<PAGE> 1
FORM 10-Q
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(Mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: March 31, 1998
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number:
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Verio Inc.
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(Exact name of registrant as specified in its charter)
Delaware 84-1339720
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(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.)
8005 S. Chester Street, Suite 200
Englewood, Colorado 80112
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(Address of principal executive offices)
(Zip Code)
303/645-1900
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes No X
--- ---
The number of shares of the registrant's Common Stock outstanding as of
May 15, 1998 was 32,064,323.
<PAGE> 2
V E R I O Inc.
FORM 10-Q - MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
December 31, 1997 and March 31, 1998 2
Consolidated Condensed Statements of Operations -
Three Months Ended March 31, 1997 and
March 31, 1998 3
Statement of Stockholders' Equity -
December 31, 1997 and March 31, 1998 4
Consolidated Condensed Statements of Cash Flows -
Three Months Ended March 31, 1997 and
March 31, 1998 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
1
<PAGE> 3
VERIO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
December 31, MARCH 31,
1997 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 72,586 $ 160,396
Restricted cash and securities (note 3) 21,015 14,285
Receivables:
Trade, net of allowance for doubtful accounts of $1,233 and $1,470, respectively 7,565 10,068
Affiliates 735 309
Prepaid expenses and other 3,921 4,103
--------- ---------
Total current assets 105,822 189,161
Restricted cash and securities (note 3) 19,539 12,928
Investments in affiliates, at cost (note 2) 2,378 1,376
Equipment and leasehold improvements:
Internet access and computer equipment 30,535 36,790
Furniture, fixtures and computer software 3,301 3,489
Leasehold improvements 1,596 2,225
--------- ---------
35,432 42,504
Less accumulated depreciation and amortization (7,219) (10,746)
--------- ---------
Net equipment and leasehold improvements 28,213 31,758
Other assets:
Goodwill, net of accumulated amortization of $3,595 and $6,047, respectively (note 2) 83,216 113,567
Debt issuance costs, net of accumulated amortization of $330 and $332, respectively 4,858 8,424
Organization costs and other, net 2,445 2,571
--------- ---------
Total assets $ 246,471 $ 359,785
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 7,389 $ 6,532
Accrued expenses 11,401 6,559
Accrued interest payable 844 4,031
Lines of credit, notes payable and current portion of long-term debt (note 3) 2,751 1,022
Current portion of capital lease obligations 1,575 2,440
Deferred revenue 7,177 7,565
--------- ---------
Total current liabilities 31,137 28,149
Long-term debt, less current portion, net of discount (note 3) 139,376 268,476
Capital lease obligations, less current portion 2,945 3,476
--------- ---------
Total liabilities 173,458 300,101
--------- ---------
Minority interests in subsidiaries 2,765 614
Redeemable preferred stock (note 4):
Series A, convertible, $.001 par value. 6,100,000 shares authorized, 6,033,333 shares issued and
outstanding at December 31, 1997 and March 31, 1998. Liquidation preference of $18,100 18,080 18,082
Series B, convertible, $.001 par value. 10,117,000 shares authorized, 10,028,334 shares issued
and outstanding at December 31, 1997 and March 31, 1998. Liquidation preference of $60,170 59,193 59,255
Series C, convertible, $.001 par value. 2,500,000 shares authorized, issued and outstanding
at December 31, 1997 and March 31, 1998. Liquidation preference of $20,000 19,976 19,978
--------- ---------
97,249 97,315
--------- ---------
Stockholders' deficit
Preferred stock, Series D-1, convertible, $.001 par value 3,000,000 shares authorized, 680,000
and 1,684,751shares issued and outstanding at December 31, 1997 and March 31, 1998,
respectively. Liquidation preference of $25,271. (note 4) 10,200 25,271
Common stock, $.001 par value. 35,133,000 shares authorized, 1,254,533 and 1,294,233
shares issued and outstanding at December 31, 1997 and March 31, 1998 1 1
Additional paid-in capital 14,272 16,340
Accumulated deficit (51,474) (79,857)
--------- ---------
Total stockholders' deficit (27,001) (38,245)
Commitments (notes 2, 3 and 4)
--------- ---------
Total liabilities and stockholders' deficit $ 246,471 $ 359,785
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
VERIO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31, March 31,
1997 1998
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<S> <C> <C>
Revenue:
Internet connectivity:
Dedicated $ 1,954 $ 9,900
Dial-up 1,106 4,147
Enhanced services and other 1,354 7,151
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Total revenue 4,414 21,198
Costs and expenses:
Internet services operating costs 2,042 9,536
Selling, general and administrative and other 6,718 19,999
Depreciation and amortization 1,246 6,381
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Total costs and expenses 10,006 35,916
Loss from operations (5,592) (14,718)
Other income (expense):
Interest income 714 1,650
Interest expense (121) (5,551)
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Loss before minority interests and extraordinary item (4,999) (18,619)
Minority interests 388 402
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Net loss before extraordinary item and accretion of preferred stock (4,611) (18,217)
Accretion of preferred stock to liquidation value (66) (65)
