997 Notes open for a period of not less than 30 days
(or longer if required by applicable law) after the date the notice of the
Exchange Offer with respect to the 1997 Notes is mailed to the holders of the
Old 1997 Notes. The Exchange Offer with respect to the Old 1997 Notes is
intended to satisfy the Issuer's exchange offer obligations under the 1997 Notes
Registration Rights Agreement.
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1998 Notes
The Old 1998 Notes were sold by the Issuer to the Initial 1998 Notes
Purchasers on March 25, 1998. The Initial 1998 Notes Purchasers subsequently
resold the Old 1998 Notes in reliance on Rule 144A under the Securities Act. The
Issuer and the Initial 1998 Notes Purchasers entered into the 1998 Notes
Registration Rights Agreement, pursuant to which the Issuer agreed, with respect
to the Old 1998 Notes and subject to the Issuer's determination that the
Exchange Offer with respect to the 1998 Notes is permitted under applicable law,
to (i) cause to be filed, on or prior to June 23, 1998, a registration statement
with the Commission under the Securities Act concerning the Exchange Offer with
respect to the 1998 Notes, and (ii) use its best efforts (a) to cause such
registration statement to be declared effective by the Commission on or prior to
August 21, 1998, and (b) to consummate the Exchange Offer with respect to the
1998 Notes on or prior to September 21, 1998. The Issuer will keep the Exchange
Offer with respect to the 1998 Notes open for a period of not less than 30 days
(or longer if required by applicable law) after the date the notice of the
Exchange Offer with respect to the 1998 Notes is mailed to the holders of the
Old 1998 Notes. The Exchange Offer with respect to the Old 1998 Notes is
intended to satisfy the Issuer's exchange offer obligations under the 1998 Notes
Registration Rights Agreement.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Following the expiration of the respective Exchange Offers, 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 with respect to such Old Notes if such holder elects not to
participate in such Exchange Offer.
TERMS OF THE EXCHANGE OFFERS
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
(i) $100 million aggregate principal amount of New 1997 Notes for up to $100.0
million aggregate principal amount of the outstanding Old 1997 Notes and (ii) up
to $175.0 million aggregate principal amount of New 1998 Notes for up to $175.0
million aggregate principal amount of the outstanding Old 1998 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 Notes in exchange of each $1,000 principal
amount of outstanding Old Notes accepted in the respective Exchange Offers.
Holders may tender some or all of their Old Notes pursuant to the Exchange
Offers. 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 with respect to the Exchange Offer
applicable to such Old Notes. The Exchange Offers are not conditioned upon any
minimum principal amount of Old Notes being tendered for exchange. However, the
Exchange Offers are subject to the terms and provisions of the 1997 Notes
Registration Rights Agreement and the 1998 Notes Registration Rights Agreement,
as applicable. See "-- Conditions of the Exchange Offers."
As of the date of this Prospectus, (i) $100.0 million in aggregate
principal amount of the Old 1997 Notes is outstanding and (ii) $175.0 million in
aggregate principal amount of Old 1998 Notes is outstanding. 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 applicable
Exchange Offer. There will be no fixed record date for determining holders of
the Old Notes entitled to participate in the applicable Exchange Offer. The
Issuer believes that, as of the date of this Prospectus, no holder of Old Notes
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.
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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 one or both of the
Exchange Offers, in which case the Expiration Date shall be the latest date and
time to which the applicable Exchange Offer is extended. The Company has no
obligation to make the Exchange Offers coterminous.
In order to extend one or both the Exchange Offers, 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 one or both the Exchange Offers, in
which event the term "Expiration Date" shall mean the latest time and date to
which one or both of the Exchange Offers is extended, as the case may be, and
(iii) to amend the terms of the Exchange Offers in any manner. If one or both of
the Exchange Offers 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 registered
holders of the Old Notes subject to such Exchange Offer. Modifications of an
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 such Exchange Offer. In order to extend an 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
with respect to such Exchange Offer.
CONDITIONS OF THE EXCHANGE OFFERS
The Exchange Offers are not conditioned upon any minimum principal amount
of the Old Notes being tendered for exchange. However, the Exchange Offers are
conditioned upon the declaration by the Commission of the effectiveness of the
Registration Statement of which this Prospectus constitutes a part.
ACCRUED INTEREST
1997 Notes
The New 1997 Notes will bear interest at a rate equal to 13 1/2% per annum
from and including their date of issuance. Holders whose Old 1997 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 1997 Notes, or if no
interest had been paid on such Old 1997 Notes, from the date of their original
issue, to, but not including, the date of issuance of the New 1997 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 1997 Notes.
See "Description of the 1997 Notes -- Maturity, Interest and Principal."
1998 Notes
The New 1998 Notes will bear interest at a rate equal to 10 3/8% per annum
from and including their date of issuance. Holders whose Old 1998 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 1998 Notes, or if no
interest had been paid on such Old 1998 Notes, from the date of their original
issue, to, but not including, the date of issuance of the New 1998 Notes
accepted for exchange, which interest accrued at the rate of 10 3/8% per annum,
and will cease to accrue on the day prior to the issuance of the New 1998 Notes.
See "Description of the 1998 Notes -- Maturity, Interest and Principal."
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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
forth below, a holder who wishes to tender Old Notes for exchange pursuant to
the applicable 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 applicable 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.
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
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conditions of the applicable 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 such Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offers
(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 applicable
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
applicable 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 such 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 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 such 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
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<PAGE> 34
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 an Exchange Offer, the
Issuer will accept any and all Old Notes that are properly tendered in such
Exchange Offers prior to 5:00 p.m., New York City time, on the Expiration Date
with respect to such Exchange Offer. The New Notes issued pursuant to an
Exchange Offer will be delivered promptly after acceptance of the Old Notes. For
purposes of the Exchange Offers, 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 Offers 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 Offers. 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
Offers.
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 of this Prospectus, at
any time prior to 5:00 p.m., New York City time, on the applicable 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 applicable
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
Offers -- Procedure for Tendering Old Notes" at any time on or prior to the
Expiration Date.
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<PAGE> 35
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 Offers
and compliance with the 1997 Notes Registration Rights Agreement and the 1998
Notes Registration Rights Agreement, as the case may be, 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 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 1997
Notes Registration Rights Agreement or the 1998 Notes Registration Rights
Agreement, as the case may be, (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 Offers and will not make any payments to brokers, dealers of others
soliciting acceptance of the Exchange Offers. 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 Offers. If, however, a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offers, 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.
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<PAGE> 36
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 Offers will be amortized over the term of
the respective 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 Offers 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
Offers. 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 Offers are 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 an 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 Offers 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 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 Offers.
The Exchange Offers are intended to satisfy certain of the Company's
obligations under the 1997 Notes Registration Rights Agreement and the 1998
Notes 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
29
<PAGE> 37
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 1997 Notes Offering (after deducting the
Initial 1997 Notes 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
1997 Notes to fund when due the first five scheduled interest payments on the
Old 1997 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
applicable Exchange Offer, will continue to be held for the benefit of the
holders of the New 1997 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 1997 Notes 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 1997 Notes in short-term, interest-bearing, investment-grade securities.
Net proceeds from the Initial 1998 Notes Offering (after deducting the
Initial 1998 Notes Purchasers' discount and expenses payable by the Issuer) were
approximately $169.8 million. The net proceeds from the Initial 1998 Notes
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 1998 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 1997 Indenture, the 1998 Indenture
and the Bank Facility place limitations on the Company's ability to pay
dividends. Future dividends, if any, will be at the discretion of the Board and
will depend upon, among other things, the Company's operations, capital
requirements and surplus, general financial condition, contractual restrictions
and such other factors as the Board may deem relevant. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
30
<PAGE> 38
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 the conversion of all
the outstanding Preferred Stock into Common Stock upon the completion of the
proposed IPO, and (iii) the pro forma capitalization adjusted to reflect the
proposed IPO, the proceeds from the 1998 Notes, the Refinancing, and the NTT
Investment. This table should be read in conjunction with the Selected
Consolidated Financial Data, the Unaudited Pro Forma Condensed Combined
Financial Statements and the Historical Consolidated Financial Statements and
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------
PRO FORMA
HISTORICAL PRO FORMA(1) AS ADJUSTED(2)
---------- ------------ --------------
<S> <C> <C> <C>
Cash and cash equivalents................................ $ 72,586 $ 27,299 $314,649
Restricted cash and securities........................... 40,554 40,554 27,822
======== ======== ========
Long-term debt and capital lease obligations, net of
current portions....................................... 142,321 143,651 272,694
-------- -------- --------
Redeemable preferred stock(3):
Series A, par value $0.001 per share; 6,100,000 shares
authorized: 6,033,333 shares outstanding............ 18,080 -- --
Series B, par value $0.001 per share; 10,117,000 shares
authorized: 10,028,334 shares outstanding........... 59,193 -- --
Series C, par value $0.001 per share; 2,500,000 shares
authorized and outstanding.......................... 19,976 -- --
-------- -------- --------
97,249 -- --
-------- -------- --------
Stockholders equity (deficit):
Preferred stock, Series D-1, par value $0.001 per
share; 3,000,000 shares authorized: 680,000 shares
outstanding (2,384,000 shares pro forma)(3)......... 10,200 -- --
Common stock, par value $0.001 per share; 35,133,000
shares authorized; 1,254,533 shares outstanding
historical; 22,200,200 shares pro forma; 31,838,927
shares pro forma -- as adjusted and additional paid
in capital(4)....................................... 1,598 134,607 293,952
Warrants............................................... 12,675 12,675 12,675
Accumulated deficit.................................... (51,474) (51,474) (61,578)
-------- -------- --------
Total stockholders' equity (deficit)........... (27,001) 95,808 245,049
-------- -------- --------
Total capitalization........................... $212,569 $239,459 $517,743
======== ======== ========
</TABLE>
- ---------------
(1) Pro forma for (i) the Completed and Proposed Acquisitions as if they had
occurred on December 31, 1997, (ii) the conversion of the Preferred Stock
into Common Stock upon completion of the proposed IPO and (iii) 1,704,000
shares of Series D-1 Preferred Stock 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."
(2) As adjusted (a) to give effect to (i) the proposed IPO after deducting the
Underwriter's discounts and commissions and estimated expenses, (ii) the
proceeds from the Old 1998 Notes and the application of the proceeds
therefrom to effect the Refinancing, and (iii) the sale of 4,638,727 shares
of Common Stock to NTT for approximately $78.5 million (based upon an
assumed initial public offering of 5,000,000 shares of Common Stock at an
assumed price to public of $17.50 per share in the proposed IPO)
concurrently with the proposed IPO, and (b) to reflect an extraordinary
charge of approximately $10.1 million for the loss on early extinguishment
of $50.0 million of Old 1997 Notes, representing the excess of the
repurchase price over the carrying value of the Old 1997 Notes as of
December 31, 1997.
(3) All of the shares of the Company's Preferred Stock are convertible into
Common Stock on a one-for-one basis, subject to certain anti-dilution
adjustments. The shares of Series A, B and C Preferred Stock are subject to
mandatory redemption beginning on October 10, 2004, and are subject to
mandatory conversion into Common Stock upon consummation of the proposed
IPO.
(4) Includes 1,704,000 shares of Series D-1 Preferred Stock that as of December
31, 1997 were issued and proposed to be issued in connection with
Acquisitions and Buyouts which have been assumed to have been converted to
Common Stock for pro forma and pro forma as adjusted purposes. Does not
include 2,237,050 shares of Common Stock reserved for issuance pursuant to
outstanding stock options as of December 31, 1997, or 2,112,480 shares of
Common Stock issuable upon exercise of outstanding warrants.
31
<PAGE> 39
SELECTED CONSOLIDATED FINANCIAL DATA
(dollars in thousands, except per share amounts)
The selected historical consolidated financial data as of and for the
period from inception (March 1, 1996) to December 31, 1996 and as of and for the
year ended December 31, 1997 have been derived from the audited Consolidated
Financial Statements of the Company included elsewhere in this Prospectus.
The information set forth below should be read in conjunction with the
Unaudited Pro Forma Condensed Combined Financial Statements and the historical
Consolidated Financial Statements of the Company and the notes thereto included
elsewhere in this Prospectus. Results of operations for the year ended December
31, 1997 are not necessarily indicative of results of operations for future
periods. The Company's development and expansion activities, including
acquisitions, during the periods shown below significantly affect the
comparability of this data from one period to another. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)(2)
-------------------------------- ---------------
PERIOD FROM
INCEPTION
(MARCH 1, 1996) YEAR ENDED YEAR ENDED
TO DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1997
--------------- ------------ ---------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Dedicated connectivity........................ $ 1,100 $ 16,383 $ 46,330
Dial-up connectivity.......................... 1,139 7,093 16,725
Enhanced services and other................... 126 12,216 25,210
-------- ---------- -----------
Total revenue......................... 2,365 35,692 88,265
Costs and expenses:
Internet services operating costs............. 974 15,974 38,145
Selling, general and administrative and
other...................................... 7,002 49,383 82,070
Depreciation and amortization................. 669 10,624 25,911
-------- ---------- -----------
Total costs and expenses................... 8,645 75,981 146,126
-------- ---------- -----------
Loss from operations....................... (6,280) (40,289) (57,861)
Other income (expense):
Interest income............................... 593 6,080 6,147
Interest expense.............................. (115) (11,826) (12,417)
Equity in losses of affiliates................ -- (1,958) --
Minority interests.............................. 680 1,924 --
-------- ---------- -----------
Net loss.............................. (5,122) (46,069) (64,131)
Accretion of redeemable preferred stock to
liquidation value............................. (23) (260) --
-------- ---------- -----------
Net loss attributable to common
stockholders........................ $ (5,145) $ (46,329) $ (64,131)
======== ========== ===========
Loss per common share -- basic and diluted(3)... $ (5.29) $ (40.47) $ (2.90)
======== ========== ===========
Weighted average common shares
outstanding -- basic and diluted.............. 971,748 1,144,685 22,090,352
======== ========== ===========
OTHER DATA:
EBITDA(4)....................................... $ (5,611) $ (29,665) $ (31,950)
Capital expenditures(5)......................... 3,430 14,547 14,547
Ratio of earnings to fixed charges(6)........... -- -- --
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>
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<PAGE> 40
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
AS OF ----------------------------------------
DECEMBER 31, PRO FORMA
1996 ACTUAL PRO FORMA(1) AS ADJUSTED(7)
------------ -------- ------------ --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $66,467 $ 72,586 $ 27,299 $314,649
Restricted cash and securities.............. -- 40,554 40,554 27,822
Goodwill, net............................... 8,736 83,216 152,241 152,241
Total assets................................ 82,628 246,471 276,058 555,888
Long-term debt and capital lease
obligations, net of discount.............. 106 142,321 143,651 272,694
Redeemable preferred stock.................. 76,877 97,249 -- --
Stockholders' equity (deficit).............. (4,055) (27,001) 95,808 245,049
</TABLE>
- ---------------
(1) Pro forma for the Completed and Proposed Acquisitions as if they had
occurred on December 31, 1997 for balance sheet purposes and on January 1,
1997 for statement of operations data purposes and the conversion of the
Preferred Stock into Common Stock upon completion of the proposed IPO. See
"Unaudited Pro Forma Condensed Combined Financial Statements."
(2) Pro forma interest expense, including amortization of debt issuance costs,
assuming that the Old 1998 Notes had been issued on January 1, 1997 and
after giving effect to the Refinancing, totaled $27.3 million for the year
ended December 31, 1997.
(3) The Company paid no cash dividends on its Common Stock during the period
from inception (March 1, 1996) to December 31, 1996 and the year ended
December 31, 1997.
(4) EBITDA represents earnings (loss) from operations before interest, taxes,
depreciation, amortization and provision for loss on write-offs of
investments in ISPs and fixed assets. The primary measure of operating
performance is net earnings (loss). Although EBITDA is a measure commonly
used in the Company's industry, it should not be construed as an alternative
to net earnings (loss), determined in accordance with generally accepted
accounting principles ("GAAP"), as an indicator of operating performance or
as an alternative to cash flows from operating activities, determined in
accordance with GAAP. In addition, the measure of EBITDA presented herein by
the Company may not be comparable to other similarly titled measures of
other companies.
(5) Excludes equipment and leasehold improvements acquired in business
acquisitions.
(6) For the period ended December 31, 1996 and the year ended December 31, 1997,
earnings were insufficient to cover combined fixed charges by $5.8 million
and $48.0 million, respectively. On a pro forma basis, giving effect to the
completed and proposed acquisitions and Buyouts, earnings would have been
insufficient to cover combined fixed charges by $64.1 million for the year
ended December 31, 1997. Combined fixed charges consist of interest expense
and that portion of rent expense the Company believes to be representative
of interest (i.e., one third of rent expense), adjusted for minority
interests.
(7) As adjusted (a) to give effect to (i) the proposed IPO after deducting the
Underwriters' discounts and commissions and estimated expenses, (ii) the
proceeds from the Old 1998 Notes and the application of the proceeds
therefrom to effect the Refinancing, and (iii) the sale of 4,638,727 shares
of Common Stock to NTT for $78.5 million (based upon an initial public
offering of 5,000,000 shares of Common Stock at an assumed price to public
of $17.50 per share in the proposed IPO), concurrently with the proposed
IPO, and (b) to reflect an extraordinary charge of approximately $10.1
million for the loss on early extinguishment of $50.0 million of Old 1997
Notes, representing the excess of the repurchase price over the carrying
value of the 1997 Notes as of December 31, 1997.
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<PAGE> 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis is based on the historical and pro
forma results of the Company and includes a number of ISPs acquired at various
times. See "Unaudited Pro Forma Condensed Combined Financial Statements" for the
basis of presentation and those business acquisitions included therein.
Investments in ISP affiliates in which Verio acquires a minority interest are
accounted for at cost. Investments in ISP affiliates in which Verio acquires a
majority interest through the acquisition of net assets, common stock or
convertible preferred stock, and exercises significant control over the
operations are accounted for using the purchase method of accounting and,
accordingly, the financial results of these ISPs have been consolidated with
those of the Company. Certain statements set forth below constitute
"forward-looking statements" within the meaning of the Reform Act. The safe
harbor provisions provided in Section 27A of the Securities Act and Section 21E
of the Exchange Act do not apply to forward-looking statements made in
connection with an initial public offering. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company, or industry
results, to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Given
these uncertainties, prospective investors are cautioned not to place undue
reliance on such forward-looking statements. See "Risk Factors -- Forward-
Looking Statements."
OVERVIEW
Verio is a leading national provider of Internet connectivity and enhanced
Internet services to small and medium sized businesses. Since its inception in
March 1996, the Company has rapidly established a national presence through the
acquisition, integration, and growth of local ISPs with a business customer
focus. Verio believes that small and medium sized businesses represent an
attractive target market for the provision of Internet services due to this
market's low current penetration levels and customer churn, and the expanding
Internet needs of these businesses. The Company believes it has a unique
competitive advantage in serving small and medium sized business customers
through the combination of the technical competency, hands-on support and
entrepreneurial culture of locally based ISPs with the quality and economic
efficiency of Verio's national network, operational infrastructure and financial
strength. Verio has quickly built critical mass by acquiring the stock or assets
of, or making significant investments in, over 30 ISPs that provide a
comprehensive range of Internet connectivity and enhanced products and services
to over 80,000 customer accounts in 33 of the top 50 MSAs in the country, with
combined revenues of approximately $23.2 million for the three months ended
December 31, 1997.
From March 1996 through September 1997, Verio's strategy was to acquire 51%
to 100% of a large regional ISP, and a minority interest in smaller ISPs within
each region. Verio now seeks to acquire 100% of new ISPs, and is in the process
of bringing its ownership interest in its existing ISPs to 100%. Upon achieving
100% ownership of its ISPs in a region, Verio then consolidates the management
teams, network operations, and marketing efforts within that region. While some
one-time costs are incurred in these consolidation efforts, Verio believes that
the combined organizations will be able to increase revenues faster and more
cost effectively. In addition, 100% ownership facilitates the introduction of
the Verio brand name, a suite of nationwide product offerings, and the
transition of all ISPs onto Verio's national network and financial systems.
In conjunction with the consolidation of its regional operations, as of
December 31, 1997, the Company had completed the Buyout of four of its initially
non-wholly owned ISPs. Since then, the Company has completed eight additional
Buyouts and intends to complete the Buyouts of the four remaining ISPs in which
it did not initially acquire 100% ownership during the remainder of 1998. The
Company expects to consummate two of those four remaining Buyouts prior to or
concurrently with the proposed IPO, and considers those two Buyouts to be
probable. Verio has incurred and expects to incur costs of approximately $50.0
million, in the aggregate, in 1998 in connection with the Buyouts, which have
been and will be paid with a combination of cash and preferred stock of Verio.
As a result of its acquisitions, and the limited amount of
34
<PAGE> 42
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
(recently acquired by WorldCom). It also issued $150.0 million principal amount
of Old 1997 Notes to a group of institutional investors and Brooks, $100.0
million of which remain outstanding following the Refinancing. On March 25,
1998, the Company consummated the sale of $175.0 million principal amount of Old
1998 Notes, a portion of the proceeds of which was used to effect the
Refinancing. See "-- Liquidity and Capital Resources" and "Certain
Transactions."
RESULTS OF OPERATIONS
REVENUE
The Company derives the majority of its revenues from business customers
who purchase Internet connections and enhanced services such as Web hosting.
Verio's ISP affiliates offer a broad range of connectivity options to their
customers including dedicated, dial-up, ISDN, frame relay and point-to-point
connections. Dedicated customers typically sign a contract for one to three
years of service that provides for fixed, recurring monthly service charges, and
pay a one-time setup fee. These charges vary depending on the type of service,
the length of the contract, and local market conditions. Dial-up customers also
typically pay a one-time setup fee and recurring monthly service charges. Fees
and service charges for enhanced services vary from product to product. For
example, Web hosting customers pay a one-time setup fee and fixed monthly
service charges that vary depending on the amount of disk space and bandwidth
required. Additional sources of revenue include e-commerce, virtual private
networks, security services, co-location services, consulting and the sales of
equipment and customer circuits. Revenue related to Internet connectivity and
enhanced services is recognized as the services are provided. Amounts billed
relating to future periods are recorded as deferred revenue and amortized
monthly as services are rendered.
Currently, connectivity services provide a majority of total revenues.
However, revenues from enhanced services, especially Web hosting, are expected
to represent an increasing percentage of total revenues in future periods.
Revenue from business customers currently represents more than 80% of total
revenues and is projected to increase as a percent of total revenues. In
addition to the growth that the Company is achieving through acquisitions,
revenues are also expected to increase due to the internal growth of
consolidated ISPs. For ISPs consolidated for the entire fiscal year of 1997,
revenue increased an average of 16% quarter-over-quarter for the three quarters
ended December 31, 1997.
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 include Web hosting, consulting, sales of equipment and customer circuits.
The increase in dedicated and dial-up revenues and enhanced services and other
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 a change in the revenue mix resulting from 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 the cost incurred by
the Company to transport its Internet traffic and for its national network. In
some instances the Company also will pay for the local telecommunications
line(s)
35
<PAGE> 43
from the customer's location to one of the POPs. As of December 31, 1997, 25 ISP
affiliates were utilizing the Verio national network for their Internet access
and paying Verio for these network services based on their bandwidth
requirements. The Company recently signed a long-term long haul capacity
agreement with Qwest in order to reduce the per unit costs of such services.
There will not be a significant effect on the results for 1998 from this
agreement due to the time required to convert from existing circuits; however,
the Company expects that the pricing advantages provided by this agreement will
substantially reduce the cost of these services in future years. Additionally,
the Company has the right to fund its minimum commitment, which would allow the
capitalization of costs (to the extent prepaid) under this contract. Such
capitalized costs would be amortized to operations over the term of the
agreement. The amount of the prepayment currently would be approximately $60.0
million.
Selling, general and administrative and other expenses consist primarily of
salaries and related employment expenses, consulting, travel and entertainment,
rent, and utilities. Depreciation is provided over the estimated useful lives of
the assets ranging from 3 to 5 years using the straight-line method. The excess
of cost over the fair value of net assets acquired, or goodwill, is amortized
using the straight-line method over a ten-year period.
Year Ended December 31, 1997 Compared to the Period from Inception to December
31, 1996
Internet services operating costs were 45% and 41% of total revenues for
the year ended December 31, 1997 and the 1996 Period, respectively. Selling,
general and administrative and other expenses were 138% and 296% of revenues for
the year ended December 31, 1997 and the 1996 Period, respectively. The Company
expects Internet services operating costs to increase in absolute dollars but to
decrease as a percentage of total revenues over time as additional ISP
affiliates are added onto Verio's national network, as enhanced services become
a larger percentage of total revenues, and as the Qwest agreement is
implemented. The Company expects selling, general and administrative expenses to
continue to increase in absolute dollars but to decrease as a percentage of
total revenues as the Company acquires additional ISPs, allowing it to spread
its corporate overhead over a larger revenue base, as its scaleable systems
reduce the incremental costs of additional revenues, as sales force productivity
increases with experience, and as indirect selling channels are expanded. The
anticipated increases in absolute dollar terms will be primarily due to
increased personnel resulting from acquisitions, and additional expenditures in
sales and marketing. Depreciation and goodwill amortization are expected to
continue to increase significantly as a result of the Company's acquisition and
investment strategies. Also, the Company will continue to have non-recurring
expenses related to its strategy of acquiring and regionalizing groups of ISPs.
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 for the year ended December 31, 1997 primarily as a result of the
completion of the $150.0 million placement of the Old 1997 Notes on June 24,
1997. Interest expense is expected to increase in 1998, reflecting a full year's
interest on the 1997 Notes and interest due on the 1998 Notes.
INCOME TAXES
As of December 31, 1997, the Company had a net operating loss carryforward
for federal income tax purposes of approximately $49.9 million which is
available to offset future federal taxable income, if any, through 2011. The
utilization of a portion of the net operating loss carryforwards may be limited
under Section 382 of the Internal Revenue Code. No tax benefit for such losses
has been recorded by the Company in 1996 or 1997 due to uncertainties regarding
the utilization of the loss carryforward.
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<PAGE> 44
QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue:
Dedicated connectivity..................... $ 1,954 $ 3,852 $ 4,314 $ 6,263
Dial-up connectivity....................... 1,106 1,564 1,644 2,779
Enhanced services and other................ 1,354 2,833 3,666 4,363
------- ------- -------- --------
Total revenue...................... 4,414 8,249 9,624 13,405
Costs and expenses:
Internet services operating costs.......... 2,042 3,433 4,029 6,470
Selling, general and administrative and
other................................... 6,718 11,122 13,393 18,150
Depreciation and amortization.............. 1,246 2,548 2,943 3,887
------- ------- -------- --------
Total costs and expenses................ 10,006 17,103 20,365 28,507
------- ------- -------- --------
Loss from operations.................... $(5,592) $(8,854) $(10,741) $(15,102)
======= ======= ======== ========
EBITDA....................................... $(4,346) $(6,306) $ (7,798) $(11,215)
======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
(AS A PERCENTAGE OF TOTAL REVENUE)
<S> <C> <C> <C> <C>
Total revenue................................ 100% 100% 100% 100%
Costs and expenses:
Internet services operating costs.......... 46% 42% 42% 48%
Selling, general and administrative and
other................................... 152% 135% 139% 135%
Depreciation and amortization.............. 28% 31% 31% 29%
Total costs and expenses................ 227% 207% 212% 213%
Loss from operations.................... (127%) (107%) (112%) (113%)
EBITDA....................................... (98%) (76%) (81%) (84%)
</TABLE>
The Company's operating results have fluctuated in the past and may in the
future fluctuate significantly depending upon a variety of factors, including
the incurrence of capital costs and costs associated with the Buyouts and the
introduction of value-added enhanced services and new services by the Company.
Additional factors that may contribute to variability of operating results
include: the pricing and mix of services offered by the Company; customer
retention rate; changes in pricing policies and product offerings by the
Company's competitors; growth in demand for network and Internet access
services; one-time costs associated with regional consolidation; and general
telecommunications services' performance and availability. The Company also has
experienced seasonal variation in Internet use and, therefore, revenue streams
may fluctuate accordingly. As a result, variations in the timing and amounts of
revenues could have a material adverse effect on the Company's quarterly
operating results. Due to the foregoing factors, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and that such comparisons cannot be relied upon as indicators of
future performance.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business 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.
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<PAGE> 45
Net cash used by operating activities was $35.3 million during the year
ended December 31, 1997, which includes a decrease of $88,000 in working
capital. Net cash used by investing activities was $120.3 million during the
year ended December 31, 1997, which includes the investment of restricted cash
totalling $46.6 million from the proceeds of the Old 1997 Notes, and
approximately $64.0 million for acquisitions. Net cash provided by financing
activities was $161.8 million during the year ended December 31, 1997, primarily
from the sale of 2,500,000 shares of Series C Preferred Stock for gross proceeds
of approximately $20.0 million and issuance of the Old 1997 Notes for gross
proceeds of approximately $150.0 million.
Since inception, the Company has financed itself primarily through the
private sale of Preferred Stock and debt and, to a lesser extent, Common Stock.
In 1996, the Company raised approximately $79.2 million (gross) through the
issuance of Common Stock, Series A Preferred Stock and Series B Preferred Stock.
In June 1996, the Company sold 6,033,333 shares of Series A Preferred Stock and
in December 1996, the Company sold 10,000,000 shares of Series B Preferred Stock
for gross proceeds of approximately $18.1 million and approximately $60.0
million, respectively. During the course of 1996, 1,090,000 shares of Common
Stock were sold for gross proceeds of approximately $1.1 million. In 1997, an
additional 164,533 shares of Common Stock were issued for approximately
$508,000. In May 1997, the Company completed the sale of 2,500,000 shares of
Series C Preferred Stock for gross proceeds of approximately $20.0 million. In
December 1997, the Company issued 680,000 shares of Series D-1 Preferred Stock
to fund a portion of the acquisition cost of one 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
principal amount of the Old 1997 Notes and attached warrants (the "Warrants").
One hundred fifty thousand units were issued, each consisting of $1,000
principal amount of the Old 1997 Notes and eight Warrants, with each Warrant
entitling the holder thereof to purchase 1.76 shares of the Company's Common
Stock at a price of $.01 per share, for a total of 2,112,480 shares of Common
Stock. The Warrants and the Old 1997 Notes were separated on December 15, 1997.
The 1997 Notes mature on June 15, 2004. Interest on the 1997 Notes, at the
annual rate of 13 1/2%, is payable semi-annually in arrears on June 15 and
December 15 of each year. Concurrent with the completion of the sale of the Old
1997 Notes, the Company was required to deposit funds into an escrow account in
an amount that together with interest would be sufficient to fund the first five
interest payments on the 1997 Notes. Upon consummation of the sale of the Old
1998 Notes and the Refinancing, that portion of the escrowed amount attributable
to the principal amount of the Old 1997 Notes refinanced was released to the
Company. The 1997 Notes are redeemable at the option of the Company commencing
June 15, 2002. The 1997 Notes are senior unsecured obligations of the Company
ranking pari passu in right of payment with all existing and future unsecured
and senior indebtedness. The 1997 Notes impose significant limitations on the
Company's ability to incur additional indebtedness unless the Company's
Consolidated Pro Forma Interest Coverage Ratio (as defined) is greater than or
equal to 1.8 to 1.0 prior to June 30, 1999, or 2.5 to 1.0 on or after that date.
The Company is also limited in its ability to pay dividends or make Restricted
Payments (as defined), to engage in businesses other than the internet service
business, and to place liens on its assets for the benefit of persons other than
the bondholders, among other restrictions. If a Change of Control (as defined in
the 1997 Indenture) occurs, the Company is required to make an offer to purchase
all of the Old 1997 Notes then outstanding at a price equal to 101% of the
principal amount, plus accrued and unpaid interest.
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 or amount
of Common Stock sold by the Company will be in the amounts currently
contemplated.
On March 25, 1998, the Company completed the placement of $175.0 million
principal amount of the Old 1998 Notes. The 1998 Notes mature on April 1, 2005.
Interest on the 1998 Notes, at the annual rate of 10 3/8%, is payable
semi-annually in arrears on April 1 and October 1 of each year, commencing
October 1, 1998. The 1998 Notes are redeemable at the option of the Company
commencing April 1, 2002. The 1998 Notes are senior unsecured obligations of the
Company ranking pari passu in right of payment with all existing and future
unsecured and senior indebtedness. The form and terms of the New 1998 Notes will
be identical in all material respects to the form and terms of the Old 1998
Notes, except that the New 1998 Notes will be registered under the Securities
Act, and therefore will not be subject to certain transfer restrictions and
38
<PAGE> 46
registration rights provisions applicable to the Old 1998 Notes. The Company
used approximately $54.5 million of the proceeds from the issuance of the Old
1998 Notes to effect the Refinancing. As a result of the Refinancing, the
Company was refunded approximately $13.3 million from the escrow account for the
1997 Notes, of which approximately $1.9 million was used to pay accrued and
unpaid interest on the $50.0 million principal amount of Old 1997 Notes
repurchased from Brooks.
On April 6, 1998, Verio entered into the Bank Facility with a group of
commercial lending institutions that committed to provide a $57.5 million
revolving credit facility secured by the stock of the ISPs that Verio owns
currently or may own in the future and the Capacity Agreement (as defined). See
"Business -- Verio National Network." The Chase Manhattan Bank serves as agent
for the Bank Facility. The Bank Facility requires no payments of principal until
its maturity on December 31, 1999. The terms of the Bank Facility provide for
borrowings at LIBOR + 3%, with a 1% decrease in that rate if the Company has
completed a public equity offering of $50.0 million or more. If the Company has
not completed such an offering by December 31, 1998, or by June 30, 1999, there
will be a 2% increase in the rate on each such date. There is a commitment fee
of 1/2% per annum on the undrawn amount of the Bank Facility and a one-time fee
of 1/2% on any amounts drawn. The last $3.0 million of the Bank Facility cannot
be drawn except for the payment of interest.
The Bank Facility sets forth covenants restricting, among other things, the
Company's ability to borrow, to guarantee the debt of others, and to make
borrowings at the subsidiary level. The Company is also limited in its ability
to enter into transactions with affiliates, create liens on its assets, and make
certain investments. In particular, Indebtedness (less cash) may not exceed 2.35
times annualized pro forma revenues for the most recent fiscal quarter.
Dividends and certain types of investments are prohibited, as are liens incurred
for borrowed money. Borrowings under the Bank Facility would be required to be
paid down with the proceeds of new Indebtedness (as defined), certain asset
sales, Excess Cash Flow (as defined), or the net proceeds from insurance claims.
On April 7, 1998, the Company entered into agreements establishing a
strategic relationship with NTT pursuant to which the Company agreed to sell to
NTT, concurrently with and conditioned upon consummation of the proposed IPO, a
number of shares of Common Stock equal to the lesser of (i) 12.5% of the total
number of outstanding shares of Common Stock, on a fully diluted and fully
converted basis (taking into account the proposed IPO and the NTT Investment) or
(ii) the quotient of $100.0 million divided by 96.75% of the price to public in
the proposed IPO. See "Business -- NTT Strategic Relationship."
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, proceeds
from the sale, or issuance of capital stock, credit facilities (including the
Bank Facility), and lease financing. There can be no assurance that the Company
will have sufficient resources to fund its investment programs, particularly if
operating losses continue to increase. EBITDA decreased from negative $5.6
million in the 1996 Period to negative $29.7 million in 1997 despite an increase
in revenues from $2.4 million to $34.7 million, respectively. The Company
incurred $49.4 million in selling, general and administrative expenses in 1997
as it invested in scaleable systems, hiring and sales training, and network
improvements, that it expects will result in incremental revenue at reduced
incremental costs. The Company will have to increase revenues without a
commensurate increase in costs to generate sufficient cash to enable it to meet
its debt service obligations as described above. There can be no assurance that
the Company will be able to service its indebtedness.
39
<PAGE> 47
Insufficient funding may require the Company to delay or abandon some of its
planned future expansion or expenditures, which could have a material adverse
effect on the Company's growth and its ability to compete. In addition, the
Company's operating flexibility with respect to certain business activities is
limited by covenants associated with its indebtedness. There can be no assurance
that such covenants will not adversely affect the Company's ability to finance
its future operations or capital needs or to engage in business activities that
may be in the interest of the Company.
FORWARD-LOOKING STATEMENTS
The statements included in the discussion and analysis above that are not
historical fact are "forward-looking statements" (as such term is defined in the
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 assurance can be given that future results indicated, whether
expressed or implied, will be achieved. While sometimes presented with numerical
specificity, these projections and other forward-looking statements are based
upon a variety of assumptions relating to the business of the Company, which,
although considered reasonable by the Company, may not be realized. Because of
the number and range of the assumptions underlying the Company's projections and
forward-looking statements, many of which are subject to significant
uncertainties and contingencies that are beyond the reasonable control of the
Company, some of the assumptions will not materialize and unanticipated events
and circumstances may occur subsequent to the date of this report. These
forward-looking statements are based on current expectations, and the Company
assumes no obligation to update this information. Therefore, the actual
experience of the Company and results achieved during the period covered by any
particular projections or forward-looking statements may differ substantially
from those projected. Consequently, the inclusion of projections and other
forward-looking statements should not be regarded as a representation by the
Company, or any other person, that these estimates and projections will be
realized and actual results may vary materially. There can be no assurance that
any of these expectations will be realized or that any of the forward-looking
statements contained herein will prove to be accurate.
40
<PAGE> 48
BUSINESS
OVERVIEW
Verio is a leading national provider of Internet connectivity and enhanced
Internet services to small and medium sized businesses. Since its inception in
March 1996, the Company has rapidly established a national presence through the
acquisition, integration, and growth of local ISPs with a business customer
focus. Verio believes that small and medium sized businesses represent an
attractive target market for the provision of Internet services due to this
market's low current penetration levels and customer churn rates, and the
expanding Internet needs of these businesses. Because of their limited internal
technical resources, small and medium sized businesses also typically require
hands-on local support and highly reliable turnkey solutions for mission
critical applications. Verio further believes that these needs currently are
underserved by both the national and local ISPs. While national ISPs lack the
local presence to provide customized, hands-on service, local ISPs typically
lack the scale and resources required to provide dedicated, high-capacity
Internet access, around-the-clock support and tailored product offerings at
competitive prices.
The Company believes it has a unique competitive advantage in serving small
and medium sized business customers, through the combination of the technical
competency, hands-on support and entrepreneurial culture of locally based ISPs
with the quality and economic efficiency of Verio's national network,
operational infrastructure and financial strength. Verio has quickly built
critical mass by acquiring the stock or assets of, or making significant
investments in, over 30 ISPs that provide a comprehensive range of Internet
connectivity and enhanced products and services to over 80,000 customer accounts
in 33 of the top 50 MSAs in the country, with combined revenues of approximately
$23.2 million for the three months ended December 31, 1997. The Company
integrates and optimizes the operations of its ISPs by consolidating their
operations into regional operating units with centralized regional management,
connecting their local networks to Verio's high-speed, highly reliable national
backbone, and providing them with Verio's integrated national support services.
Verio believes that a critical factor in the successful implementation of
its business strategy is the quality of its management team and Board of
Directors. The Company's senior management team and Board of Directors have
previously successfully executed similar consolidation strategies and have
considerable experience in the management and growth of recurring revenue-based
telecommunications businesses. Management believes that its experience in the
deployment of similar systems and services in other emerging telecommunications
industries can be leveraged to significantly improve the quality of services
currently available in the Internet service industry.
INDUSTRY BACKGROUND
Internet connectivity and enhanced Internet services represent two of the
fastest growing segments of the telecommunications services market. Total ISP
revenues in the United States are projected to grow from $3.3 billion in 1996 to
$18.3 billion in 2000, according to IDC, an independent company that prepares
market studies relating to the Internet. The availability of Internet
connectivity, advancements in technologies required to navigate the Internet,
and the proliferation of content and applications available over the Internet
have attracted a rapidly growing number of users. Businesses are increasingly
recognizing that the Internet can significantly enhance communications among
geographically distributed offices and employees as well as with customers and
suppliers. In addition, the Internet presents a compelling profit opportunity
for businesses as it enables them to reduce operating costs, access valuable
information and reach new markets. As a result, businesses increasingly are
utilizing the Internet for mission critical applications such as sales, customer
service and project coordination. IDC estimates that U.S. corporate dedicated
access revenues will grow from $1.1 billion in 1996 to $5.6 billion in 2000,
representing a 50% compounded annual growth rate. There can be no assurance that
the bases for these projections or the results generated thereby will be
realized.
In addition to Internet connectivity, business customers increasingly are
seeking a variety of enhanced products and applications to take full advantage
of the Internet. For example, a growing number of businesses are implementing
secured virtual private networks ("VPNs") over the Internet as a more economical
option
41
<PAGE> 49
than dedicated private networks. Technological advances such as increases in
microprocessor speeds, the introduction of innovative software tools and the
development of higher bandwidth data networking technology have led to rapid
innovation and development of enhanced Internet services. The principal enhanced
services being offered by business-oriented ISPs today include Web hosting,
security, e-commerce, virtual private networks (sometimes called "intranets" and
"extranets"), and advanced Internet applications such as voice and fax, video
conferencing and data storage and retrieval solutions. According to IDC,
enhanced services is the fastest growing segment of the Internet services market
and is expected to grow from $126 million in 1996 to over $7 billion in 2000. As
business users of the Internet adopt enhanced services, they also require
additional bandwidth to support their expanded use of the Internet. The Company
expects this trend to continue as high-bandwidth enhanced services continue to
be developed, improve and proliferate and as Internet usage continues to expand.
Industry analysts have reported that small and medium sized businesses
represent a potential market of over seven million customers in the U.S., and
use of the Internet by this market segment is expected to grow substantially
from its current low level of market penetration. IDC predicts that dedicated
connections to the Internet for small and medium sized businesses will grow from
approximately 90,000 in 1996 to just under 800,000 in 2000, representing a 73%
compounded annual growth rate. Small and medium sized businesses generally seek
an ISP with locally based personnel who are readily available to respond
in-person to technical issues, who can assist in developing and implementing the
customer's effective use of the Internet, and with whom they can establish a
stable and long-term relationship. In addition, they are increasingly reliant on
enhanced product offerings that address their specific business needs on a
cost-effective basis, allowing them to compete with larger companies. For
example, IDC estimates Web hosting revenues from small and medium sized
businesses will grow from $84 million in 1996 to over $3.4 billion in 2000,
representing 95% of the total Web hosting market.
The rapid development and growth of the Internet has resulted in a highly
fragmented industry of over 4,000 national and local ISPs in the United States,
with no dominant ISP serving the needs of small and medium sized businesses. The
large national ISPs have primarily focused on the large business or consumer
markets and lack the local presence to provide the customized, hands-on service
required by small and medium sized businesses. The Company believes that
independent local and regional ISPs generally have been more adept at serving
small and medium sized businesses, and that these ISPs are often the source of
innovative Internet products and services. As a result, independent regional and
local ISPs have successfully captured approximately one-half of this market,
despite the substantially greater resources of the national providers. However,
rising costs and increasing demands from business customers are making it more
difficult for the small ISP to meet its customer's demands on a cost-effective
basis. Facing these competitive pressures, Verio believes that independent
regional and local ISPs will continue to be attracted to and benefit from the
consolidation opportunity provided by Verio.
THE VERIO SOLUTION
Verio is a leading provider of Internet connectivity and enhanced Internet
services to small and medium sized businesses. The Company's business strategy
of combining national scale with local presence was specifically developed to
serve the needs of this market sector. Verio has taken a leading role in
consolidating the fragmented, independent ISP industry, rapidly establishing its
national presence through the acquisition, integration, and growth of
established, well-regarded regional and local ISPs with a business customer
focus. The Company believes it has a unique competitive advantage in serving
small and medium sized business customers. Verio's combination of national scale
with local presence provides distinct and significant value to these customers,
which the Company expects will result in long-term customer loyalty and an
expanding customer base. Verio intends to enhance this value as it continues to
develop, both internally and through strategic vendor relationships, an
expanding array of enhanced, higher margin product and service offerings to
continue to address the business needs of its customers. The Company further
believes that the small and medium sized business market is more attractive than
the consumer or large business market segments for Internet services, in large
part due to the stability of the customer relationship resulting from the
customer's reliance on its service provider's hands-on technical support and
ability to provide a turnkey Internet solution based on customized products and
services designed for the customer's particular business needs. The
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<PAGE> 50
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 the stock or assets
of, or making significant investments in, established, well-regarded independent
ISPs in selected regions throughout the U.S. The Company intends to continue its
consolidation strategy, acquiring additional business-focused ISPs to deepen and
broaden its market presence and to expand its strength in targeted product areas
such as Web hosting. Given the increasing competitive pressures facing the
independent local and regional ISPs, Verio believes that these ISPs will
continue to be attracted to and benefit from the consolidation opportunity
provided by Verio. As part of its integration strategy, the Company now seeks to
acquire 100% of new ISP affiliates and 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 (formerly BBN), as well as
with over 90 smaller domestic and international networks. Furthermore, the
Company's scale also allows it to support a high quality national network and
invest in leading edge systems for network management, billing, customer
service, and financial information.
Develop and Offer Enhanced Products and Services to Increase
Revenues. Small and medium sized businesses are purchasing an increasing number
of enhanced products and services as these businesses deploy mission critical
applications on the Internet. As a result, the Company believes that it will be
able to derive incremental revenue from these customers by selling an expanding
array of enhanced services and additional bandwidth to support these services.
The Company accelerated its ability to provide sophisticated Web hosting
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<PAGE> 51
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 typically sought a larger regional ISP to serve as the focal point
for the region and as the vehicle for integrating and optimizing the networks
and operations in that region. The Company also has invested in smaller ISPs to
increase its local presence and market share. Having established a presence in
each of its initially targeted regions, the Company has expanded its target
markets to encompass all of the top 50 MSAs and is continuing to add
incrementally to its presence within its existing regions. It is also in the
process of consolidating most of the Verio ISP operations within each region
into single, integrated operating units.
The Company conducts its operations with both a national and regional
approach. As of April 10, 1998, the Company had acquired the stock or assets of,
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. Verio also has substantially increased its
national Web hosting presence with its acquisition of iServer, based on which
Verio has established a national operating division through which it can offer
Web hosting services to ISP customers throughout its regions. The Company is now
focusing its efforts on seeking greater coverage in the Midwest and establishing
a presence in the Southeast. As of April 10, 1998, the Company had executed
definitive agreements to acquire four additional ISPs. Two of these ISPs will
expand the Company's Midwest presence, one will join the Northeast operations,
and one is located in Florida and is the Company's first acquisition in the
Southeast region. With these four additional ISPs, the Company will serve 36 of
the top 50 MSAs. The revenue attributable to these four proposed ISPs is
estimated to be approximately $2.3 million for the three
44
<PAGE> 52
months ended December 31, 1997, which would bring the Company's total revenue
for that three month period to $25.5 million. The Company believes that
consummation of each of these acquisitions is probable. Accordingly, financial
information for these acquisitions is reflected in the pro forma financial
statements contained herein. Nonetheless, there can be no assurance that all of
the closing conditions will be satisfied or that the Company will consummate any
or all of these acquisitions. In addition, the Company has executed a
non-binding letter of intent to acquire an additional ISP located in Michigan
which, if consummated, would further enhance the Company's market presence in
the Midwest region.
The following chart identifies, by operating region, the 33 ISPs acquired
or invested in by Verio, or from which Verio has acquired significant assets, as
of April 10, 1998. It also includes the four ISPs subject to definitive
acquisition agreements as of April 10, 1998, the consummation of which the
Company believes to be probable. The chart provides certain summary information
concerning Verio's revenues for the three months ended December 31, 1997 as if
all such ISPs had been owned by the Company at such date.
<TABLE>
<CAPTION>
REVENUE FOR THE
THREE MONTHS ENDED
OPERATING REGION PRIMARY MSAS SERVED VERIO ISPS DECEMBER 31, 1997(1)
---------------- ------------------- ---------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C>
VERIO NORTHWEST $ 5,667
- Seattle, WA - NorthWestNet, Inc.
- Portland, OR - AccessOne, Inc.
- RAINet, Inc.
- Internet Engineering
Associates, Inc.
- Pacific Rim Network, Inc.
- Structured Network
Systems, Inc.(2)
VERIO NORTHERN CALIFORNIA 2,411
- San Francisco - Aimnet Corporation
- Sacramento - CCnet Inc.
- San Jose - West Coast Online, Inc.
- Oakland - NSNet, Inc.
VERIO SOUTHERN CALIFORNIA 2,892
- Los Angeles - Compute Intensive Inc.(3)
- San Diego - ATMnet, Inc.
- Riverside/San
Bernardino
- Orange County
VERIO TEXAS/GULF SOUTH 4,284
- 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
- Washington, DC - Clark Internet Services,
- Baltimore, MD Inc.
- Monumental Network
Systems, Inc.
- Internet Online, Inc.(4)
VERIO NORTHEAST 2,264
- New York, NY - Global Enterprise Services
- Boston, MA - Pioneer Global
- Philadelphia, PA Telecommunications, Inc.
- Pittsburgh, PA - ServiceTech, Inc.
- Hartford, CT - Surf Network, Inc.
- Newark, NJ - PREPnet
- Buffalo/Niagara, NY - Wingnet
- Providence, RI - LI Net, Inc.
- Nassau/Suffolk, NY - Matrix Online Media Inc.(5)
- Bergen/Passaic, NJ
</TABLE>
45
<PAGE> 53
<TABLE>
<CAPTION>
REVENUE FOR THE
THREE MONTHS ENDED
OPERATING REGION PRIMARY MSAS SERVED VERIO ISPS DECEMBER 31, 1997(1)
---------------- ------------------- ---------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C>
VERIO MIDWEST 3,070
- Chicago, IL - Verio Chicago(6)
- St. Louis, MO - Global Internet Network
- Detroit, MI Services, Inc.
- Kansas City, MO - RustNet, Inc.
- Milwaukee/Waukesha - Branch Information
Services, Inc.
- STARnet, L.L.C.(7)
- Computing Engineers Inc.
(d/b/a Worldwide Access)(8)
VERIO ROCKY MOUNTAIN 49
- Denver, CO - Verio Colorado(9)
- Salt Lake City, UT
VERIO SOUTHEAST 394
- Miami - Florida Internet
- Fort Lauderdale Corporation (10)
VERIO WEB HOSTING 1,155
- National Product - Internet Servers, Inc.