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Net loss attributable to common shareholders before extraordinary item (4,677) (18,282)
Extraordinary item - loss related to debt repurchase -- (10,101)
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Net loss attributable to common shareholders $ (4,677) $ (28,383)
========== ==========
Weighted average number of common shares outstanding - basic and diluted 1,090 1,265
========== ==========
Loss per common share - basic and diluted:
Loss per common share before extraordinary item $ (4.29) $ (14.45)
Extraordinary item -- (7.99)
---------- ----------
Loss per common share - basic and diluted $ (4.29) $ (22.44)
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
VERIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Additional
Preferred Common Stock Paid-in Accumulated
Stock Shares Amount Capital Deficit Total
----- ------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 $ 10,200 1,254,533 $ 1 $ 14,272 $ (51,474) $ (27,001)
Issuance of common stock
for exercise of options -- 39,733 -- 131 -- 131
Issuance of preferred stock in
business combinations 15,071 -- -- -- -- 15,071
Issuance of options in
business combinations -- -- -- 1,937 -- 1,937
Accretion of redeemable preferred
stock to liquidation value -- -- -- -- (65) (65)
Net loss (28,318) (28,318)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT MARCH 31, 1998
(UNAUDITED) $ 25,271 1,294,266 $ 1 $ 16,340 $ (79,857) $ (38,245)
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
VERIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
March 31, March 31,
1997 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ...................................................... $ (4,611) $ (28,318)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization .............................. 1,246 6,381
Minority interests' share of losses ........................ (388)
(402)
Extraordinary item - loss related to the
repurchase of debt ....................................... -- 10,101
Changes in operating assets and liabilities,
excluding effects of business combinations:
Receivables .............................................. (975) (1,226)
Prepaid expenses and other current assets ................ (667) 773
Accounts payable ......................................... (2,668) (1,607)
Accrued expenses ......................................... (2,218) (3,509)
Accrued interest payable ................................. -- 3,467
Deferred revenue ......................................... 399 (466)
---------- ----------
Net cash used by operating activities ................. (9,882) (14,806)
---------- ----------
Cash flows from investing activities:
Acquisition of equipment and leasehold improvements ........... (2,987) (3,820)
Acquisition of net assets in business combinations and
investments in affiliates, net of cash acquired ............ (18,538) (18,844)
Restricted cash and securities ................................ -- 13,341
Other ......................................................... (620) (373)
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Net cash used by investing activities ................. (22,145) (9,696)
---------- ----------
Cash flows from financing activities:
Proceeds from lines of credit, notes payable and
long-term debt .............................................. 60 169,769
Repayments of lines of credit and notes payable ............... (750) (57,138)
Repayments of capital lease obligations ....................... (104) (450)
Proceeds from issuance of common stock ........................ -- 131
---------- ----------
Net cash provided (used) by financing activities ...... (794) 112,312
---------- ----------
Net increase (decrease) in cash and cash
equivalents ......................................... (32,821) 87,810
Cash and cash equivalents:
Beginning of period ........................................... 66,467 72,586
---------- ----------
End of period ................................................. $ 33,646 $ 160,396
========== ==========
Supplemental disclosures of cash flow information:
Equipment acquired through capital lease obligations .......... $ -- $ 1,651
========== ==========
Cash paid for interest ........................................ $ -- $ 1,875
========== ==========
Acquisition of net assets in business combination
through issuance of preferred stock and preferred
stock options ............................................... $ -- $ 17,008
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 7
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING PRINCIPLES AND BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Verio Inc. and Subsidiaries (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to form 10-Q and Article 10 of Regulation S-X. All
material adjustments, consisting of only normal and recurring adjustments,
which, in the opinion of Management, were necessary for a fair presentation of
the results for the interim periods have been reflected. Operating results for
the three month period ending March 31, 1998 are not necessarily indicative of
the results that may be expected for the full year. The consolidated condensed
financial statements and notes thereto should be read in conjunction with the
financial statements and notes for the period and year ended December 31, 1996
and 1997.
During 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting ("SFAS") No. 130, Reporting Comprehensive
Income and No. 131, Disclosures about Segments of an Enterprise and Related
Information. The adoption of SFAS 130 and 131 did not have a significant effect
on the Company's financial position or results of operations.