Offering
$25,506(11)
=======
</TABLE>
- ---------------
(1) These amounts reflect the full amount of revenues generated by all of the
ISPs in each region, including (i) ISPs which are subject to definitive
acquisition agreements (the consummation of which the Company believes is
probable) and (ii) 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 20% of the fully diluted equity of this
ISP and expects to consummate the Buyout of the remaining equity prior to
or concurrent with the consummation of the proposed IPO.
(3) Verio currently owns approximately 55% of the fully diluted equity of this
ISP and expects to consummate the Buyout of all of the remaining fully
diluted equity interests not currently owned by Verio prior to or
concurrent with the consummation of the proposed IPO.
(4) Verio currently owns approximately 33% of the fully diluted equity of this
ISP.
(5) Verio and Matrix Online Media, Inc. (d/b/a SpaceLab) have executed a
definitive agreement pursuant to which Verio expects to acquire 100% of the
stock of this ISP. Closing is expected to occur prior to consummation of
the proposed IPO subject to satisfaction of certain closing conditions.
(6) Funded as a start up to oversee Midwest operations and initiate operations
in Chicago.
(7) Verio and STARnet L.L.C. have executed a definitive agreement pursuant to
which Verio expects to acquire 100% of the member interests in this ISP.
Closing is expected to occur prior to consummation of the proposed IPO
subject to satisfaction of certain closing conditions.
(8) Verio and the shareholders of Computing Engineers Inc. (d/b/a Worldwide
Access) have executed a definitive agreement pursuant to which Verio
expects to acquire 100% of the stock of this ISP. Closing is expected to
occur prior to consummation of the proposed IPO subject to satisfaction of
certain closing conditions.
(9) Funded as a start up to oversee Rocky Mountain operations and initiate
operations in the primary Colorado business centers, Verio Rocky Mountain
(d/b/a Verio Colorado) is owned 69% by Verio.
(10) Verio and the shareholders of Florida Internet Corporation have executed a
definitive agreement pursuant to which Verio will acquire 100% of the stock
of this ISP. Closing is expected to occur prior to consummation of the
proposed IPO subject to satisfaction of certain closing conditions.
(11) Includes $2.3 million of revenues attributable to the four ISPs subject to
definitive acquisition agreements, the consummation of which the Company
believes is probable.
46
<PAGE> 54
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 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,
47
<PAGE> 55
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.
- 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
48
<PAGE> 56
opportunities. For example, the Company currently provides mail list
services to customers that have a need to send out hundreds of thousands
of e-mail messages to their customers, suppliers and prospects.
Verio has and intends to continue to enter into agreements with Internet
companies to leverage their products, brand names, distribution channels and
other assets. Verio believes that its existing Internet product and service
partners have been attracted to the Company because of its broad geographic
coverage, ability to influence purchase decisions of its business customers, and
the ability of the Verio sales forces to sell complex Internet solutions. The
Company has established strategic relationships with software providers such as
Microsoft, Oracle and Raptor, and equipment providers such as Cisco and
Farallon, and intends to expand its strategic relationships with additional
providers of key products and services. These relationships provide the Company
with benefits including preferred pricing, access to the latest products,
co-marketing with the vendors, tailored product training and access to the
vendor's distribution channels to generate leads for new customers.
SALES AND MARKETING
Verio offers its products and services through a consultative sales
approach which makes use of local technical talent to understand customer
applications and provide bundled Internet applications solutions consisting of
hardware, software, access and value-added services. Verio believes that this
localized approach will allow it to provide end-to-end customer solutions and
ongoing support. Verio 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 customer
accounts. Over 5,000 of these customer 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 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
49
<PAGE> 57
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 and reliable national network, peering relationships with other
national ISPs, sophisticated network management tools and engineering support
services. The reliability of the national network is the result of many factors,
including but not limited to redundant routers and other critical hardware,
carrier class facilities at POP locations (such as back up power, fire
suppression and climate control), and redundant telecommunications lines.
Network Infrastructure. As of April 1998, the national network carried
traffic for 25 of the Verio ISPs and the remaining ISPs' traffic will be added
as growth drives the need for additional capacity, as private and public peering
is implemented and as their current transit contracts expire. 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.
Following is a diagram of the Company's national network as of February
1998:
[graphic to be inserted showing diagram of the Company's national network
infrastructure]
50
<PAGE> 58
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) 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 and third quarters
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.
On March 31, 1998, the Company entered into a 15-year Capacity and Services
Agreement (the "Capacity Agreement") with Qwest, under which the Company will
have access to long haul capacity and ancillary services on Qwest's planned
16,285 mile MacroCapacity(SM) Fiber Network. Over the first seven years of the
term of the Capacity Agreement (the "Commitment Term"), the Company must
purchase, and Qwest must provide, not less than $100.0 million, in the
aggregate, of such capacity and services (the "Commitment"), at agreed upon
prices. The amount of capacity represented by the minimum Commitment would
satisfy less than 50% of the Company's projected long haul capacity requirements
over the Commitment Term. However, the Company has the right to order capacity
and services in excess of the Commitment level, and after the expiration of the
Commitment Term, at the same agreed upon prices. The Company also currently is
party to a number of other long haul capacity agreements with additional
telecommunication providers. These agreements are for various terms (of up to 5
years), and have varied pricing. Verio anticipates that it will satisfy a
substantial portion of its capacity and ancillary services needs under the
Capacity Agreement, because it believes that the agreed upon pricing levels will
significantly reduce the per unit costs that it otherwise would pay under its
other existing long haul capacity agreements.
The Company believes that the currently installed Cisco routers will be
sufficient to support its traffic routing needs up to and including OC-3 speeds.
To handle the routing at speeds higher than OC-3, new technology will be
required. The Company is investigating various options to support these higher
speeds and bandwidth requirements. Verio's options include switching, higher
capacity and faster routers, or hybrid routing and switching solutions.
Peering Relationships. By implementing its own national network and
establishing peering relationships with other national ISPs, the Company
believes it can lower the cost of its Internet transit and increase the
performance and reliability of its network operations. Peering is the Internet
practice under which ISPs
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<PAGE> 59
exchange each other's traffic without the payment of settlement charges. The
basis on which the large national ISPs make peering available or impose
settlement charges is evolving as the provision of Internet access and related
services has expanded and the dominance of a small group of national ISPs has
driven industry peering 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 nearly all of the
major national ISPs, as well as 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 points to private peering locations. Verio also is
evaluating additional private peering proposals from other national ISPs. The
Company currently anticipates that, as Verio's traffic grows, more peering
relationships can be obtained. However, no assurance can be given that peering
relationships will continue to be made available to the Company. Even if these
relationships are not maintained or established, Verio believes that it will be
more economical for Verio to maintain an exchange point transit agreement than
to pay other national ISPs for transit. See "Risk Factors -- Dependence upon
Implementation of Network Infrastructure; Establishment and Maintenance of
Peering Relationships."
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 17 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 21 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. The Company believes that the
market for ISP services, as a whole, is evolving towards the provision of
credits to customers for service outages as a result of ISP network failures.
While the Company has not provided general service warranties or instituted a
uniform policy to date relating to the extent or the provision of service
credits, certain of the Verio ISPs have done so and continue to do so in certain
circumstances.
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, 20 of the Verio ISPs are utilizing
the financial reporting system and eight are utilizing the payroll human
resources system. These systems enable Verio to cost effectively increase the
productivity and quality of administrative support by standardizing operational
systems such as payroll, payables, purchasing and financial reporting. These
enhancements are part of the Company's initiative to implement continuous
improvement methodology and to create a learning organization.
Billing and Collections. The Company has implemented the Kenan Systems' EC
Arbor billing solution which offers high quality, flexibility,
cost-effectiveness and scalability. Kenan is a leading billing solutions
provider to the telecommunications industry, providing accurate, timely, and
easy-to-understand invoicing. This system currently serves 16 of the 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.
NTT STRATEGIC RELATIONSHIP
On April 7, 1998, the Company entered into agreements establishing a
strategic relationship with NTT. These agreements provide for an investment by
NTT or one of its affiliates in the Company, concurrent with and conditioned
upon the consummation of the proposed IPO, for up to 12.5% of Company's fully
diluted Common Stock (after giving effect to the proposed IPO and the NTT
Investment) up to a maximum investment of $100.0 million, at a 3.25% discount to
the price to public in the proposed IPO. In connection with the NTT Investment,
NTT is entitled to designate one member to serve on the Company's Board of
Directors. See "Principal Stockholders -- NTT Investment."
In addition, the Company and NTT America entered into a three year Outside
Service Provider Agreement (the "OSP Agreement"), which will take effect upon
the closing of the NTT Investment.
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Pursuant to the OSP Agreement, the Company will be designated as the preferred
provider of Internet access and related services to customers of NTT America on
a reseller basis. Verio and NTT will connect their backbones and establish a
peering and transit relationship. During the term of the OSP Agreement, NTT
America will pay the Company for the services provided by the Company at
predetermined rates reflective of the strategic relationship between the
parties. Within 30 days after the IPO Closing (as defined), NTT America and the
Company have agreed to establish certain working groups to develop the details
for implementation of the specific technical and administrative aspects arising
under the OSP Agreement.
ISP OWNERSHIP STRUCTURE
While the Company now typically seeks to acquire 100% of new ISPs, the
Company's early acquisition strategy was to rapidly build mass and scale by
acquiring less than 100% of its ISPs. In each case where the Company acquired
less than 100% of an ISP initially, it obtained the right to acquire the
remaining equity in the future at a price based on either agreed upon revenue
multiples or the fair market value of the ISP. As part of its integration
strategy, the Company 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 April 10, 1998, Verio had consummated the Buyout of 12 ISPs.
Verio currently expects to effect the Buyouts of the remaining four ISPs that it
did not initially acquire 100% during the remainder of 1998. However, there can
be no assurance that the Company will be able to complete these additional
Buyouts at the times, or on the terms and conditions, that it currently
contemplates.
As the Company completes the Buyouts, in general, the ISPs in each region
are consolidated into a single, integrated regional operating subsidiary which
is wholly owned by the Company. In certain instances, some of the ISPs may
continue to exist as separate, indirect, wholly owned subsidiaries of Verio, but
operated as part of the particular integrated operating region.
Verio also currently holds a 20% interest in V-I-A Internet, Inc., 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. The Company believes that a reliable national
network, knowledgeable salespeople and the quality of technical support
currently are the primary competitive factors in the Company's target market,
and that price is usually secondary to these factors.
ISPs. According to Boardwatch magazine's directory of Internet Service
Providers, there are currently over 4,000 ISPs in the United States, consisting
of national, regional and local providers. The Company's current primary
competitors include other ISPs with a significant national presence which focus
on business customers, such as UUNet, GTE Internetworking (formerly BBN),
PSINet, Concentric Network and DIGEX. While the Company believes that its level
of local service and support and target market focus distinguish it from these
competitors, some of these competitors have significantly greater market
presence, brand recognition, and financial, technical and personnel resources
than the Company, and have extensive coast-to-coast Internet backbones. The
Company also competes with unaffiliated regional and local ISPs in its targeted
geographic regions.
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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. 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
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less than 200 square feet, in various geographic locations to house network
infrastructure and telecommunications equipment. Operational functions are
principally located in the offices of its regional operations. The Verio ISPs
typically are party to lease agreements for administrative office space
sufficient for their respective personnel, as well as smaller site leases to
house their network equipment.
EMPLOYEES
As of March 31, 1998, the Company employed approximately 901 people,
including full-time and part-time employees at its corporate headquarters in
Colorado, its network operations and customer support center in Texas and at its
controlled ISPs. The Company considers its employee relations to be good. None
of the employees of the Company is covered by a collective bargaining agreement.
TRADEMARKS AND TRADE NAMES
The Company filed for federal trademark protection of "Verio" on November
29, 1996. This application is pending and the Company has no assurance that it
will be granted. Trademark protections for the Verio mark also have been applied
for in the European Economic Community, as well as in Japan. Additionally,
corporate name reservations for the name "Verio Inc." have been filed in all
fifty states. In conjunction with the consolidation of its ISPs into regional
operating entities, the ISPs have migrated to the Verio brand name, with a
regional or local geographical identifier appended.
LEGAL PROCEEDINGS
The Company is not currently party to any material legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages as of April 10, 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)............................. 52 Chairman of the Board
Justin L. Jaschke(3)(4).............................. 40 Chief Executive Officer, Director
James C. Allen(2).................................... 51 Director
Trygve E. Myhren(1)(2)(4)............................ 61 Director
Paul J. Salem........................................ 34 Director
Stephen W. Schovee(1)(2)............................. 38 Director
George J. Still, Jr.(4).............................. 40 Director
Sean G. Brophy....................................... 39 Vice President of Corporate Development
James F. B. Browning................................. 43 Vice President of Operations
Chris J. DeMarche.................................... 41 Chief Technical Officer
Carla Hamre Donelson................................. 42 Vice President, General Counsel and
Secretary
Peter B. Fritzinger.................................. 40 Chief Financial Officer
Deb Mayfield Gahan................................... 43 Vice President of Finance and
Administration
James M. Kieffer..................................... 36 Vice President of Customer Operations
John R. Viviani...................................... 43 Vice President of Sales and Marketing
</TABLE>
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Executive Committee
(4) Member of Finance Committee
Mark D. Johnson, who served as the Company's President, Chief Operating
Officer and a director of the Company, died on March 9, 1998. While Mr. Johnson
played an important role in overseeing the Company's operations, the Company
does not expect that his death will adversely affect the Company's operations,
growth or financial prospects, because of the strength of the Company's core
management team. On March 18, 1998, Mr. Jaschke was appointed to serve as the
Company's President while the Company conducts and executive search to seek a
replacement for the positions that were held by Mr. Johnson. See
"Summary -- Recent Developments."
All of the officers identified above serve at the discretion of the Board
of Directors of the Company. There are no family relationships between any
persons identified above. The following are brief biographies of the persons
identified above.
Steven C. Halstedt has served as Chairman of the Board of Directors of
Verio since the Company's inception in March 1996. Mr. Halstedt is a co-founder
of The Centennial Funds. Mr. Halstedt has 17 years of direct venture capital
experience and serves as a general partner of each of the Centennial Holdings'
partnerships. Prior to co-founding The Centennial Funds in 1981, he was
Executive Vice President and Director of Daniels & Associates, Inc., a private
communications service company involved in cable television system operations.
Mr. Halstedt is a member of the Board of Directors of Formus Communications,
Inc., Pluto Technologies International, Inc. and V-I-A Internet, Inc. 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 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
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Scholar. He attended the University of Connecticut School of Law. He was a
Platoon Leader and Battalion Operations Officer in a U.S. Army Combat Engineer
Battalion in Vietnam.
Justin L. Jaschke has served as Chief Executive Officer of Verio since 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.
James C. Allen has served as a director of Verio since May 1996. Mr. Allen
served as CEO of Brooks Fiber Properties, Inc. until its recent acquisition by
WorldCom. Mr. Allen has twenty-five years of experience as an entrepreneur,
operator, financier, expert witness and advisor in cable television and
broadband telecommunications. Prior to joining Brooks, he served as Chief
Financial Officer and Chief Operating Officer of David Lipscomb University from
which he holds a Bachelor of Science degree. Mr. Allen was a founder and former
President, CFO and COO of Cencom Cable Associates, which was purchased by a
subsidiary of Hallmark Cards, and a former Vice President of Operations of
Telcom Engineering, Inc., a telecommunications engineering and consulting firm
with clients in both the telephone and cable television industries. Mr. Allen
previously held positions as Vice President of Operations of United Cable
Television, Divisional Manager of Continental Telephone Corporation, and Vice
President of Finance for National Communications Service Corporation. Mr. Allen
also is a director of MetroNet Communications Corp. ("MetroNet"), an LEC.
Trygve E. Myhren has served as a director of Verio since April 1997. Mr.
Myhren is President of Myhren Media, Inc. which invests in and advises media,
communications and consumer products companies. From 1990 to 1996, Mr. Myhren
was President and a director of The Providence Journal Company. From 1975 until
1988, Mr. Myhren was an officer of American Television and Communications
Corporation (ATC), the cable television subsidiary of Time, Inc. (now
Time/Warner Cable), serving as Chairman and CEO from 1980 to 1988. Mr. Myhren
also serves on the boards of The Providence Journal Company, Advanced Marketing
Services, Peapod, Ltd., CableLabs, J.D. Edwards, Inc., Founders Funds and The
University of Denver. Previously, Mr. Myhren served as chairman of the National
Cable Television Association (NCTA), and also served on the boards of Turner
Broadcasting Systems, Continental Cablevision, Inc., Citizens Bank and several
internal Time, Inc. boards, including Home Box Office, Temple-Eastex and Time
Magazine Group. He also served on the FCC's Advisory Committee on High
Definition TV. Mr. Myhren has an undergraduate degree in political science and
philosophy from Dartmouth and a Master of Business Administration from the Amos
Tuck Graduate School at Dartmouth. He served three and one-half years as a naval
officer with the U.S. Pacific Fleet.
Paul J. Salem has served as a director of Verio since December 1996. Mr.
Salem is a Managing Director of Providence Equity Partners, Inc., and is a
partner of the general partner of Providence's private equity funds. Providence
manages over $500 million in equity and specializes in communications and media
investments. Mr. Salem has been responsible for many of Providence's investment
activities, including its investments in competitive local exchange companies,
enhanced specialized mobile radio, wireless data networks, radio representation,
telecommunications infrastructure and other areas. He is currently a director of
Interep National Radio Sales, Inc., MetroNet, Wired Ventures, Inc. and UniSite,
Inc. Prior to joining Providence, Mr. Salem worked for Morgan Stanley & Co. in
corporate finance and mergers and acquisitions. Previously, Mr. Salem spent four
years with Prudential Investment Corporation, an affiliate of Prudential
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Insurance, where his responsibilities included private placement financings,
leveraged buyout transactions and establishing Prudential's European investment
office. Mr. Salem received a Bachelor of Arts in business from Brown University
and a Master of Business Administration from Harvard Business School.
Stephen W. Schovee has been a director of the Company since the Company's
inception in March 1996. Mr. Schovee serves as Managing Member of Telecom
Partners, L.P. and Telecom Partners II, L.P. Mr. Schovee was previously
co-founder, Chief Executive Officer and a Director of OneComm from its inception
until its merger with Nextel. Prior to that, Mr. Schovee was a Vice President of
Centennial Holdings, the manager of the Centennial Funds, a Denver based venture
capital fund with over $400 million of subscribed capital. Mr. Schovee was a
partner in two of the Centennial Funds where he focused on telecommunications
investments. Mr. Schovee is a special limited partner of Centennial Fund IV,
L.P. and Centennial Fund V, L.P. He is a director of SMR Direct, Intergram
International, and Infobeat. Mr. Schovee received a Bachelor of Science degree
in mechanical engineering from Bucknell University and a Master of Business
Administration from The Wharton School.
George J. Still, Jr. has been a director of the Company since the Company's
inception in March 1996. Mr. Still, based in Palo Alto, California, is a
Managing Partner of Norwest Venture Partners VI, L.P. and Norwest Equity
Partners V, L.P., and a General Partner of Norwest Equity Partners IV. From July
1984 until October 1989, he was a General Partner with the Centennial Funds
based in Denver, Colorado. Prior to Centennial, Mr. Still was with Ernst &
Whinney (now Ernst & Young) in San Francisco. Currently, he is a Director of
PeopleSoft, Inc. and 3Dfx Interactive, Inc., both public companies. In addition,
he serves on the board of several private companies, including Metapath Software
Corporation, Intrepid Systems, ObjectStream, Inc., and Chordiant Software.
Further, Mr. Still serves as a Director of the National Venture Capital
Association. He holds a Bachelor of Science degree in business administration
from Pennsylvania State University and a Master of Business Administration from
the Amos Tuck School at Dartmouth College.
Sean G. Brophy has served as Vice President of Corporate Development since
November 1997, and prior to that served as Vice President of Marketing and
Business Development for the Company since joining Verio in May 1996. Mr. Brophy
served as Vice President of Marketing for OneComm and then Nextel from 1994 to
1996. He worked at Northern Telecom from 1990 through 1994 in a variety of
capacities, including strategic planning and product management, where he had
global responsibilities for new products for Personal Communications Services.
Prior to that he worked at Bell Northern Research, the research and development
arm of Northern Telecom, designing telephone equipment and services ranging from
the DMS-100 to key systems. While there he was awarded patent and design
excellence awards. Mr. Brophy holds a Bachelor of Science degree in computer
engineering from McMaster University, a Master of Science degree in electrical
engineering from Carleton University and a Master of Science degree in
management from the Sloan School of Management at MIT.
James F. B. Browning was appointed Vice President of Network Operations for
the Company in January 1998, having previously served as President and CEO of
ATMnet, a company he founded in 1995 to provide integrated digital
communications services to businesses with broadband networking requirements.
Verio acquired ATMnet in November 1997. Mr. Browning has 20 years of experience
managing high technology development and operations. From 1988 to 1994, as
co-founder, he served as Chief Financial Officer and Chief Operating Officer of
VisiCom Laboratories, Inc., a systems engineering firm specializing in digital
satellite communications and operating system level software development. From
1983 to 1988, Mr. Browning served as Executive Vice President and then President
of Pacific Microcomputers, Inc., which developed and produced Single Board
Computers for use in Unix workstations and real time embedded computing
environments. Previously, Mr. Browning held financial and operational management
positions with Advanced Digital Systems and Tetra Tech, a subsidiary of
Honeywell. Mr. Browning holds a Bachelor of Science degree in accounting from
San Diego State University.
Chris J. DeMarche has been Chief Technical Officer of the Company since
joining the Company in May 1996. From 1995 to 1996, Mr. DeMarche was CTO and
Senior Vice President of Nextel, where he was credited with addressing many
critical technology issues. From 1993 to 1995, he was Senior Vice President of
Engineering and Technology at OneComm, where he was responsible for building a
national engineering team
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and designing and implementing wireless communication networks. Mr. DeMarche
also worked in advanced technology areas at PacTel Corporation and Hughes
Aircraft Corporation and served in the U.S. Naval Submarine Force. Mr. DeMarche
received his Master of Business Administration from UCLA in 1990, his Master of
System Management from University of Southern California in 1986, and his
Bachelor of Science from the United States Naval Academy in 1978.
Carla Hamre Donelson has served as Vice President, General Counsel and
Secretary of the Company since joining Verio in October 1996 from the law firm
of Morrison & Foerster LLP, where she had practiced law since March 1987. She
served as a partner in that firm's business department from 1990 and as head of
the Denver business practice from 1993. While in private practice, Ms. Donelson
was engaged in a general corporate and transactional practice, focused primarily
on the communications and related technology industries, representing domestic
and foreign entities in numerous financing, merger, acquisition, investment, and
licensing transactions. She served as regular outside corporate counsel to
OneComm and represented OneComm in connection with a variety of its SMR
acquisitions as well as its merger with Nextel. Ms. Donelson received her
Bachelor of Arts degree in molecular biology from the University of Colorado,
her Juris Doctor degree from the University of Denver College of Law, and is a
member of the Colorado Bar Association.
Peter B. Fritzinger has served as Chief Financial Officer of the Company
since June 1997. From September 1993 until June 1997, Mr. Fritzinger served as
Chief Financial Officer of Louis Dreyfus Natural Gas Corp., an independent,
publicly held oil and gas company headquartered in Oklahoma City. From 1991 to
1993, he was Vice President-Finance and Treasurer of Louis Dreyfus Energy Corp.,
a diversified, global enterprise with investments in oil and gas reserves and
other petroleum-related industries. Mr. Fritzinger joined Louis Dreyfus Energy
Corp. from J.P. Morgan, where he was a Vice President in its corporate finance
group, having held various positions with Morgan Guaranty Trust Company of New
York since 1980. Mr. Fritzinger received his Bachelor of Arts degree in math and
psychology from Amherst College.
Deb Mayfield Gahan has served as Vice President of Finance and
Administration for the Company since joining the Company in May 1996. She brings
with her ten years of extensive start-up and telecommunications experience. From
1994 to 1996, Ms. Gahan served as Vice President of Business Services and
Controller for OneComm and then for Nextel following its acquisition of OneComm.
From 1987 to 1994, she was Director of Business Operations and Controller for
American Cellular Communications and then BellSouth Cellular Corp., a leading
provider of cellular service in 15 states. In these positions, she was
responsible for implementing cost-effective financial control systems, asset
protection, revenue assurance, financial reporting, treasury and business
process development. Ms. Gahan is a Certified Public Accountant and holds a
Master of Business Administration from Mississippi College, as well as a
Bachelor of Science in accounting from Mississippi State University.
James M. Kieffer has served as Vice President of Customer Operations for
the Company since joining the Company in July 1996. Previously, Mr. Kieffer
served as Nextel's Vice President of Customer Operations responsible for
customer care, billing, accounts receivable, and inventory management from
August 1996. Prior to OneComm's merger with Nextel, Mr. Kieffer led the
development of OneComm's customer care as Director of Customer Operations from
January 1994 to August 1995. Prior to that, Mr. Kieffer served as National
Customer Service Manager for Motorola's Land Mobile Products Sector. During his
six years with Motorola, he held several key roles while developing a
consolidated national customer care organization from March 1990 until January
1994. Prior to joining Motorola, Mr. Kieffer managed customer relations and
accounts receivable for IBM. He received his Master of Business Administration
from DePaul University and holds a Bachelor of Science in management from
Illinois State University.
John R. Viviani joined the Company in December 1997 and serves as its Vice
President of Sales and Marketing. Prior to that time, Mr. Viviani was most
recently Sales Director of Worldwide Channels for IBM Networking Hardware
Division. In that capacity, he was responsible for developing worldwide indirect
channels. Prior thereto from 1992 to 1996, Mr. Viviani implemented and directed
national sales and marketing teams responsible for launching IBM U.S. into the
internetworking solution market place and establishing the IBM Networking
division in the indirect channels. Mr. Viviani was employed by IBM since 1978,
serving as a
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business unit executive, account executive and marketing manager. Mr. Viviani
received his Master of Business Administration from St. Thomas Aquinas College
and his Bachelor of Science degree in management and finance from Marymount
College.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board has established an Executive Committee, a Finance
Committee, a Compensation Committee and an Audit Committee. The Executive
Committee is responsible for reviewing and, where appropriate, authorizing
corporate action with respect to the conduct of the business of the Company
between Board meetings. The Executive Committee is composed of Messrs. Halstedt
and Jaschke. The Finance Committee is responsible for reviewing and, where
appropriate, authorizing certain corporate actions with respect to the finances
of the Company. 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. 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
proposed 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 of Common Stock at an exercise price equal to
the fair market value of the Common Stock at the date of grant.
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EXECUTIVE COMPENSATION
The following table sets forth certain summary information for the years
ended December 31, 1997 and 1996, respectively, concerning the compensation paid
and awarded to: (a) the Company's Chief Executive Officer and (b) the Company's
four most highly compensated executive officers whose salaries and bonuses
exceeded $100,000 who were serving as executive officers as of December 31, 1997
(collectively, with the Chief Executive Officer, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
ANNUAL COMPENSATION -----------------------
-------------------------------- RESTRICTED SECURITIES
FISCAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR(1) SALARY($) BONUS($) AWARDS($) OPTIONS(#) COMPENSATIONS($)
- --------------------------- ------- --------- -------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Justin L. Jaschke........... 1997 175,003 66,500 85,000 -- --
Chief Executive Officer 1996 124,631(2) 44,867 -- 240,000 --
Mark D. Johnson............. 1997 113,337 50,603 -- 200,000 --
President and Chief
Operating 1996 -- -- -- -- --
Officer(3)
Chris J. DeMarche........... 1997 160,004 60,800 25,000 20,000 --
Chief Technical Officer 1996 106,666(4) 38,215 -- 70,000 --
Carla Hamre Donelson........ 1997 160,004 57,760 -- 20,000 --
Vice President, General 1996 26,320(5) 13,680 50,000 60,000 42,678(7)
Counsel and Secretary
Peter B. Fritzinger......... 1997 89,443(6) 31,287 -- 75,000 70,267(8)
Chief Financial Officer 1996 -- -- -- -- --
</TABLE>
- ---------------
(1) Fiscal year 1996 covers the period from inception (March 1, 1996) to
December 31, 1996.
(2) Reflects compensation paid to Mr. Jaschke commencing with his appointment as
Chief Executive Officer in April 1996.
(3) Mr. Johnson, who served as the Company's President and Chief Operating
Officer beginning in March 1997, died on March 9, 1998. See
"Summary -- Recent Developments."
(4) Reflects compensation paid to Mr. DeMarche commencing with his appointment
as Chief Technical Officer in May 1996.
(5) Reflects compensation paid to Ms. Donelson commencing with her appointment
as Vice President, General Counsel and Secretary in October 1996.
(6) Reflects compensation paid to Mr. Fritzinger commencing with his appointment
as Chief Financial Officer in June 1997.
(7) Represents the cost to the Company of tax reimbursements.
(8) Represents the cost to the Company of providing relocation benefits.
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<PAGE> 70
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 -- 20,000 160,000 290,000 2,320,000
Mark D. Johnson............ -- -- -- 200,000 -- 2,300,000
Chris J. DeMarche.......... -- -- 14,000 76,000 203,000 1,027,000
Carla Hamre Donelson....... -- -- 12,000 68,000 174,000 911,000
Peter B. Fritzinger........ -- -- -- 75,000 -- 862,500
</TABLE>
- ---------------
(1) The value of options at year-end is based on an assumed fair market value of
$17.50 per share of Common Stock (the mid-point of the assumed price range
in the proposed IPO).
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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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 proposed 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.
COMPENSATION PROTECTION AGREEMENTS
The Company has entered into compensation protection agreements (the
"Compensation Protection Agreements") with all of the Named Executive Officers
and certain additional officers (collectively, the "Protected Officers") of the
Company. Each of the Compensation Protection Agreements contain substantially
similar terms. The form of Compensation Protection Agreement has been filed as
an exhibit to the Company's Registration Statement of which this Prospectus is a
part. The Compensation Protection Agreements will be for a term of three years
from April 1, 1998 (the "Effective Date"), subject to automatic yearly
extensions. In no event will the Compensation Protection Agreements terminate
within 12 months of a Change in Control of the Company. "Change in Control"
includes the following:
(a) An acquisition (other than directly from the Company) of any
voting securities of the Company (the "Voting Securities") by any Person
(as defined in the Exchange Act) immediately after which such Person has
Beneficial Ownership (as defined in the Exchange Act) of 40% or more of the
combined voting power of the Company's then outstanding Voting Securities.
In determining whether a Change in Control has occurred, Voting Securities
which are acquired in a "Non-Control Acquisition," as defined in the
Compensation Protection Agreements, do not constitute an acquisition which
would cause a Change in Control;
(b) The individuals who, as of date the Compensation Protection
Agreements were approved by the Board, are members of the Board (the
"Incumbent Board"), cease for any reason to constitute at least a majority
of the Board (subject to certain provisos);
(c) Approval by stockholders of the Company of: (1) a merger,
consolidation or reorganization involving the Company, unless such merger,
consolidation or reorganization ("event") satisfies certain specified
conditions;
(d) Any other event that at least two-thirds of the Incumbent Board
determines constitutes a Change in Control; and
(e) If a Protected Officer's employment is terminated prior to a
Change in Control and the Board determines that such termination was at the
request of a third party who has indicated an intention or taken steps to
effect a Change in Control and who subsequently effectuates a Change in
Control, or occurred in connection with, or in anticipation of, a Change in
Control which actually occurs, then a Change in Control is considered to
have occurred with respect to that Protected Officer.
Upon termination within 12 months of a Change in Control, each Protected
Officer will receive the following severance benefits:
(i) If a Protected Officer's employment is terminated within 12 months
of a Change in Control for Cause (as defined in the Compensation Protection
Agreements) or by reason of the Protected Officer's Disability (as defined
in the Compensation Protection Agreements), death, retirement, or by the
Protected Officer other than for Good Reason (as defined in the
Compensation Protection Agreements), then the Company must pay to the
Protected Officer the Accrued Compensation (as defined below) due through
the date of termination (the "Termination Date"). Accrued Compensation
includes base salary, reimbursement for reasonable and necessary expenses
incurred by the Protected Officer on behalf of the Company during the
period ending on the Termination Date, and vacation pay.
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(ii) If a Protected Officer's employment is terminated within 12
months of a Change of Control for any other reason than specified above,
the Protected Officer will receive:
(A) his or her Accrued Compensation;
(B) an amount equal to the product of a fraction, the numerator of
which is the number of days in the Company's fiscal year through the
Termination Date and the denominator of which is 365, and the bonus
amount, which will be the greater of 100% of the last annual incentive
payment paid or payable to the Protected Officer prior to the
Termination Date, and the Protected Officer's incentive target for the
fiscal year in which the Change in Control occurs (the "Bonus Amount");
(C) an amount equal to two (2) times the sum of the Protected
Officer's annual base salary in effect immediately prior to the Change
in Control, plus the Bonus Amount. However, the amount paid to Mr.
Jaschke will be three (3) times that sum;
(D) until the third anniversary of the Termination Date, the same
rights with respect to benefits provided by the Company, as were
provided to the Protected Officer as of the Effective Date, or, if
greater, at any time within 90 days preceding the date of the Change in
Control; and
(E) the immediate vesting and removal of all restrictions on any
outstanding incentive awards granted to the Protected Officer under the
Company's stock option and other stock incentive plans or arrangement.
The Compensation Protection Agreements will further provide that the
Protected Officers will not be required to mitigate the amount of any payment by
seeking employment or otherwise. Protected Officers may be entitled to
additional compensation or benefits in accordance with the Company's employee
benefit plans and other applicable programs, policies and practices then in
effect. The Compensation Protection Agreements will contain a "gross-up"
provision pursuant to which any Severance Payment, which would be subject to
certain excise taxes occurring as a result of Change 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. As of April 10, 1998, options to purchase 115,933 shares of Common
Stock granted under the 1996 Stock Option Plan had been exercised, options to
purchase 2,043,967 shares of Common Stock were outstanding and options to
purchase 45,400 additional shares of Common Stock remained available for grant.
The outstanding options were exercisable at a weighted average exercise price of
$6.59 per share. Outstanding options to purchase an aggregate of 1,480,667
shares were held by employees who are not officers or directors of the Company.
Of the 115,933 shares issued upon exercise of options, a total of 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").
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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 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 grant has been made.
During an optionee's lifetime, an Incentive Stock Option is exercisable
only by the optionee and no Incentive Stock Option may be transferred by the
optionee other than by will or the laws of descent and distribution. During an
optionee's lifetime (or a transferee pursuant to a qualified domestic relation
order), a Non-Qualified Stock Option is exercisable only by the optionee and no
Non-Qualified Stock Option may be transferred by the optionee other than by will
or the laws of descent and distribution or pursuant to a qualified domestic
relation order satisfying the requirements of the prior version of Rule 16b-3
under the Exchange Act. An optionee whose continuous status as an employee,
director or consultant of the Company terminates for any reason (other than
termination because of death or disability) may exercise, in the three-month
period following such cessation (unless such Options terminate or expire sooner
by their terms), or such longer or shorter period as specified in the Option,
that portion of the optionee's Options that is exercisable at the time of such
cessation. In the event the optionee becomes disabled, the Options vested as of
the date of disability may be exercised prior to the earlier of such Option's
specified expiration date or 12 months from the date of the optionee's
disability, or such longer or shorter period as specified in the Option. In the
event the optionee dies, the Options vested as of the date of disability may be
exercised prior to the earlier of such Option's specified expiration date or 18
months from the date of the optionee's disability, or such longer or shorter
period as specified in the Option.
In the event of (i) a dissolution or liquidation of the Company, (ii) a
merger or consolidation in which the Company is not the surviving corporation,
(iii) a reverse merger in which the Company is the surviving corporation but the
shares of the Company's outstanding common stock immediately prior to such
merger are converted into other property, whether in the form of securities,
cash or otherwise, or (iv) any other capital reorganization in which the
Company's shareholders receive less than 50% of the outstanding voting shares of
the surviving corporation: (a) any surviving corporation shall assume any
Options outstanding under the 1996 Stock Option Plan, (b) such Options shall
continue in full force and effect, or (c) the Options shall terminate if not
exercised prior to such event.
1997 California Stock Option Plan
The Company's 1997 California Stock Option Plan (the "1997 California
Plan") was adopted by the Board of Directors in February 1997, and approved by
the Company's stockholders in April 1997. In February 1998, the 1997 California
Plan was amended, with the approval of the Board, to reserve a total of 795,400
shares of Common Stock for issuance under this plan. This amendment has been
approved by the Company's stockholders. As of April 10, 1998, no options to
purchase shares of Common Stock had been exercised under the 1997 California
Plan, options to purchase 447,850 shares of Common Stock were outstanding and
options to purchase an additional 347,550 shares of Common Stock remained
available for grant. The outstanding options were exercisable at a weighted
average exercise price of $9.16 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.
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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 of 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 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"),
which was adopted by the Board of Directors in February 1998, was amended and
restated as of March 19, 1998 and has been approved by the Company's
stockholders. From and after the proposed IPO, all further option grants will be
made solely under the 1998 Stock Incentive Plan. As of April 10, 1998, no
options to purchase shares of Common Stock had been exercised under the 1998
Stock Incentive Plan, options to purchase 1,138,123 shares of Common Stock were
outstanding and options to purchase an additional 611,189 shares of Common Stock
remained available for grant. The outstanding options were exercisable at a
weighted average exercise price of $12.02 per share. The purpose of the 1998
Stock Incentive Plan is to attract and retain the best available personnel, to
provide additional incentive to employees, directors and consultants of the
Company and its related entities and to promote the success of the Company's
business. The 1998 Stock Incentive Plan provides for the granting to employees
of Incentive Stock Options and the granting of nonstatutory stock options, stock
appreciation rights, dividend equivalent rights, restricted stock, performance
units, performance shares, and other equity-based rights ("Awards") to
employees, directors and consultants of the Company and its related entities.
Initially, 165,000 shares of Series D-1 Preferred Stock and 1,749,300 shares of
Common Stock, together with any shares of Common Stock represented by Awards
under the 1996 Stock Option Plan which are forfeited, expire or are cancelled
following the adoption of the 1998 Stock Incentive Plan, will be reserved for
issuance under the 1998 Stock Incentive Plan. Upon and after the proposed IPO,
6,199,300 shares of Common Stock will be reserved for issuance under the 1998
Stock Incentive Plan, together with (a) any
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shares of Common Stock available for future awards under the 1997 California
Plan as of the proposed IPO and (b) any shares of Common Stock represented by
Awards under the 1996 Stock Option Plan and the 1997 California Plan (the "Prior
Plans"), that are forfeited, expire or are cancelled following the proposed IPO.
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.
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 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 has been approved by
the Company's stockholders. 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
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than 20 hours per week are eligible to participate in the Stock Purchase Plan.
Employees hired after the consummation of the proposed IPO are eligible to
participate in the Stock Purchase Plan, subject to a six-month waiting period
after hiring. Non-employee directors, consultants, and employees subject to the
rules or laws of a foreign jurisdiction that prohibit or make impractical the
participation of such employees in the Stock Purchase Plan are not eligible to
participate in the Stock Purchase Plan.
The Stock Purchase Plan designates Purchase Periods, Accrual Periods and
Exercise Dates. Purchase Periods are generally overlapping periods of 12 months.
The initial Purchase Period will begin on the effective date of the Stock
Purchase Plan, which is the effective date of the Company's Registration
Statement relating to the Company's initial public offering of its Common Stock,
and end on May 14, 1999. Additional Purchase Periods will commence each May 15
and November 15. Accrual Periods are generally six month periods, with the
initial Accrual Period commencing on the effective date of the Stock Purchase
Plan and ending on November 14, 1998. Thereafter, Accrual Periods will commence
each May 15 and November 15. Exercise Dates are the last day of each Accrual
Period. In the event of a merger of the Company with or into another
corporation, the sale of all or substantially all of the assets of the Company,
or certain other transactions in which the stockholders of the Company before
the transaction own less than 50% of the total combined voting power of the
Company's outstanding securities following the transaction, the administrator of
the Stock Purchase Plan may elect to shorten the Purchase Period then in
progress.
On the first day of each Purchase Period, a participating employee is
granted a purchase right which is a form of option to be automatically exercised
on the forthcoming Exercise Dates within the Purchase Period during which
deductions are to be made from the pay of participants (in accordance with their
authorizations) and credited to their accounts under the Stock Purchase Plan.
When the purchase right is exercised, the participant's withheld salary is used
to purchase shares of Common Stock of the Company. The price per share at which
shares of Common Stock are to be purchased under the Stock Purchase Plan during
any Accrual Period is the lesser of (a) 85% of the fair market value of the
Common Stock on the date of the grant of the option (the commencement of the
Purchase Period) or (b) 85% of the fair market value of the Common Stock on the
Exercise Date (the last day of an Accrual Period). The participant's purchase
right is exercised in this manner on both Exercise Dates arising in the Purchase
Period unless, on the first day of any Accrual Period, the fair market value of
the Common Stock is lower than the fair market value of the Common Stock on the
first day of the Purchase Period. If so, the participant's participation in the
original Purchase Period is terminated, and the participant is automatically
enrolled in the new Purchase Period effective the same date.
Payroll deductions may range from 1% to 10% (in whole percentage
increments) of a participant's regular base pay and bonuses, exclusive of
overtime, shift-premiums or commissions. Participants may not make direct cash
payments to their accounts. The maximum number of shares of Common Stock which
any employee may purchase under the Stock Purchase Plan during an Accrual Period
is 1,250 shares. Certain additional limitations on the amount of Common Stock
which may be purchased during any calendar year are imposed by the Code.
The Stock Purchase Plan will be administered by the Board of Directors or a
committee designated by the Board, which will have the authority to terminate or
amend the Stock Purchase Plan (subject to specified 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
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<PAGE> 77
percentages by an additional 20% for each year of service thereafter. The 401(k)
Plan is intended to qualify under Section 401 of the Internal Revenue Code of
1986, as amended, so that contributions by employees or by the Company to the
401(k) Plan, and income earned on the 401(k) Plan contributions, are not taxable
to employees until withdrawn from the 401(k) Plan, and so that contributions by
the Company, if any, will be deductible by the Company when made. The trustee
under the 401(k) Plan, at the direction of each participant, invests the 401(k)
Plan employee salary deferrals in selected investment options. The Company made
no contributions to the 401(k) Plan in 1996 or in 1997. The Company does not
presently expect to make any contributions to the 401(k) Plan during the fiscal
1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Chairman of the Compensation Committee is Mr. Schovee. No member of the
Compensation Committee was at any time during the fiscal year ended December 31,
1997, or at any other time, an officer or employee of the Company. No member of
the Compensation Committee of the Company serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Company's Board of Directors or Compensation
Committee. See "Certain Transactions" for a description of transactions between
the Company and entities affiliated with members of the Compensation Committee.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Restated Certificate of Incorporation and bylaws provide that
the Company shall indemnify to the fullest extent permitted by Section 145 of
the DGCL, as it now exists or as amended, all directors and officers pursuant
thereto. The Company's Restated Certificate of Incorporation and bylaws also
authorize the Company to indemnify its employees and other agents, at its
option, to the fullest extent permitted by Section 145, as it now exists or as
amended. The Company intends to enter into agreements to indemnify its directors
and officers, in addition to indemnification provided for in the Company's
charter documents. These agreements, among other things, provide for the
indemnification of the Company's directors and officers for certain expenses
(including attorneys' fees), judgments, fines and settlement amounts incurred by
any such person in any action or proceeding, including any action by or in the
right of the Company, arising out of such person's services as a director or
officer of the Company, any subsidiary of the Company or any other company or
enterprise to which such person provides services at the request of the Company
to the fullest extent permitted by applicable law. The Company believes that
these provisions and agreements will assist the Company in attracting and
retaining qualified persons to serve as directors and officers.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
or (iv) for any transaction from which the director derived an improper personal
benefit. The Company's Restated Certificate of Incorporation will provide for
the elimination of personal liability of a director for breach of fiduciary
duty, as permitted by Section 102(b)(7) of the DGCL.
The underwriting agreement to be executed by the Company and the
Underwriters in connection with the proposed IPO (the "Underwriting Agreement")
provides for indemnification by the Underwriters under certain circumstances of
directors, officers and controlling persons of the Company against certain
liabilities, including liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions contained in the Certificate of Incorporation and
Bylaws of the Company, the DGCL, the Underwriting Agreement, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit, or proceeding) is
asserted by such director, officer or controlling person in connection with the
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<PAGE> 78
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> 79
CERTAIN TRANSACTIONS
SERIES A PURCHASE AGREEMENT
Pursuant to a Series A Preferred Stock purchase agreement by and among
Centennial Fund IV, L.P., Centennial Holdings, Inc., Telecom Partners, L.P.,
Norwest Equity Partners, V and Brooks Fiber Properties, Inc. (together, the
"Series A Purchasers") and the Company, dated as of June 25, 1996 (the "Series A
Purchase Agreement"), the Series A Purchasers made their initial investments in
the Company. The Series A Purchasers purchased, in the aggregate, 5,250,000
shares of Series A Preferred Stock for an aggregate purchase price of
$15,750,000. Pursuant to Amendment No. 1 to the Series A Stock Purchase
Agreement, dated as of July 3, 1996, the Company sold an additional 756,666
shares of Series A Preferred Stock to certain of the Series A Purchasers and to
certain additional purchasers for the aggregate purchase price of $2,270,000.
Subsequently, the Company sold an additional 26,667 shares of Series A Preferred
Stock to certain members of the Company's management for an aggregate purchase
price of $80,001. In connection with the Series A Purchase Agreement, the
Company, the Series A Purchasers and certain members of the Company's management
entered into a stockholders agreement, dated as of June 25, 1996 (the "Series A
Stockholders Agreement"), which provided the Series A Stockholders with certain
demand and piggyback registration rights. The parties to Amendment No. 1 to the
Series A Stock Purchase Agreement became parties to the Series A Stockholders
Agreement. The Series A Stockholders Agreement was replaced by the Series B
Stockholders Agreement which, in turn was replaced by the Stockholders
Agreement. See "-- Series B Purchase Agreement" and "-- Series C Purchase
Agreement."
SERIES B PURCHASE AGREEMENT
The Company, certain of the Series A Purchasers and several additional
purchasers (together, the "Series B Purchasers") entered into a Series B
Preferred stock purchase agreement, dated as of December 5, 1996 (the "Series B
Stock Purchase Agreement"), pursuant to which the Series B Purchasers acquired,
in the aggregate, 10,000,000 shares of Series B Preferred Stock for the
aggregate purchase price of $60,000,000. In connection with the Series B Stock
Purchase Agreement, the Company, the Series A Purchasers, the Series B
Purchasers and members of the Company's management entered into a stockholders
agreement, dated as of December 5, 1996 (the "Series B Stockholders Agreement").
The Series B Stockholders Agreement replaced the Series A Stockholders Agreement
and was later replaced by the Stockholders Agreement. See "-- Series C Purchase
Agreement."
SERIES C PURCHASE AGREEMENT
The Company, certain of the Series A Purchasers and certain of the Series B
Purchasers (together, the "Series C Purchasers") entered into a Series C
Preferred stock purchase agreement, dated as of May 20, 1997 (the "Series C
Stock Purchase Agreement"), pursuant to which the Series C Purchasers acquired,
in the aggregate, 2,500,000 shares of Series C Preferred Stock for the aggregate
purchase price of $20,000,000. In connection with the Series C Stock Purchase
Agreement, the Company, the Series A Purchasers, the Series B Purchasers, the
Series C Purchasers, and members of the Company's management entered into a
Stockholders Agreement (the "Stockholders Agreement"), which replaced the Series
B Stockholders Agreement. See "-- Stockholders Agreement."
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<PAGE> 80
The following table sets forth the number of shares of Series A, Series B
and Series C Preferred Stock, and Common Stock purchased by the Company's
directors, five percent stockholders and their respective affiliates.
<TABLE>
<CAPTION>
COMMON SERIES A SERIES B SERIES C
HOLDERS STOCK PREFERRED PREFERRED PREFERRED
- ------- ------- --------- --------- ---------
<S> <C> <C> <C> <C>
Brooks Fiber Properties, Inc.(1)................. -- 1,666,667 2,500,000 498,304
Norwest Equity Partners V(2)..................... 270,000 1,666,667 2,083,333 281,250
Providence Equity Partners(3).................... -- -- 2,083,333 972,360
Centennial Fund V, L.P.(4)....................... -- -- 1,627,983 674,320
Centennial Fund IV, L.P.(4)...................... 250,000 1,543,210 353,395 12,500
Centennial Entrepreneurs Fund V, L.P.(4)......... -- -- 50,350 20,855
Centennial Holdings I, LLC(4).................... 14,452 89,208 37,289 316
Justin L. Jaschke................................ 50,000 33,333 22,501 --
Estate of Mark D. Johnson........................ 60,000 -- -- --
James C. Allen................................... 25,000 -- -- --
Trygve E. Myhren................................. -- -- 10,000 --
</TABLE>
- ---------------
(1) As a result of the acquisition of Brooks by WorldCom, which resulted in
Brooks becoming a wholly owned subsidiary of WorldCom, WorldCom may be
deemed to indirectly beneficially own the shares owned by Brooks. James C.
Allen served as CEO of Brooks until the acquisition. Mr. Allen serves on the
Company's Board of Directors.
(2) George J. Still, Jr. is a general partner of Itasca Partners V. ("Itasca"),
which is the sole general partner of Norwest Equity Partners, V ("Norwest").
Mr. Still serves on the Company's Board of Directors.
(3) Paul J. Salem, a member of Providence Equity Partners LLC ("PEPLLC"), which
is the sole general partner of Providence Equity Partners ("Providence"),
serves on the Company's Board of Directors.
(4) The sole General Partner of Centennial Fund IV, L.P. ("Centennial IV") is
Centennial Holdings IV, L.P. ("Holdings IV"), the sole General Partner of
Centennial Fund V, L.P. ("Centennial V") and Centennial Entrepreneurs Fund
V, L.P. ("Centennial Entrepreneurs") is Centennial Holdings V, L.P.
("Holdings V"). Steven C. Halstedt is a general partner of Holdings IV and
Holdings V, and a unit holder of Centennial Holdings I, L.L.C. ("Holdings
LLC"). Mr. Halstedt serves as the Chairman of the Board of Directors of the
Company.
SERIES D-1 AGREEMENTS
In connection with the acquisitions of iServer and NSNet, the Company
issued a total of 797,642 shares of Series D-1 Preferred Stock to former
stockholders of iServer and NSNet. The Company has issued or expects to issue a
total of approximately 1,439,912 additional shares of Series D-1 Preferred Stock
pursuant to Buyouts completed or probable as of April 9, 1998. In addition,
options to acquire 164,977 shares of Series D-1 Preferred Stock were issued in
connection with the Buyout of NorthWestNet, Inc.
The Series D-1 Preferred Stock will be converted into Common Stock upon
completion of the proposed IPO. The recipients of the shares of Series D-1
Preferred Stock issued in the Buyouts and the acquisition of NSNet have been
granted certain registration rights with respect to the shares of Common Stock
issuable upon conversion of the Series D-1 Preferred Stock and have agreed to
certain market standoff provisions following the proposed IPO in the agreements
pursuant to which the Series D-1 Preferred Stock is issued (the "Series D-1
Agreements"). See "Description of Capital Stock -- Registration Rights" and
"Shares Eligible for Future Sale."
STOCKHOLDERS AGREEMENT
Pursuant to the terms of the Stockholders Agreement, the holders of the
Series A Preferred Stock, the Series B Preferred Stock and the Series C
Preferred Stock (together, the "Investors") acquired certain 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
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<PAGE> 81
of 25% or more of the Registrable Securities (as defined in the Stockholders
Agreement) may require the Company to effect registration under the Securities
Act of their Registrable Securities, subject to the Board of Directors' right to
defer such registration for a period of up to 180 days. In addition, if the
Company proposes to register securities under the Securities Act (other than a
registration relating either to the sale of securities to employees pursuant to
a stock option, stock purchase or similar plan or a transaction under Rule 145
of the Securities Act), then any of the Investors has a right (subject to
quantity limitations determined by underwriters if the offering involves an
underwriting) to request that the Company register such holder's Registrable
Securities. All registration expenses incurred in connection with up to two
long-form and all short-form and piggyback registrations will be borne by the
Company. Each Investor will pay for selling expenses pro rata on the basis of
the number of shares sold by such Investor. The Company has agreed to indemnify
the Investors (including the officers, directors, partners, agents, employees
and representatives, and each person controlling such Investor within the
meaning of Section 15 of the Securities Act) against all expenses, claims,
losses, damages and liabilities (or actions, proceedings or settlements in
respect thereof) arising out of or based on any untrue or alleged untrue
statement of a material fact contained in any prospectus, offering circular or
other document (including any related registration statement, notification or
the like) incident to any such registration, qualification or compliance, or
based on any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or any violation by the Company of the Securities Act or any rule or
regulation thereunder applicable to the Company and relating to action or
inaction required of the Company in connection with any such registration,
qualification or compliance, and will reimburse each such Investor for any legal
and any other expenses reasonably incurred in connection with investigating and
defending or settling any such claim, loss, damage, liability or action;
provided, however, that the Company will not be liable in any such case to the
extent that such claim, loss, damage, liability or expense arises out of or is
based on any untrue statement or omission based upon written information
furnished to the Company by such Investor and stated to be specifically for use
therein. This indemnification does not apply to amounts paid in settlement of
any such loss, claim, damage, liability or action if such settlement is effected
without the consent of the Company.
Subject to certain exceptions, the Company has a right of first refusal to
purchase shares of Common Stock held by Management Holders (as defined in the
Stockholders Agreement) which, to the extent not purchased by the Company, are
subject to an additional right of first refusal by the Investors according to
their respective pro rata shares. In addition, transfers of Common Stock held by
Investors are subject to a right of first refusal by other Investors who 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 the proposed IPO.
TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
On June 16, 1997, the Company made a loan in the amount of $100,000 to
Peter Fritzinger, which Mr. Fritzinger repaid on July 21, 1997 with interest at
the then current market rate.
OTHER TRANSACTIONS
On March 18, 1998, in response to an offer by Brooks, the Company and
Brooks reached an agreement pursuant to which the Company agreed to repurchase
the $50.0 million principal amount of the Company's Old 1997 Notes held by
Brooks for an aggregate net purchase price of approximately $54.5 million, plus
accrued interest. A portion of the proceeds from the sale of the Old 1998 Notes
was used to effect the Refinancing. See "Summary -- Recent Developments."
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<PAGE> 82
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of April 10, 1998
with respect to the beneficial ownership of the Company's Common Stock by (i)
each stockholder known by the Company to own beneficially more than five
percent, in the aggregate, of the outstanding shares of the Company's
outstanding Common Stock, (ii) each director and Named Executive Officer of the
Company and (iii) all executive officers and directors as a group.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY OWNED(1)
--------------------------------------------
NUMBER OF
SHARES
BENEFICIALLY PRIOR TO AFTER
HOLDERS OWNED PROPOSED IPO PROPOSED IPO
------- ------------ ------------ ------------
<S> <C> <C> <C>
Brooks Fiber Properties, Inc.(2)....................... 5,064,971 22.52% 15.76%
425 Woods Mill Road South
Suite 300
Town & Country, Missouri 63017
Nippon Telegraph and Telephone Corporation............. 4,638,727 -- 14.62%
Global Communications Headquarters
Tokyo Opera City Tower
20-2 Nishi-Shinjuku 3-chome
Shinjuku-ku
Tokyo 163-14, Japan
Norwest Equity Partners, V............................. 4,301,250 19.47% 13.56%
245 Lytton Avenue
Palo Alto, California 94301
Providence Equity Partners............................. 3,055,693 13.83% 9.63%
50 Kennedy Plaza
Providence, Rhode Island 02903
Centennial Fund V, L.P.(3)............................. 2,302,303 10.42% 7.26%
1428 Fifteenth Street
Denver, Colorado 80202
Centennial Fund IV, L.P.(3)............................ 2,159,105 9.77% 6.80%
1428 Fifteenth Street
Denver, Colorado 80202
Steven C. Halstedt(4).................................. -- -- --
Justin L. Jaschke(5)................................... 188,834 * *
Estate of Mark D. Johnson(6)........................... 130,000 * *
James C. Allen......................................... 25,000 * *
Trygve E. Myhren(7).................................... 18,000 * *
Paul J. Salem(8)....................................... -- -- --
Stephen W. Schovee..................................... -- -- --
George J. Still, Jr.(9)................................ -- -- --
Chris J. DeMarche(10).................................. 88,833 * *
Carla Hamre Donelson(11)............................... 29,917 * *
Peter B. Fritzinger.................................... 25,000 * *
All executive officers and directors as a group (15
persons)(12)......................................... 495,584 2.23% 1.56%
</TABLE>
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<PAGE> 83
- ---------------
* Less than 1%
(1) Percentage of beneficial ownership prior to the proposed IPO is based on
(i) 1,294,266 shares of Common Stock outstanding at April 10, 1998; (ii)
18,561,667 shares of Common Stock issuable upon conversion of the Series A,
B, and C Preferred Stock outstanding at April 10, 1998; and (iii) 2,237,554
shares of Common Stock issuable upon conversion of the Series D-1 Preferred
Stock issued and expected to be issued in connection with the acquisitions
and Buyouts completed or probable as of April 10, 1998, totalling
22,093,487 shares of capital stock of the Company. Percentage of beneficial
ownership after the proposed IPO is based on 31,732,214 total shares of
capital stock outstanding, which includes the shares of capital stock
outstanding prior to the proposed IPO identified above plus (i) 4,638,727
shares of Common Stock to be sold by the Company to NTT for approximately
$78.5 million (based upon an assumed initial public offering of 5,000,000
shares of Common Stock at an assumed price to public of $17.50 per share in
the proposed IPO) concurrently with the proposed IPO and (ii) 5,000,000
shares of Common Stock to be sold pursuant to the proposed IPO. In
computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of Common Stock subject to
options or warrants that are currently exercisable or exercisable within 60
days of April 10, 1998 are deemed outstanding; provided, however that such
shares are not deemed outstanding for the purpose of computing the
percentage of ownership of any other person. Except as indicated in the
footnotes to this table and pursuant to applicable community property laws,
each of the persons named in this table has sole voting and investment
power with respect to the shares set forth opposite such stockholder's
name.
(2) Includes warrants for 400,000 shares of Common Stock exercisable within 60
days. As a result of the acquisition of Brooks by WorldCom, which resulted
in Brooks becoming a wholly owned subsidiary of WorldCom, WorldCom may be
deemed to indirectly beneficially own the shares owned by Brooks.
(3) Does not include 71,205 shares of the Company's capital stock held by
Centennial Entrepreneurs Fund V, L.P. ("Entrepreneurs Fund"). Holdings V is
the sole general partner of Entrepreneurs Fund and may be deemed to
indirectly beneficially own such shares by virtue of its authority to make
decisions regarding the voting and disposition of shares beneficially owned
by Entrepreneurs Fund. Centennial V disclaims beneficial ownership of the
shares held by Entrepreneurs Fund and Entrepreneurs Fund disclaims
beneficial ownership of the shares held by Centennial V. In addition,
Centennial V disclaims beneficial ownership of the shares held by
Centennial IV, and Centennial IV disclaims beneficial ownership of the
shares held by Centennial V.
(4) The sole General Partner of Centennial IV is Holdings IV and the sole
General Partner of Centennial V is Holdings. Holdings IV and Holdings V may
be deemed to indirectly beneficially own the shares owned by Centennial IV
and Centennial V, respectively. Mr. Halstedt is a general partner of
Holdings IV and Holdings V and may be deemed to be the indirect beneficial
owner of the shares owned by Centennial IV and Centennial V. Mr. Halstedt
disclaims beneficial ownership of shares held by Centennial IV and
Centennial V. In addition, this amount does not include 141,265 shares of
the Company's capital stock held by Holdings LLC, of which Mr. Halstedt is
a unit holder. Centennial Holdings, Inc. ("Holdings Inc."), of which Mr.
Halstedt is an officer and director, is the sole Managing Member of
Holdings LLC and may be deemed to beneficially own shares directly
beneficially owned by Holdings LLC. However, Mr. Halstedt, acting alone,
does not have voting or investment power with respect to any of the shares
directly held by either Holdings Inc. or Holdings LLC, and as a result, Mr.
Halstedt disclaims beneficial ownership of the shares held by Holdings LLC.
(5) Includes options for 20,000 shares of Common Stock exercisable within 60
days.
(6) Includes options exercisable for 70,000 shares of Common Stock exercisable
within 60 days.
(7) Includes options exercisable for 8,000 shares of Common Stock exercisable
within 60 days.
(8) The sole general partner of Providence is PEPLLC. Mr. Salem is a member of
PEPLLC and may be deemed to indirectly beneficially own the shares owned by
Providence. Mr. Salem disclaims beneficial ownership of these shares.
(9) The sole general partner of Norwest is Itasca . Mr. Still is a general
partner of Itasca and may be deemed to indirectly beneficially own the
shares owned by Norwest. Mr. Still disclaims beneficial ownership of these
shares.
(10) Includes options exercisable for 28,000 shares of Common Stock exercisable
within 60 days.
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<PAGE> 84
(11) Includes options exercisable for 12,000 shares of Common Stock exercisable
within 60 days.
(12) Includes options exercisable for 98,000 shares of Common Stock exercisable
within 60 days (not including options held by Mr. Johnson's estate).
NTT INVESTMENT
NTT Stock Purchase Agreement and NTT Investment Agreement. Pursuant to a
Stock Purchase and Master Strategic Relationship Agreement, dated as of April 7,
1998, between the Company and NTT (the "NTT Stock Purchase Agreement"), NTT
agreed to purchase, concurrent with and conditioned upon the consummation of the
proposed IPO (the "IPO Closing"), a number of shares of the Company's Common
Stock equal to the lesser of (i) 12.5% of the total number of shares of Common
Stock, on a fully diluted and fully converted basis (calculated as of the IPO
Closing after giving effect to the proposed IPO and the sale to NTT), or (ii)
the quotient of $100.0 million divided by the "Per Share Price" payable by NTT.
The "Per Share Price" to be paid by NTT will be equal to the Price to Public in
the proposed IPO multiplied by 96.75% (subject to certain adjustments in the
event that shares of Common Stock are issued at less than the Per Share Price
prior to the IPO Closing). In the event that the applicable waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), with respect to the purchase of the Common Stock by NTT shall not have
expired or been terminated prior to the IPO Closing, then, in lieu of shares of
Common Stock, NTT will purchase from the Company shares of the Company's Series
X Junior Convertible Preferred Stock (the "Convertible Preferred Shares"). The
Convertible Preferred Shares, which are not entitled to any voting rights except
as required by applicable corporate law, will convert automatically into Common
Stock upon the expiration or termination of the applicable waiting period,
including any extension thereof, under the HSR Act.
The Company and NTT also entered into an Investment Agreement, dated as of
April 7, 1998 (the "NTT Investment Agreement"), providing for certain
arrangements generally effective from and after the purchase of shares by NTT
under the NTT Stock Purchase Agreement. Pursuant to the NTT Investment
Agreement, the Company agreed to appoint an individual designated by NTT to the
Board of Directors of the Company. The NTT designee will serve for an initial
term ending as of the third annual stockholder meeting following the IPO
Closing. Thereafter, the Company has agreed, subject to certain exceptions, to
nominate as a member of the Board of Directors at each subsequent election of
the applicable class of directors a person designated by NTT who will be subject
to election by the stockholders of the Company. Additionally, NTT will have the
right to designate up to three individuals to be employed by the Company in
corporate development, technical and/or marketing positions to assist in
implementing and carrying out the commercial relationship between Verio and NTT.
The Investment Agreement imposes certain limitations on NTT's ability to
dispose of the shares of Common Stock that it acquires. In particular, NTT has
granted to the Company certain rights of first offer and rights of first refusal
which apply, under certain circumstances, in the event that NTT proposes to sell
some or all of the shares that it acquires. The specific terms of these rights
vary depending upon the quantity of shares proposed to be sold and other terms
of the proposed sale. In addition, NTT has agreed on behalf of itself and its
affiliates to certain "standstill" restrictions pursuant to which NTT and its
affiliates may make open market or privately negotiated purchases of additional
voting securities (including Common Stock) so long as the total holdings of NTT
and its affiliates do not exceed 17.5% of the Company's fully diluted Common
Stock after taking into account such acquisition. The Company also granted NTT
certain registration rights with respect to the Common Stock it acquires. See
"Certain Transactions -- Description of Capital Stock -- Registration Rights."
The NTT Stock Purchase Agreement may be terminated prior to the IPO Closing
only in certain limited circumstances, including in the event that the sale of
shares to NTT has not occurred by July 31, 1998. The NTT Investment Agreement
will terminate automatically upon any termination of the NTT Stock Purchase
Agreement.
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DESCRIPTION OF THE 1997 NOTES
Set forth below is a summary of certain provisions of the New 1997 Notes.
The New 1997 Notes will be issued under the 1997 Indenture between the Issuer
and the Trustee. A copy of the 1997 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 1997 Notes and the New 1997 Notes. As used herein, the term "1997 Notes"
means the Old 1997 Notes and the New 1997 Notes, unless otherwise indicated.
The form and terms of the New 1997 Notes will be identical in all material
respects to the form and terms of the Old 1997 Notes, except that the New 1997
Notes will be registered under the Securities Act, and therefore such New 1997
Notes will not be subject to certain transfer restrictions and, registration
rights applicable to the Old 1997 Notes. See "The Exchange Offers."
The 1997 Notes are issued under the 1997 Indenture, a copy of the form of
which is available upon request. The 1997 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 1997 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 1997 Indenture,
including the definitions of certain terms therein and those terms made a part
of the 1997 Indenture by reference to the Trust Indenture Act, as in effect on
the date of the 1997 Indenture. The definitions of certain capitalized terms
used in the following summary are set forth below under "Certain Definitions."
GENERAL
The 1997 Notes are general senior obligations of the Issuer. The 1997 Notes
are collateralized by a first priority security interest in the Escrow Account
described under "-- Disbursement of Funds; Escrow Account." The 1997 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 1997 Notes are payable, and the 1997 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 1997 Notes, except in certain circumstances for any tax or other
governmental charge that may be imposed in connection therewith.
MATURITY, INTEREST AND PRINCIPAL
The 1997 Notes are limited to $100,000,000 aggregate principal amount after
the Refinancing and will mature on June 15, 2004. Interest on the 1997 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 1997 Notes, on the June 1
or December 1, as the case may be, immediately preceding such Interest Payment
Date. Interest on the 1997 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 1997 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 1997 Notes.
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<PAGE> 86
REDEMPTION
Optional Redemption. The 1997 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 1997 Notes
from the net proceeds thereof at a redemption price equal to 113.5% of the
principal amount of the 1997 Notes, together with accrued and unpaid interest to
the date of redemption; provided that not less than $100.0 million aggregate
principal amount of 1997 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 1997 Notes. However, (i) following the
occurrence of a Change of Control, the Issuer is required to make an offer to
purchase all outstanding 1997 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 1997 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 1997 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 1997 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 1997 Notes to be redeemed at its registered
address. If any 1997 Note is to be redeemed in part only, the notice of
redemption that relates to such 1997 Note shall state the portion of the
principal amount thereof to be redeemed. A new 1997 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 1997 Note. Upon giving
of a redemption notice, interest on 1997 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 1997 Notes will
cease to be outstanding.
DISBURSEMENT OF FUNDS; ESCROW ACCOUNT
The 1997 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 1997 Notes issued pursuant to the Initial 1997 Notes
Offering (the "Escrow Collateral"), representing funds that, together with the
proceeds from the investment thereof, were sufficient to pay interest on the
1997 Notes
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<PAGE> 87
for five scheduled interest payments through December 15, 1999 (but not any
Additional Interest (as defined) arising under the 1997 Notes Registration
Rights Agreement).
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 1997 Notes
and New 1997 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 1997 Indenture
and the 1997 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 1997 Notes (or, if a portion of the 1997
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 1997 Notes not so retired and (ii) the interest payments which
have not previously been made on such retired 1997 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 1997 Indenture). As a result of the Refinancing, the Company was refunded
approximately $13.3 million from the escrow account for the 1997 Notes, of which
approximately $1.9 million was used to pay accrued and unpaid interest on the
$50.0 million principal amount of Old 1997 Notes repurchased from Brooks. 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 1997 Notes, the Escrow
Agreement provides for the foreclosure by the Trustee upon the net proceeds of
the Escrow Account. Under the terms of the 1997 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 1997 Notes and the 1997 Indenture. Under the Escrow Agreement,
assuming that the Issuer makes the first five scheduled interest payments on the
1997 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 1997 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 1997 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 1997
Indenture.
Limitation on Additional Indebtedness. The 1997 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
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<PAGE> 88
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.
Limitation on Restricted Payments. The 1997 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
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<PAGE> 89
thereof if at such date of declaration such payment would be permitted by the
provisions of the 1997 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
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 1997 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 1997 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.
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Limitation on Liens Securing Certain Indebtedness. The 1997 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 1997 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 1997 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 1997 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 1997 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 1997 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 1997 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 1997 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 1997
Indenture does not contain provisions that permit the holders of the 1997 Notes
to require that the Company repurchase or redeem the 1997 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 1997 Notes
that might be delivered by holders of 1997 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 1997 Notes validly tendered and not withdrawn under such Change of
Control Offer.
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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.
The phrase "all or substantially all" of the assets of the Company, as used
in the definition of "Change of Control," will likely be interpreted under
applicable state law and will be dependent upon particular facts and
circumstances. Although there is a developing body of case law interpreting the
phrase "substantially all," there is no precise established definition of the
phrase under applicable law. As a result, there may be a degree of uncertainty
in ascertaining whether a sale or transfer of "all or substantially all" of the
assets of the Company has occurred.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The 1997 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 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 1997 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 1997 Indenture and the 1997 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 1997 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
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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 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 1997 Notes, that aggregate principal amount of 1997
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
1997 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 1997 Notes validly
tendered and not withdrawn by holders thereof exceeds the amount of 1997 Notes
which can be purchased with the Offer Excess Proceeds, 1997 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 1997 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 1997 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.
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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 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 1997 Indenture provides that, for periods prior to the fiscal
quarter ending June 30, 1998, the Issuer shall furnish without cost to each
holder of 1997 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 1997 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 1997 Notes upon 10-days advance written request of
holders of at least 10% of the aggregate principal amount of 1997 Notes
outstanding at the time of such request; provided that holders of 1997 Notes may
make only one such request per fiscal quarter.
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Limitation on Designations of Unrestricted Subsidiaries. The 1997 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 1997 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 1997 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.
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 1997 Indenture in
the Designation Amount. The 1997 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 1997 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 1997
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 1997 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 1997 Notes. The 1997 Indenture provides that the Issuer will
use its best efforts to obtain a rating for the 1997 Notes from each of Moody's
and S&P within 18 months of the Issue Date. A rating, if
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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 1997 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 1997 Notes and the 1997 Indenture, and
shall, if required by law to effectuate such assumption, execute a supplemental
indenture to effect such assumption which supplemental indenture shall be
delivered to the Trustee and shall be in form and substance reasonably
satisfactory to the Trustee; (c) immediately after giving effect to such
transaction or series of transactions on a pro forma basis (including, without
limitation, any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction or series of transactions),
the Issuer or the surviving entity (assuming such surviving entity's assumption
of the Issuer's obligations under the 1997 Notes and the 1997 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 1997 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 1997 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 1997
Indenture and the 1997 Notes.
The 1997 Indenture provides that for all purposes of the 1997 Indenture and
the 1997 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.
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EVENTS OF DEFAULT
The following are "Events of Default" under the 1997 Indenture:
(i) default in the payment of interest on the 1997 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 1997 Notes); or
(ii) default in the payment of the principal of, or premium, if any,
on the 1997 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
1997 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 1997 Notes (in each case,
when such notice is deemed received in accordance with the 1997 Indenture);
or
(v) failure to perform any term, covenant, condition or provision of
one or more classes or issues of Indebtedness in an aggregate principal
amount of $7.5 million or more under which the 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
1997 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 1997 Notes
shall, declare the principal amount of, premium (if any) on, and any accrued and
unpaid interest on, all outstanding 1997 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 1997 Notes
shall ipso facto become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any holder.
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After a declaration of acceleration, the holders of a majority in aggregate
principal amount of outstanding 1997 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 1997 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 1997 Notes also have the right
to waive past defaults under the 1997 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 1997 Notes.
No holder of any of the 1997 Notes has any right to institute any
proceeding with respect to the 1997 Indenture or any remedy thereunder, unless
the holders of at least 25% in principal amount of the outstanding 1997 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 1997 Notes. Such limitations do not apply, however, to a suit
instituted by a holder of a 1997 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 1997 Note.
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the 1997 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 1997 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 1997 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 1997 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 1997 Indenture provides that the Trustee will, within 45 days after the
occurrence of any Default, give to the holders of the 1997 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 1997 Indenture.
DEFEASANCE
The Issuer may at any time terminate all of its obligations with respect to
the 1997 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 1997 Notes, to replace mutilated, destroyed, lost or
stolen 1997 Notes as required by the 1997 Indenture and to maintain agencies in
respect of 1997 Notes. The Issuer may at any time terminate its obligations
under certain covenants set forth in the 1997 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 1997 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 1997 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 1997 Notes to redemption or maturity and
comply with certain other conditions, including the delivery of a legal opinion
as to certain tax matters.
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SATISFACTION AND DISCHARGE
The 1997 Indenture will be discharged and will cease to be of further
effect (except as to surviving rights or registration of transfer or exchange of
1997 Notes) as to all outstanding 1997 Notes when either (a) all such 1997 Notes
theretofore authenticated and delivered (except lost, stolen or destroyed 1997
Notes that have been replaced or paid and 1997 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 1997 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 1997 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 1997 Indenture; and (iii) the
Issuer has delivered irrevocable instructions to the Trustee to apply the
deposited money toward the payment of the 1997 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 1997 Notes, may
amend, waive or supplement the 1997 Indenture or the 1997 Notes for certain
specified purposes, including, among other things, curing ambiguities, defects
or inconsistencies, maintaining the qualification of the 1997 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 1997 Indenture
and the 1997 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 1997 Notes; provided that no such
modification or amendment may, without the consent of the holder of each
outstanding 1997 Note affected thereby, (i) reduce the principal amount of,
change the fixed maturity of, or alter the redemption provisions of, the 1997
Notes, (ii) change the currency in which any 1997 Notes or amounts owing thereon
is payable, (iii) reduce the percentage of the aggregate principal amount
outstanding of 1997 Notes which must consent to an amendment, supplement or
waiver or consent to take any action under the 1997 Indenture or the 1997 Notes,
(iv) impair the right to institute suit for the enforcement of any payment on or
with respect to the 1997 Notes, (v) waive a default in payment with respect to
the 1997 Notes, (vi) reduce the rate or change the time for payment of interest
on the 1997 Notes, (vii) following the occurrence of a Change of Control or an
Asset Sale, alter the Issuer's obligation to purchase the 1997 Notes in
accordance with the 1997 Indenture or waive any default in the performance
thereof, (viii) affect the ranking of the 1997 Notes in a manner adverse to the
holder of the 1997 Notes, (ix) release any Guarantee except in compliance with
the terms of the 1997 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 1997
Indenture and Escrow Agent under the Escrow Agreement.
GOVERNING LAW
The 1997 Indenture and the Escrow Agreement provide that the 1997 Indenture
and the 1997 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.
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CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the 1997
Indenture or the Escrow Agreement. Reference is made to the 1997 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 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
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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 1997 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 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 1997 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
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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 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
1997 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
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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, 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
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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 1997
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 1997 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 1997 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 any such stock pursuant to such
provision prior to the Issuer's repurchase of such 1997 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
1997 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
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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, 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
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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.
"Issue Date" means the original date of issuance of the 1997 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.
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"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 1997 Note, the date specified in
such 1997 Note as the fixed date on which the principal of such 1997 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.
"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
1997 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
1997 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.
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<PAGE> 107
"Permitted Indebtedness" means the following Indebtedness (each of which
shall be given independent effect):
(a) Indebtedness under the 1997 Notes and the 1997 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), (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 1997 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 1997 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 1997 Indenture, provided the aggregate principal amount
of all such Indebtedness does not exceed $30.0 million at any time
outstanding;
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<PAGE> 108
(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 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 1997 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.
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"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.
"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.
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<PAGE> 110
"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 designation 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.
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DESCRIPTION OF THE 1998 NOTES
Set forth below is a summary of certain provisions of the New 1998 Notes.
The New 1998 Notes will be issued under the 1998 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 1998 Notes and the New 1998 Notes. As used herein, the term "1998 Notes"
means the Old 1998 Notes and the New 1998 Notes, unless otherwise indicated.
The form and terms, of the New 1998 Notes will be identical in all material
respects to the form and terms of the Old 1998 Notes, except that the New 1998
Notes will be registered under the Securities Act, and therefore such New 1998
Notes will not be subject to certain transfer restrictions and, registration
rights applicable to the Old 1998 Notes. See "The Exchange Offers."
The 1998 Notes are issued under the 1998 Indenture, a copy of the form of
which is available upon request. The 1998 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 1998 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 1998 Indenture,
including the definitions of certain terms therein and those terms made a part
of the 1998 Indenture by reference to the Trust Indenture Act, as in effect on
the date of the 1998 Indenture. The definitions of certain capitalized terms
used in the following summary are set forth below under "Certain Definitions."
GENERAL
The 1998 Notes are general senior obligations of the Issuer. The 1998 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 1998 Notes are payable, and the 1998 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 1998 Notes, except in certain circumstances for any tax or
other governmental charge that may be imposed in connection therewith.
MATURITY, INTEREST AND PRINCIPAL
The 1998 Notes are limited to $175,000,000 aggregate principal amount and
will mature on April 1, 2005. The Issuer will not be required to make any
mandatory sinking fund payments in respect of the 1998 Notes. Interest on the
1998 Notes will accrue at a rate of 10 3/8% per annum and be payable in cash
semi-annually in arrears on each April 1 and October 1 (each, an "Interest
Payment Date"), commencing October 1, 1998, to registered holders of 1998 Notes,
on the March 15 or September 15, as the case may be, immediately preceding such
Interest Payment Date. Interest on the 1998 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 1998 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 1998
Notes.
REDEMPTION
Optional Redemption. The 1998 Notes are redeemable, at the option of the
Issuer, in whole or in part, on or after April 1, 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
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any, to the applicable redemption date, if redeemed during the twelve-month
period beginning on April 1 of each of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<S> <C>
2002........................................................ 105.188%
2003........................................................ 102.594%
2004........................................................ 100.000%
</TABLE>
Notwithstanding the foregoing, in the event that after the Issue Date and
prior to April 1, 2001 the Issuer issues, in one or more transactions, Capital
Stock (other than Disqualified Stock) of the Issuer to WorldCom or one or more
Strategic Equity Investors or in any Public Equity Offering for aggregate gross
cash proceeds of $50.0 million or more (an "Equity Sale"), the Issuer may
redeem, at its option, up to a maximum of 35% of the initially outstanding
aggregate principal amount of 1998 Notes from the net proceeds thereof at a
redemption price equal to 110.375% of the principal amount of the 1998 Notes,
together with accrued and unpaid interest to the date of redemption; provided
that not less than $113.75 million aggregate principal amount of 1998 Notes is
outstanding following such redemption. Any such redemption may only be effected
once and must be effected upon not less than 30 nor more than 60 days' notice
given within 180 days after such Equity Sale.
Selection; Effect of Redemption Notice. In the case of a partial
redemption, selection of the 1998 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 1998 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 1998 Notes to be redeemed at its registered
address. If any 1998 Note is to be redeemed in part only, the notice of
redemption that relates to such 1998 Note shall state the portion of the
principal amount thereof to be redeemed. A new 1998 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 1998 Note. Upon giving
of a redemption notice, interest on 1998 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 1998 Notes will
cease to be outstanding.
RANKING
The indebtedness of the Issuer evidenced by the 1998 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 including the 1997 Notes.
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 1998 Notes, to participate in the assets of any of the Issuer's subsidiaries
upon any liquidation or administration of any such subsidiary will be subject to
the prior claims of the subsidiary's creditors, including trade creditors. As of
December 31, 1997, on a pro forma basis after giving effect to the proposed IPO,
there would have been approximately $9.6 million of secured long-term
indebtedness outstanding to which holders of 1998 Notes would have been
effectively subordinated in right of payment and approximately $7.0 million of
subsidiary indebtedness to which holders of 1998 Notes would have been
structurally subordinated. In addition, the Bank Facility is secured by certain
assets, including the equity of the ISPs that Verio owns currently or may own in
the future, and thus the 1998 Notes are effectively subordinated to the Bank
Facility to the extent of the value of such assets. 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."
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CERTAIN COVENANTS
Set forth below are certain covenants that are contained in the 1998
Indenture.
Limitation on Additional Indebtedness. The 1998 Indenture provides that
the Issuer will not, and will not permit any Restricted Subsidiary to, directly
or indirectly, incur any Indebtedness (including any Acquired Indebtedness),
except for Permitted Indebtedness (including Acquired Indebtedness to the extent
it would constitute Permitted Indebtedness); provided, however, that (i) the
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 ratio
of Total Consolidated Indebtedness to Consolidated Annualized Pro Forma
Operating Cash Flow would be less than 6.0 to 1.0.
Limitation on Restricted Payments. The 1998 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
January 1, 1998 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
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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 1998 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 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 1998 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 1998 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) so long as no Default shall have occurred and be continuing,
Investments constituting Restricted Payments in joint ventures formed to provide
services in furtherance of an Internet Service Business of the Issuer and the
ISPs or 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 following the first Public Equity Offering resulting in aggregate gross
cash proceeds of $50.0 million or more to the Issuer, the aggregate amount of
Investments permitted pursuant to this clause (ix) shall be increased to an
aggregate amount not to exceed $50.0 million outstanding at any time; and (x)
cash payments in lieu of fractional shares pursuant to any warrant, option or
other similar agreement.
In determining whether the receipt of net cash proceeds of a sale of
Capital Stock is "substantially concurrent" for purposes of clause (iv)(b)(x) of
the preceding paragraph, if such net cash proceeds are deposited in escrow with
a third party, free and clear of any Lien (other than the Lien of the escrow
agent), to be applied for purposes directed by the Issuer and such net cash
proceeds are excluded from clause (iii)(b) of
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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 1998 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 any 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 1998 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 1998 Notes are equally and ratably
secured with the Liens securing such other Indebtedness, except, in the case of
this clause (y), Permitted Liens.
Limitation on Business. The 1998 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 1998 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 1998 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 1998 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 1998 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.
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Except as described above with respect to a Change of Control, the 1998
Indenture does not contain provisions that permit the holders of the 1998 Notes
to require that the Issuer repurchase or redeem the 1998 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 1998 Notes
that might be delivered by holders of 1998 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 1998 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.
The phrase "all or substantially all" of the assets of the Company, as used
in the definition of "Change of Control," will likely be interpreted under
applicable state law and will be dependent upon particular facts and
circumstances. Although there is a developing body of case law interpreting the
phrase "substantially all," there is no precise established definition of the
phrase under applicable law. As a result, there may be a degree of uncertainty
in ascertaining whether a sale or transfer of "all or substantially all" of the
assets of the Company has occurred.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The 1998 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 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
restrictions pertaining to an asset subject to a Lien to the extent set forth in
the security documentation governing such Lien, (v) any encumbrance or
restriction applicable to a Restricted Subsidiary at the time that it becomes a
Restricted Subsidiary that is not created in contemplation thereof, (vi) any
encumbrance or restriction existing under any agreement that refinances or
replaces an agreement containing a restriction permitted by clause (v) above;
provided that the terms and conditions of any such encumbrance or restriction
are not materially less favorable to the holders of 1998 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 1998 Indenture and the 1998 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.
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Disposition of Proceeds of Asset Sales. The 1998 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 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 1998 Notes, that aggregate principal amount of 1998
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
1998 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 1998 Notes validly
tendered and not withdrawn by holders thereof exceeds the amount of 1998 Notes
which can be purchased with the Offer Excess Proceeds, 1998 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 1998 Indenture provides that the Issuer will not permit any
Restricted Subsidiary to issue any Preferred Stock (other than to the Issuer or
a Restricted Subsidiary).
Limitation on Transactions with Affiliates. The 1998 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
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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
related to the provision of internet services in the ordinary course of
business; provided that (x) such transactions are entered into on an arm's
length basis and are fair and reasonable to the Issuer or such Restricted
Subsidiary, as the case may be, and (y) in the good faith judgment of the Issuer
or the applicable Restricted Subsidiary, the Fair Market Value of the
consideration received by the Issuer or such Restricted Subsidiary, as the case
may be, reasonably approximates the Fair Market Value of the services provided,
(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 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 continues to meet the conditions and requirements
of the definition of "ISP" in all material respects until such time as a Rollup
shall have occurred with respect to such ISP.
Reports. The 1998 Indenture provides that, for periods prior to the fiscal
quarter ending June 30, 1998, the Issuer shall furnish without cost to each
holder of 1998 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 Offering Memorandum, (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 Offering
Memorandum, (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 1998 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
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(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 1998 Notes upon 10-days advance written request
of holders of at least 10% of the aggregate principal amount of 1998 Notes
outstanding at the time of such request; provided that holders of 1998 Notes may
make only one such request per fiscal quarter.
Limitation on Designations of Unrestricted Subsidiaries. The 1998
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 1998 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 1998 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.
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 1998 Indenture in
the Designation Amount. The 1998 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 1998 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 1998
Indenture.
All Designations and Revocations must be evidenced by Board Resolutions
delivered to the Trustee certifying compliance with the foregoing provisions.
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Limitation on Status as Investment Company. The 1998 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.
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
The 1998 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 1998 Notes and the 1998 Indenture, and
shall, if required by law to effectuate such assumption, execute a supplemental
indenture to effect such assumption which supplemental indenture shall be
delivered to the Trustee and shall be in form and substance reasonably
satisfactory to the Trustee; (c) immediately after giving effect to such
transaction or series of transactions on a pro forma basis (including, without
limitation, any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction or series of transactions),
the Issuer or the surviving entity (assuming such surviving entity's assumption
of the Issuer's obligations under the 1998 Notes and the 1998 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 1998 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 1998 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 1998
Indenture and the 1998 Notes.
The 1998 Indenture provides that for all purposes of the 1998 Indenture and
the 1998 Notes (including the provision of this covenant and the covenants
"Limitation on Additional Indebtedness," "Limitation on Restricted Payments" and
"Limitation on Liens Securing Certain Indebtedness"), Subsidiaries of any
surviving entity will, upon such transaction or series of related transactions,
become Restricted Subsidiaries or
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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 1998 Indenture:
(i) default in the payment of interest on the 1998 Notes when it
becomes due and payable and continuance of such default for a period of 30
days or more; or
(ii) default in the payment of the principal of, or premium, if any,
on the 1998 Notes when due; or
(iii) default in the performance, or breach, of any covenant described
under "-- Certain Covenants -- Change of Control," "-- 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
1998 Indenture (other than defaults specified in clause (i), (ii) or (iii)
above), and continuance of such default or breach for a period of 30 days
or more after written notice to the 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 1998 Notes (in each case, when such notice is
deemed received in accordance with the 1998 Indenture); or
(v) failure to perform any term, covenant, condition or provision of
one or more classes or issues of Indebtedness in an aggregate principal
amount of $7.5 million or more under which the 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.
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
1998 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 1998 Notes
shall, declare the principal amount of, premium (if any) on, and any accrued and
unpaid interest on, all outstanding 1998 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 1998 Notes
shall ipso facto become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any holder.
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After a declaration of acceleration, the holders of a majority in aggregate
principal amount of outstanding 1998 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 1998 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 1998 Notes also have the right
to waive past defaults under the 1998 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 1998 Notes.
No holder of any of the 1998 Notes has any right to institute any
proceeding with respect to the 1998 Indenture or any remedy thereunder, unless
the holders of at least 25% in principal amount of the outstanding 1998 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 1998 Notes. Such limitations do not apply, however, to a suit
instituted by a holder of a 1998 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 1998 Note.
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the 1998 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 1998 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 1998 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 1998 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 1998 Indenture provides that the Trustee will, within 45 days after the
occurrence of any Default, give to the holders of the 1998 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 1998 Indenture.
DEFEASANCE
The Issuer may at any time terminate all of its obligations with respect to
the 1998 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 1998 Notes, to replace mutilated, destroyed, lost or
stolen 1998 Notes as required by the 1998 Indenture and to maintain agencies in
respect of 1998 Notes. The Issuer may at any time terminate its obligations
under certain covenants set forth in the 1998 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 1998 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 1998 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 1998 Notes to redemption or maturity and
comply with certain other conditions, including the delivery of a legal opinion
as to certain tax matters.
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SATISFACTION AND DISCHARGE
The 1998 Indenture will be discharged and will cease to be of further
effect (except as to surviving rights or registration of transfer or exchange of
1998 Notes) as to all outstanding 1998 Notes when either (a) all such 1998 Notes
theretofore authenticated and delivered (except lost, stolen or destroyed 1998
Notes that have been replaced or paid and 1998 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 1998 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 1998 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 1998 Indenture; and (iii) the
Issuer has delivered irrevocable instructions to the Trustee to apply the
deposited money toward the payment of the 1998 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 1998 Notes, may
amend, waive or supplement the 1998 Indenture or the 1998 Notes for certain
specified purposes, including, among other things, curing ambiguities, defects
or inconsistencies, maintaining the qualification of the 1998 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 1998 Indenture
and the 1998 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 1998 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 1998 Notes,
(ii) change the currency in which any 1998 Notes or amounts owing thereon is
payable, (iii) reduce the percentage of the aggregate principal amount
outstanding of 1998 Notes which must consent to an amendment, supplement or
waiver or consent to take any action under the 1998 Indenture or the 1998 Notes,
(iv) impair the right to institute suit for the enforcement of any payment on or
with respect to the 1998 Notes, (v) waive a default in payment with respect to
the 1998 Notes, (vi) reduce the rate or change the time for payment of interest
on the 1998 Notes, (vii) following the occurrence of a Change of Control or an
Asset Sale, alter the Issuer's obligation to purchase the 1998 Notes in
accordance with the 1998 Indenture or waive any default in the performance
thereof, (viii) affect the ranking of the 1998 Notes in a manner adverse to the
holder of the 1998 Notes, or (ix) release any Guarantee except in compliance
with the terms of the 1998 Indenture.
GOVERNING LAW
The 1998 Indenture provides that the 1998 Indenture and the 1998 Notes 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 1998
Indenture. Reference is made to the 1998 Indenture for the full definition of
all such terms, as well as any other capitalized terms used herein for which no
definition is provided.
"1997 Notes" means the Issuer's 13 1/2% Senior Notes Due 2004.
"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
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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 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.
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"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 1998 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 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; (v) other debt obligations maturing in 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-" by
S&P or "A3" by Moody's; and (vi) money market funds which invest substantially
all of their assets in securities of the type described in the preceding clauses
(i) through (v).
"Change of Control" 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 WorldCom, is or becomes
the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act, except that a person shall be deemed to have "beneficial ownership" of all
securities that such person has the right to acquire, whether such right is
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 1998 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 WorldCom, is the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person
shall be deemed to have "beneficial ownership" of all securities that such
person has the right to acquire, whether such right is 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 WorldCom) to constitute
a majority of the Board then in office. The good faith determination by the
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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 Annualized Pro Forma Operating Cash Flow" means, at any date
of determination, Consolidated Operating Cash Flow for the latest fiscal quarter
for which consolidated financial statements of the Issuer are available
multiplied by four. For purposes of calculating "Consolidated Operating Cash
Flow" for any fiscal quarter for purposes of this definition, (i) any Subsidiary
of the Issuer that is a Restricted Subsidiary on the date of the transaction
(the "Transaction Date") giving rise to the need to calculate "Consolidated
Annualized Pro Forma Operating Cash Flow" shall be deemed to have been a
Restricted Subsidiary at all times during such fiscal quarter and (ii) any
Subsidiary of the 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 fiscal quarter. In addition to and without limitation of the foregoing, for
purposes of this definition, "Consolidated Operating Cash Flow" shall be
calculated after giving effect on a pro forma basis for the applicable fiscal
quarter to, without duplication, any Asset Sales or Asset Acquisitions
(including, without limitation, any Asset Acquisition giving rise to the need to
make such calculation as a result of the 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 fiscal quarter to and including the Transaction Date, as if such
Asset Sale or Asset Acquisition occurred on the first day of such fiscal
quarter.
"Consolidated Income Tax Expense" means, with respect to any period, the
provision for United States corporation, local, foreign and other income taxes
of the 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 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
1998 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
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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.
"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 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 1998
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 1998 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 1998 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 "Disposition of Proceeds
of Asset Sales" and "Change of Control" covenants described above and such
Capital Stock specifically provides that such person will not repurchase or
redeem any such stock pursuant to such provision prior to the
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Issuer's repurchase of such 1998 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.
"incur" means, with respect to any Indebtedness or other obligation of any
person, to create, issue, incur (by conversion, exchange or otherwise), assume,
guarantee or otherwise become liable in respect of such Indebtedness or other
obligation including by acquisition of Subsidiaries or the recording, as
required pursuant to GAAP or otherwise, of any such Indebtedness or other
obligation on the balance sheet of such person (and "incurrence," "incurred,"
"incurrable" and "incurring" shall have meanings correlative to the foregoing);
provided that a change in GAAP that results in an obligation of such person that
exists at such time becoming Indebtedness shall not be deemed an incurrence of
such Indebtedness and that neither the accrual of interest nor the accretion of
original issue discount shall be deemed an Incurrence of Indebtedness.
Indebtedness otherwise incurred by a person before it becomes a Subsidiary of
the Issuer (whether by merger, consolidation, acquisition or otherwise) shall be
deemed to have been incurred at the time at which such person becomes a
Subsidiary of the Issuer.
"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
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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
issued with original issue discount shall be the face amount of such
Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such date as determined in conformity with GAAP
and (y) the principal amount of any Indebtedness shall be reduced by any amount
of cash or Cash Equivalent collateral securing on a perfected basis, and
dedicated for disbursement exclusively to the payment of principal of and
interest on, such Indebtedness.
"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 or Wholly Owned Restricted Subsidiaries own
either (x) Qualifying Preferred Stock representing in aggregate from 20% to 50%
of such person's outstanding Capital Stock (on an economic basis) or (y) Common
Stock or Qualifying Preferred Stock representing in aggregate in excess of 50%
of such person's voting Capital Stock, (c) as to which the 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
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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.
"Issue Date" means the original date of issuance of the 1998 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 1998 Note, the date specified in
such 1998 Note as the fixed date on which the principal of such 1998 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)
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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.
"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
1998 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
1998 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 Stockholders Agreement, each as in effect on the Issue Date.
"Permitted Credit Facility" means any senior commercial term loan and/or
revolving credit facility (including any letter of credit subfacility) entered
into principally with commercial banks and/or other financial institutions
typically party to commercial loan agreements.
"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 1998 Notes and the 1998 Indenture;
(b) Indebtedness of the Issuer and/or any Restricted Subsidiary
outstanding on the Issue Date, including, without limitation, the 1997
Notes;
(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
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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), (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 1998 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 1998 Indenture,
in an aggregate principal amount not to exceed $140.0 million at any time
outstanding;
(i) Indebtedness of the Issuer and/or any Restricted Subsidiary
incurred under any Permitted Equipment Financing in an aggregate principal
amount not to exceed the Fair Market Value of the assets acquired with the
proceeds thereof;
(j) Indebtedness of the Issuer and/or any Restricted Subsidiary
incurred as a result of any Rollup of any ISP, and any Refinancings thereof
otherwise incurred in compliance with the 1998 Indenture, provided the
aggregate principal amount of all such Indebtedness does not exceed $30.0
million at any time outstanding;
(k) 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
$30.0 million at any time outstanding; and
(l) 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 $40.0 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 the ISPs,
represented by accounts receivable, extended on usual and customary terms in the
ordinary course of business or (ii) guarantees of commitments for the purchase
of goods or services by any ISP incurred in the ordinary course of business so
long as such guarantees to the extent
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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 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 (k) 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 1998 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.
"Public Equity Offering" means an underwritten public offering of Common
Stock (other than Disqualified Stock) made pursuant to a registration statement
filed with the Commission under the Securities Act.
"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
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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, the Series C Preferred Stock or
the Series D 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.
"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
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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 designation may be revoked by a Board
Resolution delivered to the Trustee, subject to the provisions of such covenant.
"Voting Stock" means, with respect to any person, the Capital Stock of any
class or kind ordinarily having the power to vote for the election of directors
or other members of the governing body of such person.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of
which 99% or more of the outstanding Capital Stock is owned by the 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.
"WorldCom" means WorldCom, Inc. (and its successors by merger or
consolidation) and its controlled Affiliates.
BOOK-ENTRY; DELIVERY AND FORM
Except as set forth under "-- Certificated Securities," each of the New
1997 Notes and the New 1998 Notes will be issued in the form of one Global New
Note. Each such 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, each such 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 each such 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 each such Global New Note, the Depository will credit,
on its book-entry registration and transfer system, the principal amount of the
applicable New Notes represented by such
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Global New Note to the accounts of participants. Ownership of beneficial
interests in each such Global New Note will be limited to participants or
persons that may hold interests through participants. Ownership of beneficial
interests in each such 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 applicable 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 each such Global New Note.
So long as the Depository, or its nominee, is the registered holder and
owner of a Global New Notes, 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 1997 Indenture or 1998 Indenture, as the
case may be. Except as set forth below, owners of beneficial interests in each
Global New Note will not be entitled to have the New Notes represented by the
applicable Global New Note registered in their names, will not receive or be
entitled to receive physical delivery of certificated New Notes in definitive
form and will not be considered to be the owners or holders of any New Notes
under the applicable Global New Note. The Issuer understands that under existing
industry practice, in the event an owner of a beneficial interest in a Global
New Note desires to take any action that the Depository, as the holder of the
Global New Notes 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 a 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 applicable Global New Note.
The Company expects that the Depository or its nominee, upon receipt of any
payment of principal of or interest on a Global New Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the applicable 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
a 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 a 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 Notes 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 Notes 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 each 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 each 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 related 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.
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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 Offers and the ownership and disposition of the New Notes by
holders who acquire the New Notes pursuant to the Exchange Offers, 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 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 Offers 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 OFFERS
The exchange of Old Notes for New Notes pursuant to the Exchange Offers
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 Offers
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.
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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.
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. New 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 New 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
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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
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 Offers 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
with respect to each Exchange Offer and ending on 180 days after such 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.
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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 Offers 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 Offers and any broker or dealer that participates in a distribution
of such New Notes 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 applicable 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 Offers (including the expenses of one counsel for the
holders of the respective 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. and Subsidiaries as of
December 31, 1996 and 1997 and for the period from inception (March 1, 1996) to
December 31, 1996, and the year ended December 31, 1997 and the financial
statements of On-Ramp Technologies, Inc. as of and for the nine months ended
July 31, 1996; Global Enterprise Services -- Network Division (a Division of
Global Enterprise Services, Inc.) as of December 31, 1995 and 1996, and for each
of the years in the three-year period ended December 31, 1996 and the period
ended January 17, 1997; Compute Intensive Inc. as of December 31, 1995 and 1996,
and for each of the years in the two-year period ended December 31, 1996, and
the period ended February 18, 1997; NorthWestNet, Inc. as of and for the six
months ended June 30, 1996 and the eight months ended February 28, 1997,
Northwest Academic Computing Consortium, Inc. as of and for the year ended June
30, 1995 and the six months ended December 31, 1995; Aimnet Corporation as of
and for the year ended March 31, 1997 and the period ended May 19, 1997; West
Coast Online, Inc. as of and for the nine months ended September 30, 1997; Clark
Internet Services, Inc. as of and for the year ended September 30, 1997 and the
period ended October 17, 1997; ATMnet, Corporation as of and for the years ended
October 31, 1996 and 1997; Global Internet Network Services, Inc. as of December
31, 1996 and November 26, 1997 and for the year and period then ended;
Pennsylvania Research Partnership Network as of and for the years ended November
30, 1996 and 1997 and the period ended December 24, 1997; Monumental Network
Systems, Inc. as of and for the years ended December 31, 1996 and 1997; Internet
Servers, Inc. as of December 31, 1996 and 1997 and for the period from inception
(August 23, 1995) to December 31, 1995 and the years ended December 31, 1996 and
1997; Access One, Inc. as of and for the year ended December 31, 1997; NSNet,
Inc. as of and for the years ended December 31, 1996 and 1997; STARnet, L.L.C.
as of and for the year ended December 31, 1997; Computing Engineers Inc. as of
and for the years ended December 31, 1996 and 1997; and LI Net, Inc. as of April
30, 1997 and January 31, 1998 and for the years ended April 30, 1996 and 1997
and the nine months ended January 31, 1998, have been included herein and in the
Registration Statement in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
133
<PAGE> 141
GLOSSARY OF TERMS
ATM Asynchronous Transfer Mode. An information transfer standard
for routing traffic which uses packets (cells) of a fixed
length.