NOTE 2 - BUSINESS COMBINATIONS AND INVESTMENTS IN AFFILIATES
During the three months ended March 31, 1998, the Company purchased
additional investments in eight of the Company's affiliates and acquired one new
internet service provider for a combination of cash and Series D-1 Preferred
Stock (see note 4). All acquisitions were accounted for using the purchase
method of accounting. For those businesses acquired and consolidated, the
results of operations for the acquired businesses are included in the Company's
consolidated statement of operations from the dates of acquisition. Summary
information regarding the business combinations is as follows:
Consolidated acquisitions in 1998:
<TABLE>
<CAPTION>
Ownership Total
interest ownership interest Approximate
Business name Acquisition date purchased at March 31, 1998 purchase price
------------ ---------------- --------- ----------------- --------------
<S> <C> <C> <C> <C>
Signet Partners, Inc. January 30, 1998 14%
February 26, 1998 45% 100% $ 1,925
Pacific Rim Network, Inc. February 16, 1998 73% 100% 730
Clark Internet Services, Inc. February 25, 1998 49% 100% 3,863
Internet Engineering
Associates, Inc. February 25, 1998 80% 100% 1,608
On-Ramp Technologies, Inc. February 26, 1998 45% 100% 11,849
National Knowledge Networks, Inc. February 27, 1998 59% 100% 2,092
Access One, Inc. February 27, 1998 80% 100% 5,601
NSNet, Inc. February 27, 1998 100% 100% 3,661
NorthWestNet, Inc. March 6, 1998 15% 100% 4,803
-------
36,132
Acquisition costs 544
-------
$36,676
=======
</TABLE>
The following unaudited condensed pro forma information presents the
unaudited results of operations of the Company as if all consolidated
acquisitions as of March 31, 1998 had occurred at the beginning of the
respective periods presented.
<TABLE>
<CAPTION>
Three months ended
--------------------------------
March 31, 1997 March 31, 1998
-------------- --------------
<S> <C> <C>
Revenue $16,189 $22,959
Loss before extraordinary item and
accretion of preferred stock (9,058) (19,280)
Net loss (9,058) (29,381)
Net loss attributable to common shareholders (9,124) (29,446)
Loss per common share - basic and diluted (8.37) (23.28)
</TABLE>
The pro forma results do not necessarily represent results that would have
occurred if the transactions had been consummated as of January 1, 1997 and 1998
and is not intended to indicate the expected results for any future period.
Subsequent to March 31, 1998, the Company completed additional
acquisitions of five unrelated entities and acquired the remaining equity in two
affiliates in which the Company did not initially acquire 100% ownership for
approximately $35.6 million in cash, Series D-1 Preferred Stock and options to
acquire Series D-1 Preferred Stock (see note 4).
6
<PAGE> 8
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - DEBT
On March 25, 1998, the Company completed the private placement of
$175.0 million principal amount of senior notes (the "1998 Notes"). The 1998
Notes are redeemable at the option of the Company commencing April 1, 2002. 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 senior unsecured
obligations of the Company ranking pari passu in right of payment with all
existing and future unsecured and senior indebtedness. The 1998 Notes contain
terms that are substantially similar to the 1997 Notes. The Company used
approximately $54.5 million of the proceeds plus accrued interest to repurchase
$50.0 million principal amount of the $150,000,000 13 1/2% Senior Notes due 2004
("1997 Notes"). As a result, the Company was refunded approximately $13.3
million from the escrow account for the 1997 Notes, of which approximately $1.9
million was used to pay accrued and unpaid interest on the $50.0 million
principal amount of 1997 Notes repurchased from Brooks Fiber Properties, Inc.
This transaction resulted in an extraordinary loss of $10.1 million.
On April 6, 1998, the Company entered into a credit facility ("the Bank
Facility') with a group of commercial lending institutions that committed to
provide a $57.5 million revolving credit facility secured by the stock of the
affiliates that the Company owns currently or may own in the future and the
Company's long haul capacity agreement with Qwest Communications Corporation.
The Chase Manhattan Bank serves as agent for the Bank Facility. The Bank
Facility requires no payments of principal until its maturity on December 31,
1999. The terms of the Bank Facility provide for borrowings at LIBOR + 2%. There
is a commitment fee of 1/2% per annum on the undrawn amount of the Bank Facility
and a one-time fee of 1/2% on any amounts drawn. The last $3.0 million of the
Bank Facility can only be drawn for the payment of interest. No borrowings are
outstanding under the Bank Facility at March 31, 1998.
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) as defined in the
Credit Agreement dated as of April 6, 1998 by and among the Registrant, The
Chase Manhattan Bank and Fleet National Bank ("the Credit Agreement"), may not
exceed 2.35 times annualized pro forma revenue 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 are required to
be paid down with the proceeds of new Indebtedness (as defined in the Credit
Agreement), certain asset sales, Excess Cash Flow (as defined in the Credit
Agreement), or the net proceeds from insurance claims.