Backbone A centralized high-speed network that interconnects smaller,
independent networks.
Bandwidth The number of bits of information which can move through a
communications medium in a given amount of time; the
capacity of a telecommunications circuit/ network to carry
voice, data and video information. Typically measured in
kbps and Mbps.
caching Temporary storage or replication of a Web server content at
one or more locations throughout the Internet to provide a
quicker response to a browser request.
CPE Customer Premise Equipment.
CSU/DSU Channel Service Unit/Digital Service Unit. A device used to
terminate telephone company equipment and prepare data for
router interface.
DNS Domain Name Server.
DS-3 or T-3 A data communications circuit capable of transmitting data
at 45 Mbps. Equivalent to 28 T-1's of data capacity.
Currently used only by businesses/institutions and carriers
for high end applications.
Ethernet A common method of networking computers in a LAN. Ethernet
will handle about 10 Mbps and can be used with almost any
kind of computer.
FDDI Fiber Distributed Data Interface. A standard for
transmitting data on fiber-optic cables at a rate of 100
Mbps.
Firewall A system placed between networks that filters data passing
through it and prevents unauthorized traffic, thereby
enhancing the security of the network.
Frame Relay An information transfer standard for relaying traffic based
on an address contained in the six-byte header of a variable
length packet that is up to 2,106 bytes long.
Hertz The dimensional unit for measuring the frequency with which
an electromagnetic signal cycles through the zero-value
state between lowest and highest states. One Hertz
(abbreviated Hz) equals one cycle per second. KHz
(KiloHertz) stands for thousands of Hertz; MHz (MegaHertz)
stands for millions of Hertz; GHz (GigaHertz) stands for
billions of Hertz.
Internet A global collection of interconnected computer networks
which use a specific communications protocol.
IP Internet Protocol. Network protocols that allow computers
with different architectures and operating system software
to communicate with other computers on the Internet.
ISDN Integrated Services Digital Network. An information transfer
standard for transmitting digital voice and data over
telephone lines at speeds up to 128 Kbps.
ISPs Internet Service Providers. Companies formed to provide
access to the Internet to consumers and business customers
via local networks.
IXC Interexchange Carrier. A telecommunications company that
provides telecommunications services between local exchanges
on an interstate or intrastate basis.
kbps Kilobits per second. A transmission rate. One kilobit equals
1,024 bits of information.
134
<PAGE> 142
LAN Local Area Network. A data communications network designed
to interconnect personal computers, workstations,
minicomputers, file servers and other communications and
computing devices within a localized environment.
Leased Line Telecommunications line dedicated to a particular customer
along predetermined routes.
LEC Local Exchange Carrier. A telecommunications company that
provides telecommunications services in a geographic area in
which calls generally are transmitted without toll charges.
LECs include both RBOCs and competitive local exchange
carriers.
LMDS Local Multipoint Distribution Service. Two blocks of
spectrum with total bandwidth of 1150 MHz and 150 MHz to be
auctioned and used for various wireless services.
MAE-East A major exchange point among ISPs, located in Falls Church,
Virginia.
MAE-West A major exchange point among ISPs, located in Santa Clara,
California.
Mbps Megabits per second. A transmission rate. One megabit equals
1,024 kilobits.
MMDS Microwave Multipoint Distribution Service.
Modem A device for transmitting digital information over an analog
telephone line.
MSAs Metropolitan Statistical Areas. A designation by the U.S.
Census Bureau for Metropolitan areas with a central city or
an urbanized area having a minimum population of 50,000 with
a total metropolitan population of at least 100,000 and
including all counties that have strong economic and social
ties to the central city.
NAP Network Access Point. A location at which ISPs exchange each
other's traffic.
National Node National network access point where IP traffic is exchanged
between network links and where regional networks access the
national network.
NOC Network Operations Center. Facility where the Company
monitors and manages the Company's network.
OC-3 A data communications circuit consisting of three DS-3s
capable of transmitting data at 155 Mbps.
Peering The commercial practice under which ISPs exchange each
other's traffic without the payment of settlement charges.
Peering occurs at both public and private exchange points.
POP Point of Presence. Telecommunications facility where the
Company locates network equipment used to connect customers
to its network backbone.
Proxy Server A server that acts on behalf of one or more other servers,
usually for screening, firewall, caching, or a combination
of these purposes. Typically, a proxy server is used within
a company to gather all Internet requests, forward them out
to Internet servers, and then receive the responses and in
turn forward them to the original requestor within the
company.
Router Equipment placed between networks that relays data to those
networks based upon a destination address contained in the
data packets being routed.
TCP/IP Transmission Control Protocol/Internet Protocol. A suite of
network protocols that allow computers with different
architectures and operating system software to communicate
with other computers on the Internet.
135
<PAGE> 143
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").
136
<PAGE> 144
VERIO INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Unaudited Pro Forma Condensed Combined Financial Statements:
Pro Forma Condensed Combined Balance Sheet as of December
31, 1997 (unaudited).................................... F-4
Pro Forma Condensed Combined Statement of Operations for
the Year Ended December 31, 1997 (unaudited)............ F-5
Notes to Pro Forma Condensed Combined Financial Statements
(unaudited)............................................. F-6
Verio Inc. and Subsidiaries -- Consolidated Financial
Statements:
Independent Auditors' Report.............................. F-14
Consolidated Balance Sheets as of December 31, 1996 and
1997.................................................... F-15
Consolidated Statements of Operations for the Period from
Inception (March 1, 1996) to December 31, 1996 and the
Year Ended December 31, 1997............................ F-16
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-17
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-18
Notes to Consolidated Financial Statements................ F-19
On-Ramp Technologies, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-29
Balance Sheet as of July 31, 1996......................... F-30
Statement of Operations for the Nine Months Ended July 31,
1996.................................................... F-31
Statement of Stockholders' Deficit for the Nine Months
Ended July 31, 1996..................................... F-32
Statement of Cash Flows for the Nine Months Ended July 31,
1996.................................................... F-33
Notes to Financial Statements............................. F-34
Global Enterprises Services -- Network Division -- Financial
Statements:
Independent Auditors' Report.............................. F-37
Balance Sheets as of December 31, 1995 and 1996........... F-38
Statements of Operations and Owner's Deficit for the Years
Ended December 31, 1994, 1995, 1996 and Period Ended
January 17, 1997........................................ F-39
Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996 and Period Ended January 17, 1997... F-40
Notes to Financial Statements............................. F-41
Compute Intensive, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-44
Balance Sheets as of December 31, 1995 and 1996........... F-45
Statements of Operations for the Years Ended December 31,
1995 and 1996 and Period Ended February 18, 1997........ F-46
Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1995 and 1996 and Period Ended
February 18, 1997....................................... F-47
Statements of Cash Flows for the Years Ended December 31,
1995 and 1996 and Period Ended February 18, 1997........ F-48
Notes to Financial Statements............................. F-48
NorthWestNet, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-54
Balance Sheets as of June 30, 1995 and 1996............... F-55
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-56
Statements of Stockholders' Equity and Fund Balance for
the Year Ended June 30, 1995 and the Six Months Ended
December 31, 1995 and Six Months Ended June 30, 1996 and
the Eight Months Ended February 28, 1997................ F-57
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-58
Notes to Financial Statements............................. F-59
Aimnet Corporation -- Financial Statements:
Independent Auditors' Report.............................. F-66
Balance Sheet as of March 31, 1997........................ F-67
Statement of Operations for the Year Ended March 31, 1997
and Period Ended May 19, 1997........................... F-68
Statements of Stockholders' Equity for the Year Ended
March 31, 1997 and Period Ended May 19, 1997............ F-69
Statements of Cash Flows for the Year Ended March 31, 1997
and Period Ended May 19, 1997........................... F-70
Notes to Financial Statements............................. F-71
West Coast Online, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-74
Balance Sheet as of September 30, 1997.................... F-75
Statement of Operations and Accumulated Deficit for the
Nine Months Ended September 30, 1997.................... F-76
Statement of Cash Flows for the Nine Months Ended
September 30, 1997...................................... F-77
Notes to Financial Statements............................. F-78
Clark Internet Services, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-81
Balance Sheet as of September 30, 1997.................... F-82
Statements of Operations and Retained Earnings for the
Year Ended September 30, 1997 and Period Ended October
17, 1997................................................ F-83
Statements of Cash Flows for the Year Ended September 30,
1997 and Period Ended October 17, 1997.................. F-84
Notes to Financial Statements............................. F-85
ATMnet, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-87
Balance Sheets as of October 31, 1996 and 1997............ F-88
Statements of Operations for the Years Ended October 31,
1996 and 1997........................................... F-89
Statements of Stockholders' Deficit for the Years Ended
October 31, 1996 and 1997............................... F-90
</TABLE>
F-1
<PAGE> 145
<TABLE>
<S> <C>
Statements of Cash Flows for the Years Ended October 31,
1996 and 1997........................................... F-91
Notes to Financial Statements............................. F-92
Global Internet Network Services, Inc. -- Financial
Statements:
Independent Auditors' Report.............................. F-96
Balance Sheets as of December 31, 1996 and November 26,
1997.................................................... F-97
Statements of Operations for the Year Ended December 31,
1996 and the Period Ended November 26, 1997............. F-98
Statements of Stockholders' Equity (Deficit) for the Year
Ended December 31, 1996 and the Period Ended November
26, 1997................................................ F-99
Statements of Cash Flows for the Year Ended December 31,
1996 and the Period Ended November 26, 1997............. F-100
Notes to Financial Statements............................. F-101
Pennsylvania Research Partnership Network
(PREPnet) -- Financial Statements:
Independent Auditors' Report.............................. F-104
Balance Sheets as of November 30, 1996 and 1997........... F-105
Statements of Operations and Owner's Deficit for the Years
Ended November 30, 1996 and 1997 and the Period Ended
December 24, 1997....................................... F-106
Statements of Cash Flows for the Years Ended November 30,
1996 and 1997 and the Period Ended December 24, 1997.... F-107
Notes to Financial Statements............................. F-108
Monumental Network Systems, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-111
Balance Sheets as of December 31, 1996 and 1997........... F-112
Statements of Operations for the Years Ended December 31,
1996 and 1997........................................... F-113
Statements of Stockholders' Deficit for the Years Ended
December 31, 1996 and 1997.............................. F-114
Statements of Cash Flows for the Years Ended December 31,
1996 and 1997........................................... F-115
Notes to Financial Statements............................. F-116
Internet Servers, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-120
Balance Sheets as of December 31, 1996 and 1997........... F-121
Statements of Operations for the Period from Inception
(August 23, 1995) to December 31, 1995 and Years Ended
December 31, 1996 and 1997.............................. F-122
Statements of Stockholders' Equity for the Period from
Inception (August 23, 1995) to December 31, 1995 and
Years ended December 31, 1996 and 1997.................. F-123
Statements of Cash Flows for the Period from Inception
(August 23, 1995) to December 31, 1995 and Years Ended
December 31, 1996 and 1997.............................. F-124
Notes to Financial Statements............................. F-125
NSNet, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-128
Balance Sheets as of December 31, 1996 and 1997........... F-129
Statements of Operations for the Years Ended December 31,
1996 and 1997........................................... F-130
Statements of Owner's and Stockholder's Equity for the
Years Ended December 31, 1996 and 1997.................. F-131
Statements of Cash Flows for the Years Ended December 31,
1996 and 1997........................................... F-132
Notes to Financial Statements............................. F-133
Access One, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-136
Balance Sheet as of December 31, 1997..................... F-137
Statement of Operations and Accumulated Deficit for the
Year Ended December 31, 1997............................ F-138
Statement of Cash Flows for the Year Ended December 31,
1997.................................................... F-139
Notes to Financial Statements............................. F-140
STARnet, L.L.C. -- Financial Statements:
Independent Auditors' Report.............................. F-143
Balance Sheet as of December 31, 1997..................... F-144
Statement of Operations for the Year Ended December 31,
1997.................................................... F-145
Statement of Members' Equity for the Year Ended December
31, 1997................................................ F-146
Statement of Cash Flows for the Year Ended December 31,
1997.................................................... F-147
Notes to Financial Statements............................. F-148
Computing Engineers Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-150
Balance Sheets as of December 31, 1996 and 1997........... F-151
Statements of Operations for the Years Ended December 31,
1996 and 1997........................................... F-152
Statements of Stockholders' Equity for the Years Ended
December 31, 1996 and 1997.............................. F-153
Statements of Cash Flows for the Years Ended December 31,
1996 and 1997........................................... F-154
Notes to Financial Statements............................. F-155
LI Net, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-157
Balance Sheets as of April 30, 1997 and January 31,
1998.................................................... F-158
Statements of Operations for the Years Ended April 30,
1996 and 1997 and the Nine Months Ended January 31,
1998.................................................... F-159
Statements of Stockholders' Equity (Deficit) for the Years
Ended April 30, 1996 and 1997 and the Nine Months Ended
January 31, 1998........................................ F-160
Statements of Cash Flows for the Years Ended April 30,
1996 and 1997 and the Nine Months Ended January 31,
1998.................................................... F-161
Notes to Financial Statements............................. F-162
</TABLE>
F-2
<PAGE> 146
VERIO INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
During the period from August 1, 1996 through the date of this Registration
Statement, Verio Inc. ("Verio" or the "Company") completed numerous business
combinations, whereby the Company acquired newly authorized redeemable,
convertible preferred stock, shares of common stock, or certain net assets of
entities operating in the Internet industry (ISPs), and completed the Buyout of
the remaining equity interests of certain ISPs in which it initially acquired a
less-than-100% equity position (collectively, the "Completed Acquisitions"). In
addition, the Company has entered into definitive agreements to acquire an
additional four ISPs, which acquisitions, in the opinion of management, are
probable to be completed, (the "Proposed Acquisitions"). The Company also has
contractual rights to effect additional Buyouts which have not been completed at
the date of this Registration Statement but two of which, in the opinion of
management, are probable to be completed and are also included as 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
equity method of accounting, as described in Note 1 to the 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 the date of
this Registration Statement, Verio has consummated the Buyout of the following
twelve ISPs; On-Ramp Technologies, Inc.; NorthWestNet, Inc.; National Knowledge
Networks, Inc.; Access One, Inc.; Signet Partners, Inc.; Surf Network, Inc.;
Pacific Rim Network, Inc.; Internet Engineering Associates, Inc.; AimNet
Corporation; West Coast Online, Inc.; ServiceTech, Inc., and Clark Internet
Services, Inc. Verio currently expects to effect the Buyouts of the remaining
four ISPs in which it acquired a less-than-100% position during the remainder of
1998. With respect to those Buyouts that have not yet been completed, the
Company expects to consummate two of these Buyouts prior to or concurrent with
the proposed IPO, and considers these Buyouts probable. The Company has
contractual rights to effect the other two Buyouts and expects to complete these
Buyouts during the remainder of 1998. However, there can be no assurance that
the Company will be able to complete these Buyouts at the times, or in
accordance with the terms and conditions, that it currently contemplates. These
acquisitions will also be accounted for using the purchase method of accounting.
The unaudited pro forma condensed combined balance sheet assumes that the
Completed Acquisitions 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
balance sheet also assumes the conversion of the Preferred Stock into Common
Stock upon completion of the proposed IPO.
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> 147
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 $ 828 $ 341 $(46,456)(1) $ 27,299
Restricted cash and securities.... 21,015 -- -- -- 21,015
Receivables, net.................. 7,565 1,198 814 -- 9,577
Prepaid expenses and other........ 4,656 685 290 (535)(3) 5,096
-------- ------- ------ -------- --------
Total current assets...... 105,822 2,711 1,445 (46,991) 62,987
Investments in affiliates, at
cost.............................. 2,378 -- -- (1,198)(1) 1,180
Restricted cash and securities...... 19,539 -- -- -- 19,539
Equipment and leasehold
improvements, net................. 28,213 2,315 2,043 -- 32,571
Other assets:
Goodwill, net..................... 83,216 -- -- 69,025(1) 152,241
Other, net........................ 7,303 196 41 -- 7,540
-------- ------- ------ -------- --------
Total assets.............. $246,471 $ 5,222 $3,529 $ 20,836 $276,058
======== ======= ====== ======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued
expenses....................... $ 19,634 $ 2,049 $ 458 $ -- $ 22,141
Lines of credit, notes payable and
current portion of long-term
debt and capital lease
obligations.................... 4,326 1,166 450 (535)(3) 5,407
Deferred revenue.................. 7,177 921 953 -- 9,051
-------- ------- ------ -------- --------
Total current
liabilities............. 31,137 4,136 1,861 (535) 36,599
Long-term debt and capital lease
obligations, less current
portion........................... 142,321 594 736 -- 143,651
-------- ------- ------ -------- --------
Total liabilities......... 173,458 4,730 2,597 (535) 180,250
Minority interests in
subsidiaries...................... 2,765 -- -- (2,765)(5) --
Redeemable preferred stock.......... 97,249 2,716 -- (2,716)(2) --
(97,249)(7)
Stockholders' deficit:
Preferred stock................... 10,200 -- -- (10,200)(7) --
Common stock and additional
paid-in capital................ 1,598 848 844 (1,692)(2) 134,607
107,449(7)
25,560(1)
Warrants.......................... 12,675 -- -- -- 12,675
Retained earnings (deficit)....... (51,474) (3,072) 88 2,984(2) (51,474)
-------- ------- ------ -------- --------
(27,001) (2,224) 932 124,101 95,808
-------- ------- ------ -------- --------
Total liabilities and
stockholders' deficit... $246,471 $ 5,222 $3,529 $ 20,836 $276,058
======== ======= ====== ======== ========
</TABLE>
F-4
<PAGE> 148
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 $32,887 $ 6,790 $ (98)(3) $ 63,055
Enhanced services and other............. 12,216 11,340 1,654 -- 25,210
---------- ------- ------- ----------- -----------
Total revenue.................... 35,692 44,227 8,444 (98) 88,265
---------- ------- ------- ----------- -----------
Costs and expenses:
Internet services operating costs....... 15,974 19,338 2,909 (76)(3) 38,145
Selling, general and administrative and
other................................. 49,383 28,411 4,276 -- 82,070
Depreciation and amortization........... 10,624 2,524 733 12,030(4) 25,911
---------- ------- ------- ----------- -----------
Total costs and expenses......... 75,981 50,273 7,918 11,954 146,126
---------- ------- ------- ----------- -----------
Loss from operations.................. (40,289) (6,046) 526 (12,052) (57,861)
Other income (expense):
Interest income......................... 6,080 56 11 -- 6,147
Interest expense........................ (11,826) (458) (133) -- (12,417)
Equity in losses of affiliates.......... (1,958) -- -- 1,958(5) --
---------- ------- ------- ----------- -----------
Loss before minority interests and
income taxes........................ (47,993) (6,448) 404 (10,094) (64,131)
Minority interests........................ 1,924 -- -- (1,924)(5) --
Income taxes.............................. -- (1,076) (171) 1,247(6) --
---------- ------- ------- ----------- -----------
Net loss......................... (46,069) (7,524) (233) (10,771) (64,131)
Accretion of preferred stock to
liquidation value....................... (260) -- -- 260(7) --
---------- ------- ------- ----------- -----------
Net loss attributable to common
stockholders............................ $ (46,329) $(7,524) $ 233 $ (10,511) $ (64,131)
========== ======= ======= =========== ===========
Weighted average shares
outstanding -- basic and diluted........ 1,144,685 20,945,667(8) 22,090,352
========== =========== ===========
Loss per common share -- basic and
diluted................................. $ (40.47) $ (2.90)
========== ===========
</TABLE>
F-5
<PAGE> 149
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(A) BASIS OF PRESENTATION
During the period from inception (March 1, 1996) to April 9, 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
APRIL 9, 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 January 17, 1997 100% 100%
Division................................
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% 100%
March 6, 1998 15%
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> 150
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OWNERSHIP PERCENTAGE
--------------------------------------
COMPLETED
ACQUISITIONS
THROUGH
APRIL 9, 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%
NSNet, Inc................................ February 27, 1998 100% 100%
LI Net, Inc............................... April 9, 1998 100% 100%
STARnet, L.L.C............................ -- -- 100% 100%
Computing Engineers Inc................... -- -- 100% 100%
Matrix Online Media, Inc.................. -- -- 100% 100%
Florida Internet Corporation.............. -- -- 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 April 9, 1998, including the acquisitions of the remaining interests in
certain consolidated subsidiaries and minority owned affiliates, and proposed
acquisitions to be completed subsequent to April 9, 1998. 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> 151
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 as of December 31, 1997 is as follows:
<TABLE>
<CAPTION>
INTERNET NATIONAL STRUCTURED
PACIFIC RIM SIGNET ENGINEERING KNOWLEDGE NETWORK
NETWORK, INC. PARTNERS, INC. ASSOCIATES, INC. NSNET, INC. NETWORKS, INC. SYSTEMS, INC.
------------- -------------- ---------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents.............. $ -- $ 60 $271 $ 20 $ 166 $ 27
Receivables, net........... 46 112 106 86 73 206
Prepaid expenses and
other.................... 31 83 49 354 12 1
----- ----- ---- ---- ------- -----
Total current
assets.............. 77 255 426 460 251 234
Equipment and leasehold
improvements, net.......... 181 238 191 379 92 54
Other assets............... -- 25 45 67 13 7
----- ----- ---- ---- ------- -----
Total assets......... 258 $ 518 $662 $906 $ 356 $ 295
===== ===== ==== ==== ======= =====
Current liabilities:
Accounts payable and
accrued expenses......... 366 $ 285 $119 $139 $ 70 $ 252
Lines of credit, notes
payable and current
portion of long-term debt
and capital lease
obligations.............. 100 35 32 234 89 70
Deferred revenue........... 12 88 157 83 112 16
----- ----- ---- ---- ------- -----
Total current
liabilities......... 478 408 308 456 271 338
Long-term debt and capital
lease obligations, less
current portion.......... 124 10 10 62 65 15
----- ----- ---- ---- ------- -----
Total liabilities.... 602 418 318 518 336 353
Redeemable preferred
stock...................... 150 802 206 -- 899 150
Stockholders' equity:
Common stock and additional
paid-in capital.......... 55 38 10 107 227 1
Retained earnings
(deficit)................ (549) (740) 128 281 (1,106) (209)
----- ----- ---- ---- ------- -----
Total stockholders'
equity (deficit).... (494) (702) 138 388 (879) (208)
----- ----- ---- ---- ------- -----
Total liabilities and
stockholders' equity
(deficit)........... $ 258 $ 518 $662 $906 $ 356 $ 295
===== ===== ==== ==== ======= =====
<CAPTION>
ACCESS ONE, LI NET
INC. INC. TOTAL
----------- ------ -------
<S> <C> <C> <C>
Current assets:
Cash and cash
equivalents.............. $ 259 $ 25 $ 828
Receivables, net........... 344 225 1,198
Prepaid expenses and
other.................... 146 9 685
------ ----- -------
Total current
assets.............. 749 259 2,711
Equipment and leasehold
improvements, net.......... 679 501 2,315
Other assets............... 10 29 196
------ ----- -------
Total assets......... $1,438 $ 789 $ 5,222
====== ===== =======
Current liabilities:
Accounts payable and
accrued expenses......... $ 550 $ 268 $ 2,049
Lines of credit, notes
payable and current
portion of long-term debt
and capital lease
obligations.............. 453 153 1,166
Deferred revenue........... 294 159 921
------ ----- -------
Total current
liabilities......... 1,297 580 4,136
Long-term debt and capital
lease obligations, less
current portion.......... 38 270 594
------ ----- -------
Total liabilities.... 1,335 850 4,730
Redeemable preferred
stock...................... 509 -- 2,716
Stockholders' equity:
Common stock and additional
paid-in capital.......... 93 317 848
Retained earnings
(deficit)................ (499) (378) (3,072)
------ ----- -------
Total stockholders'
equity (deficit).... (406) (61) (2,224)
------ ----- -------
Total liabilities and
stockholders' equity
(deficit)........... $1,438 $ 789 $ 5,222
====== ===== =======
</TABLE>
F-8
<PAGE> 152
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Historical condensed balance sheet information for the Proposed
Acquisitions as of December 31, 1997 is as follows:
<TABLE>
<CAPTION>
FLORIDA MATRIX COMPUTING
INTERNET ONLINE ENGINEERS STARNET,
CORPORATION MEDIA, INC. INC. L.L.C. TOTAL
----------- ----------- --------- -------- ------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents....................... $ 4 $ 111 $ 16 $ 210 $ 341
Receivables, net................................ 107 165 430 112 814
Prepaid expenses and other...................... 145 18 39 88 290
----- ----- ------ ----- ------
Total current assets..................... 256 294 485 410 1,445
Equipment and leasehold improvements, net......... 219 566 1,050 208 2,043
Other assets.................................... 3 14 20 4 41
----- ----- ------ ----- ------
Total assets............................. $ 478 $ 874 $1,555 $ 622 $3,529
===== ===== ====== ===== ======
Current liabilities:
Accounts payable and accrued expenses........... $ 96 $ 59 $ 259 $ 44 $ 458
Lines of credit, notes payable and current
portion of long-term debt and capital lease
obligations................................... -- 142 308 -- 450
Deferred revenue................................ 212 119 250 372 953
----- ----- ------ ----- ------
Total current liabilities................ 308 320 817 416 1,861
Long-term debt and capital lease obligations,
less current portion.......................... -- 122 614 -- 736
----- ----- ------ ----- ------
Total liabilities........................ 308 442 1,431 416 2,597
Redeemable preferred stock........................
Stockholders' equity:
Common stock and additional paid-in capital..... 298 540 6 -- 844
Retained earnings (deficit)..................... (128) (108) 118 206 88
----- ----- ------ ----- ------
Total stockholders' equity (deficit)..... 170 432 124 206 932
----- ----- ------ ----- ------
Total liabilities and stockholders'
equity (deficit)....................... $ 478 $ 874 $1,555 $ 622 $3,529
===== ===== ====== ===== ======
</TABLE>
F-9
<PAGE> 153
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>
PIONEER GLOBAL
AIMNET RUSTNET, COMPUTE NORTHWEST TELECOMMUNICATIONS, WEST COAST
YEAR ENDED DECEMBER 31, 1997 CORPORATION INC. GES INTENSIVE NET INC. ONLINE, INC.
---------------------------- ----------- -------- ----- --------- --------- ------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity....... $1,068 $ 310 $ 112 $ 468 $ 709 $ 62 $1,192
Enhanced services and
other..................... 101 69 -- 326 351 7 457
------ ----- ----- ----- ------ ---- ------
Total revenue......... 1,169 379 112 794 1,060 69 1,649
Operating costs and expenses:
Internet services operating
costs..................... 444 147 94 301 113 33 735
Selling, general and
administrative and
other..................... 978 319 133 673 1,661 37 981
Depreciation and
amortization.............. 248 17 -- 16 136 4 77
------ ----- ----- ----- ------ ---- ------
Total costs and
expenses............ 1,670 483 227 990 1,910 74 1,793
------ ----- ----- ----- ------ ---- ------
Earnings (loss) from
operations................ (501) (104) (115) (196) (850) (5) (144)
Interest income............... 8 -- --
Interest expense.............. -- (8) -- (8) -- (2) --
------ ----- ----- ----- ------ ---- ------
Earnings (loss) before
income taxes............ (493) (112) (115) (204) (850) (7) (144)
Income taxes.................. -- -- -- -- 118 (5) --
------ ----- ----- ----- ------ ---- ------
Net earnings (loss)... $ (493) $(112) $(115) $(204) $ (732) $(12) $ (144)
====== ===== ===== ===== ====== ==== ======
<CAPTION>
BRANCH
INFORMATION
YEAR ENDED DECEMBER 31, 1997 SERVICES, INC.
---------------------------- --------------
<S> <C>
Revenue:
Internet connectivity....... $588
Enhanced services and
other..................... 84
----
Total revenue......... 672
Operating costs and expenses:
Internet services operating
costs..................... 84
Selling, general and
administrative and
other..................... 298
Depreciation and
amortization.............. 2
----
Total costs and
expenses............ 384
----
Earnings (loss) from
operations................ 288
Interest income............... --
Interest expense.............. --
----
Earnings (loss) before
income taxes............ 288
Income taxes.................. (101)
----
Net earnings (loss)... $187
====
</TABLE>
<TABLE>
<CAPTION>
GLOBAL
CLARK INTERNET
INTERNET SURF NETWORK
COMMUNIQUE, SERVICES, NETWORK, ATMNET, SERVICES,
INC. INC. INC. SESQUINET INC. INC. PREPNET
----------- --------- -------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Internet connectivity................... $1,454 $2,582 $ 585 $1,124 $2,754 $2,501 $2,026
Enhanced services and other............. 764 562 190 -- 73 1,284 121
------ ------ ------ ------ ------- ------ ------
Total revenue..................... 2,218 3,144 775 1,124 2,827 3,785 2,147
Operating costs and expenses:
Internet services operating costs....... 690 1,394 431 538 2,976 2,679 793
Selling, general and administrative and
other................................. 1,159 1,784 981 367 1,786 1,019 773
Depreciation and amortization........... 5 116 76 54 40 280 121
------ ------ ------ ------ ------- ------ ------
Total costs and expenses.............. 1,854 3,294 1,488 959 4,802 3,978 1,687
------ ------ ------ ------ ------- ------ ------
Earnings (loss) from operations....... 364 (150) (713) 165 (1,975) (193) 460
Interest income........................... -- 2 -- -- -- -- --
Interest expense.......................... -- (25) (33) -- (171) (8) (11)
------ ------ ------ ------ ------- ------ ------
Earnings (loss) before income taxes... 364 (173) (746) 165 (2,146) (201) 449
Income taxes.............................. (127) -- -- (58) -- -- (171)
------ ------ ------ ------ ------- ------ ------
Net earnings (loss)............... $ 237 $ (173) $ (746) $ 107 $(2,146) $ (201) $ 278
====== ====== ====== ====== ======= ====== ======
</TABLE>
F-10
<PAGE> 154
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...................... $2,425 $ 704 $ 1,536 $ 472 $1,133 $1,832
Enhanced services and other................ 47 3,688 627 337 518 15
------ ------ ------- ----- ------ ------
Total revenue.......................... 2,472 4,392 2,163 809 1,651 1,847
Operating costs and expenses:
Internet services operating costs.......... 1,162 536 1,229 385 336 471
Selling, general and administrative and
other.................................... 1,757 2,006 1,814 674 1,977 939
Depreciation and amortization.............. 172 260 197 69 10 126
------ ------ ------- ----- ------ ------
Total costs and expenses............... 3,091 2,802 3,240 1,128 2,323 1,536
------ ------ ------- ----- ------ ------
Earnings (loss) from operations.......... (619) 1,590 (1,077) (319) (672) 311
Interest income.............................. -- 26 -- -- -- --
Interest expense............................. (16) -- (42) (15) (5) (6)
------ ------ ------- ----- ------ ------
Earnings (loss) before income taxes...... (635) 1,616 (1,119) (334) (677) 305
Income taxes................................. -- (602) 33 (15) -- (116)
------ ------ ------- ----- ------ ------
Net earnings (loss).................... $ (635) $1,014 $(1,086) $(349) $ (677) $ 189
====== ====== ======= ===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
INTERNET NATIONAL
ENGINEERING STRUCTURED KNOWLEDGE
ASSOCIATES, NETWORK ACCESSONE, NETWORKS, LI
INC. SYSTEMS, INC. INC. INC. NET, INC. TOTAL
---------------- ------------- ---------- -------------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity.................... $ 831 $ 859 $2,484 $1,169 $1,907 $32,887
Enhanced services and other.............. 303 27 1,035 234 120 11,340
------ ----- ------ ------ ------ -------
Total revenue........................ 1,134 886 3,519 1,403 2,027 44,227
Operating costs and expenses:
Internet services operating costs........ 323 473 1,510 669 792 19,338
Selling, general and administrative and
other.................................. 678 511 2,251 1,282 1,573 28,411
Depreciation and amortization............ 63 -- 245 55 135 2,524
------ ----- ------ ------ ------ -------
Total costs and expenses............. 1,064 984 4,006 2,006 2,500 50,273
------ ----- ------ ------ ------ -------
Earnings (loss) from operations........ 70 (98) (487) (603) (473) (6,046)
Interest income............................ 14 -- -- 6 -- 56
Interest expense........................... -- (17) (26) (26) (39) (458)
------ ----- ------ ------ ------ -------
Earnings (loss) before income taxes.... 84 (115) (513) (623) (512) (6,448)
Income taxes............................... (29) -- -- (3) -- (1,076)
------ ----- ------ ------ ------ -------
Net earnings (loss).................. $ 55 $(115) $ (513) $ (626) $ (512) $(7,524)
====== ===== ====== ====== ====== =======
</TABLE>
F-11
<PAGE> 155
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Historical condensed statement of operations information for the Proposed
Acquisitions for the year ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
FLORIDA MATRIX
INTERNET ONLINE WORLDWIDE STARNET,
YEAR ENDED DECEMBER 31, 1997 CORPORATION MEDIA, INC. ACCESS L.L.C. TOTAL
- ---------------------------- ----------- ----------- --------- -------- ------
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity.................... $1,172 $1,094 $3,322 $1,202 $6,790
Enhanced services and other.............. 264 233 758 399 1,654
------ ------ ------ ------ ------
Total revenue.................... $1,436 $1,327 $4,080 $1,601 $8,444
------ ------ ------ ------ ------
Operating costs and expenses:
Internet services operating costs........ 773 393 1,026 717 2,909
Selling, general and administrative and
other................................. 578 787 2,341 570 4,276
Depreciation and amortization............ 121 127 329 156 733
------ ------ ------ ------ ------
Total costs and expenses......... 1,472 1,307 3,696 1,443 7,918
------ ------ ------ ------ ------
Earnings (loss) from
operations.......................... (36) 20 384 158 526
Interest Income............................ -- 2 -- 9 11
Interest Expense........................... (12) (19) (96) (6) (133)
------ ------ ------ ------ ------
Earnings (loss) before income taxes... (48) 3 288 161 404
Income taxes............................... -- -- (110) (61) (171)
------ ------ ------ ------ ------
Net earnings (loss).............. $ (48) $ 3 $ 178 $ 100 $ 233
====== ====== ====== ====== ======
</TABLE>
F-12
<PAGE> 156
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 $69,025,000 and to adjust investments in affiliates for
the proposed acquisitions of majority interests. Preferred shares issued
for acquisitions were recorded at fair value as determined by the Company's
Board of Directors and based on other third-party issuances of Company
securities. In the opinion of management, the historical balances of all
other assets acquired and liabilities assumed approximate fair value.
(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, as if
such acquisitions had been completed as of January 1, 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 reflect the conversion of all preferred shares into common
stock upon completion of the proposed IPO.
(8) To reflect the conversion of 20,945,667 shares of preferred stock
into common stock upon completion of the proposed IPO, including 1,704,000
shares of preferred stock assumed to be issued and converted to common
stock subsequent to December 31, 1997.
F-13
<PAGE> 157
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-14
<PAGE> 158
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 of accumulated amortization of
$330.................................................... -- 4,858
Organization costs and other, net......................... 262 2,445
-------- --------
Total assets........................................ $ 82,628 $246,471
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 2,132 $ 7,389
Accrued expenses.......................................... 931 11,401
Accrued interest payable.................................. -- 844
Accrued preferred stock issuance costs.................... 1,110 --
Lines of credit, notes payable and current portion of
long-term debt (note 3)................................. 2,573 2,751
Current portion of capital lease obligations (note 4)..... 64 1,575
Deferred revenue.......................................... 659 7,177
-------- --------
Total current liabilities........................... 7,469 31,137
Long-term debt, less current portion, net of discount (note
3)........................................................ 20 139,376
Capital lease obligations, less current portion (note 4).... 86 2,945
-------- --------
Total liabilities................................... 7,575 173,458
-------- --------
Minority interests in subsidiaries (note 2)................. 2,231 2,765
Redeemable preferred stock (note 5):
Series A, convertible, $.001 par value. 6,100,000 shares
authorized, 6,033,333 shares issued and outstanding at
December 31, 1996 and 1997. Liquidation preference of
$18,100................................................. 18,078 18,080
Series B, convertible, $.001 par value. 10,117,000 shares
authorized 10,000,000 and 10,028,334 shares issued and
outstanding at December 31, 1996 and 1997. Liquidation
preference of $60,170................................... 58,799 59,193
Series C, convertible, $.001 par value. 2,500,000 shares
authorized, issued and outstanding at December 31, 1997.
Liquidation preference of $20,000....................... -- 19,976
-------- --------
76,877 97,249
-------- --------
Stockholders' equity (deficit) (note 6):
Preferred stock, Series D-1, convertible, $.001 par value.
3,000,000 shares authorized, 680,000 shares issued and
outstanding at December 31, 1997. Liquidation preference
of $10,200 (note 5)..................................... -- 10,200
Common stock, $.001 par value; 35,133,000 shares
authorized; 1,090,000 and 1,254,533 shares issued and
outstanding at December 31, 1996 and 1997............... 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-15
<PAGE> 159
VERIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEAR
(MARCH 1, 1996) ENDED
TO DECEMBER 31, DECEMBER 31,
1996 1997
----------------- ------------
<S> <C> <C>
Revenue:
Internet connectivity:
Dedicated.............................................. $ 1,100 $ 16,383
Dial-up................................................ 1,139 7,093
Enhanced services and other............................... 126 12,216
------- --------
Total revenue..................................... 2,365 35,692
Costs and expenses:
Internet services operating costs......................... 974 15,974
Selling, general and administrative and other............. 7,002 49,383
Depreciation and amortization............................. 669 10,624
------- --------
Total costs and expenses.......................... 8,645 75,981
------- --------
Loss from operations.............................. (6,280) (40,289)
Other income (expense):
Interest income........................................... 593 6,080
Interest expense.......................................... (115) (11,826)
Equity in losses of affiliates............................ -- (1,958)
------- --------
Loss before minority interests.................... (5,802) (47,993)
Minority interests.......................................... 680 1,924
------- --------
Net loss.......................................... (5,122) (46,069)
Accretion of preferred stock to liquidation value........... (23) (260)
------- --------
Net loss attributable to common shareholders...... $(5,145) $(46,329)
======= ========
Loss per common share -- basic and diluted.................. $ (5.29) $ (40.47)
======= ========
Weighted average number of common shares outstanding --basic
and diluted............................................... 971,748 1,144,685
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE> 160
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-17
<PAGE> 161
VERIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION YEAR
(MARCH 1, 1996) ENDED
TO DECEMBER 31, DECEMBER 31,
1996 1997
--------------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(5,122) $(46,069)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization.......................... 669 10,624
Minority interests' share of losses.................... (680) (1,924)
Equity in losses of affiliates......................... -- 1,958
Changes in operating assets and liabilities, excluding
effects of business combinations:
Receivables.......................................... (265) (1,561)
Prepaid expenses and other current assets............ (284) (2,305)
Accounts payable..................................... 1,439 (1,656)
Accrued expenses..................................... 1,910 3,082
Accrued interest payable............................. -- 844
Deferred revenue..................................... 7 1,684
------- --------
Net cash used by operating activities............. (2,326) (35,323)
------- --------
Cash flows from investing activities:
Acquisition of equipment and leasehold improvements....... (3,430) (14,547)
Acquisition of net assets in business combinations and
investments in affiliates, net of cash acquired........ (5,627) (64,023)
Restricted cash and securities............................ (40,554)
Other..................................................... (66) (1,206)
------- --------
Net cash used by investing activities............. (9,123) (120,330)
------- --------
Cash flows from financing activities:
Proceeds from lines of credit, notes payable and long-term
debt................................................... -- 145,512
Repayments of lines of credit and notes payable........... (20) (3,468)
Repayments of capital lease obligations................... (8) (950)
Proceeds from issuance of common and preferred stock, net
of issuance costs...................................... 77,944 20,678
------- --------
Net cash provided by financing activities......... 77,916 161,772
------- --------
Net increase in cash and cash equivalents......... 66,467 6,119
Cash and cash equivalents:
Beginning of period....................................... -- 66,467
------- --------
End of period............................................. $66,467 $ 72,586
======= ========
Supplemental disclosures of cash flow information:
Cash paid for interest.................................... $ -- $ 10,982
======= ========
Equipment acquired through capital lease obligations...... $ 58 $ 3,301
======= ========
Acquisition of net assets in business combination through
issuance of notes payable.............................. $ 6,675 $ 4,718
======= ========
Acquisition of net assets in business combination through
issuance of preferred stock............................ $ -- $ 10,200
======= ========
Warrants issued in connection with debt offering.......... $ -- $ 12,675
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE> 162
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Basis of Presentation
Verio Inc. (Verio or the Company) was incorporated on March 1, 1996 to
capitalize on the growing demand for Internet access and enhanced services by
business users through the acquisition, integration, and growth of existing
independent Internet service providers with a business customer focus in
targeted geographic regions. The goal of the Company is to be the dominant,
full-service national provider of Internet connectivity and enhanced Internet
services to small and medium sized businesses. The Company commenced operations
in April 1996 and had no activity other than the sale of common stock to
founders prior to April 1, 1996.
The accompanying consolidated financial statements include the accounts of
Verio and its majority owned subsidiaries, as described in Note 2. All
significant intercompany balances and transactions have been eliminated in
consolidation. The preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
(b) Cash and Cash Equivalents and Restricted Cash
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. Included in cash
equivalents as of December 31, 1996 and December 31, 1997 are U.S. government,
municipal and corporate debt securities, money market accounts and commercial
paper, totaling $61,769,000 and $75,442,000 (exclusive of cash overdraft in the
amount of $11,228,000), respectively, with maturities ranging from thirty to
ninety days.
Restricted cash and securities include U.S. government securities which are
classified as securities held to maturity and recorded at cost. At December 31,
1997, cost approximated market value.
(c) Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost. Depreciation is
provided over the estimated useful lives of the assets ranging from 3 to 5 years
using the straight-line method. Leasehold improvements are amortized over the
shorter of the lease term or the estimated useful life of the asset.
(d) Investments in Affiliates and Consolidation of Subsidiaries
Investments in affiliates represent newly issued preferred shares of
various affiliates. The preferred shares are convertible at the option of the
Company into common shares on a one-for-one basis and represent future common
stock ownership interests, upon conversion, of less than 50%. As the Company did
not acquire a common stock ownership interest, these investments are recorded at
cost until such time as the preferred shares are converted to common. In
addition, if these entities incur losses resulting in the equity of the common
shareholders being reduced to zero, the Company will utilize the equity method
of accounting for these investments and will generally recognize 100% of all
losses of the affiliates from that date, up to the amount of the Company's
investment, based on the inability of the majority common shareholders to fund
additional losses. During the year ended December 31, 1997, the Company
recognized equity in losses of affiliates of $1,958,000 under this method of
accounting.
The Company has also acquired preferred shares in certain entities which
are convertible into future common stock ownership interests of greater than
50%. In these situations, the Company has majority representation on the Board
of Directors and majority voting rights, exercises significant control over the
F-19
<PAGE> 163
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
entities' operations, and intends to acquire a 100% common ownership interest in
the future. Accordingly, the accounts of these investees have been consolidated
with those of the Company in the accompanying consolidated financial statements
from the dates of acquisition (see note 2).
(e) Other Assets
The excess of cost over the fair value of net assets acquired, or goodwill,
is amortized using the straight-line method over a 10-year period. Other
intangibles are amortized using the straight-line method over periods ranging
from three to seven years.
(f) Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lives Assets to be Disposed
Of (SFAS 121). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations, including goodwill, when indications of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. In addition, the
recoverability of goodwill is further evaluated under the provisions of APB
Opinion No. 17, Intangible Assets, based upon undiscounted cash flows. If such
assets are impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the estimated fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
value or fair value, less costs to sell.
(g) Revenue Recognition
Revenue related to Internet services is recognized as the services are
provided, and deferred and amortized to operations for amounts billed relating
to future periods. Installation and customer set-up fees are recognized upon
completion of the services. Revenue from consulting services is recognized as
the services are provided. Revenue from hardware and software sales is
recognized upon shipment of the respective products.
(h) 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-20
<PAGE> 164
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 shareholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock and resulted in the
issuance of common stock. Basic and diluted EPS are the same in 1996 and 1997,
and all common stock equivalents are antidilutive.
(2) BUSINESS COMBINATIONS AND INVESTMENTS IN AFFILIATES
During the period from inception (March 1, 1996) to December 31, 1996, the
Company completed seven business combinations and investments for cash and notes
payable. All of the acquisitions were accounted for using the purchase method of
accounting 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%(b)
RAINet, Inc.................. August 2, 1996 100% 100%(c)
CCnet Inc.................... December 19, 1996 100% 100%(c)
</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%(b)
National Knowledge Networks,
Inc........................... August 2, 1996 26% 26%(b)
Access One, Inc................. December 12, 1996 20% 20%(b)
Signet Partners, Inc............ December 19, 1996 25% 25%(b)
</TABLE>
The aggregate purchase price of the above investments, including acquisition
costs of $102,000, was $1,536,000.
F-21
<PAGE> 165
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%(d)
Pioneer Global Telecommunications,
Inc. ........................... February 6, 1997 100% 100%(c)
Compute Intensive Inc. ........... February 18, 1997 55% 55%(b)
NorthWestNet, Inc. ............... February 28, 1997 85% 85%(c)
RUSTnet, Inc. .................... March 14, 1997 100% 100%(c)
Aimnet Corporation ............... May 19, 1997 55%
September 22, 1997 45% 100%(c)
Branch Information Services,
Inc. ........................... September 17, 1997 100% 100%(c)
West Coast Online, Inc. .......... April 29, 1997 12%
September 30, 1997 68% 100%(b)
Communique, Inc. ................. October 2, 1997 100% 100%(c)
Clark Internet Services, Inc. .... October 17, 1997 51% 51%(b)
ATMnet, Inc. ..................... November 5, 1997 100% 100%(d)
Global Internet Network Services,
Inc. ........................... December 1, 1997 100% 100%(c)
Surf Network, Inc. ............... January 31, 1997 25%
December 22, 1997 75% 100%(b)
PREPnet........................... December 24, 1997 100% 100%(d)
Service Tech, Inc. ............... August 1, 1997 40%
December 31, 1997 60% 100%(b)
Monumental Network Systems,
Inc. ........................... December 31, 1997 100% 100%(c)
Internet Servers, Inc. ........... December 31, 1997 100% 100%(c)
</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-22
<PAGE> 166
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%(b)
Internet Engineering Associates,
Inc........................... March 4, 1997 20% 20%(b)
Internet Online, Inc............ March 5, 1997 35% 35%(b)
Structured Network Systems,
Inc........................... March 6, 1997 20% 20%(b)
National Knowledge Networks,
Inc........................... November 7, 1997 15% 41%(b)
Signet Partners, Inc............ November 20, 1997 16% 41%(b)
</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.
(b) Represents ownership of preferred stock of affiliate or subsidiary.
(c) Represents ownership of common stock of affiliate or subsidiary.
(d) Represents acquisition of net assets.
The following unaudited condensed pro forma information presents the
unaudited results of operations of the Company as if the above consolidated
acquisitions had occurred on January 1, 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997
---------- ----------
(AMOUNTS IN THOUSANDS,
EXCEPT FOR PER SHARE DATA)
<S> <C> <C>
Revenue..................................................... $ 44,693 $ 63,665
Net loss.................................................... (33,326) (59,006)
Net loss attributable to common shareholders................ (33,349) (59,266)
Loss per common share -- basic and diluted.................. $ (34.32) $ (51.77)
</TABLE>
The pro forma results do not necessarily represent results that would have
occurred if the consolidated acquisitions had taken place as of January 1, 1996,
nor are they necessarily indicative of the results of future operations.
For all of its less-than-100%-owned ISP affiliates, the Company has the
option to acquire all of the remaining ownership interests. Generally, the
option may be exercised beginning one year from the date of the initial
investment or upon the earlier of the completion of an initial public offering
of common stock by the Company or a significant strategic investment in the
Company. In one case, the Company's option becomes mandatorily exercisable upon
completion of an initial public offering.
Subsequent to December 31, 1997 and through February 25, 1998, the Company
has completed or expects to complete the acquisition of the remaining ownership
interests and acquisitions of 12 ISPs, for total consideration of approximately
$50 million in preferred stock and cash.
F-23
<PAGE> 167
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 based on the Company's most recent equity
offering. Interest on the 1997 Notes is payable semi-annually on June 15
and December 15 of each year. The value attributed to the warrants has been
recorded as debt discount and is being amortized to interest expense using
the interest method over the term of the 1997 Notes. Upon closing, the
Company deposited U.S. Treasury securities in an escrow account in an
amount that, together with interest on the securities, will be sufficient
to fund the first five interest payments (through December 1999) on the
1997 Notes. This restricted cash and securities balance totaled $38,195,404
at December 31, 1997. The 1997 Notes are redeemable on or after June 15,
2002 at 103% of the face value.
The indenture covering the 1997 Notes includes various covenants
restricting the payment of dividends, additional indebtedness, disposition of
assets, and transactions with affiliates.
Maturities of lines of credit, notes payable and long-term debt are as
follows:
<TABLE>
<S> <C>
1998.............................................. $ 2,751
1999.............................................. 1,032
2000.............................................. 474
2001.............................................. --
2002.............................................. --
Thereafter........................................ 137,870
--------
$142,127
========
</TABLE>
As of February 25, 1998, Verio had received commitments from a group of
commercial lending institutions to provide an aggregate of up to $57.5 million
pursuant to a two-year revolving credit financing facility. The Company is in
the process of negotiating the definitive terms and conditions and final
documentation for this facility. Chase Manhattan Bank has committed to serve as
agent for the lenders in this facility. In addition, the Company is considering
a possible private placement of up to $100 million in senior
F-24
<PAGE> 168
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
notes. There can be no assurance that the Company will be able to negotiate
final terms and conditions that are acceptable to the Company with respect to,
or to consummate, either of such financing efforts.
(4) LEASES AND COMMITMENTS
The Company leases office space, certain facilities storing internet points
of presence and certain computer and office equipment under capital and
operating leases expiring at various dates through 2003. Future minimum annual
lease payments under these leases as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
1998........................................................ $ 2,279 $ 5,786
1999........................................................ 1,840 5,178
2000........................................................ 1,128 3,485
2001........................................................ 42 1,393
2002........................................................ 9 487
Thereafter.................................................. -- 172
------- -------
Total minimum payments............................ $ 5,298 $16,501
=======
Less amount representing interest........................... (778)
-------
Present value of net minimum lease payments....... 4,520
Less current portion........................................ (1,575)
-------
$ 2,945
=======
</TABLE>
Rent expense for the period from inception (March 31, 1996) to December 31,
1996 and the year ended December 31, 1997 was $128,000 and $1,856,000,
respectively.
In addition, the Company has entered into agreements with two
telecommunications companies to provide the Company with products and services
to be used in its operations. Under one agreement, the minimum payments as of
December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................ $1,200
1999................................................ 1,900
2000................................................ 2,400
2001................................................ 800
------
Total minimum payments.................... $6,300
======
</TABLE>
Under the second agreement, the Company is obligated to spend a total of
$39 million between June 16, 1997 and June 16, 2002 of which $1,500,000 had been
paid as of December 31, 1997. Annual payments will be based on actual usage by
the Company.
The Company had an outstanding irrevocable letter of credit in the amount
of $1.1 million as of December 31, 1997. This letter of credit, which is
automatically renewed after one year at the discretion of the bank, not to be
extended beyond January 31, 2003, is to collateralize the Company's lease
obligation to a third party. The fair value of this letter of credit
approximates contract value which is fixed over the life of the commitment.
Restricted cash in the amount of $1,400,000 secures the letter of credit.
(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
F-25
<PAGE> 169
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock initially on a one-for-one basis. In December 1997, the Company also
issued 680,000 shares of Series D-1 preferred shares at $15 per share in
connection with an acquisition. The preferred shares are entitled to receive
dividends equal, on an as-converted basis, to any amount paid to common
stockholders. In the event of any liquidation or dissolution of the Company,
including certain mergers, consolidations and asset sales, holders of the
preferred shares are entitled to receive an amount equal to the original
issuance price, plus any declared and unpaid dividends.
In addition, the Series A, B and C preferred shares are subject to
mandatory redemption, in total, by the Company in October 2004. The Series D-1
preferred shares are not redeemable. Upon redemption, the Series C shares are
senior to Series B shares, which are senior to Series A shares, on the basis
provided in the preferred stock terms. Series A, B, C and D-1 preferred shares
may be converted into shares of common stock at any time at the option of the
holder. The Series A, B, C and D-1 preferred shares are also subject to
mandatory conversion upon consummation of a public offering of common stock
resulting in proceeds to the Company of not less than $30 million and at an
offering price per share equal to at least $15. In addition, shares of Series
D-1 preferred stock are subject to mandatory conversion upon the election of
each of the Series A, B and C classes, each voting as a separate class, to
convert to common.
(6) STOCK-BASED COMPENSATION PLANS
The Company has established Incentive Stock Option Plans (the Plans)
whereby, at the discretion of the Board of Directors (the Board), the Company
may grant stock options to employees of the Company and its controlled
subsidiaries. As of December 31, 1997, the Company had reserved 2,750,000 shares
for issuance under the Plans. The Plans were amended 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-26
<PAGE> 170
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, of which $5.9
million and $44.0 million is available to offset future federal taxable income,
if any, through 2011 and 2012, respectively. As a result of various preferred
stock transactions during 1996 and 1997, management believes the Company has
undergone an "ownership change" as defined by section 382 of the Internal
Revenue Code. Accordingly, the utilization of a portion of the net operating
loss carryforward may be limited. Due to this limitation, and the uncertainty
regarding the ultimate utilization of the net operating loss carryforward, no
tax benefit for losses has been recorded by the Company in 1996 and 1997, and a
valuation allowance has been recorded for the entire amount of the deferred tax
asset 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 no
concentrations of credit risk. Concentrations of credit risk with respect to
trade receivables are limited
F-27
<PAGE> 171
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
due to the large number of customers comprising the Company's customer base and
the relatively minor balances of each individual account. At December 31, 1996
and December 31, 1997, the fair value, of the Company's financial instruments
approximate their carrying value, based on their terms and interest rates.
(9) EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Plan (the Plan) for all full time employees of the
Company. The Company may make discretionary contributions to the Plan on behalf
of employees that meet certain contribution eligibility requirements defined
under the terms of the Plan. The Company did not make any contributions to the
Plan during 1996 or 1997.
(10) QUARTERLY FINANCIAL DATA (UNAUDITED)
Summary quarterly financial information for the Company is as follows. The
second quarter of 1996 represents the period from inception (March 1, 1996) to
March 31, 1996 (Amounts in Thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
1996 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
---- -------- ------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
Revenue.................................. $ -- $ -- $ 678 $ 1,687 $ 2,365
Loss from operations..................... -- (329) (1,395) (4,556) (6,280)
Net loss................................. -- (329) (1,442) (3,374) (5,145)
Loss per common share -- basic and
diluted................................ -- (0.34) (1.48) (3.47) (5.29)
</TABLE>
<TABLE>
<CAPTION>
1997 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
---- -------- ------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
Revenue.................................. $ 4,414 $ 8,249 $ 9,624 $ 13,405 $ 35,692
Loss from operations..................... (5,592) (8,854) (10,741) (15,102) (40,289)
Net loss................................. (4,677) (8,120) (12,762) (20,770) (46,329)
Loss per common share -- basic and
diluted................................ (4.29) (7.28) (10.84) (18.06) (40.47)
</TABLE>
F-28
<PAGE> 172
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheet of On-Ramp Technologies,
Inc. as of July 31, 1996, and the related statements of operations,
stockholders' deficit, and cash flows for the nine months then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of On-Ramp Technologies, Inc.
as of July 31, 1996, and the results of its operations and its cash flows for
the nine months then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Denver, Colorado
April 11, 1997
F-29
<PAGE> 173
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-30
<PAGE> 174
ON-RAMP TECHNOLOGIES, INC.
STATEMENT OF OPERATIONS
NINE MONTHS ENDED JULY 31, 1996
<TABLE>
<S> <C>
Revenue:
Internet services......................................... $2,959,650
Computer hardware and software sales...................... 312,487
Consulting services....................................... 92,881
----------
Total revenue..................................... 3,365,018
----------
Cost and expenses:
Internet services operating costs......................... 606,249
Cost of hardware and software sales....................... 249,990
Selling, general and administrative....................... 2,210,706
Provision for bad debts................................... 497,742
Depreciation.............................................. 260,194
----------
Total operating expenses.......................... 3,824,881
----------
Loss from operations.............................. (459,863)
Other income (expense):
Interest income........................................... 8,035
Interest expense.......................................... (7,991)
----------
Net loss.......................................... $ (459,819)
==========
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE> 175
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-32
<PAGE> 176
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-33
<PAGE> 177
ON-RAMP TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Basis of Presentation
On-Ramp Technologies, Inc. (the Company) was incorporated in the State of
Texas on December 27, 1993. The Company's business consists of providing
regional internet access services, and hardware and software sales and
consulting, to customers in Texas and Georgia.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance.
Revenue from consulting services is recognized as the services are
provided. Revenue from hardware and software sales is recognized upon shipment
of the respective products.
Equipment
Equipment is stated at cost, less accumulated depreciation. Depreciation is
recorded using the straight-line method over the estimated useful life of the
related assets of three years. Costs for normal repairs and maintenance are
expensed as incurred.
Income Taxes
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, (SFAS 109).
Under SFAS 109, deferred income taxes are recognized for the future tax
consequences of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121). This
statement was effective for financial statements for fiscal years beginning
after December 15, 1995. Statement No. 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. The adoption of SFAS 121 as of November
1, 1995 did not have a significant effect on the Company's financial position or
results of operations.
Stock Based Compensation
In October 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, (SFAS No. 123), which establishes a fair
F-34
<PAGE> 178
ON-RAMP TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
value-based method of accounting for stock-based compensation plans. Companies
are encouraged to adopt all provisions of SFAS No. 123 and are required to
comply with the disclosure requirements of SFAS No. 123, which was effective for
fiscal years beginning after December 15, 1995. The Company will continue to
account for stock based compensation under the provisions of APB Opinion No. 25
and will provide the pro forma disclosures required by SFAS 123.
(2) EQUIPMENT
Equipment consisted of the following at July 31, 1996:
<TABLE>
<S> <C>
Internet and computer equipment............................. $1,155,370
Furniture and office equipment.............................. 119,973
Leasehold improvements...................................... 6,668
----------
1,282,011
Less accumulated depreciation............................... (414,623)
----------
$ 867,388
==========
</TABLE>
(3) DEBT
Debt as of July 31, 1996 consists of the following:
<TABLE>
<S> <C>
Note payable bearing interest at 18%, monthly principal and
interest payments of $7,020 through April 1, 1998......... $113,695
Less current portion...................................... (55,003)
--------
$ 58,692
========
</TABLE>
(4) COMMITMENTS AND CONTINGENCIES
Future minimum annual lease payments under operating leases for each of the
years ending July 31, are as follows:
<TABLE>
<S> <C>
1997........................................................ $129,377
1998........................................................ 326,781
1999........................................................ 324,755
2000........................................................ 211,920
--------
$992,833
========
</TABLE>
Rent expense for the nine months ended July 31, 1996 totaled $90,999.
Concentration of Credit Risk and Financial Instruments
The Company provides unsecured credit to customers in the normal course of
business. Failure of the customers to pay could result in losses up to the
recorded receivable balances. The Company does not have any customers that
represent greater than 5% of total revenue at July 31, 1996.
The Company conducts business in Texas and Georgia. Customers who operate
in Texas represent approximately 97% of the Company's customer base and accounts
receivable.
At July 31, 1996, the fair values of the Company's financial instruments
approximate their carrying values based on their terms and interest rates.
F-35
<PAGE> 179
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-36
<PAGE> 180
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-37
<PAGE> 181
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-38
<PAGE> 182
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-39
<PAGE> 183
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-40
<PAGE> 184
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-41
<PAGE> 185
GLOBAL ENTERPRISE SERVICES -- NETWORK DIVISION
(A DIVISION OF GLOBAL ENTERPRISE SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk and Financial Instruments
The Network Division provides unsecured credit to customers in the normal
course of business. Failure of the customers to pay could result in losses up to
the recorded receivable balances. The Network Division does not have any
customers that represent greater than 5% of total revenue for the years ended
December 31, 1994, 1995 and 1996 or for the period ended January 17, 1997.
At December 31, 1996, the fair values of the Network Division's financial
instruments approximate their carrying values based on their terms and interest
rates.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121). This
statement was effective for financial statements for fiscal years beginning
after December 15, 1995. Statement No. 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. The adoption of SFAS 121 effective
January 1, 1996 did not have a significant effect on the Network Division's
financial position or results of operations.
(2) EQUIPMENT
Equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Internet and computer equipment............................. $2,277,949 3,286,929
Furniture and office equipment.............................. 5,889 64,709
Leasehold improvements...................................... 27,165 204,624
---------- -----------
2,311,003 3,556,262
Less accumulated depreciation and amortization.............. (638,958) (1,167,753)
---------- -----------
$1,672,045 2,388,509
========== ===========
</TABLE>
(3) RELATED PARTY TRANSACTIONS
Amounts due to related party represent net cash transfers between the
Network Division and the other divisions of GES, and are non interest bearing.
(4) EMPLOYEE BENEFIT PLAN
GES has established a defined contribution savings plan which provides for
eligible employees who have met certain age and service requirements to
participate by electing to contribute up to 15% of their gross salary to the
plan, as defined, with GES and the Network Division matching 25% of a
participant's contribution up to a maximum of 10% of gross salary, as defined.
Employee contributions are immediately vested. Contributions to the savings plan
on behalf of the Network Division employees for the years ended December 31,
1994, 1995 and 1996 were $3,253, $1,697 and $6,838, respectively.
F-42
<PAGE> 186
GLOBAL ENTERPRISE SERVICES -- NETWORK DIVISION
(A DIVISION OF GLOBAL ENTERPRISE SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) NATIONAL SCIENCE FOUNDATION GRANTS
The Network Division receives grant revenue from the National Science
Foundation (NSF) to provide network connections to certain not-for-profit
educational institutions. Funding is received on a per entity basis. The grant
revenue is recognized ratably over the term of the contract with the
not-for-profit educational institution, which is generally twelve months. Grant
revenue amounted to $131,166, $99,487 and $47,112, in 1994, 1995 and 1996,
respectively. Total amounts receivable at December 31, 1994, 1995 and 1996 were
$34,990, $72,199 and $23,243, respectively.
In September 1994, GES and the Network Division entered into a four year
cooperative agreement with the NSF to provide for interregional connectivity for
the Network Division's United States research and educational customers in the
aggregate amount of $625,115. Pursuant to the agreement, the Network Division
will be reimbursed by the NSF for costs associated with upgrading the Network
Division's existing telecommunications network. The level of funding for each
year will be determined based upon a progress review of the Network Division by
the NSF and the availability of NSF funds. The Network Division is required to
submit an annual plan to the NSF. For the years ended December 31, 1995 and
1996, respectively, the Network Division recognized $154,344 and $196,169 as a
reduction to internet services operating costs. No amounts were recognized for
the year ended December 31, 1994. Total amounts receivable were $30,904 and
$10,326 as of December 31, 1995 and 1996, respectively.
(6) LEASES
The Network Division has entered into capital and operating leases for
telecommunications equipment and office space. Future minimum lease commitments
under all leases at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ ---------- ---------
<S> <C> <C>
1997................................... $ 650,731 344,562
1998................................... 468,940 360,623
1999................................... 392,382 360,830
2000................................... 89,056 372,295
2001................................... -- 191,466
---------- ---------
Total minimum lease payments............................. 1,601,109 1,629,776
=========
Less amount representing interest.......................... (228,467)
----------
Present value of minimum lease payments.................. $1,372,642
Less current portion....................................... (548,608)
----------
$ 824,034
==========
</TABLE>
Rent expense for the years ended December 31, 1994, 1995 and 1996 was
$193,904, $218,408 and $455,936, respectively.
The Network Division has guaranteed monthly usage levels with its primary
communications vendors at December 31, 1996 as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1997.................................................... $205,000
1998.................................................... 205,000
1999.................................................... 51,250
--------
Total.............................................. $461,250
========
</TABLE>
F-43
<PAGE> 187
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheets of Compute Intensive, Inc.
as of December 31, 1995 and 1996, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the two
year period ended December 31, 1996 and for the period ended February 18, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Compute Intensive, Inc. as
of December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the years in the two year period ended December 31, 1996 and
for the period ended February 18, 1997 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
February 25, 1998
F-44
<PAGE> 188
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-45
<PAGE> 189
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-46
<PAGE> 190
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-47
<PAGE> 191
COMPUTE INTENSIVE INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND PERIOD ENDED FEBRUARY 18, 1997
<TABLE>
<CAPTION>
PERIOD
ENDED
FEBRUARY 18,
1995 1996 1997
--------- --------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)................................... $ 3,865 (195,074) (204,904)
Adjustments to reconcile net earnings (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization...................... 46,174 133,280 15,954
Deferred income tax expense (benefit).............. 11,972 (11,428) --
Provision for bad debts............................ 35,015 135,593 5,580
Changes in operating assets and liabilities:
Increase in receivables.......................... (306,539) (186,462) (64,719)
Decrease (increase) in prepaid expenses and
other......................................... 4,463 (117,897) (33,368)
Increase in other assets......................... (7,678) (35,191) (2,251)
Increase in accounts payable..................... 306,005 372,637 78,036
Increase in accrued liabilities.................. 22,478 29,017 49,219
Increase in income tax receivable................ (17,064) (5,898) 15,510
Increase in deferred revenue..................... 34,358 9,952 (18,215)
--------- --------- ---------
Net cash provided (used) by operating
activities.................................. 133,049 128,529 (159,428)
--------- --------- ---------
Cash flows from investing activities -- Purchases of
equipment............................................. (131,193) (158,549) (119,999)
--------- --------- ---------
Cash flows from financing activities:
Borrowings under revolving lines of credit............ 19,000 305,258 66,057
Repayments of revolving lines of credit............... (1,808) (126,336) (98,225)
Borrowings (payments) on note payable to related
party.............................................. (11,275) (19,563) 200,000
Principal payments on capital lease obligations....... (24,880) (105,346) (12,717)
Cash overdraft........................................ -- -- 79,984
--------- --------- ---------
Net cash provided (used) by financing
activities.................................. (18,963) 54,013 235,099
--------- --------- ---------
Increase (decrease) in cash................... (17,107) 23,993 (44,328)
Cash, beginning of period............................... 37,442 20,335 44,328
--------- --------- ---------
Cash, end of period..................................... $ 20,335 44,328 --
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes....................................... $ 10,800 -- $ --
========= ========= =========
Interest........................................... $ 21,571 54,175 $ 7,253
========= ========= =========
Noncash investing and financing activities -- Equipment
acquired through capital lease obligations............ $ 158,006 232,089 $ --
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE> 192
COMPUTE INTENSIVE INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Compute Intensive, Inc. (the Company) was incorporated in the State of
California on December 31, 1993. The Company has three distinct areas of
business; providing regional internet access services to customers in California
and New Mexico, software and hardware consulting and sales, and software
development and implementation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance.
Revenue from consulting services is recognized when services have been
rendered. On fixed price contracts, revenue is recognized over the course of the
contract using the percentage-of-completion method. The Company provides for any
anticipated losses on such contracts in the period in which such losses are
first determinable.
Revenue from hardware and software sales is recognized upon shipment of the
respective products if the Company has no significant future obligations and
collectibility is probable.
Equipment
Equipment, including any assets under capital leases, is stated at cost,
less accumulated depreciation and amortization. Depreciation and amortization is
recorded using the straight-line method over the estimated useful lives of the
related assets on the lease term, which range from five to seven years. Costs
for normal repairs and maintenance are expensed as incurred.
Income Taxes
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, (SFAS 109).
Under SFAS 109, deferred income taxes are recognized for the future tax
consequences of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of December 31, 1995 and 1996 approximate their
carrying values based on their terms and interest rates. The use of different
market assumptions and/or estimation methodologies may have a significant effect
on the estimated fair values.
F-49
<PAGE> 193
COMPUTE INTENSIVE INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121). This
statement was effective for financial statements for fiscal years beginning
after December 15, 1995. Statement No. 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at lower of the carrying amount or
fair value less costs to sell. The adoption of SFAS 121 in 1996 did not have a
significant effect on the Company's financial position or results of operations.
Stock Based Compensation
In October 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, (SFAS No. 123), which establishes a fair value-based method of
accounting for stock-based compensation plans. Companies are encouraged to adopt
all provisions of SFAS No. 123 and are required to comply with the disclosure
requirements of SFAS No. 123, which was effective for fiscal years beginning
after December 15, 1995. The Company will continue to account for stock based
compensation under the provisions of APB Opinion No. 25 and will provide the pro
forma disclosures required by SFAS 123.
Reclassifications
Certain reclassifications have been made to the 1995 financial statements
to conform with the 1996 presentation.
(2) EQUIPMENT
Equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Internet and computer equipment............................. $342,407 730,143
Furniture and office equipment.............................. 55,016 57,718
Leasehold improvements...................................... 1,892 2,092
-------- --------
399,315 789,953
Less accumulated depreciation and amortization.............. (54,327) (185,595)
-------- --------
$344,988 604,358
======== ========
</TABLE>
Equipment includes assets owned under capital leases with a net book value
of $173,607 and $315,303 at December 31, 1995 and 1996, respectively.
(3) DEBT
At December 31, 1995 and 1996, the Company had an $100,000 unsecured
revolving line of credit agreement with a bank, under which $28,193 and $32,167
was outstanding, respectively. Borrowings under the line bear interest at the
bank's prime lending rate plus 4.75% or 4.5%, based on an average daily balance,
payable monthly (12.75% at December 31, 1996) and are due in 1997.
F-50
<PAGE> 194
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-51
<PAGE> 195
COMPUTE INTENSIVE INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
employees that meet certain contribution eligibility requirements defined under
the terms of the Plan. The Company did not make any contributions to the Plan
during 1995 or 1996.
(6) STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
On February 18, 1997, the Company issued 770,234 shares of newly authorized
redeemable, convertible preferred stock to Verio for cash consideration of
$4,899,998. The preferred shares are convertible into common shares on a 1.000
for 1.0017 basis and represent a 55% ownership interest in the Company upon
conversion. The preferred shares are redeemable at the option of the holder at
any time, vote on an as-converted basis, and include a liquidation preference
equal to the issuance price. In addition, Verio acquired an option to acquire a
100% common stock ownership in the Company which it may exercise at any time on
or after one year following the issuance date of the preferred shares. Upon the
initial public offering of Verio common stock or a significant strategic
investor in Verio, Verio is required to exercise the option.
The Company's 1995 Stock Option/Stock Issuance Plan (the Plan) was adopted
by the Board of Directors and approved by the shareholders of the Company in
March 1995. The Plan provides that salaried officers or key employees,
non-employee directors, and consultants who provide services to the Company may,
at the discretion of the plan administrator, be granted options to purchase
shares of common stock. 250,000 shares of the Company's Common Stock have been
authorized for issuance under the Plan, of which 131,000 and 29,500 nonqualified
options were granted in 1995 and 1996, respectively, with an exercise price of
$.05 and $.001 per share, respectively. All options were granted at fair value
at the date of grant, as determined by the Company's Board of Directors. There
were no options exercised and 18,176 were canceled during 1996.
Generally, options vest 25% on the first anniversary of the option grant
date and the balance vests thereafter in equal successive monthly installments
over the next 36 months of service. Option grants to nonemployee directors must
be approved by the Board.
During 1995 and 1996, the per share weighted-average fair values of stock
options granted was $.01 and $.65, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for both years; expected dividend yield 0%, risk-free interest rate
of 6%, and expected life of three years. If the Company determined compensation
expense in 1995 and 1996 based on the fair value of the options at the grant
date under SFAS No. 123, net loss and net earnings would not have been
significantly different than the historical results of operations.
(7) INCOME TAXES
Income tax expense (benefit) consists of the following for the years ended
December 31:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Current:
Federal.................................................. $(3,838) (6,698)
State.................................................... (826) 800
------- -------
(4,664) (5,898)
------- -------
Deferred:
Federal.................................................. 9,261 (8,717)
State.................................................... 2,711 (2,711)
------- -------
11,972 (11,428)
------- -------
$ 7,308 (17,326)
======= =======
</TABLE>
No tax benefit was recorded for the period ended February 18, 1997 due to
uncertainty as to realization of the net operating loss for the period.
F-52
<PAGE> 196
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-53
<PAGE> 197
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-54
<PAGE> 198
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-55
<PAGE> 199
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-56
<PAGE> 200
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-57
<PAGE> 201
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-58
<PAGE> 202
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-59
<PAGE> 203
NORTHWESTNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(e) Concentrations of Credit Risk
Financial instruments that potentially subject NorthWestNet to
concentrations of credit risk consist principally of cash equivalents and
accounts receivable. NorthWestNet's cash equivalents represent investments in
money market funds which are readily convertible to cash. Accounts receivable
are principally from NorthWestNet's customers located throughout the Northwest.
(f) Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of (SFAS 121). This
statement was effective for financial statements for fiscal years beginning
after December 15, 1995. Statement No. 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. The adoption of SFAS 121 effective July
1, 1996 did not have a significant effect on the NorthWestNet's financial
position or results of operations.
(g) Revenue Recognition
Revenues consist primarily of Internet access fees, connection fees and
on-line information service fees. Internet access fees consist of fixed monthly
amounts and are recognized ratably over the terms of the service contracts.
Connection fees, representing customer site equipment and installation charges,
are recognized upon installation of a customer's Internet connectivity. Fixed
on-line information service fees are recognized ratably over the terms of the
service contracts. Volume-based on-line information service fees are recognized
as such services are delivered. Payments received in advance of providing
services are deferred until the period such services are provided.
(h) Advertising Costs
Advertising costs are expensed as incurred.
(i) Depreciation and Amortization
Equipment, furniture and leasehold improvements are stated at cost.
Depreciation and amortization are provided on the straight-line method over the
estimated useful lives of the assets, or the lease term, if shorter. The
estimated useful lives of the assets are as follows:
<TABLE>
<CAPTION>
<S> <C>
Network equipment........................................... 3 - 4 years
Computer and office equipment............................... 2 - 3 years
Furniture and fixtures...................................... 7 years
Leasehold improvements...................................... 5 years
</TABLE>
(j) Use of Estimates
NorthWestNet management has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, revenues and expenses, and
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
F-60
<PAGE> 204
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-61
<PAGE> 205
NORTHWESTNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) BORROWING AGREEMENT
NorthWestNet had a borrowing agreement with a commercial bank, which
expired in June 1997, that provided for a $400,000 operating line of credit
(Line of Credit) and a $600,000 equipment term loan (Term Loan). Borrowings
under the Line of Credit were limited to 75% of eligible accounts receivable and
bear interest at the bank's prime rate plus 1.75%. The Term Loan bore interest
at the bank's prime rate plus 2%. Borrowings under this agreement were secured
by substantially all of NorthWestNet's assets. There were no borrowings under
the Line of Credit or Term Loan as of June 30, 1996.
(5) INCOME TAXES
The components of NorthWestNet's income tax expense (benefit) for the six
months ended June 30, 1996 and the eight months ended February 28, 1997 are as
follows:
<TABLE>
<CAPTION>
SIX EIGHT
MONTHS MONTHS
ENDED ENDED
JUNE 30, FEBRUARY 28,
1996 1997
-------- ------------
<S> <C> <C>
Current:
Federal..................................................... $100,000 (66,000)
State....................................................... 5,000 5,000
Deferred -- Federal......................................... (46,000) (74,000)
-------- ---------
$ 59,000 (135,000)
======== =========
</TABLE>
Deferred income taxes result from temporary differences in the recognition
of income and expense between financial statement and income tax reporting.
Temporary differences at June 30, 1996 are primarily attributable to
depreciation and amortization of equipment, furniture and leasehold
improvements. The tax effects of these temporary differences result in deferred
tax assets which are classified as noncurrent on the accompanying June 30, 1996
balance sheet. Actual tax expense for the six months ended June 30, 1996
approximates the amount calculated using the Federal statutory rate of 34%, plus
the provision for state taxes. The tax benefit for the eight months ended
February 28, 1997 differs from the expected benefit, calculated using the
Federal statutory rate of 34%, primarily due to non-deductible stock option
compensation.
(6) STOCKHOLDERS' EQUITY -- EMPLOYEE STOCK OPTION PLAN
NorthWestNet adopted a stock option plan (Plan) in January 1996 to
compensate its employees for future services and has reserved 1.5 million shares
of common stock for option grants under the Plan. Of the reserved shares,
500,000 are for options which are exercisable, upon reaching defined corporate
objectives (Contingent Options), at an exercise price of $.875 per share. The
date the defined corporate objectives are met, any excess of fair market value
per share over the exercise price per share of the outstanding options would be
charged to salaries and benefits expense in the statement of operations with a
corresponding increase in stockholder's equity. As of December 31, 1996, 370,000
contingent shares were outstanding. The remaining 1 million reserved shares are
for options which generally vest, based on continued employment, over periods
ranging from three to four years in equal monthly increments beginning the month
after the grant (Noncontingent Options). All options expire ten years from the
date of grant and are exercisable at the fair market value of the common stock
at the grant date.
F-62
<PAGE> 206
NORTHWESTNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of stock option activity under the Plan follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------------------
WEIGHTED-
SHARES AVERAGE
AVAILABLE NON- EXERCISE
FOR GRANT CONTINGENT CONTINGENT PRICE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Authorization of Plan.......................... 1,500,000 -- -- $ --
Options granted................................ (988,000) 583,000 405,000 0.875
Options relinquished........................... 76,771 (41,771) (35,000) 0.875
Balances at June 30, 1996...................... 588,771 541,229 370,000 0.875
Options granted................................ (54,000) 54,000 -- 1.956
Options exercised.............................. -- (100) -- 0.875
Options relinquished........................... 3,229 (3,229) -- 0.875
Options surrendered for cash................... -- (192,265) -- 0.875
Balances at February 28, 1997.................. 538,000 399,635 370,000 $0.951
</TABLE>
NorthWestNet applies APB Opinion No. 25 in accounting for its Plans, and,
because the Company grants options at fair value, as determined by the Company's
Board of Directors, no compensation cost has been recognized for its employee
stock options in the financial statements. Had NorthWestNet determined
compensation cost of employee stock options based on the fair value at the grant
date for its stock options under SFAS No. 123, NorthWestNet's net earnings would
have been reported as the pro forma amounts indicated below:
<TABLE>
<CAPTION>
SIX EIGHT
MONTHS MONTHS
ENDED ENDED
JUNE 30, FEBRUARY 28,
1996 1997
-------- ------------
<S> <C> <C>
Net earnings (loss):
As reported............................................... $99,359 (791,656)
Pro forma................................................. 26,469 (892,205)
</TABLE>
The per share weighted-average fair value of stock options granted during
the six months ended June 30, 1996 and the eight months ended February 28, 1997
was $0.28 and $0.70 respectively, on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions: six months
ended June 30, 1996 -- expected dividend yield 0%, risk-free interest rate of
5.51% and an expected life of 7 years; eight months ended February 28,
1997 -- expected dividend yield 0%, risk-free interest rate of 6.55%, and an
expected life of 7 years.
F-63
<PAGE> 207
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-64
<PAGE> 208
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-65
<PAGE> 209
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-66
<PAGE> 210
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-67
<PAGE> 211
AIMNET CORPORATION
(WHOLLY-OWNED BY AIMQUEST CORPORATION)
STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, 1997 AND PERIOD ENDED MAY 19, 1997
<TABLE>
<CAPTION>
PERIOD ENDED
MAY 19,
1997 1997
----------- ------------
<S> <C> <C>
Revenue:
Internet services......................................... $ 2,649,839 303,600
Other (note 3)............................................ 215,279 87,788
----------- ---------
Total revenue..................................... 2,865,118 391,388
----------- ---------
Operating expenses:
Internet services and other operating costs............... 1,225,329 124,275
Selling, general and administrative....................... 2,098,958 437,292
Provision for bad debts................................... 425,295 --
Depreciation.............................................. 528,931 94,801
----------- ---------
Total operating expenses.......................... 4,278,513 656,368
----------- ---------
Net loss.......................................... $(1,413,395) (264,980)
=========== =========
</TABLE>
See accompanying notes to financial statements.
F-68
<PAGE> 212
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-69
<PAGE> 213
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-70
<PAGE> 214
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-71
<PAGE> 215
AIMNET CORPORATION
(WHOLLY-OWNED BY AIMQUEST CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of March 31, 1997 approximate their carrying values
based on their terms and interest rates. The use of different market assumptions
and/or estimation methodologies may have a significant effect on the estimated
fair values.
Customers who operate in California represent substantially all of the
Company's customer base and accounts receivable. However, no single customer
comprised more than 5% of accounts receivable or total revenue as of or for the
year ended March 31, 1997 or the period ended May 19, 1997.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121). This
statement was effective for financial statements for fiscal years beginning
after December 15, 1995. Statement No. 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value, less costs to sell. The adoption of SFAS 121 effective
April 1, 1996 did not have a significant effect on the Company's financial
position or results of operations.
(2) EQUIPMENT
Equipment consisted of the following at March 31, 1997:
<TABLE>
<S> <C>
Internet and computer equipment.......................... $1,712,000
Furniture................................................ 29,144
----------
1,741,144
Less accumulated depreciation............................ (860,920)
----------
$ 880,224
==========
</TABLE>
Equipment includes assets owned under capital leases with a net book value
of $25,562 at March 31, 1997.
(3) RELATED PARTY TRANSACTIONS
The Company provides internet services to Aimquest which totaled $5,924 for
the year ended March 31, 1997 and $20,386 for the period ended May 19, 1997.
Amounts due to parent represent cash transfers from Aimquest which are
noninterest bearing.
F-72
<PAGE> 216
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-73
<PAGE> 217
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheet of West Coast Online, Inc.
as of September 30, 1997 and the related statements of operations and
accumulated deficit, and cash flows for the nine months then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of West Coast Online, Inc. as
of September 30, 1997, and the results of its operations and its cash flows for
the nine months then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Denver, Colorado
November 21, 1997
F-74
<PAGE> 218
WEST COAST ONLINE, INC.
BALANCE SHEET
SEPTEMBER 30, 1997
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash...................................................... $ 25,907
Trade receivables, net of allowance for doubtful accounts
of $3,588.............................................. 96,659
Prepaid expenses and other................................ 4,933
---------
Total current assets.............................. 127,499
Equipment, net (note 2)..................................... 524,474
Other assets................................................ 7,148
---------
Total assets...................................... $ 659,121
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable:
Trade.................................................. $ 41,270
Related party.......................................... 27,009
Accrued liabilities....................................... 105,487
Deferred revenue.......................................... 99,679
Current portion of capital lease obligations (note 3)..... 57,874
---------
Total current liabilities......................... 331,319
Capital lease obligations, less current portion (note 3).... 69,994
Total liabilities................................. 401,313
---------
Redeemable preferred stock, 2,000,000 shares authorized
(note 4):
Series A, 60,000 shares issued and outstanding............ 225,000
Series B, 50,710 shares issued and outstanding............ 250,000
---------
Total redeemable preferred stock.................. 475,000
---------
Stockholders' deficit (note 4):
Common stock, no par value, 1,000,000 shares authorized,
246,000 shares issued and outstanding.................. 79,775
Accumulated deficit....................................... (296,967)
---------
Total stockholders' deficit....................... (217,192)
Commitments (note 3)
Total liabilities and stockholders' deficit....... $ 659,121
=========
</TABLE>
See accompanying notes to financial statements.
F-75
<PAGE> 219
WEST COAST ONLINE, INC.
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
<S> <C>
Revenue:
Internet services......................................... $1,354,911
Computer hardware sales................................... 171,818
Other..................................................... 126,394
----------
Total revenue..................................... 1,653,123
----------
Operating expenses:
Internet services operating costs......................... 641,106
Cost of hardware sales.................................... 136,978
Selling, general and administrative....................... 913,743
Depreciation.............................................. 106,185
----------
Total operating expenses.......................... 1,798,012
----------
Loss from operations.............................. (144,889)
Interest expense............................................ (22,772)
----------
Net loss.......................................... (167,661)
Accumulated deficit at beginning of period.................. (129,306)
----------
Accumulated deficit at end of period........................ $ (296,967)
==========
</TABLE>
See accompanying notes to financial statements.
F-76
<PAGE> 220
WEST COAST ONLINE, INC.
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(167,661)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation........................................... 106,185
Provision for bad debts................................ 3,588
Changes in operating assets and liabilities:
Receivables.......................................... (39,945)
Prepaid expenses and other current assets............ 5,197
Other assets......................................... (7,148)
Accounts payable and accrued liabilities............. 12,802
Deferred revenue..................................... 35,944
---------
Net cash used by operating activities............. (51,038)
---------
Cash flows from investing activities -- purchase of
equipment................................................. (154,301)
---------
Cash flows from financing activities:
Proceeds from issuance of redeemable preferred stock...... 250,000
Principal payments under capital lease obligations........ (36,541)
---------
Net cash provided by financing activities......... 213,459
---------
Net increase in cash.............................. 8,120
Cash at beginning of period................................. 17,787
---------
Cash at end of period....................................... $ 25,907
=========
Supplemental disclosure of cash flow information -- cash
paid during the year for interest......................... $ 22,772
=========
Noncash investing and finance activities -- equipment
acquired through capital lease obligations................ $ 67,064
=========
</TABLE>
See accompanying notes to financial statements.
F-77
<PAGE> 221
WEST COAST ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
West Coast Online, Inc. (the Company) was incorporated in the State of
California on January 30, 1996. The Company provides internet access services
and computer hardware sales to customers primarily in California.
As of September 30, 1997, Verio Inc. (Verio) acquired all of the
outstanding common stock of the Company, resulting in 100% ownership.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Equipment
Equipment is stated at cost, less accumulated depreciation. Depreciation is
recorded using the straight-line method over the shorter of the estimated useful
lives of the related assets or the lease term, which range from three to five
years. Costs of normal repairs and maintenance are expensed as incurred.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations, including goodwill, when indications of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the estimated fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value, less costs to sell.
Revenue Recognition
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance.
Revenue from hardware sales is recognized upon shipment of the respective
products if the Company's future obligations are not significant and
collectibility is probable.
Income Taxes
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109).
Under SFAS 109, deferred income taxes are recognized for the future tax
consequences of differences between the tax bases of assets and liabilities and
their financial reporting amounts at September 30, 1997 based on enacted tax
laws and statutory rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company has a net operating loss carryforward of approximately $181,000
which expires in 2012. No tax benefit has been recorded by the Company for the
nine months ended September 30, 1997 due to the Company's net loss and the
uncertainty regarding the ultimate utilization of such loss carryforward. A
valuation allowance has been
F-78
<PAGE> 222
WEST COAST ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
recorded for the entire balance of the deferred tax asset related to the
carryforward. Other temporary differences between financial statement and income
tax bases of assets and liabilities are not significant.
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of December 31, 1997 approximate their carrying values
based on their terms and interest rates. The use of different market assumptions
and/or estimation methodologies may have a significant effect on the estimated
fair values.
Customers who operate in California represent substantially all of the
Company's customer base. However, no single customer comprised more than 10% of
accounts receivable or total revenue for the nine months ended September 30,
1997.
(2) EQUIPMENT
Equipment consisted of the following at September 30, 1997:
<TABLE>
<S> <C>
Internet and computer equipment............................. $ 733,411
Furniture and office equipment.............................. 21,312
---------
754,723
Less accumulated depreciation and amortization.............. (230,249)
---------
$ 524,474
=========
</TABLE>
Equipment includes assets held under capital leases with a net book value
of $134,362 at September 30, 1997.
(3) COMMITMENTS
The Company leases certain computer and office equipment under capital
leases. The Company also leases office space under noncancelable leases expiring
at various dates through 2001. Future minimum annual lease payments under
noncancelable operating leases for each of the years ending September 30 are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1998................................................... $ 70,104 $ 72,160
1999................................................... 63,728 36,342
2000................................................... 18,974 10,743
2001................................................... -- 7,162
-------- --------
Total minimum payments............................... $152,806 $126,407
========
Less amount representing interest...................... (24,938)
--------
Present value of net minimum lease payments.......... 127,868
Less current portion................................... (57,874)
--------
$ 69,994
========
</TABLE>
Rent expense for the nine months ended September 30, 1997 totaled $64,820.
F-79
<PAGE> 223
WEST COAST ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) REDEEMABLE PREFERRED STOCK
The Company issued 60,000 Series A and 50,710 Series B shares of
redeemable, convertible preferred stock in 1996 and 1997, respectively, to
Verio. The preferred shares were convertible into common shares on a one for one
basis and were mandatorily redeemable in 2000. On September 30, 1997, in
connection with the Verio Acquisition, as described in Note 1, Verio converted
these preferred shares to common stock.
F-80
<PAGE> 224
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-81
<PAGE> 225
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-82
<PAGE> 226
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-83
<PAGE> 227
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-84
<PAGE> 228
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-85
<PAGE> 229
CLARK INTERNET SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
has been recorded for the full amount of the deferred tax asset related to the
net operating loss carryforward, which represents the only significant temporary
difference as of September 30, 1997.
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statements purposes. Management estimates that the fair values of all
financial instruments as of September 30, 1997 approximate their carrying values
based on their terms and interest rates. The use of different market assumptions
and/or estimation methodologies may have a significant effect on the estimated
fair values.
(2) EQUIPMENT
Equipment consisted of the following at September 30, 1997:
<TABLE>
<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-86
<PAGE> 230
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-87
<PAGE> 231
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-88
<PAGE> 232
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
----------- -----------
Total operating expenses.......................... 3,050,627 5,643,012
----------- -----------
Loss from operations...................................... (1,373,834) (2,398,339)
Other expenses:
Interest expense.......................................... (36,203) (167,864)
Other..................................................... (21,000) (169,626)
----------- -----------
Net loss.......................................... $(1,431,037) $(2,735,829)
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-89
<PAGE> 233
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-90
<PAGE> 234
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-91
<PAGE> 235
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-92
<PAGE> 236
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 values of all
financial instruments as of October 31, 1997 and 1996 approximate their carrying
values based on their terms and interest rates. The use of different market
assumptions and/or estimation methodologies may have a significant effect on the
estimated fair values.
Customers who operate in California represent substantially all of the
Company's customer base and accounts receivable. However, no single customer
comprised more than 5% of accounts receivable or total revenue as of or for the
year ended October 31, 1997 or 1996.
Long-Lived Assets
The Company accounts for long-lived assets under the provisions of
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
(SFAS 121). Statement No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value, less
costs to sell.
Stock-Based Compensation
The Company applies APB Opinion 25 and related interpretations in
accounting for its stock compensation plan. Accordingly, since the Company
grants stock options with exercise prices equal to fair value at the date of
grant, no compensation expense has been recognized in 1996 or 1997. Under
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123), entities are permitted to adopt the fair value method
of accounting for employee stock-based compensation plans. However, SFAS 123
allows an entity to continue using the intrinsic value method under APB Opinion
No. 25, but requires the entity to make pro forma disclosures of net income or
loss as if the fair value method of accounting had been applied.
(2) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment consisted of the following at October 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
---------- ---------
<S> <C> <C>
Internet and computer equipment............................. $1,613,305 1,786,575
Furniture and fixtures...................................... 77,668 133,730
Leasehold improvements...................................... 12,080 100,983
---------- ---------
1,703,053 2,021,288
Less accumulated depreciation............................... (298,190) (900,892)
---------- ---------
$1,404,863 1,120,396
========== =========
</TABLE>
Equipment and leasehold improvements includes assets owned under capital
leases with a net book value of $195,294 and $333,079 at October 31, 1996 and
1997, respectively.
F-93
<PAGE> 237
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-94
<PAGE> 238
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-95
<PAGE> 239
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-96
<PAGE> 240
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-97
<PAGE> 241
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-98
<PAGE> 242
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-99
<PAGE> 243
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-100
<PAGE> 244
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-101
<PAGE> 245
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-102
<PAGE> 246
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-103
<PAGE> 247
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheets of the Pennsylvania
Research Partnership Network (PREPnet) as of November 30, 1996 and 1997, and the
related statements of operations and owners' deficit, and cash flows for the
years then ended and the period ended December 24, 1997. These financial
statements are the responsibility of PREPnet's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Pennsylvania Research
Partnership Network (PREPnet) as of November 30, 1996 and 1997, and the results
of its operations and its cash flows for the years then ended and for the period
ended December 24, 1997 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Denver, Colorado
February 20, 1998
F-104
<PAGE> 248
THE PENNSYLVANIA RESEARCH PARTNERSHIP NETWORK
(PREPnet)
BALANCE SHEETS
NOVEMBER 30, 1996 AND 1997
ASSETS
<TABLE>
<CAPTION>
1996 1997
----------- ---------
<S> <C> <C>
Current assets:
Trade receivables, net of allowance for doubtful accounts
of $14,631 and $13,313, respectively................... $ 73,943 $ 102,041
Prepaid expenses and other................................ 1,769 15,409
----------- ---------
Total current assets.............................. 75,712 117,450
Equipment, net (note 2)..................................... 200,538 138,008
----------- ---------
Total assets...................................... $ 276,250 $ 255,458
=========== =========
LIABILITIES AND OWNER'S DEFICIT
Current liabilities:
Accounts payable.......................................... $ 88,639 $ 132,039
Accrued liabilities....................................... 44,555 3,020
Current portion of obligations under capital leases (note
3)..................................................... 57,468 56,262
Deferred revenue.......................................... 1,084,501 683,371
----------- ---------
Total current liabilities......................... 1,275,163 874,692
Capital lease obligations, less current portion (note 3).... 55,502 --
----------- ---------
Total liabilities................................. 1,330,665 874,692
Owners' deficit............................................. (1,054,415) (619,234)
Commitments (note 3)
----------- ---------
Total liabilities and owner's deficit............. $ 276,250 $ 255,458
=========== =========
</TABLE>
See accompanying notes to financial statements.
F-105
<PAGE> 249
THE PENNSYLVANIA RESEARCH PARTNERSHIP NETWORK
(PREPnet)
STATEMENTS OF OPERATIONS AND OWNERS' DEFICIT
YEARS ENDED NOVEMBER 30, 1996 AND 1997 AND PERIOD ENDED DECEMBER 24, 1997
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 24,
1996 1997 1997
----------- ----------- ------------
<S> <C> <C> <C>
Revenue:
Internet services.................................... $ 2,027,682 $ 2,026,439 $ 156,459
Grant revenue (note 4)............................... 194,343 98,711 --
Other................................................ 6,309 22,477 --
----------- ----------- ----------
Total revenue................................ 2,228,334 2,147,627 156,459
----------- ----------- ----------
Costs and expenses:
Internet services operating costs.................... 588,543 792,684 80,972
Selling, general and administrative (note 5)......... 831,230 773,174 64,625
Depreciation......................................... 92,251 121,192 8,285
----------- ----------- ----------
Total costs and expenses..................... 1,512,024 1,687,050 153,882
----------- ----------- ----------
Earnings from operations..................... 716,310 460,577 2,577
Interest expense, net.................................. (18,331) (11,261) (938)
----------- ----------- ----------
Net earnings................................. 697,979 449,316 1,639
Owners' deficit at beginning of period................. (726,569) (1,054,415) (619,234)
Net advances to owners................................. (1,025,825) (14,135) (23,911)
----------- ----------- ----------
Owners' deficit at end of period....................... $(1,054,415) $ (619,234) $ (641,506)
=========== =========== ==========
Pro forma information:
Historical net earnings.............................. $ 697,979 $ 449,316 $ 1,639
Pro forma adjustment for income tax expense.......... (265,000) (171,000) (600)
----------- ----------- ----------
Pro forma net earnings....................... $ 432,979 $ 278,316 $ 1,039
=========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-106
<PAGE> 250
THE PENNSYLVANIA RESEARCH PARTNERSHIP NETWORK
(PREPnet)
STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 1996 AND 1997 AND PERIOD ENDED DECEMBER 24, 1997
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 24,
1996 1997 1997
----------- --------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings........................................ $ 697,979 $ 449,316 $ 1,639
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation..................................... 92,251 121,192 8,285
Provision for bad debts.......................... 14,631 13,313 --
Changes in operating assets and liabilities:
Trade receivables.............................. 58,406 (41,411) (38,747)
Prepaid expenses and other assets.............. -- (13,640) 6,294
Accounts payable and accrued liabilities....... 100,318 1,865 (5,400)
Deferred revenue............................... 178,313 (401,130) 57,131
----------- --------- ---------
Net cash provided by operating activities... 1,141,898 129,505 29,202
----------- --------- ---------
Cash flows from investing activities -- purchase of
equipment........................................... (61,987) (58,662) --
----------- --------- ---------
Cash flows from financing activities:
Repayments of capital lease obligations............. (54,086) (56,708) (5,291)
Net advances to owners.............................. (1,025,825) (14,135) (23,911)
----------- --------- ---------
Net cash used by financing activities....... (1,079,911) (70,843) (29,202)
----------- --------- ---------
Net change in cash and cash at beginning and
end of period............................. $ -- $ -- $ --
=========== ========= =========
Supplemental disclosure of cash flow
information -- cash paid for interest............... $ 18,331 $ 11,261 $ 938
=========== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-107
<PAGE> 251
THE PENNSYLVANIA RESEARCH PARTNERSHIP NETWORK
(PREPnet)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
The accompanying financial statements include the accounts of the
Pennsylvania Research Partnership Network (PREPnet), the data communications
network of a consortium of research institutions in Pennsylvania. A joint
venture between Carnegie Mellon University and the University of Pittsburgh
serves as the legal entity and coordinator of the consortium. The accompanying
financial statements have been prepared assuming that PREPnet had been operated
separately as of December 1, 1995 and thereafter. PREPnet provides internet
services to businesses, educational institutions, not-for-profit organizations,
and individual subscribers.
Effective December 24, 1997, the net assets of PREPnet were acquired by
Verio Inc. in a purchase business combination.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
Internet services are recognized as the services are provided. PREPnet
records deferred revenue for amounts billed and/or collected in advance.
Equipment
Equipment, including any assets held under capital leases, is stated at
cost, less accumulated depreciation. Depreciation is recorded using the
straight-line method over the estimated useful lives of the related assets or
the lease term, which is 3 years. Costs for normal repairs and maintenance are
expensed as incurred.
Long-Lived Assets
PREPnet evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). Statement No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
Income Taxes
The operations of PREPnet are included in the income tax returns of the
joint venture, which is a non-profit entity and is exempt from income taxes.
However, pro forma information has been included in the accompanying statement
of operations to reflect a pro forma adjustment for income tax expense as if
PREPnet had been a separate taxable entity subject to federal and state income
taxes for all periods presented.
F-108
<PAGE> 252
THE PENNSYLVANIA RESEARCH PARTNERSHIP NETWORK
(PREPnet)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statements purposes. Management estimates that the fair values of all
financial instruments as of November 30, 1996 and 1997 approximate their
carrying values based on their terms and interest rates. The use of different
market assumptions and/or estimation methodologies may have a significant effect
on the estimated fair values.
(2) EQUIPMENT
Equipment consisted of the following at November 30:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Internet and computer equipment............................. $ 321,434 $ 376,014
Furniture and office equipment.............................. 5,854 9,936
--------- ---------
327,288 385,950
Less accumulated depreciation and amortization.............. (126,750) (247,942)
--------- ---------
$ 200,538 $ 138,008
========= =========
</TABLE>
(3) COMMITMENTS
PREPnet leases certain computer and office equipment under capital leases.
PREPnet also leases office space under noncancelable operating leases expiring
at various dates through 2001.