NOTE 4 - PREFERRED STOCK
From January 1, 1998 through March 31, 1998, the Company issued
1,004,751 additional shares of Series D-1 Preferred Stock at $15 per share in
connection with business combinations. As of March 31, 1998, the Company had
outstanding an aggregate 20,246,418 shares of Series A, B, C and D-1 Preferred
Stock. Subsequent to March 31, 1998, the Company issued an additional 529,762
shares of the Series D-1 Preferred Stock related to an acquisition of an
affiliate. Pursuant to the Company's Certificate of Incorporation, upon the
consummation of the Company's initial Public Offering (the "Offering") on May
15, 1998 (note 6), all shares of the Company's outstanding Series A, B, C,
Redeemable Preferred Stock and D-1 Preferred Stock automatically converted to
an equivalent number of shares of Common Stock. If the conversion of the
redeemable preferred stock and the preferred stock had occurred on March 31,
1998, equity would have been $59.1 million on a pro forma basis.
7
<PAGE> 9
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INCOME TAXES
As of March 31, 1998, the Company had a net operating loss carryforward
for federal income tax purposes of approximately $78.3 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 1997 or 1998 due to uncertainties regarding
the utilization of the loss carryforward.
NOTE 6 - SUBSEQUENT EVENTS
On May 15, 1998, the Company consummated the Offering of 5,500,000
shares of the Company's Common Stock for net proceeds of approximately $117.0
million after deduction of the underwriting discounts, commissions and expenses
of the Offering. Concurrently with the consummation of the Offering, the Company
completed the sale of 4,493,877 shares of its Common Stock to an affiliate of
Nippon Telegraph and Telephone Corporation for proceeds of approximately $100.0
million.
The Company accounts for its stock-based compensation plans in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and Related Interpretations. Since inception, the Company
has granted stock options with exercise prices equal to the fair value of the
underlying Common Stock, as determined by the Company's Board of Directors and
based on the Company's other equity transactions. Accordingly, the Company has
not recorded compensation expense related to the granting of stock options in
1996, 1997 and through February 28, 1998. Subsequent to February 28, 1998, the
Company granted options to employees with exercise prices less than the fair
value per share based upon the Company's estimated price per share in the
Offering. Accordingly the Company will record compensation expense totaling
approximately $10.6 million. Such compensation expense will be recognized pro
rata over the forty-eight month vesting period of the options. This compensation
expense will total approximately $2.0 million for the year ended December 31,
1998. It is the intention of the Company to generally grant future stock options
with exercise prices equal to the fair value of the underlying Common Stock at
the date of grant. The compensation expense related to the three months ended
March 31, 1998 is immaterial.
8
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Unless the context otherwise requires, references herein to (i) "Verio"
or the "Company" are to Verio Inc., a Delaware corporation and its subsidiaries,
and (ii) the "Verio ISPs" are to those Internet service providers in which Verio
has a direct or indirect equity investment, including subsidiaries and minority
investments.
FORWARD-LOOKING STATEMENTS
The statements included in the discussion and analysis below that are
not historical fact are "forward-looking statements" (as such term is defined in
Section 21E of the Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended), 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. These forward-looking statements are subject to significant risks
and uncertainties, including those identified in the Company's Registration
Statement on Form S-1 in connection with its initial public offering of Common
Stock, which was declared effective by the Securities and Exchange Commission on
May 11, 1998. 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.
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 Internet service
providers ("ISPs") with a business customer focus. Verio believes that small and
medium sized businesses represent an attractive target market for the provision
of Internet services due to this market's low current penetration levels and
customer churn, and the expanding Internet needs of these businesses. The
Company believes it has a unique competitive advantage in serving small and
medium sized business customers through the combination of the technical
competency, hands-on support and entrepreneurial culture of locally based ISPs
with the quality and economic efficiency of Verio's national network,
operational infrastructure and financial strength. Verio has quickly built
critical mass by acquiring the stock or assets of, or making significant
investments in, over 35 ISPs that provide a comprehensive range of Internet
connectivity and enhanced products and services to over 100,000 customer
accounts in 36 of the top 50 MSAs in the country. Verio and its consolidated
subsidiaries had total revenue of approximately $21.2 million for the three
months ended March 31, 1998. With the additional ISPs acquired and Buyouts
completed since that date, Verio's combined revenue for that same three-month
period was approximately 27.7 million. Combined revenue includes the revenue of
the Verio ISPs that were owned 100% on or before May 15, 1998. This excludes
Internet Online, Inc. and Verio Colorado in which the Company currently holds a
35% and a 69% equity investment, respectively. Those entities have reported
revenue for the three months ended March 31, 1998 of approximately $591 thousand
and $98 thousand, respectively.
9
<PAGE> 11
Initially, Verio's strategy was to acquire 51% to 100% of a large
regional ISP, and a minority interest in smaller ISPs within designated
geographic regions. Verio now generally seeks to acquire 100% of new ISPs, and
has brought its ownership interest in all but two of its existing ISPs to 100%,
in conjunction with its effort to integrate the operations and consolidate the
ownership of its ISPs in each region. This includes the consolidation and
integration of management teams, network operations and marketing efforts within
each particular region. While some one-time costs are incurred in these
consolidation efforts, Verio believes that the combined organizations will be
able to increase revenue 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
March 31, 1998, the Company had completed the acquisition of all the remaining
equity ("Buyout") of all but four of its initially non-wholly owned ISPs. Since
then, the Company has completed two additional Buyouts and currently expects to
complete the Buyouts of the two remaining ISPs in which it did not initially
acquire 100% ownership during the remainder of 1998. From January 1, 1998
through May 15, 1998, Verio has incurred costs of approximately $43.8 million,
in the aggregate, in connection with the Buyouts and approximately $28.0 million
for acquisitions, which were paid with a combination of cash, preferred stock
and options to acquire preferred stock of Verio. As a result of its
acquisitions, and the limited amount of fixed assets required to operate an ISP,
Verio has recorded significant amounts of goodwill, and expects goodwill to
increase significantly during 1998.
To fund its acquisitions and operations, through March 31, 1998 Verio
had raised approximately $100.0 million of equity capital primarily from venture
capital funds and Brooks Fiber Properties, Inc. ("Brooks") (recently acquired by
WorldCom, Inc.). It also issued $150.0 million principal amount of 13 1/2%
Senior Notes due 2004 ("1997 Notes") to a group of institutional investors and
Brooks, $100.0 million of which remain outstanding following the refinancing of
$50.0 million principal amount of the 1997 Notes previously held by Brooks
(the "Refinancing"). On March 25, 1998, the Company consummated the sale of
$175.0 million principal amount of 10 3/8% Senior Notes Due 2005 ("1998
Notes"), a portion of the proceeds of which was used to effect the Refinancing.
See "-- Liquidity and Capital Resources". On May 15, 1998, the Company
consummated the initial Public Offering (the "Offering") of 5,500,000 shares of
the Company's Common Stock for net proceeds of approximately $117.0 million
after deduction of the underwriting discounts, commissions and expenses of the
Offering. Concurrently with the consummation of the Offering, the Company
completed the sale of 4,493,877 shares of its Common Stock to an affiliate of
Nippon Telegraph and Telephone Corporation ("NTT") for proceeds of
approximately $100.0 million.
RESULTS OF OPERATIONS
REVENUE
The Company derives the majority of its revenue from business customers
who purchase dedicated 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, Integrated Services Digital
Network ("ISDN"), frame relay and point-to-point connections. Dedicated
connection customers typically sign a contract for one to three years of service
that provides for fixed, recurring monthly service charges, and pay a one-time
setup fee. These charges vary depending on the type of service, the length of
the contract, and local market conditions. Dial-up customers also typically pay
a one-time setup fee and recurring monthly service charges. Fees and service
charges for enhanced services vary from product to product. For example, Web
hosting customers 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.
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<PAGE> 12
Currently, connectivity services provide a majority of total revenue.
However, revenue from enhanced services, especially Web hosting, is expected
to represent an increasing percentage of total revenue in future periods.
Revenue from business customers currently represents more than 80% of total
revenue and is projected to increase as a percent of total revenue. In
addition to the growth that the Company is achieving through acquisitions,
revenue is also expected to increase due to the internal growth of
consolidated ISPs.
Three months ended March 31, 1997 compared to the three months ended March 31,
1998
Total consolidated revenue increased 380% from $4.4 million for the
three months ended March 31, 1997, to $21.2 million for the three months ended
March 31, 1998. Internet connectivity represented 69% and 66% of total revenue
for the three months ended March 31, 1997 and the three months ended March 31,
1998, respectively, with the balance derived from enhanced services and other,
which include Web hosting, consulting, sales of equipment and customer circuits.
The increase in enhanced services and other revenue as a percentage of total
revenue is due to acquisitions and increased sales of enhanced services. The
increase in dedicated and dial-up revenue and enhanced services and other
revenue for the three months ended March 31, 1998 compared to the three months
ended March 31, 1997 was primarily due to the acquisitions of ISPs subsequent to
March 31, 1997. Revenue from the three ISPs consolidated for the entire three
months ended March 31, 1997 and 1998 increased $1.2 million or 54% quarter over
quarter. Revenue attributable to acquisitions completed subsequent to March 31,
1997 accounted for $11.0 million or 52% of total revenue for the three months
ended March 31, 1998. Of these acquisitions, revenue from material acquisitions
for the three months ended March 31, 1998 were $1.5 million from Clark Internet
Services, Inc., $1.4 million from Internet Servers, Inc. and $1.1 million from
Communique, Inc.