Future minimum annual lease payments under capital and noncancelable
operating leases for each of the years ending November 30 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1998........................................................ $ 58,810 $ 50,731
1999........................................................ -- 50,341
2000........................................................ -- 27,867
2001........................................................ -- 49,171
-------- --------
Total minimum payments.................................... 58,810 $178,110
========
Less amount representing interest........................... (2,548)
--------
Present value of net minimum lease payments............... 56,262
Less current portion........................................ (56,262)
--------
$ --
========
</TABLE>
Rent expense for the years ended November 30, 1996 and 1997 and the period
ended December 24, 1997 was $47,674, $73,218 and $6,102, respectively.
(4) GRANT REVENUE
PREPnet receives grant revenue from the National Science Foundation and
other government agencies to provide network connections to certain
not-for-profit educational institutions. Grant revenue is recognized ratably
over the term of the contract, which is generally twelve months. Total deferred
grant revenue at November 30, 1996 was $71,667.
F-109
<PAGE> 253
THE PENNSYLVANIA RESEARCH PARTNERSHIP NETWORK
(PREPnet)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) RELATED PARTY TRANSACTIONS
Carnegie Mellon University provides administrative support and use of
facilities to PREPnet and allocates the cost of these services to the entity.
Such allocations totalled approximately $69,188 and $81,886 for the years ended
November 30, 1996 and 1997, respectively.
F-110
<PAGE> 254
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheets of Monumental Network
Systems, Inc. as of December 31, 1996 and 1997, and the related statements of
operations, stockholders' deficit, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Monumental Network Systems,
Inc. as of December 31, 1996 and 1997, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
February 25, 1998
F-111
<PAGE> 255
MONUMENTAL NETWORK SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
ASSETS
<TABLE>
<CAPTION>
1996 1997
--------- -----------
<S> <C> <C>
Current assets:
Cash...................................................... $ 63,693 $ --
Trade receivables, net of allowance for doubtful accounts
of $15,363 and $41,207................................. 138,263 214,440
--------- -----------
Total current assets.............................. 201,956 214,440
Equipment, net (note 2)..................................... 359,327 440,406
Other assets, net........................................... 17,664 66,562
--------- -----------
Total assets...................................... $ 578,947 $ 721,408
========= ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 186,526 $ 258,319
Accrued liabilities....................................... 23,052 163,436
Current portion of notes payable (note 3):
Related party.......................................... 30,025 132,954
Other.................................................. 9,789 49,694
Current portion of obligations under capital lease (note
4)..................................................... 70,736 82,194
Deferred revenue.......................................... 326,924 573,057
Cash overdraft............................................ -- 166,157
--------- -----------
Total current liabilities......................... 647,052 1,425,811
Notes payable, less current portion (note 3)................ 8,915 21,067
Capital lease obligations, less current portion (note 4).... 114,764 97,208
--------- -----------
Total liabilities................................. 770,731 1,544,086
Stockholders' deficit:
Common stock, $1.00 par value, 500,000 shares authorized,
300,944 and 302,779 shares issued and outstanding as of
December 31, 1996 and 1997............................. 300,944 302,779
Additional paid-in capital................................ 197,494 199,329
Accumulated deficit....................................... (690,222) (1,324,786)
--------- -----------
Total stockholders' deficit....................... (191,784) (822,678)
Commitments (note 4)
--------- -----------
Total liabilities and stockholders' deficit....... $ 578,947 $ 721,408
========= ===========
</TABLE>
See accompanying notes to financial statements.
F-112
<PAGE> 256
MONUMENTAL NETWORK SYSTEMS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Revenue:
Internet services......................................... $1,250,789 $2,425,121
Computer hardware and software sales...................... 95,557 41,733
Other..................................................... 24,197 4,653
---------- ----------
Total revenue..................................... 1,370,543 2,471,507
---------- ----------
Operating expenses:
Internet services operating costs......................... 385,439 743,524
Cost of hardware and software sales....................... 198,486 417,559
Selling, general and administrative....................... 1,246,716 1,756,956
Depreciation.............................................. 74,607 172,092
---------- ----------
Total operating expenses.......................... 1,905,248 3,090,131
---------- ----------
Loss from operations.............................. (534,705) (618,624)
Interest expense, net....................................... 18,448 15,940
---------- ----------
Net loss.......................................... $ (553,153) $ (634,564)
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-113
<PAGE> 257
MONUMENTAL NETWORK SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
------------------ PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1996.............. 114,015 $114,015 $ -- $ (137,069) $ (23,054)
Issuance of common shares for cash....... 100,000 100,000 100,000 -- 200,000
Issuance of common shares for services or
equipment.............................. 86,929 86,929 97,494 -- 184,423
Net loss................................. -- -- -- (553,153) (553,153)
------- -------- -------- ----------- ---------
BALANCES AT DECEMBER 31, 1996............ 300,944 300,944 197,494 (690,222) (191,784)
Issuance of common shares for cash....... 1,000 1,000 1,000 -- 2,000
Issuance of common shares for services... 835 835 835 -- 1,670
Net loss................................. -- -- -- (634,564) (634,564)
------- -------- -------- ----------- ---------
BALANCES AT DECEMBER 31, 1997............ 302,779 $302,779 $199,329 $(1,324,786) $(822,678)
======= ======== ======== =========== =========
</TABLE>
See accompanying notes to financial statements.
F-114
<PAGE> 258
MONUMENTAL NETWORK SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(553,153) $(634,564)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation........................................... 74,607 172,092
Provision for bad debts................................ 15,363 170,634
Changes in operating assets and liabilities:
Trade receivables.................................... (127,442) (246,811)
Other assets......................................... (15,691) (48,898)
Accounts payable..................................... 120,414 71,793
Accrued liabilities.................................. 13,704 140,384
Deferred revenue..................................... 278,172 246,133
--------- ---------
Net cash used by operating activities............. (194,026) (129,237)
--------- ---------
Cash flows from investing activities -- purchases of
equipment................................................. (142,367) (178,377)
--------- ---------
Cash flows from financing activities:
Net change in cash overdraft.............................. -- 166,157
Borrowings under note payable to related parties.......... 30,848 130,000
Principal payments on note payable to related parties..... (823) (27,071)
Borrowings under notes payable............................ 18,704 66,229
Repayments of notes payable............................... -- (14,172)
Principal payments on capital lease obligations........... (36,824) (80,892)
Issuance of common stock.................................. 384,423 3,670
--------- ---------
Net cash provided by financing activities......... 396,328 243,921
--------- ---------
Increase (decrease) in cash....................... 59,935 (63,693)
Cash at beginning of year................................... 3,758 63,693
--------- ---------
Cash at end of year......................................... $ 63,693 $ --
========= =========
Supplemental disclosure of cash flow information -- cash
paid during the year for interest......................... $ 18,739 $ 16,508
========= =========
Noncash investing and financing activities -- equipment
acquired through capital lease obligations................ $ 219,242 $ 74,794
========= =========
</TABLE>
See accompanying notes to financial statements.
F-115
<PAGE> 259
MONUMENTAL NETWORK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Monumental Network Systems, Inc. (the Company) was incorporated in the
State of Virginia on April 13, 1994. The Company's business consists of
providing regional internet access services, hardware and software sales, and
consulting to customers in Virginia, Maryland and the Washington D.C. area.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Effective December 31, 1997, Verio Inc. acquired all of the outstanding
common stock of the Company.
Equipment
Equipment, including any assets held under capital leases, is stated at
cost, less accumulated depreciation. Depreciation is recorded using the
straight-line method over the estimated useful lives of the related assets, or
over the lease term, which range from three to seven years. Costs for normal
repairs and maintenance are expensed as incurred.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). Statement No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at lower of the carrying amount or fair value less
costs to sell.
Revenue Recognition
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance.
Revenue from consulting services is recognized when services have been
rendered.
Revenue from hardware and software sales is recognized upon shipment of the
respective products, if significant future vendor obligations do not exist and
collectibility is probable.
Income Taxes
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109).
Under SFAS 109, deferred income taxes are recognized for the future tax
consequences of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
F-116
<PAGE> 260
MONUMENTAL NETWORK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of December 31, 1996 and 1997 approximate their
carrying values based on their terms and interest rates. The use of different
market assumptions and/or estimation methodologies may have a significant effect
on the estimated fair values.
Customers who operate in Virginia, Maryland and the Washington D.C. area
represent substantially all of the Company's customer base. No single customer
comprised more than 10% of accounts receivable or total revenue as of or for the
years ended December 31, 1996 or 1997.
Stock-Based Compensation
The Company accounts for its stock-based employee compensation plan using
the intrinsic value based method prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations (APB 25). The Company has provided pro forma disclosures of net
loss as if the fair value based method of accounting for the plan, as prescribed
by Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123), had been applied. Pro forma disclosures
include the effects of employee stock options granted during the years ended
December 31, 1996 and 1997.
(2) EQUIPMENT
Equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
-------- ---------
<S> <C> <C>
Equipment................................................... $413,615 $ 642,498
Furniture and office equipment.............................. 39,310 55,505
Leasehold improvements...................................... -- 8,093
-------- ---------
452,925 706,096
Less accumulated depreciation............................... (93,598) (265,690)
-------- ---------
$359,327 $ 440,406
======== =========
</TABLE>
Equipment includes assets held under capital leases with a net book value
of $198,445 and $201,745 at December 31, 1996 and 1997, respectively.
Depreciation expense totaled $74,607 and $172,092 for the years ended December
31, 1996 and 1997, respectively.
(3) DEBT
Notes payable consists of the following as of December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Notes payable with interest rates ranging from 8.25% to
8.39%, secured by vehicles due through 2002............... $14,319 $ 34,625
Unsecured notes payable to vendors with interest at 15% due
in 1998................................................... 4,385 36,136
------- --------
18,704 70,761
Less current portion........................................ (9,789) (49,694)
------- --------
$ 8,915 $ 21,067
======= ========
</TABLE>
F-117
<PAGE> 261
MONUMENTAL NETWORK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During 1996, the Company issued notes payable to stockholders of the
Company in the amount of $30,848, with interest at 6%, and monthly payments of
principal and interest due in various dates through 1998. The total unpaid
balance as of December 31, 1997 was $30,025.
During 1997, the Company issued additional notes payable to stockholders of
the Company totaling $130,000, which bear interest at 9%, with interest payable
annually, and are due on demand.
(4) COMMITMENTS
The Company leases certain computer and office equipment under capital
leases. The Company also leases office space under noncancelable operating
leases expiring at various dates through 2001. Future minimum annual lease
payments under capital and noncancelable operating leases for each of the years
ending December 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1998........................................................ $103,978 $29,132
1999........................................................ 66,919 5,736
2000........................................................ 39,031 1,710
2001........................................................ 3,818 --
-------- -------
Total minimum payments.................................... 213,746 $36,578
=======
Less amount representing interest........................... (34,344)
--------
Present value of net minimum lease payments............... 179,402
Less current portion........................................ (82,194)
--------
$ 97,208
========
</TABLE>
Rent expense for the years ended December 31, 1996 and 1997 was $38,967 and
$53,084, respectively.
(5) INCOME TAXES
As of December 31, 1997, the Company has a net operating loss carryforward
of approximately $470,000 which will expire in 2012, if not utilized. A
valuation allowance has been recorded for the entire deferred tax asset related
primarily to the net operating loss carryforward due to the uncertainty relating
to the realization of the benefit of the deferred tax asset in the future.
(6) STOCK OPTION PLAN
The Company's 1997 Option Plan (the Plan) was adopted by the Board of
Directors and approved by the stockholders of the Company on January 1, 1997.
The Plan provides that salaried officers or key employees, non-employee
directors, and consultants who provide services to the Company may, at the
discretion of the plan administrator, be granted Incentive or Non-statutory
stock options to purchase shares of common stock. 200,000 shares of the
Company's common stock have been authorized for issuance under the Plan, of
which 11,872 incentive stock options were granted in 1997, with an exercise
price of $2.00 per share. None of the options were exercised or canceled during
1997.
Options vest 25% on the first anniversary of the option grant date and 25%
on each of the following three anniversary dates. As of December 31, 1997, no
options were vested or exercisable. The weighted average contractual term of
outstanding options was approximately 9 years at December 31, 1997.
The per share weighted-average fair value of stock options granted was $.33
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions; expected dividend yield
F-118
<PAGE> 262
MONUMENTAL NETWORK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
0%, risk-free interest rate of 6%, and expected life of three years. If the
Company determined compensation expense in 1997 based on the fair value of the
options at the grant date under SFAS No. 123, net loss would not have been
significantly different from the historical results of operations other than for
compensation expense recognized for options granted at less than fair value, as
discussed below.
None of the incentive stock option shares were exercisable or vested as of
December 31, 1997. However, in accordance with the acquisition agreement between
the Company and Verio Inc., Monumental Network Systems, Inc. purchased the
11,872 options outstanding as of December 31,1997 at fair market value, less the
exercise price per share, and recorded a charge to operations of $84,152.
F-119
<PAGE> 263
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheets of Internet Servers, Inc.
as of December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for the period from inception (August 23,
1995) to December 31, 1995 and the years ended December 31, 1996 and 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Internet Servers, Inc. as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for the period from inception (August 23, 1995) to December 31, 1995 and the
years ended December 31, 1996 and 1997 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
March 2, 1998
F-120
<PAGE> 264
INTERNET SERVERS, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
ASSETS
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 18,021 $1,161,510
Receivables:
Trade, net of allowance for doubtful accounts of
$11,029 in 1997....................................... 98,675 220,571
Employees.............................................. -- 67,000
Prepaid expenses and other................................ -- 85,478
-------- ----------
Total current assets.............................. 116,696 1,534,559
Equipment, net (note 2)..................................... 484,240 714,205
-------- ----------
Total assets...................................... $600,936 $2,248,764
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 35,061 $ 118,241
Accrued liabilities....................................... 11,731 159,366
Income taxes payable...................................... 111,314 316,456
Deferred revenue.......................................... -- 14,388
-------- ----------
Total current liabilities......................... 158,106 608,451
Stockholders' equity (note 5):
Common stock, no par value, 100,000 shares authorized,
10,895 and 11,092 shares issued and outstanding........ 70,918 426,129
Retained earnings......................................... 371,912 1,214,184
-------- ----------
Total stockholders' equity........................ 442,830 1,640,313
Commitments (note 4)
-------- ----------
Total liabilities and stockholders' equity........ $600,936 $2,248,764
======== ==========
</TABLE>
See accompanying notes to financial statements.
F-121
<PAGE> 265
INTERNET SERVERS, INC.
STATEMENTS OF OPERATIONS
PERIOD FROM INCEPTION (AUGUST 23, 1995) TO DECEMBER 31, 1995 AND
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 23,
1995) TO
DECEMBER 31,
1995 1996 1997
------------ ---------- ----------
<S> <C> <C> <C>
Revenue:
Enhanced services................................... $48,380 $1,507,875 $3,476,045
Internet services................................... -- -- 704,187
Other............................................... 2,520 -- 211,962
------- ---------- ----------
Total revenue............................... 50,900 1,507,875 4,392,194
======= ========== ==========
Operating costs and expenses:
Enhanced and internet services operating costs...... 8,240 631,111 1,820,757
Selling, general and administrative................. 35,698 166,751 721,337
Depreciation........................................ 5,728 90,343 259,984
------- ---------- ----------
Total costs and expenses.................... 49,666 888,205 2,802,078
------- ---------- ----------
Earnings from operations.................... 1,234 619,670 1,590,116
Other income, net..................................... -- 322 26,215
------- ---------- ----------
Earnings before income taxes................ 1,234 619,992 1,616,331
Income tax expense (note 3)........................... -- (111,314) (602,059)
------- ---------- ----------
Net earnings................................ $ 1,234 $ 508,678 $1,014,272
======= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-122
<PAGE> 266
INTERNET SERVERS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM INCEPTION (AUGUST 23, 1995) TO DECEMBER 31, 1995 AND
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK
------------------ RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ -------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCES AT INCEPTION......................... -- $ -- $ -- $ --
Issuances of common stock for cash............ 9,800 13,000 -- 13,000
Net earnings.................................. -- -- 1,234 1,234
------ -------- ---------- ----------
BALANCES AT DECEMBER 31, 1995................. 9,800 13,000 1,234 14,234
Issuance of common stock for services......... 1,095 57,918 -- 57,918
Dividends paid in cash........................ -- -- (138,000) (138,000)
Net earnings.................................. -- -- 508,678 508,678
------ -------- ---------- ----------
BALANCES AT DECEMBER 31, 1996................. 10,895 70,918 371,912 442,830
Issuance of common stock for services......... 197 355,211 -- 355,211
Dividends paid in cash........................ -- -- (172,000) (172,000)
Net earnings.................................. -- -- 1,014,272 1,014,272
------ -------- ---------- ----------
BALANCES AT DECEMBER 31, 1997................. 11,092 $426,129 $1,214,184 $1,640,313
====== ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-123
<PAGE> 267
INTERNET SERVERS, INC.
STATEMENTS OF CASH FLOWS
PERIOD FROM INCEPTION (AUGUST 23, 1995) TO DECEMBER 31, 1995 AND
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 23,
1995) TO
DECEMBER 31,
1995 1996 1997
------------ --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings......................................... $ 1,234 $ 508,678 $1,014,272
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation...................................... 5,728 90,343 259,984
Provision for bad debts........................... -- -- 58,371
Common stock issued for services.................. -- 57,918 355,211
Changes in operating assets and liabilities:
Receivables..................................... (12,611) (86,064) (247,267)
Prepaid expenses and other...................... -- -- (85,478)
Accounts payable................................ 13,224 21,837 83,180
Accrued liabilities............................. 4,896 6,835 147,635
Income taxes payable............................ -- 111,314 205,142
Deferred revenue................................ -- -- 14,388
-------- --------- ----------
Net cash provided by operating activities.... 12,471 710,861 1,805,438
-------- --------- ----------
Cash flows from investing activities -- purchases of
equipment............................................ (35,144) (545,167) (489,949)
-------- --------- ----------
Cash flows from financing activities:
Borrowings on debt................................... 7,000 -- --
Repayments of debt................................... -- (7,000) --
Proceeds from issuance of common stock............... 13,000 -- --
Dividends............................................ -- (138,000) (172,000)
Net change in cash overdraft......................... 2,673 (2,673) --
-------- --------- ----------
Net cash provided (used) by financing
activities................................. 22,673 (147,673) (172,000)
-------- --------- ----------
Increase in cash and cash equivalents........ -- 18,021 1,143,489
Cash and cash equivalents at beginning of period....... -- -- 18,021
-------- --------- ----------
Cash and cash equivalents at end of period............. $ -- $ 18,021 $1,161,510
======== ========= ==========
Supplemental disclosure of cash flow information --
cash paid during the year for income taxes........... $ -- $ 40,000 $ 349,743
======== ========= ==========
</TABLE>
See accompanying notes to financial statements.
F-124
<PAGE> 268
INTERNET SERVERS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Internet Servers, Inc. (the Company) was incorporated in the State of Utah
on August 23, 1995. The Company's business consists of providing regional
internet enhanced services and consulting to customers in Utah and throughout
the Western states.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Effective December 31, 1997, Verio Inc. acquired 100% of the outstanding
common stock of the Company.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue related to enhanced and internet services is recognized as the
services are provided. Enhanced services consists primarily of web hosting
services to customers. The Company records deferred revenue for accounts billed
and/or collected in advance.
Revenue from hardware and software sales is recognized upon shipment of the
respective products if the Company's future obligations are not significant and
collectibility is probable.
Equipment
Equipment is stated at cost, less accumulated depreciation. Depreciation is
provided over the estimated useful lives of the assets ranging from three to
seven years using the straight-line method. Costs for normal repairs and
maintenance are expensed as incurred.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations including goodwill when indications of impairment are
present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
impaired the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the estimated fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value less costs to sell.
Income Taxes
From inception to September 1, 1996, the Company elected to be treated as a
subchapter S Corporation for income tax purposes. Accordingly, taxable income
through September 1, 1996 was included in the income tax returns of the
shareholders. On September 1, 1996, the Company converted to a C Corporation.
F-125
<PAGE> 269
INTERNET SERVERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109).
SFAS 109 requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the difference is expected to reverse.
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of December 31, 1996 and 1997 approximate their
carrying values based on their terms and interest rates. The use of different
market assumptions and/or estimation methodologies may have a significant effect
on the estimated fair values.
Customers who operate in Utah represent substantially all of the Company's
customer base and accounts receivable. However, no single customer comprised
more than 10% of accounts receivable or total revenue as of or for the years
ended December 31, 1995, 1996 or 1997.
(2) EQUIPMENT
Equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Internet and computer equipment............................. $561,296 $1,044,691
Furniture and office equipment.............................. 19,015 25,569
-------- ----------
580,311 1,070,260
Less accumulated depreciation and amortization.............. (96,071) (356,055)
-------- ----------
$484,240 $ 714,205
======== ==========
</TABLE>
(3) INCOME TAXES
Income tax expense consists of the following for the years ended December
31:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Current:
Federal...................................... $ 91,314 $548,794
State........................................ 20,000 53,265
-------- --------
$111,314 $602,059
======== ========
</TABLE>
Income tax expense for the years ended December 31 differs from the amounts
computed using the federal statutory tax rate of 34% to earnings before income
taxes as follows:
<TABLE>
<CAPTION>
1996 1997
--------- --------
<S> <C> <C>
Expected tax expense........................................ $ 210,797 $549,553
State income taxes, net of federal benefit.................. 20,460 53,341
S Corporation taxable income................................ (120,693) --
Other....................................................... 750 (835)
--------- --------
Actual income tax expense......................... $ 111,314 $602,059
========= ========
</TABLE>
F-126
<PAGE> 270
INTERNET SERVERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Temporary differences in the bases of assets and liabilities for financial
statement and income tax purposes are not significant as of December 31, 1996
and 1997.
(4) COMMITMENTS
The Company leases certain computer equipment and office space under
noncancelable operating leases expiring at various dates through 2000. Future
minimum annual lease payments under noncancelable operating leases for each of
the years ending December 31 are as follows:
<TABLE>
<S> <C>
1998.............................................. $359,139
1999.............................................. 345,684
2000.............................................. 148,654
--------
Total minimum payments............................ $853,477
========
</TABLE>
Rent expense for the years ended December 31, 1996 and 1997 was $14,500 and
$241,402, respectively.
(5) STOCKHOLDERS' EQUITY
On October 21, 1996, the Company entered into an employment agreement with
an officer. The agreement included a compensation and benefit package which also
included a long-term incentive provision consisting of the granting of shares of
the Company's common stock equal to two percent of the total common shares
outstanding. As of December 31, 1996, 25 shares had been issued resulting in
compensation expense of $45,078 based on the estimated fair value of the stock,
as determined by the Company's Board of Directors.
In accordance with the acquisition agreement between the Company and Verio
Inc., the unvested shares under the employment agreement were fully vested at
December 31, 1997. An additional 197 shares were issued as of December 31, 1997
and compensation expense of $355,211 was recognized by the Company based on the
estimated fair value of the stock using the acquisition price in the Verio Inc.
transaction.
F-127
<PAGE> 271
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheets of NSNet, Inc. as of
December 31, 1996 and 1997, and the related statements of operations, owner's
and stockholder's equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NSNet, Inc. as of December
31, 1996 and 1997, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
March 13, 1998
F-128
<PAGE> 272
NSNET, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
ASSETS (NOTE 3)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Current assets:
Cash...................................................... $ 4,188 $ 20,169
Receivables:
Trade, net of allowance for doubtful accounts of $3,133
and $12,158 in 1996 and 1997, respectively............ 27,494 85,881
Other.................................................. -- 20,377
Prepaid expenses and other................................ 124,829 333,130
-------- --------
Total current assets.............................. 156,511 459,557
Equipment, net (note 2)..................................... 177,410 378,874
Other assets................................................ -- 67,665
-------- --------
Total assets...................................... $333,921 $906,096
======== ========
LIABILITIES AND OWNER'S AND STOCKHOLDER'S EQUITY
Current liabilities:
Cash overdraft............................................ $ 41,057 $ --
Accounts payable.......................................... 7,614 94,252
Accrued liabilities....................................... 37,778 44,866
Revolving lines of credit (note 3)........................ -- 200,000
Current portion of capital lease obligations (note 4)..... -- 34,231
Deferred revenue and customer advances.................... 42,827 82,699
-------- --------
Total current liabilities......................... 129,276 456,048
Capital lease obligations, less current portion (note 4).... -- 61,636
-------- --------
Total liabilities................................. 129,276 517,684
Owner's and Stockholder's equity:
Owner's equity............................................ 204,645 --
Common stock, no par value, 2,000,000 shares authorized,
100,000 shares issued and outstanding at December 31,
1997................................................... -- 204,645
Retained earnings......................................... -- 183,767
-------- --------
Total owner's and stockholder's equity............ 204,645 388,412
Commitments (note 4)
-------- --------
Total liabilities and owner's and stockholder's
equity.......................................... $333,921 $906,096
======== ========
</TABLE>
See accompanying notes to financial statements.
F-129
<PAGE> 273
NSNET, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Revenue:
Internet services......................................... $887,939 $1,832,374
Other..................................................... -- 14,550
-------- ----------
Total revenue..................................... 887,939 1,846,924
-------- ----------
Operating expenses:
Internet services operating costs......................... 210,517 471,247
Selling, general and administrative....................... 485,128 938,523
Depreciation.............................................. 61,106 126,301
-------- ----------
Total operating expenses.......................... 756,751 1,536,071
-------- ----------
Earnings from operations.......................... 131,188 310,853
Other income (expense), net................................. 1,885 (5,508)
-------- ----------
Net earnings...................................... $133,073 305,345
======== ==========
Pro forma information:
Historical net earnings................................... 133,073 305,345
Pro forma adjustment for income tax expense............... (51,000) (116,000)
-------- ----------
Pro forma net earnings............................ $ 82,073 $ 189,345
======== ==========
</TABLE>
See accompanying notes to financial statements.
F-130
<PAGE> 274
NSNET, INC.
STATEMENTS OF OWNER'S AND STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
TOTAL
OWNER'S COMMON RETAINED STOCKHOLDER'S
EQUITY STOCK EARNINGS EQUITY
--------- -------- --------- -------------
<S> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1996..................... $ 75,037 $ -- $ -- $ 75,037
Distributions................................. (3,465) -- -- (3,465)
Net earnings.................................. 133,073 -- -- 133,073
--------- -------- --------- ---------
BALANCES AT DECEMBER 31, 1996................... 204,645 -- -- 204,645
Issuance of common stock upon incorporation
(note 1)................................... (204,645) 204,645 -- --
Distributions................................. -- -- (121,578) (121,578)
Net earnings.................................. -- -- 305,345 305,345
--------- -------- --------- ---------
BALANCES AT DECEMBER 31, 1997................... $ -- $204,645 $ 183,767 $ 388,412
========= ======== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-131
<PAGE> 275
NSNET, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 133,073 $ 305,345
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation........................................... 61,106 126,301
Provision for bad debts................................ 3,133 24,334
Changes in operating assets and liabilities:
Receivables.......................................... (17,073) (103,098)
Prepaid expenses and other........................... (124,829) (208,301)
Accounts payable and accrued liabilities............. 26,911 93,726
Deferred revenue and customer advances............... 25,647 39,872
--------- ---------
Net cash provided by operating activities......... 107,968 278,179
--------- ---------
Cash flows from investing activities:
Purchases of equipment.................................... (141,372) (217,958)
Increase in other assets.................................. -- (67,665)
--------- ---------
Net cash used by investing activities............. (141,372) (285,623)
--------- ---------
Cash flows from financing activities:
Cash overdraft............................................ 41,057 (41,057)
Borrowings under revolving lines of credit................ -- 240,000
Repayments under revolving lines of credit................ -- (40,000)
Principal payments under capital lease obligations........ -- (13,940)
Distributions............................................. (3,465) (121,578)
--------- ---------
Net cash provided by financing activities......... 37,592 23,425
--------- ---------
Increase in cash.................................. 4,188 15,981
Cash at beginning of year................................... -- 4,188
--------- ---------
Cash at end of year......................................... $ 4,188 $ 20,169
========= =========
Supplemental disclosure of cash flow information -- cash
paid during the year for interest......................... $ -- $ 5,508
========= =========
Noncash investing and financing activities -- equipment
acquired through capital lease obligations................ $ -- $ 109,807
========= =========
</TABLE>
See accompanying notes to financial statements.
F-132
<PAGE> 276
NSNET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
NSNet, Inc. (the Company) was incorporated as a subchapter S Corporation in
the State of California on January 1, 1997. Prior to incorporation, the Company
was operating as NextGen Systems Internet Services, a sole proprietorship formed
in 1992. All assets and liabilities of the sole proprietorship were contributed
to the Company upon incorporation and recorded at historical cost. The Company
provides internet access services to customers in California.
Effective February 27, 1998, Verio Inc. acquired 100% of the outstanding
common stock of the Company.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
Internet services are recognized as the services are provided. The Company
records deferred revenue for accounts billed and/or collected in advance.
Equipment
Equipment, including assets held under capital leases, is stated at cost,
less accumulated depreciation. Depreciation is recorded using the straight-line
method over the shorter of the estimated useful lives of the related assets or
the lease term, which is three years. Costs for normal repairs and maintenance
are expensed as incurred.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations, including goodwill, when indications of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the estimated fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value, less costs to sell.
Income Taxes
No provision for income taxes has been included in the accompanying
financial statement for 1996 or 1997 due to the Company's status as a sole
proprietorship and subchapter S Corporation. Accordingly, net earnings as of
December 31, 1996 were included in owner's equity and taxable income has been
included in the tax returns of the owner and stockholder. However, pro forma
information has been included in the accompanying statements of operations to
reflect a pro forma adjustment for income tax expense as if the Company had been
a separate taxable entity subject to federal and state income taxes for both
years presented.
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair
F-133
<PAGE> 277
NSNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
values of all financial instruments as of December 31, 1996 and 1997 approximate
their carrying values based on their terms and interest rates. The use of
different market assumptions and/or estimation methodologies may have a
significant effect on the estimated fair values.
Customers who operate in California represent substantially all of the
Company's customer base. No single customer comprised more than 10% of accounts
receivable or total revenue as of or for the years ended December 31, 1996 or
1997.
(2) EQUIPMENT
Equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
-------- ---------
<S> <C> <C>
Internet and computer equipment............................. $255,112 $ 568,239
Furniture................................................... 10,000 24,638
-------- ---------
265,112 592,877
Less accumulated depreciation............................... (87,702) (214,003)
-------- ---------
$177,410 $ 378,874
======== =========
</TABLE>
Equipment includes assets held under capital leases with a net book value
of $94,248 at December 31, 1997.
(3) DEBT
At December 31, 1997, the Company had a $150,000 unsecured revolving line
of credit agreement with a bank, under which $100,000 was outstanding.
Borrowings under the line bear interest at the bank's prime rate plus 2.975%
(11.475% at December 31, 1997), and are due in 1998. The agreement included
various restrictive covenants including limitations on indebtedness and payment
of dividends. As of December 31, 1997, the Company was not in compliance with
the restrictions on additional indebtedness. All borrowings under this line were
paid in full subsequent to the acquisition by Verio, Inc.
At December 31, 1997, the Company had an additional $125,000 revolving line
of credit agreement with a second bank, secured by substantially all of the
assets of the Company, under which $100,000 was outstanding. Borrowings under
the line bear interest at the bank's prime rate plus 1.5% (10% at December 31,
1997), and are due in 1998.
(4) COMMITMENTS
The Company leases certain computer and office equipment under capital
leases. The Company also leases office space under noncancelable operating
leases expiring at various dates through 2002. Future
F-134
<PAGE> 278
NSNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
minimum annual lease payments under capital and noncancelable operating leases
for each of the years ending December 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1998........................................................ $ 43,434 $ 95,767
1999........................................................ 43,434 110,092
2000........................................................ 23,227 114,004
2001........................................................ -- 118,862
2002........................................................ -- 108,956
-------- --------
Total minimum payments.................................... 110,095 $547,681
========
Less amount representing interest........................... (14,228)
--------
Present value of net minimum lease payments............... 95,867
Less current portion........................................ (34,231)
--------
$ 61,636
========
</TABLE>
Rent expense for the years ended December 31, 1996 and 1997 totaled $19,801
and $34,082, respectively.
F-135
<PAGE> 279
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheet of Access One, Inc. as of
December 31, 1997 and the related statements of operations and accumulated
deficit, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Access One, Inc. as of
December 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Denver, Colorado
April 9, 1998
F-136
<PAGE> 280
ACCESS ONE, INC.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash...................................................... $ 259,144
Trade receivables, net of allowance for doubtful accounts
of $148,040 (note 3)................................... 344,773
Inventory................................................. 40,635
Prepaid expenses and other................................ 105,365
----------
Total current assets.............................. 749,917
Equipment, net (notes 2 and 3).............................. 678,752
Other assets................................................ 9,853
----------
Total assets...................................... $1,438,522
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Revolving line of credit.................................. $ 110,000
Accounts payable:
Trade.................................................. 144,297
Related party (note 5)................................. 273,306
Accrued liabilities....................................... 376,330
Notes payable (note 3).................................... 88,550
Current portion of capital lease obligations (note 4)..... 8,858
Note payable to related party (note 5).................... 32,194
Deferred revenue.......................................... 294,266
----------
Total current liabilities......................... 1,327,801
Capital lease obligations, less current portion (note 4).... 6,812
----------
Total liabilities................................. 1,334,613
Redeemable preferred stock, $0.01 par value, 500,000 shares
authorized, 200,000 shares issued and outstanding (note
6)........................................................ 508,748
Stockholders' deficit (note 6):
Common stock, $0.01 par value, 2,000,000 shares
authorized, 800,000 shares issued and outstanding...... 8,000
Additional paid-in capital................................ 85,476
Accumulated deficit....................................... (498,315)
----------
Total stockholders' deficit....................... (404,839)
Commitments (note 4)
----------
Total liabilities and stockholders' deficit....... $1,438,522
==========
</TABLE>
See accompanying notes to financial statements.
F-137
<PAGE> 281
ACCESS ONE, INC.
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Revenue:
Internet services......................................... $2,485,583
Enhanced services......................................... 702,639
Computer hardware and software sales...................... 303,465
Other..................................................... 27,019
----------
Total revenue..................................... 3,518,706
----------
Operating expenses:
Internet and enhanced services operating costs (note 5)... 613,084
Cost of hardware and software sales....................... 226,205
Selling, general and administrative (note 5).............. 2,922,073
Depreciation.............................................. 245,003
----------
Total operating expenses.......................... 4,006,365
----------
Loss from operations.............................. (487,659)
Other expense:
Interest expense.......................................... (21,833)
Other, net................................................ (3,808)
----------
Net loss.......................................... $ (513,300)
==========
Retained earnings at beginning of year...................... 14,985
Accumulated deficit at end of year.......................... (498,315)
==========
</TABLE>
See accompanying notes to financial statements.
F-138
<PAGE> 282
ACCESS ONE, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(513,300)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation......................................... 245,003
Provision for bad debts.............................. 386,983
Changes in operating assets and liabilities:
Receivables....................................... (445,284)
Inventory......................................... (40,635)
Prepaid expenses and other current assets......... (96,000)
Other assets...................................... (9,708)
Accounts payable and accrued liabilities.......... 541,280
Deferred revenue.................................. 148,798
---------
Net cash provided by operating activities.... 217,137
---------
Cash flows from investing activities -- purchase of
equipment................................................. (559,530)
---------
Cash flows from financing activities:
Borrowings under revolving line of credit................. 110,000
Borrowings under note payable............................. 127,916
Principal payments on note payable........................ (39,366)
Borrowings under notes to related parties................. 6,965
Principal payments under capital lease obligations........ (15,501)
---------
Net cash provided by financing activities.... 190,014
---------
Net decrease in cash......................... (152,379)
Cash at beginning of year................................... 411,523
---------
Cash at end of year......................................... $ 259,144
=========
Supplemental disclosure of cash flow information -- cash
paid during the year for interest......................... $ 21,822
=========
</TABLE>
See accompanying notes to financial statements.
F-139
<PAGE> 283
ACCESS ONE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Access One, Inc. (the Company) was originally organized as a limited
liability company on July 1, 1994. The Company reincorporated on December 9,
1996 as a C corporation in the state of Washington. The Company provides
internet access and enhanced services and computer hardware and software sales
to customers primarily in Washington.
Effective February 27, 1998, Verio Inc. (Verio) acquired all of the
outstanding common stock of the Company, resulting in 100% ownership (see Note
6).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Equipment
Equipment is stated at cost, less accumulated depreciation. Depreciation is
recorded using the straight-line method over the shorter of the estimated useful
lives of the related assets or the lease terms, which range from three to five
years. Costs for normal repairs and maintenance are expensed as incurred.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations, including goodwill, when indications of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the estimated fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value, less costs to sell.
Revenue Recognition
Internet and enhanced services are recognized as the services are provided.
Enhanced services consist primarily of web hosting and collocation services to
customers. The Company records deferred revenue for amounts billed and/or
collected in advance.
Revenue from hardware sales is recognized upon shipment of the respective
products if the Company's future obligations are not significant and
collectibility is probable.
Income Taxes
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109).
Under SFAS 109, deferred income taxes are recognized for the future tax
consequences of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
F-140
<PAGE> 284
ACCESS ONE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has a net operating loss carryforward for income tax purposes
of approximately $337,000 which expires in 2012. No tax benefit has been
recorded by the Company in 1997 due to the Company's net loss and the
uncertainty regarding the ultimate utilization of such loss carryforward. The
Company also has a deferred tax asset related to the allowance for doubtful
accounts of approximately $56,000. A valuation allowance has been recorded for
the entire balance of the deferred tax asset related to the carryforward and the
allowance for doubtful accounts. Other temporary differences between financial
statement and income tax bases of assets and liabilities are not significant.
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of December 31, 1997 approximate their carrying values
based on their terms and interest rates. The use of different market assumptions
and/or estimation methodologies may have a significant effect on the estimated
fair values.
Customers who operate in Washington represent substantially all of the
Company's customer base. No single customer comprised more than 10% of revenue
or accounts receivable as of or for the year ended December 31, 1997.
(2) EQUIPMENT
Equipment consisted of the following at December 31, 1997:
<TABLE>
<S> <C>
Internet and computer equipment........................... $ 926,175
Furniture and office equipment............................ 120,657
---------
1,046,832
Less accumulated depreciation and amortization.............. (368,080)
---------
$ 678,752
=========
</TABLE>
Equipment includes assets held under capital lease with a net book value of
$12,990 at December 31, 1997.
(3) DEBT
Lines of credit and notes payable consist of the following as of December
31, 1997:
<TABLE>
<S> <C>
Revolving line of credit, maximum credit available of
$300,000, bearing interest at 1.5% above the bank's prime
lending rate, (10% at December 31, 1997), due in 1998, and
secured by accounts receivable............................ $ 110,000
Notes payable, bearing interest at 10.25%, due on demand, or
if no demand is made, in monthly payments of principal and
interest of $5,945 through April, 1999, and secured by
certain equipment of the Company.......................... 88,550
---------
198,550
Less current portion........................................ (198,550)
---------
Long-term debt, less current portion...................... $ --
=========
</TABLE>
F-141
<PAGE> 285
ACCESS ONE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) COMMITMENTS
Leases
The Company leases certain computer and office equipment under capital
leases. The Company also leases office space under noncancelable operating
leases expiring at various dates through 1999. Future minimum annual lease
payments under noncancelable capital and operating leases for each of the years
ending December 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1998.................................... $ 8,280 $80,808
1999.................................... 7,589 1,512
------- -------
Total minimum payments................ $15,869 $82,320
======= =======
Less amount representing interest....... (199)
-------
Present value of net minimum lease
payments.............................. 15,670
Less current portion.................... (8,858)
-------
$ 6,812
=======
</TABLE>
Rent expense for the year ended December 31, 1997 totaled $219,500.
(5) TRANSACTIONS WITH RELATED PARTIES
During 1997, the Company received customer service, technical support, and
backbone transport services provided by Verio. Total amounts charged to the
Company by Verio in this manner were $79,421 included in internet and enhanced
services operating costs and $178,969 included in selling, general, and
administrative expenses. Verio also purchased approximately $14,916 of equipment
on behalf of the Company. Amounts due to related party at December 31, 1997
relate to these services and purchases of equipment and are non interest
bearing.
Note payable to related party is a non interest bearing, unsecured note
payable to the majority stockholder of the Company.
(6) REDEEMABLE PREFERRED STOCK
During 1996, the Company issued 200,000 shares of redeemable, convertible
Series A preferred stock to Verio. The preferred shares are convertible into
common shares on a one for one basis and are mandatorily redeemable in 2002. In
connection with the Verio acquisition disclosed in note 1, the preferred shares
were converted to common stock.
(7) EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) Plan (the Plan) for all full time employees.
The Company makes matching contributions of 25% of employee contributions up to
6% of the respective employee's salary. During 1997 the Company made
contributions to the Plan totaling $11,876.
F-142
<PAGE> 286
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheet of STARnet, L.L.C. as of
December 31, 1997 and the related statements of operations, members' equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of STARnet, L.L.C. as of
December 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
March 27, 1998
F-143
<PAGE> 287
STARNET, L.L.C.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash...................................................... $210,089
Trade receivables, net of allowance for doubtful accounts
of $22,944............................................. 111,541
Inventory................................................. 69,089
Prepaid expenses and other................................ 18,779
--------
Total current assets.............................. 409,498
Equipment, net (note 2)..................................... 208,336
Other assets................................................ 4,583
--------
Total assets...................................... $622,417
========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 31,371
Accrued liabilities....................................... 12,895
Deferred revenue.......................................... 371,608
--------
Total current liabilities......................... 415,874
Members' equity............................................. 206,543
Commitments (note 3)
--------
Total liabilities and members' equity............. $622,417
========
</TABLE>
See accompanying notes to financial statements.
F-144
<PAGE> 288
STARNET, L.L.C.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Revenue:
Internet services......................................... $1,201,504
Computer hardware sales................................... 386,376
Other..................................................... 13,094
----------
Total revenue..................................... 1,600,974
----------
Operating expenses:
Internet services operating costs......................... 397,019
Cost of hardware sales.................................... 319,486
Selling, general and administrative....................... 570,461
Depreciation.............................................. 155,968
----------
Total operating expenses.......................... 1,442,934
----------
Earnings from operations.......................... 158,040
Other income (expense):
Interest income........................................... 9,411
Other, net................................................ (6,282)
----------
Net earnings...................................... $ 161,169
==========
Pro forma information:
Historical net earnings................................... 161,169
Pro forma adjustment for income tax expense............... (61,000)
----------
Pro forma net earnings............................ $ 100,169
==========
</TABLE>
See accompanying notes to financial statements.
F-145
<PAGE> 289
STARNET, L.L.C.
STATEMENT OF MEMBERS' EQUITY
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Balance at January 1, 1997.................................. $ 290,109
Distributions to members.................................... (244,735)
Net earnings................................................ 161,169
---------
Balance at December 31, 1997................................ $ 206,543
=========
</TABLE>
See accompanying notes to financial statements.
F-146
<PAGE> 290
STARNET, L.L.C.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 161,169
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation........................................... 155,968
Provision for bad debts................................ 44,484
Loss on sale of assets................................. 6,282
Changes in operating assets and liabilities:
Receivables.......................................... (40,725)
Inventory............................................ 50,205
Prepaid expenses and other current assets............ (13,944)
Other assets......................................... 834
Accounts payable and accrued liabilities............. (54,304)
Deferred revenue..................................... (3,346)
---------
Net cash provided by operating activities......... 306,623
---------
Cash flows from investing activities -- purchase of
equipment................................................. (117,202)
---------
Cash flows from financing activities -- distributions to
members................................................... (244,735)
---------
Net decrease in cash.............................. (55,314)
Cash at beginning of year................................... 265,403
---------
Cash at end of year......................................... $ 210,089
=========
</TABLE>
See accompanying notes to financial statements.
F-147
<PAGE> 291
STARNET, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
STARnet, L.L.C. (the Company) was originally organized as a limited
liability company in the State of Missouri as Internetix, L.L.C. on June 21,
1994. On August 18, 1997, the Company changed its name to STARnet, L.L.C. The
Company provides internet access services and computer hardware sales to
customers primarily in Missouri and Illinois.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Equipment
Equipment is stated at cost, less accumulated depreciation. Depreciation is
recorded using a method that estimates the straight-line method over the
estimated useful lives of the related assets, which is three years. Costs for
normal repairs and maintenance are expensed as incurred.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations, including goodwill, when indications of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the estimated fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value, less costs to sell.
Revenue Recognition
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance.
Revenue from hardware sales is recognized upon shipment of the respective
products if the Company's future obligations are not significant and
collectibility is probable.
Income Taxes
No provision for income taxes has been included in the accompanying
financial statements due to the Company's status as a limited liability
corporation. Accordingly, taxable income has been included in the tax returns of
the members. However, pro forma information has been included in the
accompanying statement of operations to reflect a pro forma adjustment for
income tax expense as if the Company had been a separate taxable entity subject
to federal and state income taxes for the year ended December 31, 1997.
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of December 31, 1997 approximate their carrying values
based on their
F-148
<PAGE> 292
STARNET, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
terms and interest rates. The use of different market assumptions and/or
estimation methodologies may have a significant effect on the estimated fair
values.
Customers who operate in Missouri and Illinois represent substantially all
of the Company's customer base. Three customers comprised approximately 38% of
accounts receivable as of December 31, 1997. However, no single customer
comprised more than 10% of revenue for the year ended December 31, 1997.
(2) EQUIPMENT
Equipment consisted of the following at December 31, 1997:
<TABLE>
<S> <C>
Internet and computer equipment............................. $ 503,324
Furniture and office equipment.............................. 2,750
---------
506,074
Less accumulated depreciation and amortization.............. (297,738)
---------
$ 208,336
=========
</TABLE>
(3) COMMITMENTS
The Company leases office space and equipment under noncancelable leases
expiring at various dates through 2002. Future minimum annual lease payments
under noncancelable operating leases for each of the years ending December 31
are as follows:
<TABLE>
<S> <C>
1998............................................... $32,873
1999............................................... 26,236
2000............................................... 2,716
2001............................................... 870
2002............................................... 400
-------
Total minimum payments................... $63,095
=======
</TABLE>
Rent expense for the year ended December 31, 1997 totaled $39,630.
In addition, the Company has a verbal agreement to guarantee certain
obligations of a related party with a telecommunications company for one year in
the amount of $250,000.
F-149
<PAGE> 293
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheets of Computing Engineers Inc.
as of December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Computing Engineers Inc. as
of December 31, 1996 and 1997, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Denver, Colorado
March 27, 1998
F-150
<PAGE> 294
COMPUTING ENGINEERS INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
ASSETS (NOTE 3)
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Current assets:
Cash...................................................... $ -- $ 15,995
Trade receivables, net of allowance for doubtful accounts
of $133,739 and $62,085 in 1996 and 1997,
respectively........................................... 340,799 429,171
Inventory................................................. -- 37,411
Prepaid expenses and other................................ 2,014 2,014
---------- ----------
Total current assets.............................. 342,813 484,591
Equipment, net (note 2)..................................... 821,637 1,049,662
Other assets, net........................................... -- 20,420
---------- ----------
Total assets...................................... $1,164,450 $1,554,673
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft............................................ $ 54,352 $ --
Accounts payable.......................................... 355,223 225,153
Accrued liabilities....................................... 5,252 33,373
Current portion of note payable (note 3).................. -- 84,352
Current portion of obligations under capital leases (note
4)..................................................... 193,873 223,826
Deferred revenue.......................................... 146,010 249,817
---------- ----------
Total current liabilities......................... 754,710 816,521
Note payable, less current portion (note 3)................. -- 585,002
Capital lease obligations, less current portion (note 4).... 49,776 28,811
---------- ----------
Total liabilities................................. 804,486 1,430,334
Stockholders' equity:
Common stock, $10 par value, 1,000 shares authorized, 100
shares issued and outstanding.......................... 1,000 1,000
Additional paid-in capital................................ 5,000 5,000
Retained earnings......................................... 353,964 118,339
---------- ----------
Total stockholders' equity........................ 359,964 124,339
---------- ----------
Commitments (note 4)
Total liabilities and stockholders' equity........ $1,164,450 $1,554,673
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-151
<PAGE> 295
COMPUTING ENGINEERS INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Revenue:
Internet services......................................... $2,326,898 $3,321,562
Consulting services....................................... -- 162,683
Computer hardware and software sales...................... 88,664 537,057
Other..................................................... -- 58,176
---------- ----------
Total revenue..................................... 2,415,562 4,079,478
---------- ----------
Operating expenses:
Internet services operating costs......................... 606,522 632,653
Costs of hardware and software sales...................... 148,770 392,676
Marketing and selling..................................... 47,155 299,990
General and administrative................................ 1,179,149 2,041,265
Depreciation and amortization............................. 144,953 329,296
---------- ----------
Total operating expenses.......................... 2,126,549 3,695,880
---------- ----------
Earnings from operations.......................... 289,013 383,598
Interest expense............................................ (19,254) (95,223)
---------- ----------
Net earnings...................................... $ 269,759 $ 288,375
========== ==========
Pro forma information:
Historical net earnings................................... $ 269,759 $ 288,375
Pro forma adjustment for income tax expense............... (103,000) (110,000)
---------- ----------
Pro forma net earnings............................ $ 166,759 $ 178,375
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-152
<PAGE> 296
COMPUTING ENGINEERS INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1996............ 100 $1,000 $5,000 $ 207,104 $ 213,104
Distributions to stockholders.......... -- -- -- (122,899) (122,899)
Net earnings........................... -- -- -- 269,759 269,759
--- ------ ------ --------- ---------
BALANCES AT DECEMBER 31, 1996.......... 100 1,000 5,000 353,964 359,964
Distributions to stockholders.......... -- -- -- (524,000) (524,000)
Net earnings........................... -- -- -- 288,375 288,375
--- ------ ------ --------- ---------
BALANCES AT DECEMBER 31, 1997.......... 100 $1,000 $5,000 $ 118,339 $ 124,339
=== ====== ====== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-153
<PAGE> 297
COMPUTING ENGINEERS INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 269,759 $ 288,375
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization.......................... 144,953 329,296
Provision for bad debts................................ 133,739 165,153
Changes in operating assets and liabilities:
Trade receivables.................................... (472,524) (253,525)
Inventory............................................ -- (37,411)
Prepaid expenses and other........................... 142 --
Accounts payable..................................... 355,223 (130,070)
Accrued liabilities.................................. 238 28,121
Deferred revenue..................................... 146,010 103,807
--------- ---------
Net cash provided by operating activities......... 577,540 493,746
--------- ---------
Cash flows from investing activities -- purchases of
equipment................................................. (336,776) (228,892)
--------- ---------
Cash flows from financing activities:
Net change in cash overdraft.............................. (15,314) (54,352)
Borrowings under note payable............................. -- 700,000
Debt issuance costs....................................... -- (20,420)
Principal payments on note payable........................ -- (30,646)
Principal payments on capital lease obligations........... (102,551) (319,441)
Distributions to shareholders............................. (122,899) (524,000)
--------- ---------
Net cash used by financing activities............. (240,764) (248,859)
--------- ---------
Increase in cash.................................. -- 15,995
Cash at beginning of year................................... -- --
--------- ---------
Cash at end of year......................................... $ -- $ 15,995
========= =========
Supplemental disclosure of cash flow information -- cash
paid during the year for interest......................... $ 19,254 $ 95,223
========= =========
Noncash investing and financing activities -- equipment
acquired through capital lease obligations................ $ 346,200 $ 328,429
========= =========
</TABLE>
See accompanying notes to financial statements.