COSTS OF SERVICE AND OPERATING EXPENSES
Internet services operating costs consist primarily of local
telecommunication expense, Internet access expense and the cost of equipment and
customer circuits sold. Local telecommunications expense represents the cost of
transporting data between the Company's Points of Presence ("POPs") and a
transit provider, or various Internet access points. Internet access expense
includes the cost incurred by the Company to transport its Internet traffic and
for its national network. In some instances the Company also will pay for the
local telecommunications line(s) from the customer's location to one of the
POPs. As of March 31, 1998, 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 has signed a long-term long
haul capacity agreement with Qwest Communications Corporation ("Qwest") (the
"Capacity Agreement") in order to reduce the per unit costs of such services.
There will not be a significant effect on the results for 1998 from this
agreement due to the time required to convert from existing circuits; however,
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.
Three months ended March 31, 1997 compared to the three months ended March 31,
1998
Internet services operating costs were 46% and 45% of total revenue
for the three months ended March 31, 1997 and the three months ended March 31,
1998, respectively. For the three months ended March 31, 1998, total
consolidated Internet services operating costs increased $7.5 million or 367%
compared to the three months ended March 31, 1997 primarily due to the
acquisitions of ISPs subsequent to March 31, 1997. Internet services operating
costs from the three ISPs consolidated for the entire three months ended March
31, 1997 and 1998 increased $.4 million or 57% quarter over quarter. Internet
services operating costs attributable to acquisitions completed subsequent to
March 31, 1997 accounted for $4.1 million, or 43% of total Internet services
operating costs for the three months ended March 31, 1998.
11
<PAGE> 13
Of these acquisitions, the costs from material acquisitions for the three months
ended March 31, 1998 were $0.6 million from Global Internet Network Services,
Inc., $0.5 million each from both Clark Internet Services, Inc. and ATMnet.
Internet services operating costs attributable to corporate functions were 26%
of total Internet services operating costs for the three months ended March 31,
1997, compared to 21% of total Internet services operating costs for the three
months ended March 31, 1998. This decrease is primarily due to recent
acquisitions that have not yet converted to Verio's national network. The
Company expects Internet services operating costs to increase in absolute
dollars but to decrease as a percentage of total revenue over time as
additional ISP affiliates are integrated onto Verio's national network, as
enhanced services become a larger percentage of total revenue, and as the
Capacity Agreement (as defined) with Qwest is implemented.
Selling, general and administrative and other expenses were 152% and
94% of revenue for the three months ended March 31, 1997 and the three months
ended March 31, 1998, respectively. Total selling, general and administrative
and other expenses increased $13.3 million or 198% for the three months ended
March 31, 1998 compared to the three months ended March 31, 1997 primarily due
to acquisitions completed subsequent to March 31, 1997. Selling, general and
administrative and other expenses attributable to acquisitions completed
subsequent to March 31, 1997 accounted for $7.0 million or 35% of total selling,
general and administrative and other expenses for the three months ended March
31, 1998. Of these acquisitions, the expenses from material acquisitions were
$1.1 million from Clark Internet Services, Inc., $0.6 million from Communique,
Inc., and $0.5 million from Internet Servers, Inc. Corporate expenses accounted
for 31% of total selling, general and administrative and other expenses for the
three months ended March 31, 1998 compared to 43% for the three months ended
March 31, 1997. Sales and marketing expenses were 25% of total selling, general
and administrative and other expenses for the three months ended March 31, 1998
compared to 18% for the three months ended March 31, 1997, primarily as a result
of the Company's hiring and training of additional sales personnel.
The Company expects selling, general and administrative expenses to
continue to increase in absolute dollars but to decrease as a percentage of
total revenue 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 revenue, 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.
OTHER EXPENSES
Interest expense increased from $0.1 million for the three months ended
March 31, 1997 to $5.6 million for the three months ended March 31, 1998,
primarily as a result of the completion of the $150.0 million placement of the
1997 Notes on June 24, 1997. Interest expense is expected to increase in 1998
primarily due to the issuance of the Company's 1998 Notes in March 1998.
The Company incurred an extraordinary expense of $10.1 million related
to the Refinancing. See "-- Liquidity and Capital Resources".