F-154
<PAGE> 298
COMPUTING ENGINEERS INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Computing Engineers Inc. (the Company) was incorporated in the State of
Illinois on November 1, 1993. The Company is a provider of internet access
services to businesses and individuals, primarily in Illinois.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Equipment
Equipment, including any assets held under capital leases, is stated at
cost, less accumulated depreciation and amortization. Depreciation and
amortization is recorded using the straight-line method over the shorter of the
estimated useful lives of the related assets or the lease term, which is three
years. Costs for normal repairs and maintenance are expensed as incurred.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). Statement No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at lower of the carrying amount or fair value less
costs to sell.
Revenue Recognition
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance.
Revenue from consulting services is recognized when services have been
rendered.
Revenue from hardware and software sales is recognized upon shipment of the
respective products if the Company's future obligations are not significant and
collectibility is probable.
Income Taxes
No provision for income taxes has been included in the accompanying
financial statements for 1996 or 1997 due to the Company's status as a
subchapter S corporation. Accordingly, taxable income has been included in the
tax returns of the stockholders. However, pro forma information has been
included in the accompanying statements of operations to reflect a pro forma
adjustment for income tax expense as if the Company had been a separate taxable
entity subject to federal and state income taxes for all periods presented.
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of December 31, 1996 and 1997 approximate their
carrying values based
F-155
<PAGE> 299
COMPUTING ENGINEERS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
on their terms and interest rates. The use of different market assumptions
and/or estimation methodologies may have a significant effect on the estimated
fair values.
(2) EQUIPMENT
Equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
--------- ----------
<S> <C> <C>
Internet and computer equipment............................ $ 973,392 $1,522,201
Furniture and office equipment............................. 22,048 30,560
--------- ----------
995,440 1,552,761
Less accumulated depreciation and amortization............. (173,803) (503,099)
--------- ----------
$ 821,637 $1,049,662
========= ==========
</TABLE>
Equipment includes assets owned under capital leases with a net book value
of $305,530 and $474,893 at December 31, 1996 and 1997, respectively.
(3) DEBT
Debt consists of the following as of December 31, 1997:
<TABLE>
<S> <C>
Note payable bearing interest at prime plus 2.75% (11.25% at
December 31, 1997), monthly principal and interest
payments of $11,986 through May 12, 2004, secured by
substantially all the assets of the Company............... $669,354
Less current portion........................................ (84,352)
--------
$585,002
========
</TABLE>
(4) COMMITMENTS
The Company leases certain computer and office equipment under capital
leases. The Company also leases office space under noncancelable operating
leases expiring at various dates through 2005. Future minimum annual lease
payments under capital and noncancelable operating leases for each of the years
ending December 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
1998........................................................ $ 252,242 $ 234,353
1999........................................................ 29,695 219,153
2000........................................................ -- 192,161
2001........................................................ -- 197,120
2002........................................................ -- 202,079
Thereafter.................................................. -- 472,345
--------- ----------
Total minimum payments.................................... 281,937 $1,517,211
==========
Less amount representing interest........................... (29,300)
---------
Present value of net minimum lease payments............... 252,637
Less current portion........................................ (223,826)
---------
$ 28,811
=========
</TABLE>
Rent expense for the years ended December 31, 1996 and 1997 was $93,501 and
$134,777, respectively.
F-156
<PAGE> 300
INDEPENDENT AUDITORS' REPORT
The Board of Directors
LI Net, Inc.:
We have audited the accompanying balance sheets of LI Net, Inc. as of April
30, 1997 and January 31, 1998, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the years ended April 30,
1996 and 1997 and the nine months ended January 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LI Net, Inc. as of April 30,
1997 and January 31, 1998, and the results of its operations and its cash flows
for the years ended April 30, 1996 and 1997 and the nine months ended January
31, 1998 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
March 27, 1998
F-157
<PAGE> 301
LI NET, INC.
BALANCE SHEETS
APRIL 30, 1997 AND JANUARY 31, 1998
ASSETS
<TABLE>
<CAPTION>
1997 1998
-------- ---------
<S> <C> <C>
Current assets:
Cash...................................................... $ 49,036 $ 24,575
Receivables (note 3):
Trade, net of all allowance for doubtful accounts of
$28,948 and $50,000, respectively..................... 157,643 225,148
Other.................................................. -- 6,000
Prepaid expenses and other................................ 3,850 3,850
-------- ---------
Total current assets.............................. 210,529 259,573
Equipment, net (notes 2 and 3).............................. 355,906 500,654
Other assets................................................ 25,057 28,708
-------- ---------
Total assets...................................... $591,492 $ 788,935
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $171,038 $ 245,777
Accrued liabilities....................................... 13,942 22,521
Current portion of notes payable (note 3):
Bank................................................... -- 22,476
Related party (note 6)................................. 9,038 8,885
Revolving line of credit (note 3)......................... 15,265 39,993
Current portion of obligations under capital leases (note
4)..................................................... 52,090 81,652
Deferred revenue.......................................... 77,766 158,740
-------- ---------
Total current liabilities......................... 339,139 580,044
Notes payable, less current portion (note 3):
Bank...................................................... -- 93,542
Related party (note 6).................................... 126,052 114,029
Capital lease obligations, less current portion (note 4).... 87,826 62,453
-------- ---------
Total liabilities................................. 553,017 850,068
Stockholders' equity (deficit):
Common stock, no par value, 100 shares authorized and
issued................................................. 44,000 44,000
Additional paid-in capital................................ -- 273,100
Retained earnings (deficit)............................... 6,375 (378,233)
Treasury stock -- 5 shares at April 30, 1997, at cost..... (11,900) --
-------- ---------
Total stockholders' equity (deficit).............. 38,475 (61,133)
-------- ---------
Commitments (note 4)
Total liabilities and stockholders' equity
(deficit)....................................... $591,492 $ 788,935
======== =========
</TABLE>
See accompanying notes to financial statements.
F-158
<PAGE> 302
LI NET, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED APRIL 30, 1996 AND 1997 AND NINE MONTHS ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
1996 1997 1998
-------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Internet services..................................... $608,714 $1,033,595 $1,430,480
Computer hardware sales............................... 152,854 325,723 90,233
-------- ---------- ----------
Total revenue................................. 761,568 1,359,318 1,520,713
-------- ---------- ----------
Operating expenses:
Internet services operating costs..................... 197,025 317,225 551,993
Costs of hardware sold................................ 73,370 156,347 42,987
Selling, general and administrative expenses(note
7)................................................. 358,627 769,898 1,180,146
Depreciation.......................................... 64,470 77,762 100,902
-------- ---------- ----------
Total operating expenses...................... 693,492 1,321,232 1,876,028
Earnings (loss) from operations............... 68,076 38,086 (355,315)
Interest expense........................................ (10,596) (55,325) (29,293)
-------- ---------- ----------
Earnings (loss) before income taxes........... 57,480 (17,239) (384,608)
Income tax expense (note 5)............................. (7,600) -- --
-------- ---------- ----------
Net earnings (loss)........................... $ 49,880 $ (17,239) $ (384,608)
======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-159
<PAGE> 303
LI NET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED APRIL 30, 1996 AND 1997 AND NINE MONTHS ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL RETAINED STOCKHOLDERS'
COMMON PAID-IN EARNINGS TREASURY EQUITY
STOCK CAPITAL (DEFICIT) STOCK (DEFICIT)
------- ---------- --------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES AT MAY 1, 1995............ $44,000 $ -- $ (26,266) $ -- $ 17,734
Purchase of treasury stock......... -- -- -- (10,000) (10,000)
Net earnings....................... -- -- 49,880 -- 49,880
------- -------- --------- -------- ---------
BALANCES AT APRIL 30, 1996......... 44,000 -- 23,614 (10,000) 57,614
Purchase of treasury stock......... -- -- -- (13,800) (13,800)
Issuance of treasury stock for
services (note 7)................ -- -- -- 11,900 11,900
Net loss........................... -- -- (17,239) -- (17,239)
------- -------- --------- -------- ---------
BALANCES AT APRIL 30, 1997......... 44,000 -- 6,375 (11,900) 38,475
Issuance of treasury stock for
services (note 7)................ -- 273,100 -- 11,900 285,000
Net loss........................... -- -- (384,608) -- (384,608)
------- -------- --------- -------- ---------
BALANCES AT JANUARY 31, 1998....... $44,000 $273,100 $(378,233) $ -- $ (61,133)
======= ======== ========= ======== =========
</TABLE>
See accompanying notes to financial statements.
F-160
<PAGE> 304
LI NET, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED APRIL 30, 1996 AND 1997 AND NINE MONTHS ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)..................................... $ 49,880 $ (17,239) $(384,608)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation......................................... 64,470 77,762 100,902
Provision for bad debts.............................. -- 28,948 50,000
Issuance of treasury stock for services.............. -- 11,900 285,000
Changes in operating assets and liabilities:
Receivables........................................ (66,218) (103,079) (123,505)
Prepaid expenses and other current assets.......... -- (3,850) --
Other assets....................................... (13,602) (6,580) (3,651)
Accounts payable and accrued liabilities........... 88,042 67,313 83,318
Deferred revenue................................... -- 77,766 80,974
--------- --------- ---------
Net cash provided by operating activities....... 122,572 132,941 88,430
--------- --------- ---------
Cash flows from investing activities -- purchases of
equipment............................................... (149,667) (94,633) (182,471)
--------- --------- ---------
Cash flows from financing activities:
Borrowings under revolving lines of credit.............. -- 15,265 24,728
Proceeds from borrowings from bank...................... -- -- 130,000
Principal payments on notes payable to bank............. -- -- (13,982)
Proceeds from borrowings from related parties........... 107,713 -- --
Principal payments on notes payable to related party.... (21,128) (13,677) (12,176)
Principal payments on capital lease obligations......... -- (39,872) (58,990)
Purchase of treasury stock.............................. (10,000) (13,800) --
--------- --------- ---------
Net cash provided (used) by financing
activities.................................... 76,585 (52,084) 69,580
--------- --------- ---------
Net increase (decrease) in cash................. 49,490 (13,776) (24,461)
Cash at beginning of year................................. 13,322 62,812 49,036
--------- --------- ---------
Cash at end of year....................................... $ 62,812 $ 49,036 $ 24,575
========= ========= =========
Supplemental disclosure of cash flow information -- cash
paid during the year for interest....................... $ 10,596 $ 39,621 $ 22,593
========= ========= =========
Noncash investing and financing activities -- equipment
acquired through capital lease obligations.............. $ 32,876 $ 146,912 $ 63,179
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-161
<PAGE> 305
LI NET, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1996 AND 1997 AND NINE MONTHS ENDED JANUARY 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
LI Net, Inc. (the Company) was incorporated in the State of New York and
provides regional internet access services to customers in New York.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Equipment
Equipment, including assets held under capital leases, is stated at cost,
less accumulated depreciation. Depreciation is recorded using the straight-line
method over the shorter of the estimated useful lives of the related assets or
the lease terms, which range from three to five years. Costs for normal repairs
and maintenance are expensed as incurred.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations, including goodwill, when indications of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the estimated fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value, less costs to sell.
Revenue Recognition
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance.
Revenue from hardware sales is recognized upon shipment of the respective
products if the Company's future obligations are not significant and
collectibility is probable.
Income Taxes
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, (SFAS 109).
Under SFAS 109, deferred income taxes are recognized for the future tax
consequences of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of April 30, 1997 and January 31, 1998, approximate
their carrying values
F-162
<PAGE> 306
LI NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
based on their terms and interest rates. The use of different market assumptions
and/or estimation methodologies may have a significant effect on the estimated
fair values.
(2) EQUIPMENT
Equipment consisted of the following at April 30, 1997 and January 31,
1998:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Internet and computer equipment............................. $ 409,376 $ 641,881
Furniture and office equipment.............................. 67,532 80,677
Leasehold improvements...................................... 32,297 32,297
--------- ---------
509,205 754,855
Less accumulated depreciation and amortization.............. (153,299) (254,201)
--------- ---------
$ 355,906 $ 500,654
========= =========
</TABLE>
Equipment includes assets held under capital leases with a net book value
of approximately $139,000 and $155,000 at April 30, 1997 and January 31, 1998,
respectively.
(3) DEBT
During fiscal 1998, the Company entered into a loan agreement with a bank
and borrowed $130,000. The loan is secured by the Company's equipment, and bears
interest at 8.75%. Principal and interest payments of $2,683 are due monthly
through 2002. At January 31, 1998, the outstanding balance was $116,018.
At April 30, 1997 and January 31, 1998, the Company had a $50,000 revolving
line of credit agreement with a bank, secured by receivables, under which
$15,265 and $39,993 was outstanding, respectively. Borrowings under the line
bear interest at the bank's prime lending rate plus 2% (10.5% at January 31,
1997) and are due in 1998.
Maturities of the line of credit and note payable for each of the years
ending January 31 are as follows:
<TABLE>
<S> <C>
1999.............................................. $ 62,469
2000.............................................. 25,384
2001.............................................. 27,247
2002.............................................. 29,732
2003.............................................. 11,179
--------
$156,011
========
</TABLE>
(4) COMMITMENTS
The Company leases certain computer and office equipment under capital
leases. The Company also leases office space under noncancelable operating
leases expiring at various dates through 2002.
F-163
<PAGE> 307
LI NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum annual lease payments under capital and noncancelable
operating leases for each of the years ending January 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1999........................................................ $100,042 $ 63,879
2000........................................................ 53,085 47,121
2001........................................................ 17,937 23,386
2002........................................................ 10,060 5,459
-------- --------
Total minimum payments.................................... 181,124 $139,845
========
Less amount representing interest........................... (37,019)
--------
Present value of net minimum lease payments............... 144,105
Less current portion........................................ (81,652)
--------
$ 62,453
========
</TABLE>
Rent expense for the years ended April 30, 1996 and 1997 and nine months
ended January 31, 1998, was $25,335, $35,353, and $52,779 respectively.
(5) INCOME TAXES
Income tax expense (benefit) for the years ended April 30, 1996 and 1997
and nine months ended January 31, 1998 differs from the amounts that would
result from applying the federal statutory rate of 34% as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- ---------
<S> <C> <C> <C>
Expected tax expense (benefit)...................... $19,543 $(5,861) $(130,777)
State income taxes, net of federal benefit.......... 2,300 (690) (15,374)
Nondeductible expenses.............................. -- 622 1,653
Change in valuation allowance for deferred tax
assets............................................ (14,243) 5,929 144,498
------- ------- ---------
Actual income tax expense................. $ 7,600 $ -- $ --
======= ======= =========
</TABLE>
Temporary differences that give rise to the components of deferred tax
assets and liabilities as of April 30, 1997 and January 31, 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
-------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 12,738 $ 148,824
Accounts receivable, due to allowance for doubtful
accounts for financial statement purposes only......... 11,000 30,000
Other..................................................... 173 140
-------- ---------
Total deferred tax assets......................... 23,911 178,964
Valuation allowance....................................... (5,929) (150,427)
-------- ---------
Net deferred tax assets........................... 17,982 28,537
-------- ---------
Deferred tax liability:
Equipment, due to differences in depreciation for
financial statement and tax purposes................... (17,982) (28,537)
-------- ---------
Net deferred tax asset (liability)................ $ -- $ --
======== =========
</TABLE>
F-164
<PAGE> 308
LI NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of January 31, 1998, the Company has a net operating loss carryforward
of approximately $392,000 for federal income tax purposes which will expire in
2013, if not utilized. A valuation allowance has been recorded for a portion of
the related deferred tax asset due to the uncertainty relating to the
realization of the net operating loss carryforward in the future.
(6) TRANSACTIONS WITH RELATED PARTIES
Notes payable to related party at April 30, 1997 and January 31, 1998
included $93,917 and $89,334, respectively, of unsecured notes due to
stockholders of the Company. The loans bear interest at 10% with the principal
and interest due in total on July 1, 1999 or upon sale of 50% or more of the
stock of the stockholders.
Also included in notes payable to related party at April 30, 1997 and
January 31, 1998 was an unsecured note due to a relative of a stockholder of the
Company. Principal outstanding on the note was $41,176 and $33,580 at April 30,
1997 and January 31, 1998, respectively. The note bears interest at 10% and is
payable in monthly principal and interest payments of $1,062 until 2001.
Maturities of notes payable to related parties for each of the years ending
January 31 are as follows:
<TABLE>
<S> <C>
1999.............................................. $ 8,885
2000.............................................. 100,087
2001.............................................. 11,878
2002.............................................. 2,064
--------
$122,914
========
</TABLE>
(7) STOCKHOLDERS' EQUITY
During the year ended April 30, 1997 and the nine months ended January 31,
1998, the Company issued treasury shares to an officer as compensation for
services. The Company recorded compensation expense of $11,900 and $285,000,
respectively, which, in the opinion of the Company's Board of Directors,
represented fair value of the shares at the date of issuance.
F-165
<PAGE> 309
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 1997 Note.
4.2* -- Form of New 1997 Note.
4.3*** -- Escrow Agreement, dated as of June 24, 1997, among First
Trust National Association (as escrow agent and trustee)
and the Registrant.
4.4** -- 1997 Indenture (See Exhibit 10.1).
4.5** -- 1997 Notes Registration Rights Agreement (See Exhibit
10.4).
4.6*** -- Purchase Agreement, dated as of June 17, 1997, by and
among Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner
& Smith Incorporated, and Lazard Freres & Co. LLC
(collectively, the "Initial 1997 Notes Purchasers"), and
the Registrant.
4.7* -- Form of Old 1998 Note
4.8* -- Form of New 1998 Note
4.9** -- 1998 Indenture (See Exhibit 10.23)
4.10** -- 1998 Notes Registration Rights Agreement, dated as of
March 25, 1998, by and among the Registrant and First
Trust National Association (as trustee).
4.11 -- Purchase Agreement, dated as of March 19, 1998, by and
among Salomon Brothers Inc, Lazard Freres & Co. LLC,
Chase Securities, Inc., and BancBoston Securities Inc.
(collectively, the "Initial 1998 Notes 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.
</TABLE>
II-1
<PAGE> 310
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.4** -- Registration Rights Agreement, dated as of June 17, 1997,
by and among the Registrant and the Initial Purchasers.
10.5** -- Lease Agreement, dated as of June 20, 1997, by and
between the Registrant and Highland Park Ventures, LLC,
with respect to the property in Englewood, Colorado,
including the First Amendment to Lease Agreement, dated
as of December 16, 1997.
10.6** -- Lease Agreement, dated as of May 24, 1997, by and between
the Registrant and IM Joint Venture, with respect to the
property in Dallas, Texas, as amended.
10.7** -- Form of Indemnification Agreement between the Registrant
and each of its officers and directors.
10.8** -- Amended and Restated Stockholders Agreement, dated as of
May 20, 1997, by and between the Registrant, the Series A
Purchasers, the Series B Purchasers, the Series C
Purchasers and members of the Registrant's management.
10.9** -- The Registrant's 1996 Stock Option Plan, as amended.
10.10** -- The Registrant's 1997 California Stock Option Plan, as
amended.
10.11** -- The Registrant's 1998 Employee Stock Purchase Plan.
10.12** -- The Registrant's 1998 Stock Incentive Plan, as amended.
10.13** -- Form of Compensation Protection Agreement between the
Registrant and each of its 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.
10.19**+ -- Lateral Exchange Networks Interconnection Agreement,
dated as of February 3, 1997, by and between the
Registrant and Sprint Communications Company L.P.
("Sprint").
10.20**+ -- Cover Agreement, dated September 30, 1996, by and between
the Registrant and Sprint.
10.21**+ -- Amendment One to Cover Agreement, dated November 7, 1996,
by and between the Registrant and Sprint.
10.22**+ -- Amendment Two to Cover Agreement, dated March 2, 1998, by
and between the Registrant and Sprint.
10.23** -- Indenture, dated as of March 25, 1998, by and among the
Registrant and First Trust National Association (as
trustee).
10.24** -- Registration Rights Agreement, dated as of March 25,
1998, by and among the Registrant, and the Initial 1998
Notes Purchasers
10.25**+ -- Capacity and Services Agreement, dated as of March 31,
1998, by and among the Registrant and Qwest
Communications Corporation.
10.26** -- Credit Agreement, dated as of April 6, 1998, by and among
the Registrant, The Chase Manhattan Bank (as
administrative agent) and Fleet National Bank (as
documentation agent).
10.27** -- Stock Purchase and Master Strategic Relationship
Agreement, dated as of April 7, 1998, by and among the
Registrant and Nippon Telegraph and Telephone Corporation
("NTT"), a Japanese corporation.
</TABLE>
II-2
<PAGE> 311
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.28**+ -- Investment Agreement, dated as of April 7, 1998, by and
among the Registrant and NTT.
10.29* -- Outside Service Provider Agreement, dated as of April 7,
1998, by and among the Registrant and NTT America, Inc.
10.30**+ -- Master Services Agreement, dated as of June 13, 1997, by
and between the Registrant and MCI Telecommunications
Corporation ("MCI").
10.31**+ -- MCI Domestic (US) Public Interconnection Agreement dated
as of June 12, 1997, by and between the Registrant and
MCI, as amended.
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.
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 Offers.
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, as amended
*** Exhibit previously filed
+ Document for which confidential treatment has been requested
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 (previously filed)
</TABLE>
ITEM 22. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions described in
Item 20 above, or otherwise, the Registrant has been advised that in the opinion
of the 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.
II-3
<PAGE> 312
(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.
(e) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement.
II-4
<PAGE> 313
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 April 13,
1998.
VERIO INC.
By: /s/ CARLA HAMRE DONELSON
------------------------------------
Carla Hamre Donelson
Vice President, General Counsel and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
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 April 13, 1998
- -----------------------------------------------------
Steven C. Halstedt
/s/ JUSTIN L. JASCHKE* Chief Executive Officer and April 13, 1998
- ----------------------------------------------------- Director
Justin L. Jaschke
/s/ MARK D. JOHNSON* President, Chief Operating April 13, 1998
- ----------------------------------------------------- Officer and Director
Mark D. Johnson
/s/ JAMES C. ALLEN* Director April 13, 1998
- -----------------------------------------------------
James C. Allen
/s/ TRYGVE E. MYHREN* Director April 13, 1998
- -----------------------------------------------------
Trygve E. Myhren
/s/ PAUL J. SALEM* Director April 13, 1998
- -----------------------------------------------------
Paul J. Salem
/s/ STEVEN W. SCHOVEE* Director April 13, 1998
- -----------------------------------------------------
Steven W. Schovee
/s/ GEORGE J. STILL, JR.* Director April 13, 1998
- -----------------------------------------------------
George J. Still, Jr.
/s/ PETER B. FRITZINGER* Chief Financial Officer April 13, 1998
- -----------------------------------------------------
Peter B. Fritzinger
/s/ DEB MAYFIELD GAHAN* Vice President of Finance and April 13, 1998
- ----------------------------------------------------- Administration (Principal
Deb Mayfield Gahan Accounting Officer)
*By: /s/ CARLA HAMRE DONELSON
------------------------------------------------
Carla Hamre Donelson
Attorney-in-fact
</TABLE>
II-5
<PAGE> 314
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> 315
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 1997 Note.
4.2* -- Form of New 1997 Note.
4.3*** -- Escrow Agreement, dated as of June 24, 1997, among First
Trust National Association (as escrow agent and trustee)
and the Registrant.
4.4** -- 1997 Indenture (See Exhibit 10.1).
4.5** -- 1997 Notes Registration Rights Agreement (See Exhibit
10.4).
4.6*** -- Purchase Agreement, dated as of June 17, 1997, by and
among Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner
& Smith Incorporated, and Lazard Freres & Co. LLC
(collectively, the "Initial 1997 Notes Purchasers"), and
the Registrant.
4.7* -- Form of Old 1998 Note
4.8* -- Form of New 1998 Note
4.9** -- 1998 Indenture (See Exhibit 10.23)
4.10** -- 1998 Notes Registration Rights Agreement, dated as of
March 25, 1998, by and among the Registrant and First
Trust National Association (as trustee).
4.11 -- Purchase Agreement, dated as of March 19, 1998, by and
among Salomon Brothers Inc, Lazard Freres & Co. LLC,
Chase Securities, Inc., and BancBoston Securities Inc.
(collectively, the "Initial 1998 Notes 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, as amended.
10.10** -- The Registrant's 1997 California Stock Option Plan, as
amended.
10.11** -- The Registrant's 1998 Employee Stock Purchase Plan.
10.12** -- The Registrant's 1998 Stock Incentive Plan, as amended.
</TABLE>
<PAGE> 316
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.13** -- Form of Compensation 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.
10.19**+ -- Lateral Exchange Networks Interconnection Agreement,
dated as of February 3, 1997, by and between the
Registrant and Sprint Communications Company L.P.
("Sprint").
10.20**+ -- Cover Agreement, dated September 30, 1996, by and between
the Registrant and Sprint.
10.21**+ -- Amendment One to Cover Agreement, dated November 7, 1996,
by and between the Registrant and Sprint.
10.22**+ -- Amendment Two to Cover Agreement, dated March 2, 1998, by
and between the Registrant and Sprint.
10.23** -- Indenture, dated as of March 25, 1998, by and among the
Registrant and First Trust National Association (as
trustee).
10.24** -- Registration Rights Agreement, dated as of March 25,
1998, by and among the Registrant, and the Initial 1998
Notes Purchasers
10.25**+ -- Capacity and Services Agreement, dated as of March 31,
1998, by and among the Registrant and Qwest
Communications Corporation.
10.26** -- Credit Agreement, dated as of April 6, 1998, by and among
the Registrant, The Chase Manhattan Bank (as
administrative agent) and Fleet National Bank (as
documentation agent).
10.27** -- Stock Purchase and Master Strategic Relationship
Agreement, dated as of April 7, 1998, by and among the
Registrant and Nippon Telegraph and Telephone Corporation
("NTT"), a Japanese corporation.
10.28**+ -- Investment Agreement, dated as of April 7, 1998, by and
among the Registrant and NTT.
10.29* -- Outside Service Provider Agreement, dated as of April 7,
1998, by and among the Registrant and NTT America, Inc.
10.30**+ -- Master Services Agreement, dated as of June 13, 1997, by
and between the Registrant and MCI Telecommunications
Corporation ("MCI").
10.31**+ -- MCI Domestic (US) Public Interconnection Agreement dated
as of June 12, 1997, by and between the Registrant and
MCI, as amended.
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.
25.1 -- Form of T-1 Statement of Eligibility and Qualification
under the Trust Indenture Act of 1939 of First Trust
National Association.
</TABLE>
<PAGE> 317
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
27.1** -- Financial Data Schedule.
99.1 -- Form of Letter of Transmittal with respect to the
Exchange Offers.
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, as amended
*** Exhibit previously filed
+ Document for which confidential treatment has been requested
<PAGE> 318
======================================================
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 Offers 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 THESE EXCHANGE OFFERS, MAY BE REQUIRED TO
DELIVER A PROSPECTUS.
======================================================
======================================================
OFFER TO EXCHANGE ALL OUTSTANDING
13 1/2% SENIOR
NOTES DUE 2004
FOR
13 1/2% SENIOR
NOTES DUE 2004
AND
OFFER TO EXCHANGE ALL OUTSTANDING
10 3/8% SENIOR
NOTES DUE 2005
FOR
10 3/8% SENIOR
NOTES DUE 2005
[VERIO LOGO]
------------------------
PROSPECTUS
------------------------
Dated , 1998
======================================================
<PAGE> 1
Exhibit 4.11
VERIO INC.
$175,000,000
10-3/8 % SENIOR NOTES DUE 2005
PURCHASE AGREEMENT
New York, New York
March 19, 1998
SALOMON BROTHERS INC
LAZARD FRERES & CO. LLC
CHASE SECURITIES INC.
BANCBOSTON SECURITIES INC.
c/o Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
Ladies and Gentlemen:
Verio Inc., a Delaware corporation (the "Company"), proposes to sell,
severally and not jointly, to Salomon Brothers Inc, Lazard Freres & Co. LLC,
Chase Securities Inc. and BancBoston Securities Inc.(together, the "Initial
Purchasers") $175,000,000 principal amount of its 10-3/8 % Senior Notes Due 2005
(the "Securities") as set forth on Schedule I hereto, to be issued under an
indenture (the "Indenture") dated as of March 25, 1998 between the Company and
First Trust National Association, as trustee (the "Trustee").
The sale of the Securities to the Initial Purchasers will be made
without registration of the Securities under the Securities Act of 1933, as
amended (the "Securities Act"), in reliance upon exemptions from the
registration requirements of the Securities Act. The Initial Purchasers have
advised the Company that the Initial Purchasers will offer and sell the
Securities purchased by them hereunder in accordance with Section 4 of this
agreement (this "Agreement" or the "Purchase Agreement") as soon as they deem
advisable.
In connection with the sale of the Securities, the Company has prepared
a preliminary offering memorandum, dated March 4, 1998 (including any and all
exhibits thereto and any information incorporated by reference therein, the
"Preliminary Memorandum"), and a final offering memorandum, dated March 19, 1998
(the "Final Memorandum"). Each of the Preliminary Memorandum and the Final
Memorandum sets forth certain information concerning the Company and the
Securities. The Company hereby confirms that it has authorized the use of the
Preliminary Memorandum
<PAGE> 2
and the Final Memorandum, and any amendment or supplement thereto, in connection
with the offer and sale of the Securities by the Initial Purchasers. Unless
stated to the contrary, all references herein to the Final Memorandum are to the
Final Memorandum at the Execution Time (as defined below) and are not meant to
include any amendment or supplement subsequent to the Execution Time.
The holders of the Securities will be entitled to the benefits of the
Registration Agreement dated as of March 25, 1998, between the Company and the
Initial Purchasers (the "Registration Agreement").
This Agreement, the Indenture, the Securities and the Registration
Agreement are referred to herein as the "Transaction Documents".
Capitalized terms used herein without definitions have the respective
meanings assigned to them in the Final Memorandum.
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, each Initial Purchaser as set forth
below in this Section 1.
(a) The Preliminary Memorandum, at the date thereof, did not contain
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading. The Final Memorandum, at the
date hereof, does not, and at the Closing Date (as defined below) will not
(and any amendment or supplement thereto, at the date thereof and at the
Closing Date, will not), contain any untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading; provided, -------- however, that the Company makes no
representation or warranty as to the information contained in or -------
omitted from the Preliminary Memorandum or the Final Memorandum, or any
amendment or supplement thereto, in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of the
Initial Purchasers specifically for inclusion therein.
-2-
<PAGE> 3
(b) The Company has been advised by the National Association of
Securities Dealers, Inc. PORTAL Market that the Securities have been
designated PORTAL eligible securities in accordance with the rules and
regulations of the National Association of Securities Dealers, Inc. (the
"NASD").
(c) None of the Company nor any of its Affiliates (as defined in Rule
501(b) under the Securities Act) has, directly or through any agent, sold,
offered for sale, solicited offers to buy or otherwise negotiated in
respect of, any security (as defined in the Securities Act) which could be
integrated with the sale of the Securities in a manner that would require
the registration of the Securities under the Securities Act.
(d) None of the Company nor any of its Affiliates (as defined in Rule
501(b) under the Securities Act) or any person (other than the Initial
Purchasers, as to whom the Company makes no representation) acting at the
request of the Company has engaged, in connection with the offering of the
Securities, (A) in any form of general solicitation or general advertising
within the meaning of Rule 502(c) under the Securities Act, (B) in any
directed selling efforts within the meaning of Rule 902 under the
Securities Act in the United States in connection with the Securities being
offered and sold pursuant to Regulation S under the Securities Act, (C) in
any manner involving a public offering within the meaning of Section 4(2)
of the Securities Act or (D) in any action which would require the
registration of the offering and sale of the Securities pursuant to this
Agreement or which would violate applicable state securities or "blue sky"
laws.
(e) Assuming that the representations and warranties of the Initial
Purchasers contained in Section 4 are true, correct and complete, and
assuming compliance by the Initial Purchasers with their covenants in
Section 4, and assuming that the representations and warranties deemed to
be made by non-U.S. persons and "qualified institutional buyers" ("QIBs")
(as defined in Rule 144A under the Securities Act) purchasing Securities
are true and correct as of the Closing Date, it is not necessary in
connection with the offer, sale and delivery of the Securities to the
Initial Purchasers in the manner contemplated by, or in connection with the
initial resale of such Securities by the Initial Purchasers in accordance
with, this Agreement to register the Securities under the Securities Act or
to
-3-
<PAGE> 4
qualify any indenture in respect of the Securities under the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act").
(f) The subsidiaries of the Company listed on Schedule II hereto (also
referred to herein as the "Subsidiaries") are the only subsidiaries of the
Company that constitute "significant subsidiaries" within the meaning of
Rule 1-02(w) of Regulation S-X under the Securities Act. Each of the
Company and the Subsidiaries has been duly organized or incorporated, as
the case may be, and is validly existing and in good standing under the
laws of its jurisdiction of organization or incorporation, with all
requisite power and authority under such laws (a) to own, lease and operate
their respective properties and to conduct their respective businesses as
now conducted and as described in the Final Memorandum and (b) to enter
into, deliver, incur and perform their respective obligations under the
Transaction Documents, except, in the case of the foregoing subclause (a)
for authorizations, approvals, orders, leases, certificates and permits,
the failure of which to possess could not reasonably be expected to have a
Material Adverse Effect (as defined below); and are all duly qualified to
do business as foreign partnerships or corporations in good standing in all
other jurisdictions where the ownership or leasing of their respective
properties or the conduct of their respective businesses requires such
qualification, except where the failure to be so qualified could not
reasonably be expected to have a material adverse effect (i) on the
business, condition (financial or otherwise), results of operations,
business affairs or business prospects of the Company and the Subsidiaries
taken as a whole or (ii) on the ability of the Company to perform any of
its obligations under the Transaction Documents or to consummate any of the
transactions contemplated hereby or thereby (a "Material Adverse Effect").
The Company has no ISP affiliates (other than the Subsidiaries) that would
individually constitute a "significant subsidiary" of the Company within
the meaning of Rule 1-02(w) of Regulation S-X under the Securities Act, if
any such ISP affiliate were a subsidiary of the Company.
(g) The Securities, the Exchange Notes and the Private Exchange Notes
have been duly authorized by the Company, and the Company has all requisite
corporate power and authority to execute, issue and deliver the Securities,
the Exchange Notes and the Private Exchange Notes
-4-
<PAGE> 5
and to incur and perform its obligations provided for therein.
(h) The Securities, when executed, authenticated and issued in
accordance with the terms of the Indenture (assuming the due authorization,
execution and delivery of the Indenture by the Trustee) and when delivered
against payment of the purchase price therefor as provided in this
Agreement, will constitute valid and binding obligations of the Company,
entitled to the benefits of the Indenture and enforceable against the
Company in accordance with the terms thereof; and the Exchange Notes and
the Private Exchange Notes, if any, when executed, authenticated, issued
and delivered by the Company in exchange for the Securities in accordance
with the terms of the Registration Agreement, will constitute valid and
binding obligations of the Company, entitled to the benefits of the
Indenture and enforceable against the Company in accordance with the terms
thereof; subject, in the case of each of the foregoing, to (a) applicable
bankruptcy, insolvency, reorganization, moratorium and similar laws
affecting creditors' rights and remedies generally, (b) general principles
of equity (regardless of whether enforcement is sought in a proceeding in
equity or at law) and (c) the discretion of the court before which any
proceeding therefor may be brought (clauses (a), (b) and (c) being referred
to herein as the "Enforceability Limitations") and except that the waiver
of stay or extension laws contained in Section 5.15 of the Indenture may be
unenforceable.
(i) This Agreement has been, and, as of the Closing Date, the
Indenture, and the Registration Agreement will have been, duly authorized,
executed and delivered by the Company, and upon such execution by the
Company (assuming the due authorization, execution and delivery by parties
thereto other than the Company), as of the Closing Date, the Indenture and
the Registration Agreement will constitute the valid and binding
obligations of the Company, enforceable against the Company in accordance
with the terms hereof or thereof, subject only to the Enforceability
Limitations and except that the waiver of stay or extension laws contained
in Section 5.15 of the Indenture may be unenforceable.
(j) No consent, waiver, authorization, approval, license, qualification
or order of, or filing or registration with, any court or governmental or
regulatory agency or body, domestic or foreign, is required for the issue
-5-
<PAGE> 6
and sale of the Securities or the Exchange Notes or the Private Exchange
Notes, if any, the performance by the Company of its obligations under the
Transaction Documents, or for the consummation of any of the transactions
contemplated hereby or thereby, including, without limitation, the issuance
and sale of the Securities hereunder, except such as may be required (A) in
connection with the registration under the Securities Act of the Exchange
Notes or the Private Exchange Notes, if any, pursuant to the Registration
Agreement (including any filing with the NASD), (B) in order to qualify the
Indenture under the Trust Indenture Act or (C) by state securities or "blue
sky" laws in connection with the offer and sale of the Securities or the
registration thereof or of the Exchange Notes or the Private Exchange Notes
pursuant to the Registration Agreement.
(k) The issuance, sale and delivery of the Securities, the Exchange
Notes and the Private Exchange Notes, if any, the execution, delivery and
performance by the Company of this Agreement, the Indenture and the
Registration Agreement and the consummation by the Company of the
transactions contemplated hereby, thereby and in the Final Memorandum and
the compliance by the Company with the terms of the foregoing do not, and,
at the Closing Date, will not conflict with or constitute or result in a
breach or violation by the Company or any of the Subsidiaries of (A) any of
the terms or provisions of, or constitute a default (or an event which,
with notice or lapse of time or both, would constitute a default) by any of
the Company or the Subsidiaries or give rise to any right to accelerate the
maturity or require the prepayment of any indebtedness under, or result in
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or the Subsidiaries under any contract,
indenture, mortgage, deed of trust, loan agreement, note, lease, license,
franchise agreement, authorization, permit, certificate or other agreement
or document to which any of the Company or the Subsidiaries is a party or
by which any of them may be bound, or to which any of them or any of their
respective assets or businesses is subject (collectively, "Contracts") (and
the Company has no knowledge of any conflict, breach or violation of such
terms or provisions or of any such default, in any such case, which has
occurred or will so result), (B) the articles or by-laws (each, an
"Organizational Document") of each of the Company and the Subsidiaries or
(C) any law, statute, rule or regulation, or any judgment, decree or order,
in any
-6-
<PAGE> 7
such case, of any domestic or foreign court or governmental or regulatory
agency or other body having jurisdiction over the Company or any of the
Subsidiaries or any of their respective properties or assets. Schedule III
hereto lists each Contract with respect to which any conflict, breach or
violation of the terms or provisions thereof or any default with respect
thereto could have a Material Adverse Effect (each such Contract being
referred to herein as a "Material Contract").
(l) The Securities, the Exchange Notes, the Private Exchange Notes, the
Indenture and the Registration Agreement will each conform in all material
respects to the descriptions thereof in the Final Memorandum.
(m) The audited consolidated financial statements included in the Final
Memorandum, including the notes thereto, respectively present fairly the
financial position of each of the Company and its consolidated
subsidiaries, On-Ramp Technologies, Inc., Global Enterprise
Services-Network division, Compute Intensive Inc., NorthWestNet Inc.,
Aimnet Corporation, Clark Internet Services, Inc., ATMnet Corporation and
Global Internet Network Services, Inc. at the dates indicated, and the
statement of operations, stockholders' deficit/equity and cash flows of
each of such persons and, where applicable such persons' consolidated
subsidiaries for the periods have been prepared in conformity with United
States generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods involved. The selected financial
data and the summary financial information included in the Final Memorandum
present fairly the information shown therein and have been compiled on a
basis consistent with that of the financial statements of the Company and
its consolidated subsidaries included in the Final Memorandum. KPMG Peat
Marwick LLP, which has examined such financial statements as set forth in
its report included in the Final Memorandum, is an independent public
accounting firm with respect to each of such persons and, where applicable
such persons Subsidiaries within the meaning of Regulation S-X under the
Securities Act. Except as disclosed in the Final Memorandum, the pro forma
financial information relating to the Company and its Subsidiaries and the
related notes thereto included in the Final Memorandum present fairly the
information shown therein, have been prepared in all material respects in
accordance with the Commission's rules and guidelines with respect to pro
forma financial adjustments and have been properly computed
-7-
<PAGE> 8
on the bases described therein, and the assumptions used in the preparation
thereof are reasonable and the adjustments used therein are appropriate to
give effect to the transactions and circumstances referred to therein.
(n) Since the respective dates as of which information is given in the
Final Memorandum, except as otherwise specifically stated therein, there
has been no (A) material adverse change in the business, condition
(financial or otherwise), results of operations, business affairs or
business prospects of the Company and the Subsidiaries taken as a whole,
whether or not arising in the ordinary course of business (a "Material
Adverse Change"), (B) transaction entered into by any of the Company or the
Subsidiaries, other than in the ordinary course of business, that is
material to the Company and the Subsidiaries taken as a whole or (C)
dividend or distribution of any kind declared, paid or made by the Company
on its capital stock.
(o) The Company has the authorized, issued and outstanding
capitalization set forth in the Final Memorandum under the caption
"Description of Capital Stock"; all of the outstanding capital stock of the
Company has been duly authorized and validly issued, is fully paid and
nonassessable and was not issued in violation of any preemptive or similar
rights (whether provided contractually or pursuant to any Organizational
Document). Except as set forth in the Final Memorandum under the caption
"Business-- 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 forth
in the Final Memorandum, no holder of any securities of the Company is
entitled to have such securities (other than the Securities, the Exchange
Notes and the Private Exchange Notes, if any) registered under any
registration statement contemplated by the Registration Agreement. All of
the outstanding capital stock of each of the Subsidiaries has been duly
authorized and validly issued, is fully paid and nonassessable and was not
issued in violation of any preemptive or similar rights (whether provided
contractually or pursuant to any Organizational Document).
(p) None of the Company nor the Subsidiaries is (A) in violation of its
respective Organizational Documents, (B) in default (or, with notice or
lapse of time or
-8-
<PAGE> 9
both, would be in default) in the performance or observance of any
obligation, agreement, covenant or condition contained in any Contract or
(C) in violation of any law, statute, judgment, decree, order, rule or
regulation of any domestic or foreign court with jurisdiction over the
Company or the Subsidiaries or any of their respective assets or
properties, or other governmental or regulatory authority, agency or other
body, other than, in the case of clause (B) or (C), such defaults or
violations which could not, individually or in the aggregate, reasonably be
expected to have or result in a Material Adverse Effect; and any real
property and buildings held under lease by the Company or the Subsidiaries
are held by the Company or such Subsidiary, as the case may be, under
valid, subsisting and enforceable leases with such exceptions which could
not, individually or in the aggregate, reasonably be expected to have or
result in a Material Adverse Effect.
(q) Except as set forth in the Final Memorandum, each of the Company
and the Subsidiaries owns or possesses, or can acquire on reasonable terms,
adequate patents, patent rights, licenses, trademarks, service marks, trade
names, copyrights and know-how (including trade secrets and other
proprietary or confidential information, systems or procedures)
(collectively, "intellectual property") necessary to conduct the business
now or proposed to be operated by it as described in the Final Memorandum,
except where the failure to own, possess or have the ability to acquire any
such intellectual property could not, individually or in the aggregate, be
reasonably expected to have a Material Adverse Effect; and none of the
Company nor the Subsidiaries has received any notice of infringement of or
conflict with (nor knows of any such infringement of or conflict with)
asserted rights of others with respect to any of such intellectual
property.
(r) Each of the Company and the Subsidiaries has obtained all material
consents, approvals, orders, certificates, licenses, permits, franchises
and other authorizations (collectively, the "Licenses") of and from, and
has made all declarations and filings with, all governmental and regulatory
authorities, all self-regulatory organizations and all courts and other
tribunals necessary to own, lease, license and use its properties and
assets and to conduct its businesses in the manner described in the Final
Memorandum. None of the Company or the Subsidiaries has received any notice
of proceedings relating to the revocation or modification of, or denial of
any application
-9-
<PAGE> 10
for, any License which, if the subject of any unfavorable decision, ruling
or finding, could, singly or in the aggregate, reasonably be expected to
have or result in a Material Adverse Effect; and no event has occurred
which allows, or after notice or lapse of time, or both, would allow,
revocation or termination thereof or result in any other material
impairment of the rights of the holder of any such License, except where
such revocation or termination could not, singly or in the aggregate,
reasonably be expected to have or result in a Material Adverse Effect; and
the Licenses referred to above place no restrictions on the Company or any
of the Subsidiaries that are not described in the Final Memorandum, except
where such restrictions could not, singly or in the aggregate, reasonably
be expected to have or result in a Material Adverse Effect.
(s) There is no legal action, suit, proceeding, inquiry or
investigation before or by any court or governmental body or agency,
domestic or foreign, now pending or, to the best knowledge of the Company,
threatened against the Company or any of the Subsidiaries or any of their
respective properties which would be required to be disclosed in a
registration statement filed under the Securities Act.
(t) Each of the Company and the Subsidiaries has filed all necessary
federal, state and foreign income and franchise tax returns, and has paid
all taxes shown as due thereon; and no tax deficiency has been asserted
against any of the Company or the Subsidiaries.
(u) Except as described in the Final Memorandum, including the
financial statements and notes thereto included therein, each of the
Company and the Subsidiaries has good and marketable title to all real and
personal property described in the Final Memorandum as being owned by it
and good and marketable title to a leasehold estate in the real and
personal property described in the Final Memorandum as being leased by it,
free and clear of all liens, charges, encumbrances or restrictions, except
to the extent the failure to have such title or the existence of such
liens, charges, encumbrances or restrictions could not, individually or in
the aggregate, reasonably be expected to have or result in a Material
Adverse Effect.
(v) None of the Company or any of the Subsidiaries is an "investment
company" or a company "controlled by" an
-10-
<PAGE> 11
"investment company" as such terms are defined in the Investment Company
Act of 1940, as amended, and the rules and regulations thereunder.
(w) None of the Company nor any of the Subsidiaries nor any of their
respective directors, officers or controlling persons has taken, directly
or indirectly, any action designed, or which might reasonably be expected,
to cause or result, under the Securities Act or otherwise, in, or which has
constituted, stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Securities, the
Exchange Notes or the Private Exchange Notes.
(x) No strike, labor problem, dispute, slowdown, work stoppage or
disturbance with the employees of the Company or any of the Subsidiaries
exists or, to the best knowledge of the Company, is threatened which could,
individually or in the aggregate, reasonably be expected to have or result
in a Material Adverse Effect.
(y) The Company has insurance in such amounts and covering such risks
and liabilities as are in accordance with normal industry practice.
(z) The statistical and market-related data included in the Final
Memorandum are based on or derived from independent sources which the
Company believes to be reliable and accurate in all material respects or
represent the Company's good faith estimates that are made on the basis of
data derived from such sources.
(aa) The Company is, and immediately after the Closing Date will be,
Solvent. As used herein, the term "Solvent" means, with respect to the
Company on a particular date, that on such date (A) the fair market value
of the assets of the Company exceeds its respective liabilities (including
without limitation, stated liabilities and identified contingent
liabilities), (B) the present fair salable value of the assets of the
Company will exceed its respective probable liabilities on its debts
(including without limitation, stated liabilities and identified contingent
liabilities), (C) the fair market value of the Company's total assets
exceeds its total liabilities, including identified contingent liabilities,
by an amount at least equal to the total par value of its common stock both
immediately prior to and after the Offering, (D) the Company is and will be
able to pay its debts (including
-11-
<PAGE> 12
without limitation, stated liabilities and identified contingent
liabilities) as such debts mature and (E) the Company will not have
unreasonably small capital with which to conduct its present and
anticipated business.
(bb) Except as described in the Final Memorandum or as would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect (A) to the Company's knowledge, each of the Company and the
Subsidiaries is in compliance with and not subject to any known liability
under applicable Environmental Laws (as defined below), (B) to the
Company's knowledge, each of the Company and the Subsidiaries (i) has made
all filings and provided all notices required under any applicable
Environmental Law, and (ii) has, and is in compliance with, all Permits
required under any applicable Environmental Laws, and (iii) each of them is
in full force and effect, (C) to the Company's knowledge, there is no
civil, criminal or administrative action, or, investigation, notice or
demand letter or request for information pending or threatened against the
Company or any of the Subsidiaries under any Environmental Law, and (D) to
the Company's knowledge, no lien, charge, encumbrance or restriction has
been recorded under any Environmental Law with respect to any assets,
facility or property owned, operated, leased or controlled by the Company
or any Subsidiary.
For purposes of this Agreement, "Environmental Laws" means the common
law and all applicable federal, state and local laws or regulations
relating to the protection of the environment, including, without
limitation, laws relating to emissions, discharges, releases or threatened
releases of "hazardous substances," as defined in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended.
(cc) Except as described in the Final Memorandum, none of the Company
nor any of the Subsidiaries has incurred any liability for any prohibited
transaction or funding deficiency or any complete or partial withdrawal
liability with respect to any pension, profit sharing or other plan which
is subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), to which the Company or the Subsidiaries makes or ever
has made a contribution and in which any employee of the Company or any
such Subsidiary is or has ever been a participant, which, individually in
the aggregate, could reasonably be expected to have or result in a Material
Adverse Effect.
-12-
<PAGE> 13
With respect to such plans, each of the Company and the Subsidiaries is in
compliance in all respects with all applicable provisions of ERISA, except
where the failure to so comply could not, individually or in the aggregate,
reasonably be expected to have or a result in a Material Adverse Effect.
(dd) Each of the Company and the Subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's general
or specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (iii)
access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(ee) The Securities satisfy the eligibility requirements of Rule
144A(d)(3) under the Securities Act.
(ff) Any certificate signed by any officer of the Company and delivered
to the Initial Purchasers or to Cahill Gordon & Reindel, counsel for the
Initial Purchasers ("Counsel for the Initial Purchasers") pursuant to the
terms of this Agreement shall be deemed a representation and warranty by
the Company to the Initial Purchasers as to the matters covered thereby.
2. Purchase and Sale of the Securities. Subject to the terms and
conditions and in reliance upon the representations and warranties herein set
forth, the Company agrees to sell to each Initial Purchaser, and each Initial
Purchaser agrees, severally and not jointly, to purchase from the Company, at a
purchase price of 97.25% of the principal amount thereof, plus accrued interest,
if any, from March 25, 1998 to the Closing Date, the principal amount of
Securities set forth opposite such Initial Purchaser's name in Schedule I
hereto.
3. Delivery and Payment. Delivery of and payment for the Securities
shall be made at 9:00 AM, New York City time, on March 25, 1998 or such later
date as the Initial Purchasers shall designate, which date and time may be
postponed by agreement among the Initial Purchasers and the Company or as
provided in Section 9 hereof (such date and time of delivery
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<PAGE> 14
and payment for the Securities being herein called the "Closing Date"). Delivery
of the Securities shall be made to the Initial Purchasers for the respective
accounts of the Initial Purchasers against payment by the Initial Purchasers of
the purchase price thereof to or upon the order of the Company by wire transfer
of same day funds or such other manner of payment as may be agreed by the
Company and the Initial Purchasers. Delivery of the Securities shall be made at
such location as the Initial Purchasers shall reasonably designate at least one
business day in advance of the Closing Date and payment for the Securities shall
be made at the offices of Morrison & Foerster LLP, 425 Market Street, San
Francisco, CA 94105, or such other location as may be mutually agreed upon by
the Company and the Initial Purchasers. Certificates for the Securities shall be
registered in such names and in such denominations as the Initial Purchasers may
request not less than two full business days in advance of the Closing Date.
The Company agrees to have the Securities available for inspection,
checking and packaging by the Initial Purchasers in New York, New York, not
later than 10:00 AM on the business day prior to the Closing Date.
4. Offering of Securities. Each Initial Purchaser, severally and not
jointly, represents and warrants to and agrees with the Company that:
(a) It has not offered or sold, and will not offer or sell, any
Securities except (i) to those it reasonably believes to be QIBs and that,
in connection with each such sale, it has taken or will take reasonable
steps to ensure that the purchaser of such Securities is aware that such
sale is being made in reliance on Rule 144A, or (ii) in accordance with the
restrictions set forth in Exhibit A hereto.
(b) Neither it nor any person acting on its behalf has made or will
make offers or sales of the Securities in the United States by means of any
form of general solicitation or general advertising within the meaning of
Regulation D in the United States.
5. Agreements of the Company. The Company agrees with each Initial
Purchaser that:
(a) The Company will furnish to each Initial Purchaser and to Counsel
for the Initial Purchasers, without charge, during the period referred to
in paragraph (c) below,
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<PAGE> 15
as many copies of the Preliminary Memorandum and the Final Memorandum and
any amendments and supplements thereto as each Initial Purchaser and
Counsel for the Initial Purchasers may reasonably request.
(b) The Company will not at any time make any amendment or supplement
to the Preliminary Memorandum or the Final Memorandum without the prior
written consent of the Initial Purchasers.
(c) The Company will immediately notify each Initial Purchaser and
confirm such notice in writing of (x) any filing made by the Company
relating to the offering of the Securities with any securities exchange or
any other regulatory body in the United States or any other jurisdiction
and (y) prior to the completion of the placement of the Securities by the
Initial Purchasers as evidenced by a notice in writing from the Initial
Purchasers to the Company, any material changes in or affecting the
earnings, business affairs or business prospects of the Company and its
Subsidiaries that (i) make any statement in the Final Memorandum false or
misleading in any material respect or (ii) are not disclosed in the Final
Memorandum. In such event or if at any time prior to completion of the
distribution of the Securities by the Initial Purchasers to purchasers who
are not its affiliates (as determined by the Initial Purchasers) any other
event shall occur or condition shall exist as a result of which it is
necessary, in the opinion of the Initial Purchasers or Counsel for the
Initial Purchasers, to amend or supplement the Final Memorandum in order
that the Final Memorandum, as then amended or supplemented, will not
include an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances existing at the time it is delivered to a purchaser, not
misleading or if in the opinion of the Initial Purchasers or Counsel for
the Initial Purchasers, such amendment or supplement is necessary to comply
with applicable law, the Company will, subject to paragraph (b) of this
Section 5, promptly prepare, at its own expense, such amendment or
supplement as may be necessary to correct such untrue statement or omission
or to effect such compliance (in form and substance agreed upon by the
Initial Purchasers and Counsel for the Initial Purchasers), so that as so
amended or supplemented, the statements in the Final Memorandum will not
include an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light
-15-
<PAGE> 16
of the circumstances existing at the time it is delivered to a purchaser,
not misleading or so that such Final Memorandum as so amended or
supplemented will comply with applicable law, as the case may be, and
furnish to the Initial Purchasers such number of copies of such amendment
or supplement as the Initial Purchasers may reasonably request. The Company
agrees to notify the Initial Purchasers in writing to suspend use of the
Final Memorandum as promptly as practicable after the occurrence of an
event specified in this paragraph (c), and the Initial Purchasers hereby
agree upon receipt of such notice from the Company to suspend use of the
Final Memorandum until the Company has amended or supplemented the Final
Memorandum to correct such misstatement or omission or to effect such
compliance.
(d) Neither the Company nor any of its Affiliates (as defined in Rule
501(b) under the Securities Act) will solicit any offer to buy or offer or
sell the Securities, the Exchange Notes or the Private Exchange Notes, if
any, by means of any form of general solicitation or general advertising
(as such terms are used in Regulation D under the Securities Act), or by
means of any directed selling efforts (as defined in Rule 902 under the
Securities Act) in the United States in connection with the Securities
being offered and sold pursuant to Regulation S or in any manner involving
a public offering within the meaning of Section 4(2) of the Securities Act
prior to the effectiveness of a registration statement with respect to the
Securities, the Exchange Notes or the Private Exchange Notes, as
applicable.
(e) Neither the Company nor any of its Affiliates (as defined in Rule
501(b) under the Securities Act) will offer, sell or solicit offers to buy
or otherwise negotiate in respect of any security (as defined in the
Securities Act) which could be integrated with the sale of the Securities
in a manner that would require the registration of the Securities under the
Securities Act.
(f) The Company (A) will, so long as the Securities are outstanding,
furnish to the Trustee on a timely basis, pursuant to the Indenture,
whether or not the Company has a class of securities registered under the
Exchange Act, (i) within 135 days of the end of each fiscal year, audited
year-end consolidated financial statements of the Company (including a
balance sheet, income statement and statement of changes of cash flow)
prepared in accordance
-16-
<PAGE> 17
with GAAP and substantially in the form required under Regulation S-X under
the Securities Act and the information described in Item 303 of Regulation
S-K under the Securities Act with respect to such period and (ii) within 60
days of the end of each fiscal quarter, unaudited quarterly consolidated
financial statements of the Company (including a balance sheet, income
statement and statement of changes of cash flow) prepared in accordance
with GAAP and substantially in the form required by Regulation S-X under
the Securities Act and the information described in Item 303 of Regulation
S-K under the Securities Act with respect to such period, and (B) will
furnish to the Initial Purchasers copies of all such reports and
information, together with such other documents, reports and information as
shall be furnished by the Company to the holders of the Securities or to
the Trustee. In the event the Company is not subject to Section 13 or 15(d)
of the Exchange Act, the Company will furnish to holders of Securities and
prospective purchasers of Securities designated by such holders, upon
request of such holders or such prospective purchasers, the information
required to be delivered pursuant to Rule 144A(d)(4) under the Act to
permit compliance with Rule 144A in connection with resales of the
Securities.
(g) The Company will use its reasonable best efforts in cooperation
with the Initial Purchasers to (i) permit the Securities to be eligible for
clearance and settlement through DTC and (ii) permit the Securities to be
designated as PORTAL securities in accordance with the rules and
regulations of the NASD.
(h) Prior to the Closing Date, the Company will furnish to each Initial
Purchaser, if and as soon as they have been prepared, a copy of any
unaudited interim consolidated financial statements of the Company for any
period subsequent to the period covered by the most recent financial
statements of the Company appearing in the Final Memorandum which have been
prepared in the ordinary course of business.
(i) The Company will arrange for the registration and qualification of
the Securities for offering and sale under the applicable securities or
"blue sky" laws of such states and other jurisdictions as the Initial
Purchasers may designate in connection with the resale of the Securities as
contemplated by this Agreement and the Final Memorandum and will continue
such qualifications in effect for
-17-
<PAGE> 18
as long as may be necessary to complete the distribution of the Securities;
provided that in no event shall the Company be obligated to (i) qualify as
a foreign corporation or as a dealer in securities in any jurisdiction
where it would not otherwise be required to so qualify but for this Section
5(i), (ii) file any general consent to service of process in any
jurisdiction where it is not at the Closing Time then so subject or (iii)
subject itself to taxation in any such jurisdiction if it is not so
subject. The Company will file such statements and reports as may be
required by the laws of each jurisdiction in which the Securities have been
qualified as above provided. The Company shall promptly advise the Initial
Purchasers of the receipt by the Company of any notification with respect
to the suspension of the qualification or exemption from qualification of
the Securities for offering or sale in any jurisdiction or the institution,
threatening or contemplation of any proceeding for such purpose.
(j) The Company will use the proceeds received from the Offering in the
manner specified in the Final Memorandum under the heading "Use of
Proceeds."
(k) The Company will not, and will not permit any of its Affiliates (as
defined in Rule 501(b) under the Securities Act to, resell any Securities
that have been acquired by any of them.
6. Conditions to the Obligations of the Initial Purchasers. The
obligations of the Initial Purchasers to purchase the Securities shall be
subject to the accuracy of the representations and warranties on the part of the
Company contained herein at the date and time that this Agreement is executed
and delivered by the parties hereto (the "Execution Time"), and the Closing
Date, to the accuracy of the statements of the Company made in any certificates
pursuant to the provisions hereof, to the performance by the Company of its
obligations hereunder and to the following additional conditions:
(a) (i) At the Closing Date, the Initial Purchasers shall have received
the opinion of Morrison & Foerster LLP, counsel to the Company, dated as of
the Closing Date, in the form set forth below and otherwise reasonably
satisfactory to the Initial Purchasers and Counsel for the Initial
Purchasers, to the effect that:
(1) The Company has been duly incorporated and is validly existing
under the laws of the State of
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<PAGE> 19
Delaware, with corporate power and authority to own, lease and operate
its assets and properties and conduct its business as described in the
Final Memorandum and to enter into and perform its obligations under
this Agreement and each of the other Transaction Documents; 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 Final Memorandum under the caption
"Description of Capital Stock";
(3) Each of the Subsidiaries has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Final Memorandum 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 Final 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 and the Registration Agreement; and each of
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<PAGE> 20
this Agreement, the Securities, the Exchange Notes, the Private
Exchange Notes, the Indenture and the Registration Agreement has been
duly authorized by the Company;
(5) No consent, waiver, approval, authorization, license,
qualification or order of or filing or registration with any court or
governmental or regulatory agency or body is required for the execution
and delivery by the Company of this Agreement, the Indenture and the
Registration Agreement or for the issue and sale of the Securities, the
Exchange Notes or the Private Exchange Notes, if any, or the
performance by the Company of its obligations under the Transaction
Documents, or for the consummation of any of the transactions
contemplated hereby or thereby, except such as may be required (A) in
connection with the registration under the Securities Act of the
Exchange Notes or the Private Exchange Notes, if any, under the
Registration Agreement, (B) in order to qualify the Indenture under the
Trust Indenture Act and (C) by state securities or "blue sky" laws in
connection with the purchase and distribution of the Securities by the
Initial Purchasers (as to which such counsel need express no opinion);
(6) The issuance, sale and delivery of the Securities, the Exchange
Notes and the Private Exchange Notes, if any, the execution, delivery
and performance by the Company of this Agreement, the Indenture and the
Registration Agreement (in each case assuming due authorization and
execution by each party other than the Company), and the consummation
by the Company of the transactions contemplated hereby and thereby and
the compliance by the Company with the terms of the foregoing do not,
and, at the Closing Date, will not, conflict with or constitute or
result in a breach or violation by the Company or any of the
Subsidiaries of (A) any provision of the Certificate of Incorporation
or By-laws of the Company, (B) any of the terms or provisions of, or
constitute a default (or an event which, with notice or lapse of time
or both, would constitute a default) by the Company, or give rise to
any right to accelerate the maturity or require the prepayment of any
indebtedness under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company
or any Subsidiary under any Material
-20-
<PAGE> 21
Contract identified in Schedule III 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;
(8) The statements in the Offering Memorandum under the headings
"Summary - The Offering," "Description of Capital Stock," "Description
of the 1997 Notes," "Description of the Notes," "Exchange Offer;
Registration Rights" and "Certain Transactions," insofar as such
statements purport to summarize certain provisions of the Securities,
the Exchange Notes, the Indenture, the Registration Agreement, the
Company's authorized and outstanding capital stock and the Company's
13-1/2% Senior Notes due 2004, provide a fair summary of such
provisions of such agreements and instruments;
(9) The statements in the Offering Memorandum under the caption
"Certain Federal Income Tax Considerations" fairly and accurately
summarize the material United States federal tax consequences of owning
the Securities;
(10) Each of the Indenture and the Registration Agreement has been
duly authorized, executed and delivered by the Company and (assuming
due authorization and execution by each party thereto other than the
Company) constitutes a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, except as
such enforceability may be limited by (a) with respect to the Indenture
and the Registration Agreement, the Enforceability Limitations,
including the waiver contained in Section 5.15 of the Indenture, and
(b) with respect to the Registration Agreement, as to rights of
indemnification and contribution, principles of public policy or
federal or state securities laws relating thereto;
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<PAGE> 22
(11) Each of the Securities, when executed and authenticated in
accordance with the provisions of the Indenture and delivered and paid
for in accordance with the terms of this Agreement, and the Exchange
Notes and the Private Exchange Notes, if any, when executed,
authenticated and delivered in exchange for the Securities in
accordance with the terms of the Registration Agreement, will be
entitled to the benefits of the Indenture and will be valid and binding
obligations of the Company, enforceable in accordance with its terms
except as the enforceability thereof may be limited by the
Enforceability Limitations;
(12) To the knowledge of such counsel, other than as described in
the Final Memorandum, no legal, regulatory or governmental proceedings
are pending to which the Company is a party or to which the property or
assets of the Company are subject which, individually or in the
aggregate, could reasonably be expected to have a Material Adverse
Effect or which, individually or in the aggregate, could have a
material adverse effect on the power or ability of the Company to
perform its obligations under the Transaction Documents or to
consummate the transactions contemplated thereby or by the Offering
Memorandum and to the knowledge of such counsel, no such material
proceedings have been threatened against the Company or with respect to
any of its respective assets or properties;
(13) Assuming (a) the accuracy of, and compliance with, the
representations, warranties and covenants of the Company in subsections
1(c) and 1(d) of the Purchase Agreement, (b) the accuracy of, and
compliance with, the representations, warranties and covenants of the
Initial Purchasers in Section 4 of the Purchase Agreement, (c) the
compliance by the Initial Purchasers with the offering and transfer
procedures and restrictions described in the Final Memorandum and (d)
receipt by the purchasers to whom the Initial Purchasers initially
resell the Securities of a copy of the Final Memorandum prior to such
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
-22-
<PAGE> 23
under the Securities Act or to qualify the Indenture under the Trust
Indenture Act, it being understood that no opinion is expressed as to
any subsequent resale of any Securities;
(14) When the Securities are issued and delivered pursuant to this
Agreement, such Securities will not be of the same class (within the
meaning of Rule 144A) as securities of the Company which are listed on
a national securities exchange registered under Section 6 of the
Exchange Act or quoted in a U.S. automated inter-dealer quotation
system; and
(15) Neither the consummation of the transactions contemplated
hereby nor the sale, issuance, execution or delivery of the Securities
will violate Regulation 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 Preliminary Memorandum and Final Memorandum and the
business and affairs of the Company and the Subsidiaries were discussed,
and although such counsel has not independently verified and does not pass
upon or assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Final Memorandum (except and
only to the extent set forth in subclauses (8) and (9) above), on the basis
of the foregoing (relying as to materiality to the extent such counsel
deemed appropriate upon the representations and opinions of officers and
other representatives of the Company), no facts have come to the attention
of such counsel which lead such counsel to believe that the Final
Memorandum at the date thereof or as of the Closing Date, contained or
contains an untrue statement of a material fact or omitted or omits to
state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading (it
being understood that such counsel need not express any comment with
respect to the financial statements, including the notes thereto and
supporting schedules, or any other financial or statistical data set forth
or referred to in the Final Memorandum).
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<PAGE> 24
In rendering such opinions, such counsel (A) need not express any
opinion with regard to the application of laws of any jurisdiction other
than the Federal law of the United States, the General Corporation Law of
the State of Delaware and the laws of the State of New York and (B) may
rely, as to matters of fact, to the extent they deem proper on
representations or certificates of responsible officers of the Company and
certificates of public officials.
References to the Final Memorandum in this subsection (a)(i) include
any supplements thereto at or prior to the Closing Date.
(ii) At the Closing Date, the Initial Purchasers shall have received
the opinion of Carla Hamre Donelson, Esq., General Counsel to the Company,
dated as of the Closing Date, in the form set forth below and otherwise
reasonably satisfactory to the Initial Purchasers and Counsel for the
Initial Purchasers, to the effect that:
(1) To the knowledge of such counsel, other than as described in
the Final Memorandum, no legal, regulatory or governmental proceedings
are pending to which any of the Subsidiaries is a party or to which the
property or assets of the Subsidiaries are subject which, individually
or in the aggregate, could reasonably be expected to have a Material
Adverse Effect or which, individually or in the aggregate, could have a
material adverse effect on the power or ability of the Company to
perform its obligations under the Transaction Documents or to
consummate the transactions contemplated thereby or by the Final
Memorandum and to the knowledge of such counsel, no such material
proceedings have been threatened against the Subsidiaries or with
respect to any of their respective assets or properties; 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
-24-
<PAGE> 25
law, statute, rule or regulation, or any judgment, decree or order of
any governmental or regulatory agency or other body having jurisdiction
over the Company or any of the Subsidiaries or any of their respective
properties or assets such that any such breach or violation could
reasonably be expected to have a Material Adverse Effect.
In addition, such counsel shall state that such counsel has
participated in conferences with representatives of the Initial Purchasers,
officers and other representatives of the Company and representatives of
the independent certified accountants of the Company, at which conferences
the contents of the Preliminary Memorandum and Final Memorandum and the
business and affairs of the Company and the Subsidiaries were discussed,
and although such counsel has not independently verified and does not pass
upon or assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Final Memorandum, on the basis
of the foregoing (relying as to materiality to the extent such counsel
deemed appropriate upon the representations and opinions of officers and
other representatives of the Company), no facts have come to the attention
of such counsel which lead such counsel to believe that the Final
Memorandum at the date thereof or as of the Closing Date, contained or
contains an untrue statement of a material fact or omitted or omits to
state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading (it
being understood that such counsel need not express any comment with
respect to the financial statements, including the notes thereto and
supporting schedules, or any other financial or statistical data set forth
or referred to in the Final Memorandum).
In rendering such opinions, such counsel (A) need not express any
opinion with regard to the application of laws of any jurisdiction other
than the Federal law of the United States, the General Corporation Law of
the State of Delaware and the laws of the State of Colorado and (B) may
rely, as to matters of fact, to the extent she deems proper on
representations or certificates of responsible officers of the Company and
certificates of public officials.
References to the Final Memorandum in this subsection (a)(ii) include
any supplements thereto at or prior to the Closing Date.
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<PAGE> 26
(b) The Initial Purchasers shall have received the opinion, dated as of
the Closing Date, of Cahill Gordon & Reindel, Counsel for the Initial
Purchasers, with respect to certain matters set forth in clauses (8) (with
respect to "Description of the Notes" and "Exchange Offer; Registration
Rights,") (10) (assuming the due authorization, execution and delivery of
each of the Indenture and Registration Agreement by each party thereto),
(11) and (13) of subsection (a)(i) of this Section 6.
In rendering such opinions, such counsel (A) need not express any
opinion with regard to the application of laws of any jurisdiction other
than the Federal laws of the United States, the General Corporation Law of
the State of Delaware and the laws of the State of New York and (B) may
rely, as to matters of fact, to the extent they deem proper on
representations or certificates of responsible officers of the Company and
certificates of public officials.
In addition, such counsel shall state that such counsel has
participated in conferences with representative of the Initial Purchasers,
officers and other representatives of the Company and representatives of
the independent accountants for the Company at which conferences the
contents of the Preliminary Memorandum and Final Memorandum and related
matters were discussed, and although such counsel has not verified and does
not pass upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Final
Memorandum, on the basis of the foregoing (relying as to materiality to the
extent such counsel deemed appropriate upon the representations and
opinions of officers and other representatives of the Company), no facts
have come to the attention of such counsel which lead such counsel to
believe that the Final Memorandum, at the date thereof or as of the Closing
Date, contained or contains an untrue statement of a material fact or
omitted to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no comment
with respect to the financial statements, including the notes thereto, or
any other financial or statistical data set forth or referred to in the
Final Memorandum).
(c) The following conditions contained in clauses (i) and (ii) of this
subsection (c) shall have been satisfied
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<PAGE> 27
at and as of the Closing Date, and the Company shall have furnished to the
Initial Purchasers a certificate of the Company, signed by the Chairman of
the Board or the President and the principal financial or accounting
officer of the Company, dated the Closing Date, to the effect that the
signers of such certificate have carefully examined the Final Memorandum,
any amendment or supplement to the Final Memorandum and this Agreement and
that:
(i) the representations and warranties of the Company in this
Agreement are true and correct in all material respects on and as of
the Closing Date with the same effect as if made on the Closing Date,
and the Company has complied with all the agreements and satisfied all
the conditions on its part to be performed or satisfied hereunder in
all material respects at or prior to the Closing Date; and
(ii) since the date of the most recent financial statements
included in the Final Memorandum (exclusive of any amendment or
supplement thereto), there has been no Material Adverse Change, whether
or not in the ordinary course of business. As used in this
subparagraph, the term "Final Memorandum" means the Final Memorandum in
the form first used to confirm sales of the Securities.
(d) At the Execution Time and at the Closing Date, KPMG Peat Marwick
LLP shall have furnished to the Initial Purchasers a letter or letters,
dated respectively as of the Execution Time and as of the Closing Date, in
form and substance satisfactory to the Initial Purchasers, confirming that
they are independent accountants within the meaning of the Securities Act
and the Exchange Act and the applicable published rules and regulations
thereunder and Rule 101 of the Code of Professional Conduct of the American
Institute of Certified Public Accountants (the "AICPA") and containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to Initial Purchasers with respect to financial
statements and certain financial information contained in the Final
Memorandum, in form and substance satisfactory to Counsel for the Initial
Purchasers.
KPMG Peat Marwick LLP shall have also furnished to the Initial
Purchasers a letter stating that the Company's system of internal
accounting controls taken as a whole is sufficient to meet the broad
objectives of internal accounting
-27-
<PAGE> 28
control insofar as those objective pertain to the prevention or detection
of errors or irregularities in amounts that would be material in relation
to the financial statements of the Company and its subsidiaries.
All references in this Section 6(d) to the Final Memorandum shall be
deemed to include any amendment or supplement thereto at the date of the
letter.
(e) Subsequent to the Execution Time or, if earlier, the dates as of
which information is given in the Final Memorandum, there shall not have
been (i) any change or decrease specified in the letter or letters referred
to in paragraph (d) of this Section 6 or (ii) any change, or any
development involving a prospective change, in or affecting the business or
properties of the Company and its subsidiaries the effect of which, in any
case referred to in clause (i) or (ii) above, is, in the judgment of the
Initial Purchasers, so material and adverse as to make it impractical or
inadvisable to market the Securities as contemplated by the Final
Memorandum.
(f) On or prior to the Closing Date, the Company shall have furnished
to the Initial Purchasers such further information, certificates and
documents as the Initial Purchasers may reasonably request.
(g) The Company and the Trustee shall have entered into the Indenture.
(h) The Company and the Initial Purchasers shall have entered into the
Registration Agreement.
(i) The Company shall have repurchased from WorldCom, Inc. and
cancelled $50,000,000 aggregate principal amount of the Company's 13-1/2%
Senior Notes due 2004.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as provided in this Agreement, or if any of the opinions
and certificates mentioned above or elsewhere in this Agreement shall not be in
all material respects reasonably satisfactory in form and substance to the
Initial Purchasers and Counsel for the Initial Purchasers, this Agreement and
all obligations of the Initial Purchasers hereunder may be canceled at, or at
any time prior to, the Closing Date by the Initial Purchasers. Notice of such
cancellation shall be given to the Company in writing or by telephone or
telegraph confirmed in writing.
-28-
<PAGE> 29
The documents required to be delivered by this Section 6 will be
delivered at the office of Counsel for the Initial Purchasers, at 80 Pine
Street, New York, New York, on the Closing Date.
7. Reimbursement of Expenses. (a) Whether or not any sale of the
Securities is consummated, the Company agrees to pay and bear all costs and
expenses incident to the performance of all of its obligations under this
Agreement, including (i) the preparation and printing of the Preliminary
Memorandum, the Final Memorandum and any amendments or supplements thereto and
the cost of furnishing copies thereof to the Initial Purchasers, (ii) the
preparation, issuance, printing and distribution of the Securities, the Exchange
Notes, the Private Exchange Notes, if any, and any survey of state securities or
"blue sky" laws or legal investment memoranda, (iii) the delivery to the Initial
Purchasers of the Securities, the Exchange Notes or the Private Exchange Notes,
(iv) the fees and disbursements of the Company's counsel and accountants, (v)
the qualification of the Securities under the applicable state securities or
"blue sky" laws in accordance with the provisions of Section 5(i) hereof and any
filing for review of the offering with the NASD, if required, including filing
fees and reasonable fees and disbursements of counsel to the Initial Purchasers
in connection therewith and in connection with the preparation of any survey of
state securities or "blue sky" laws or legal investment memoranda, (vi) any fees
charged by rating agencies for rating the Securities, the Exchange Notes and the
Private Exchange Notes, if any, (vii) the fees and expenses of the Trustee,
including the fees and disbursements of counsel for the Trustee, (viii) all
expenses (including travel expenses) of the Company and the Initial Purchasers
in connection with any meetings with prospective investors in the Securities and
(ix) all expenses and listing fees in connection with the application for
designation of the Securities as PORTAL securities and to permit the Securities,
the Exchange Notes and the Private Exchange Notes, as applicable, to be eligible
to clearance through The Depository Trust Company.
(b) If the sale of the Securities provided for herein is not
consummated because any condition to the obligations of the Initial Purchasers
set forth in Section 6 hereof is not satisfied, because of any termination
pursuant to Section 10 hereof or because of any refusal, inability or failure on
the part of the Company to perform any agreement herein or comply with any
provision hereof other than by reason of a default by any of the Initial
Purchasers in payment for the Securities on the Closing Date, the Company will
reimburse the Initial
-29-
<PAGE> 30
Purchasers severally upon demand for all reasonable out-of-pocket expenses
(including reasonable fees and disbursements of counsel) that shall have been
incurred by them in connection with the proposed purchase and sale of the
Securities.
8. Indemnification and Contribution. (a) The Company agrees to
indemnify and hold harmless each Initial Purchaser, the directors, officers,
employees and agents of each Initial Purchaser and each person who controls any
Initial Purchaser within the meaning of either the Securities Act or the
Exchange Act against any and all losses, claims, damages or liabilities, joint
or several, to which they or any of them may become subject under the Securities
Act, the Exchange Act or other Federal or state statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in the
Preliminary Memorandum or the Final Memorandum or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, and agree to reimburse each such
indemnified party, as incurred, for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the Company will not
be liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made in the Preliminary
Memorandum or the Final Memorandum, or in any amendment thereof or supplement
thereto, in reliance upon and in conformity with written information furnished
to the Company by or on behalf of any Initial Purchasers specifically for
inclusion therein. This indemnity agreement will be in addition to any liability
which the Company may otherwise have.
The foregoing indemnity with respect to any untrue statement contained
in or any omission from the Preliminary Memorandum shall not inure to the
benefit of any Initial Purchaser (or any affiliate or person who controls such
Initial Purchaser within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) from whom the person asserting such loss,
liability, claim, damage or expense purchased any of the Securities that are the
subject thereof if such person was not sent or given a copy of the Final
Memorandum (or any amendment or supplement thereto), if the Company
-30-
<PAGE> 31
shall have previously furnished copies thereof to the Initial Purchasers in
accordance with this Agreement, at or prior to the written confirmation of the
sale of such Securities to such person and the untrue statement contained in or
the omission from the Preliminary Memorandum was corrected in the Final
Memorandum (or any amendment or supplement thereto).
(b) Each Initial Purchaser severally and not jointly agrees to
indemnify and hold harmless the Company, its directors, officers and each person
who controls the Company within the meaning of either the Securities Act or the
Exchange Act to the same extent as the foregoing indemnity from the Company to
each Initial Purchaser, but only with reference to written information relating
to such Initial Purchaser furnished to the Company by or on behalf of such
Initial Purchaser specifically for inclusion in the Preliminary Memorandum or
the Final Memorandum (or in any amendment or supplement thereto). This indemnity
agreement will be in addition to any liability which any Initial Purchaser may
otherwise have. The Company acknowledges that the statements set forth in the
last paragraph of the cover page and in the table, fifth paragraph and tenth
paragraph under the heading "Plan of Distribution" in the Preliminary Memorandum
and the Final Memorandum constitute the only information furnished in writing by
or on behalf of the Initial Purchasers for inclusion in the Preliminary
Memorandum or the Final Memorandum (or in any amendment or supplement thereto).
(c) Promptly after receipt by an indemnified party under this Section 8
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement thereof;
but the failure so to notify the indemnifying party (i) will not relieve it from
liability under paragraph (a) or (b) above unless and to the extent it did not
otherwise learn of such action and such failure results in the forfeiture by the
indemnifying party of substantial rights and defenses and (ii) will not, in any
event, relieve the indemnifying party from any obligations to any indemnified
party other than the indemnification obligation provided in paragraph (a) or (b)
above. The indemnifying party shall be entitled to appoint counsel of the
indemnifying party's choice at the indemnifying party's expense to represent the
indemnified party in any action for which indemnification is sought (in which
case the indemnifying party shall not thereafter be responsible for the fees and
expenses of any separate counsel retained by the indemnified party or parties
except as set forth below); provided,
-31-
<PAGE> 32
however, that such counsel shall be satisfactory to the indemnified party.
Notwithstanding the indemnifying party's election to appoint counsel to
represent the indemnified party in an action, the indemnified party shall have
the right to employ separate counsel (including local counsel), and the
indemnifying party shall bear the reasonable fees, costs and expenses of such
separate counsel if (i) the use of counsel chosen by the indemnifying party to
represent the indemnified party would present such counsel with a conflict of
interest, (ii) the actual or potential defendants in, or targets of, any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, (iii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of the institution of such action or (iv) the indemnifying party
shall authorize the indemnified party to employ separate counsel at the expense
of the indemnifying party. An indemnifying party will not, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any pending or threatened claim,
action, suit or proceeding in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified parties are actual or
potential parties to such claim or action) unless such settlement, compromise or
consent includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a) or (b) of
this Section 8 is unavailable to or insufficient to hold harmless an indemnified
party for any reason, the Company on the one hand and the Initial Purchasers on
the other hand agree to contribute to the aggregate losses, claims, damages and
liabilities (including legal or other expenses reasonably incurred in connection
with investigating or defending same) (collectively, "Losses") to which the
Company or one or more of the Initial Purchasers, as applicable, may be subject
in such proportion as is appropriate to reflect the relative benefits received
by the Company or the Initial Purchasers from the offering of the Securities;
provided, however, that in no case shall any Initial Purchaser be responsible
for any amount in excess of the purchase discount or commission applicable to
the Securities purchased by such Initial Purchaser hereunder. If the allocation
provided by the immediately preceding sentence is unavailable for any reason,
the Company and
-32-
<PAGE> 33
the Initial Purchasers shall contribute in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company or the Initial Purchasers, as applicable, in connection with the
statements or omissions which resulted in such Losses as well as any other
relevant equitable considerations. Benefits received by the Company shall be
deemed to be equal to the total net proceeds from the offering received by each
of them, respectively, (before deducting expenses), and benefits received by the
Initial Purchasers shall be deemed to be equal to the total purchase discounts
and commissions received by the Initial Purchasers from the Company in
connection with the purchase of the Securities hereunder. Relative fault shall
be determined by reference to whether any alleged untrue statement or omission
relates to information provided by the Company or the Initial Purchasers. The
Company and the Initial Purchasers agree that it would not be just and equitable
if contribution were determined by pro rata allocation or any other method of
allocation which does not take account of the equitable considerations referred
to above. Notwithstanding the provisions of this paragraph (d), no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this Section 8 each
person who controls an Initial Purchaser within the meaning of either the
Securities Act or the Exchange Act and each director, officer, employee and
agent of an Initial Purchaser shall have the same rights to contribution as such
Initial Purchaser, and each person who controls the Company within the meaning
of either the Securities Act or the Exchange Act and each officer and director
of the Company shall have the same rights to contribution as the Company subject
in each case to the applicable terms and conditions of this paragraph (d).
9. Default by an Initial Purchaser. If any one or more Initial
Purchasers shall fail to purchase and pay for any of the Securities agreed to be
purchased by such Initial Purchaser hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Initial Purchasers shall be obligated severally to take
up and pay for (in the respective proportions which the principal amount of
Securities set forth opposite their names in Schedule I hereto bears to the
aggregate principal amount of securities set forth opposite the names of all the
remaining Initial Purchasers) the Securities which the defaulting Initial
Purchaser or Initial Purchasers agreed but failed to purchase; provided,
however, that in the event that the aggregate principal amount of Securities
which the defaulting
-33-
<PAGE> 34
Initial Purchaser or Initial Purchasers agreed but failed to purchase shall
exceed 10% of the aggregate principal amount of Securities set forth in Schedule
I hereto, the remaining Initial Purchasers shall have the right to purchase all,
but shall not be under any obligation to purchase any, of the Securities, and if
such non-defaulting Initial Purchasers do not purchase all the Securities, this
Agreement will terminate without liability to any non-defaulting Initial
Purchaser or Company. In the event of a default by any Initial Purchaser as set
forth in this Section 9 the Closing Date shall be postponed for such period, not
exceeding seven days, as the Initial Purchasers shall determine in order that
the required changes in the Final Memorandum or in any other documents or
arrangements may be effected. Nothing contained in this Agreement shall relieve
any defaulting Initial Purchaser of its liability, if any, to the Company or any
non-defaulting Initial Purchaser for damages occasioned by its default
hereunder.
10. Termination. This Agreement shall be subject to termination in the
absolute discretion of the Initial Purchasers, by notice given to the Company
prior to delivery of and payment for the Securities, if prior to such time (i)
trading in any of the Company's securities shall have been suspended by the
Commission or trading in securities generally on the New York Stock Exchange or
the NASDAQ National Market shall have been suspended or limited or minimum
prices shall have been established on either of such exchanges, (ii) a banking
moratorium shall have been declared either by Federal or New York State
authorities or (iii) there shall have occurred any outbreak or escalation of
hostilities, declaration by the United States of a national emergency or war or
other calamity or crisis the effect of which on financial markets is such as to
make it, in the judgment of the Initial Purchasers, impracticable or inadvisable
to proceed with the offering or delivery of the Securities as contemplated by
the Final Memorandum.
11. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers, and of the Initial Purchasers set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation made by or on behalf of the Initial Purchasers or the Company
or any of the officers, directors or controlling persons referred to in Section
8 hereof, and will survive delivery of and payment for the Securities. The
provisions of Sections 7 and 8 hereof shall survive the termination or
cancellation of this Agreement.
-34-
<PAGE> 35
12. Notices. All communications hereunder will be in writing and
effective only on receipt, and, if sent to the Initial Purchasers, will be
mailed, delivered or telegraphed and confirmed to them, care of Salomon Brothers
Inc, at Seven World Trade Center, New York, New York 10048; if sent to the
Company, will be mailed, delivered or telegraphed and confirmed to it at Verio
Inc., 8005 South Chester Street, Suite 200, Englewood, Colorado 80112,
Attention: Carla Hamre Donelson, Esq.; with a copy to Morrison & Foerster LLP,
425 Market Street, San Francisco, CA 94105, Attention: Gavin Grover, Esq.
13. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 8 hereof, and,
except as expressly set forth in Section 5(f) hereof, no other person will have
any right or obligation hereunder.
14. Applicable Law. This Agreement will be governed by and construed in
accordance with the laws of the State of New York.
15. Business Day. For purposes of this Agreement, "business day" means
each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which
banking institutions in the City of New York, New York are authorized or
obligated by law, executive order or regulation to close.
16. Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original, but all such
counterparts will together constitute one and the same instrument.
-35-
<PAGE> 36
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this Agreement and your acceptance shall represent a binding agreement between
the Company and the Initial Purchasers.
Very truly yours,
VERIO INC.
By:
-----------------------------
Name:
Title:
The foregoing Agreement is
hereby confirmed and accepted
as of the date first above
written.
Salomon Brothers Inc
Lazard Freres & Co. LLC
Chase Securities Inc.
BancBoston Securities Inc.
By: Salomon Brothers Inc
By:
-----------------------------------
Name:
Title:
-36-
<PAGE> 37
SCHEDULE I
<TABLE>
<CAPTION>
Principal Amount
of Notes
Initial Purchasers To Be Purchased
- ------------------ ---------------
<S> <C>
Salomon Brothers Inc. ....................... $ 87,500,000
Lazard Freres and Co. LLC ................... 52,500,000
Chase Securities Inc. ....................... 26,250,000
BancBoston Securities Inc. .................. 8,750,000
------------
Total ..................... $175,000,000
</TABLE>
<PAGE> 38
SCHEDULE II
Subsidiaries
<TABLE>
<CAPTION>
Percentage
Organized Ownership
Name of Entity Under Laws of of Company
- -------------- ------------- ----------
<S> <C> <C>
Verio Web Hosting, Inc. Utah 100%
Verio-Northern California, Inc. Colorado 100%
Verio-Northeast, Inc. Colorado 100%
</TABLE>
<PAGE> 39
SCHEDULE III
Material Contracts
1. Indenture, dated as of June 24, 1997, by and among Verio Inc. and
First Trust National Association (as trustee).
2. Warrant Agreement, dated as of June 24, 1997, by and between First
Trust National Association and Verio Inc.
3. Common Stock Registration Rights Agreement, dated as of June 17,
1997, by and among Verio Inc., Brooks Fiber Properties, Inc., Norwest Equity
Partners V, Providence Equity Partners, Centennial Fund V, L.P., Centennial Fund
IV, L.P. (as investors) and the Initial Purchasers.
4. Registration Rights Agreement, dated as of June 17, 1997, by and
among Verio Inc. and the Initial Purchasers.
5. Lease Agreement, dated as of June 20, 1997, by and between Verio
Inc. and Highland Park Ventures, LLC, with respect to the property in Englewood,
Colorado, including the First Amendment to Lease Agreement, dated as of December
16, 1997.
6. Lease Agreement, dated as of May 24, 1997, by and between Verio Inc.
and IM Joint Venture, with respect to the property in Dallas, Texas, as amended.
7. Form of Indemnification Agreement between Verio Inc. and each of its
officers and directors.
8. Amended and Restated Stockholders Agreement, dated as of May 20,
1997, by and between Verio Inc., the Series A Purchasers, the Series B
Purchasers, the Series C Purchasers and members of the management of Verio Inc.
9. The 1996 Stock Option Plan of Verio Inc.
10. The 1997 California Stock Option Plan of Verio Inc..
11. The 1998 Employee Stock Purchase Plan of Verio Inc..
<PAGE> 40
12. The 1998 Stock Incentive Plan of Verio Inc..
13. Form of Executive Protection Agreement between Verio Inc. and each
of its executive officers.
14. Master Service Agreement, dated as of August 23, 1996, by and
between Verio Inc. and MFS Datanet, Inc.
15. Agreement for Terminal Facility Collocation Space, dated August 8,
1996, by and between MFS Telecom, Inc. and Verio Inc.
16. Bilateral Peering Agreement, dated May 19, 1997, between AT&T Corp.
and Verio Inc.
17. Master Lease Agreement, dated November 17, 1997, by and between
Insight Investments Corp. and Verio Inc.
18. Master Lease Agreement, dated October 27, 1997, by and between
Cisco Capital Systems Corporation and Verio Inc.
19. Home Domestic Peering Agreement, dated September 30, 1996, by and
between At Home Corporation and Verio Inc.
20. MCI Domestic (US) Public Interconnection Agreement, dated June 12,
1997, by and between MCI Telecommunications Corporation and Verio Inc., as
amended by Amendment to MCI (US) Domestic Public Interconnection Agreement dated
as of December 23, 1997.
21. Master Services Agreement, dated January 15, 1998, by and between
MCI Telecommunication Corporation and Verio Inc.
22. Cisco Systems, Inc. Domestic Internet Service Provider Agreement,
dated February 27, 1998, by and between Cisco Systems, Inc. and Verio Inc.
23. ISP Peering Agreement, dated October 21, 1997, by and between
PSINet, Inc. and Verio Inc.
24. Cover Agreement, dated September 30, 1996, by and between Sprint
Communications Company L.P. and Verio Inc., as amended by Amendment One to Cover
Agreement dated November 7, 1996 and Amendment Two to Cover Agreement dated
February 25, 1998 (not signed by Sprint yet).
<PAGE> 41
25. Lateral Exchange Networks Interconnection Agreement, dated February
3, 1997, by and between Sprint Communications Company L.P. and Verio Inc.
<PAGE> 42
EXHIBIT A
Selling Restrictions for Offers and
Sales Outside the United States
(1) (a) The Securities have not been and will not be registered under
the Securities Act and may not be offered or sold within the United States or
to, or for the account or benefit of, U.S. persons except in accordance with
Regulation S under the Securities Act or pursuant to an exemption from the
registration requirements of the Securities Act. Each Initial Purchaser
represents and agrees that, except as otherwise permitted by Section 4(a)(i) or
(ii) of the Agreement to which this is an exhibit, it has offered and sold the
Securities, and will offer and sell the Securities, (i) as part of their
distribution at any time and (ii) otherwise until 40 days after the later of the
commencement of the offering and the Closing Date, only in accordance with Rule
903 of Regulation S under the Securities Act. Accordingly, each Initial
Purchaser represents and agrees that neither it, nor any of its affiliates nor
any person acting on its or their behalf has engaged or will engage in any
directed selling efforts with respect to the Securities, and that it and they
have complied and will comply with the offering restrictions requirement of
Regulation S. Each Initial Purchaser agrees that, at or prior to the
confirmation of sale of Securities (other than a sale of Securities pursuant to
Section 4(a)(i) or (ii) of the Agreement to which this is an exhibit), it shall
have sent to each distributor, dealer or person receiving a selling concession,
fee or other remuneration that purchases Securities from it during the
restricted period a confirmation or notice to substantially the following
effect:
"The Securities covered hereby have not been registered under the U.S.
Securities Act of 1933 (the "Securities Act") and may not be offered or
sold within the United States or to, or for the account or benefit of, U.S.
persons (i) as part of their distribution at any time or (ii) otherwise
until 40 days after the later of the commencement of the offering and
[specify closing date of the offering], except in either case in accordance
with Regulation S or Rule 144A under the Securities Act. Terms used above
have the meanings given to them by Regulation S."
<PAGE> 43
(b) Each Initial Purchaser also represents and agrees that it has not
entered and will not enter into any contractual arrangement with any distributor
with respect to the distribution of the Securities, except with its affiliates
or with the prior written consent of the Company.
(c) Terms used in this section have the meanings given to them by
Regulation S.
(2) Each Initial Purchaser represents and agrees that (i) it has not
offered or sold and will not offer or sell, in the United Kingdom, by means of
any document, any Securities other than to persons whose ordinary business it is
to buy or sell shares or debentures, whether as principal or as agent (except in
circumstances which do not constitute an offer to the public within the meaning
of the Companies Act 1985 of Great Britain), (ii) it has complied and will
comply with all applicable provisions of the Financial Services Act 1986 of the
United Kingdom with respect to anything done by it in relation to the Securities
in, from or otherwise involving the United Kingdom, and (iii) it has only issued
or passed on and will only issue or pass on in the United Kingdom any document
received by it in connection with the issue of the Securities to a person who is
of a kind described in Article 9(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1988 or is a person to whom the
document may otherwise lawfully be issued or passed on.
-2-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Verio Inc.:
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" in the Prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Denver, Colorado
April 10, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
NorthWestNet, Inc.:
We consent to the use of our report relating to the financial statements of
NorthWestNet, Inc. as of June 30, 1996 and for the six months ended June 30,
1996 and the eight months ended February 28, 1997, and the financial statements
of NorthWest Academic Computing Consortium, Inc. as of June 30, 1995 and for the
year ended June 30, 1995 and the six months ended December 31, 1995, included
herein and to the reference to our firm under the heading "Experts" in the
Prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Seattle, Washington
April 10, 1998
<PAGE> 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
U. S. BANK TRUST NATIONAL ASSOCIATION
FORMERLY KNOWN AS
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.)
U. S. Bank Trust Cener
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)
10 3/8% SENIOR NOTES DUE 2005
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, U. S. Bank Trust National Association f/k/a 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 8th day of April, 1998.
U. S. BANK TRUST NATIONAL ASSOCIATION
f/k/a FIRST TRUST NATIONAL ASSOCIATION
/s/ RICHARD H. POKOSCH
--------------------------------------
Richard H. Pokosch
Assistant Vice President
/s/ KATHE M. BARRETT
- ------------------------------
Kathe M. Barrett
Assistant Secretary
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
VERIO INC.
OFFER TO EXCHANGE ALL OUTSTANDING
13 1/2% SENIOR NOTES DUE 2004
FOR
13 1/2% SENIOR NOTES DUE 2004
AND
OFFER TO EXCHANGE ALL OUTSTANDING
10 3/8% SENIOR NOTES DUE 2005
FOR
10 3/8% SENIOR NOTES DUE 2005
PURSUANT TO THE PROSPECTUS DATED , 1998
THE EXCHANGE OFFERS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1998, UNLESS THE EXCHANGE OFFERS 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 APPLICABLE EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW)
THEIR OLD NOTES TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE WITH RESPECT
TO SUCH EXCHANGE OFFER.
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 Offers") an aggregate principal amount of up to (i)
$100,000,000 13 1/2% Senior Notes Due 2004 (the "New 1997 Notes") for an equal
principal amount of the outstanding 13 1/2% Senior Notes Due 2004 (the "Old 1997
Notes" and, together with the New 1997 Notes, the "1997 Notes") and (ii)
$175,000,000 10 3/8% Senior Notes Due 2005 (the "New 1998 Notes") for an equal
principal amount of the outstanding 10 3/8% Senior Notes Due 2005 (the "Old 1998
Notes" and, together with the New 1998 Notes, the "1998 Notes"). For purposes
hereof, the New 1997 Notes and the New 1998 Notes are collectively referred to
as the "New Notes," the Old 1997 Notes and the Old 1998 Notes are collectively
referred to as the "Old Notes," and the 1997 Notes and the 1998 Notes are
collectively referred to as the "Notes."
The Company reserves the right, at any time or from time to time, to extend
the Exchange Offers in its sole discretion, in which event the term "Expiration
Date" with respect to an Exchange Offer shall mean the latest time and date to
which such Exchange Offer is extended. The Company shall notify the holders of
the Old Notes ("Holders") of any such 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 of Transmittal 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
<PAGE> 2
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
Offers -- Guaranteed Delivery Procedures" section of the Prospectus. See
Instruction 1. Delivery of this Letter of Transmittal to DTC does not constitute
delivery to the Exchange Agent.
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 TERMS OF THEIR RESPECTIVE 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 Offers 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
Offers -- 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 Offers. 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 Offers.
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 Offers.
The undersigned also acknowledges that the Company is making these Exchange
Offers 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 Offers 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 Offers 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
Offers 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 Offers,
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 1997 Notes
Registration Rights Agreement or 1998 Notes Registration Rights Agreement, as
the case may be, 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
<PAGE> 4
order to make the statements contained or incorporated by 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
Offers -- 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 Old 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 AND THE OFFER OF VERIO INC. TO EXCHANGE ITS 10 3/8%
SENIOR SUBORDINATED NOTES DUE 2005 FOR 10 3/8% SENIOR SUBORDINATED NOTES DUE
2005.
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
Offers -- 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 1997 Notes Registration Rights Agreement or the
1998 Notes Registration Rights Agreement, 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 Offers). If one or both
of the Exchange Offers is extended, the term "Expiration Date" shall mean the
latest time and date to which an Exchange Offers is extended. The Company
expressly reserves the right, at any time or from time to time, to extend the
period of time during which an 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 Offers -- 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 for the Exchange offer with respect to such Old Notes.
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 Offers" 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 Offers, 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 Offers. 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 Offers, 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 Offers set forth
in the Prospectus under the caption "The Exchange Offers" 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
Offers (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
AND
10 3/8% SENIOR SUBORDINATED NOTES DUE 2005
---------------------
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 1997 Notes") or the
10 3/8% Senior Subordinated Notes due 2005 (the "Old 1998 Notes" and, together
with the Old 1997 Notes, 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)
Capacity: __________________________________________ Telephone Number: ___________________________________
(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.