INCOME TAXES
As of March 31, 1998, the Company had a net operating loss carryforward
for federal income tax purposes of approximately $78.3 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 fiscal 1997 or 1998 due to uncertainties
regarding the utilization of the loss carryforward.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and Related Interpretations. Since inception, the Company
has granted stock options with exercise prices equal to the fair value of the
underlying Common Stock, as determined by the Company's Board of Directors and
based on the
12
<PAGE> 14
Company's other equity transactions. Accordingly, the Company has not recorded
compensation expense related to the granting of stock options in 1996, 1997 and
through February 28, 1998. Subsequent to February 28, 1998, the Company granted
options to employees with exercise prices less than the fair value per share
based upon the Company's estimated price per share in the Offering. Accordingly
the Company will record compensation expense totaling approximately $10.6
million. Such compensation expense will be recognized pro rata over the
forty-eight month vesting period of the options. This compensation expense will
total approximately $2.0 million for the year ended December 31, 1998. It is the
intention of the Company to generally grant future stock options with exercise
prices equal to the fair value of the underlying Common Stock at the date of
grant.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business and acquisition strategy has required and will
continue to require substantial capital for investments in ISPs, capital
expenditures for expansion of services, operating losses and working capital.
Net cash used by operating activities was $14.8 million during the
three months ended March 31, 1998, which includes a decrease in cash of $2.6
million related to working capital. Net cash used by investing activities was
$9.7 million during the three months ended March 31, 1998, primarily related to
purchases of fixed assets of $3.8 million and approximately $18.8 million for
acquisitions offset by $13.3 million provided from the return of the restricted
cash related to the Refinancing. Net cash provided by financing activities was
$112.3 million during the three months ended March 31, 1998, primarily from the
proceeds of the 1998 Notes of $170.2 million after expenses offset by the
Refinancing.
Until the completion of the Offering in May 1998, the Company financed
its operations primarily through the private sale of Preferred Stock and debt
and, to a lesser extent, Common Stock. In 1996, the Company raised approximately
$79.2 million (gross) through the issuance of Common Stock, Series A Preferred
Stock and Series B Preferred Stock. In June 1996, the Company sold 6,033,333
shares of Series A Preferred Stock and in December 1996, the Company sold
10,000,000 shares of Series B Preferred Stock for gross proceeds of
approximately $18.1 million and approximately $60.0 million, respectively.
During the course of 1996, 1,090,000 shares of Common Stock were sold for gross
proceeds of approximately $1.1 million. In 1997, an additional 164,533 shares of
Common Stock were issued for approximately $508,000. In May 1997, the Company
completed the sale of 2,500,000 shares of Series C Preferred Stock for gross
proceeds of approximately $20.0 million. In December 1997, the Company issued
680,000 shares of Series D-1 Preferred Stock to fund a portion of the
acquisition cost of one ISP. Subsequent to December 31, 1997, the Company issued
an additional 1,534,513 shares of Series D-1 Preferred Stock in connection with
acquisitions and Buyouts. Upon consummation of the Company's Offering on May 15,
1998, all outstanding shares of Series A, B, C and D-1 Preferred Stock
automatically converted to an equivalent number of shares of Common Stock.
On June 24, 1997, the Company completed the placement of $150.0 million
principal amount of the 1997 Notes and attached warrants (the "Warrants"). One
hundred fifty thousand units were issued, each consisting of $1,000 principal
amount of the 1997 Notes and eight Warrants, with each Warrant entitling the
holder thereof to purchase 1.76 shares of the Company's Common Stock at a price
of $.01 per share, for a total of 2,112,480 shares of Common Stock. The Warrants
and the 1997 Notes were separated on December 15, 1997. The 1997 Notes mature on
June 15, 2004. Interest on the 1997 Notes, at the annual rate of 13 1/2%, is
payable semi-annually in arrears on June 15 and December 15 of each year.
Concurrent with the completion of the sale of the 1997 Notes, the Company was
required to deposit funds into an escrow account in an amount that together with
interest would be sufficient to fund the first five interest payments on the
1997 Notes. Upon consummation of the sale of the 1998 Notes and the Refinancing,
$13.3 million, representing that portion of the escrowed amount attributable to
the principal amount of the 1997 Notes refinanced was released to the Company
from the escrow account. 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
13
<PAGE> 15
service business, and to place liens on its assets for the benefit of persons
other than the noteholders, among other restrictions. If a Change of Control (as
defined in the 1997 Indenture) occurs, the Company is required to make an offer
to purchase all of the Notes then outstanding at a price equal to 101% of the
principal amount, plus accrued and unpaid interest.
On March 25, 1998, the Company completed the placement of $175.0
million principal amount of the 1998 Notes. The 1998 Notes are senior unsecured
obligations of the Company ranking pari passu in right of payment with all
existing and future unsecured and senior indebtedness and mature on April 1,
2005. Interest on the 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 contain terms that are substantially
similar to the 1997 Notes. The Company used approximately $54.5 million of the
proceeds plus accrued interest to effect the Refinancing. As a result of the
Refinancing, the Company was refunded approximately $13.3 million from the
escrow account for the 1997 Notes, of which approximately $1.9 million was used
to pay accrued and unpaid interest on the $50.0 million principal amount of 1997
Notes repurchased from Brooks.
On April 6, 1998, Verio entered into a credit facility ("the Bank
Facility') with a group of commercial lending institutions that committed to
provide a $57.5 million revolving credit facility secured by the stock of the
ISPs that Verio owns currently or may own in the future and the Capacity
Agreement with Qwest Communications Corporation. The Chase Manhattan Bank serves
as agent for the Bank Facility. The Bank Facility requires no payments of
principal until its maturity on December 31, 1999. The terms of the Bank
Facility provide for borrowings at LIBOR + 2%. There is a commitment fee of 1/2%
per annum on the undrawn amount of the Bank Facility and a one-time fee of 1/2%
on any amounts drawn. The last $3.0 million of the Bank Facility can only be
drawn for the payment of interest.
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) as defined in the
Credit Agreement dated as of April 6, 1998 by and among the Company, The Chase
Manhattan Bank and Fleet National Bank ("the Credit Agreement"), may not exceed
2.35 times annualized pro forma revenue 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 are required to be paid
down with the proceeds of new Indebtedness (as defined in the Credit Agreement),
certain asset sales, Excess Cash Flow (as defined in the Credit Agreement), or
the net proceeds from insurance claims.
On May 15, 1998, the Company consummated the Offering of 5,500,000
shares of the Company's Common Stock for net proceeds of approximately $117.0
million after deduction of underwriting discounts, commissions and expenses.
Concurrently with the consummation of the Offering, the Company completed the
sale of 4,493,877 shares of its Common Stock to an affiliate of Nippon Telegraph
and Telephone Corporation for proceeds of approximately $100.0 million.
As of March 31, 1998, the Company had approximately $160.4 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 Verio and the Verio ISPs, 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 Verio ISPs 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 of cash
in excess of its plan, and no assurance can be given as to the actual amounts of
the Company's expenditures and additional capital requirements.
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<PAGE> 16
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 losses increased
from negative $4.3 million for the three months ended March 31, 1997 to negative
$8.3 million for the three months ended March 31, 1998 despite an increase in
revenue from $4.4 million for the three months ended March 31, 1997 to $21.2
million for the three months ended March 31, 1998. EBITDA as a percentage of
revenue improved from negative 98% to negative 39% for the three months ended
March 31, 1997 and the three months ended March 31, 1998, respectively. The
Company incurred $20.0 million in selling, general and administrative expenses
during the three months ended March 31, 1998 as it invested in scaleable
systems, hiring and sales training, and network improvements, that it expects
will result in incremental revenue at reduced incremental costs. As a result,
the Company expects EBITDA as a percentage of revenue to improve during 1998.
Although the Company is seeking to reduce EBITDA losses as a percentage of
revenue over time, there can be no assurance that the Company will be able to
do so, or that the rate of any reduction in EBITDA losses will be as rapid as is
being sought by the Company. The Company intends to use a significant portion of
its cash for acquisitions, and will have to increase revenue without a
commensurate increase in costs to generate sufficient cash to enable it to meet
its debt service obligations as described above. In the near term, the Company
intends to use its excess cash and the Bank Facility which provides for up to
$57.5 million in credit until it matures on December 31, 1999.
Over the longer term, the Company will be dependent on increased
operating cash flows, and, to the extent cash flow is not sufficient, the
availability of additional financing, to meet its debt service obligations.
There can be no assurance that the Company will be able to service its
indebtedness. Insufficient funding may require the Company to delay or abandon
some of its planned future expansion or expenditures, which could have a
material adverse effect on the Company's growth and its ability to compete. In
addition, the Company's operating flexibility with respect to certain business
activities is limited by covenants associated with its indebtedness. There can
be no assurance that such covenants will not adversely affect the Company's
ability to finance its future operations or capital needs or to engage in
business activities that may be in the interest of the Company.
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<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not Applicable
(b) Not Applicable
(c) Sales of Unregistered Securities. On May 15, 1998, Verio Inc. (the
"Company") completed the sale of 4,493,877 shares of Common Stock to an
affiliate of Nippon Telegraph and Telephone Corporation for proceeds of
approximately $100.0 million. The issuance of the shares was made in reliance on
Section 4(2) of the Securities Act of 1933, as amended, ("Securities Act") and
Regulation D promulgated thereunder.
(d) Use of Proceeds from Sales of Registered Securities. On May 15, 1998, the
Company completed an initial public offering of its Common Stock (the
"Offering"). The managing underwriters in the Offering were Smith Barney Inc.,
Credit Suisse First Boston Corporation and Donaldson, Lufkin & Jenrette
Securities Corporation (the "Underwriters"). The shares of Common Stock sold in
the Offering were registered under the Securities Act, on a Registration
Statement on Form S-1 (the "Registration Statement") (Registration Number
333-47099). The Registration Statement was declared effective by the Securities
and Exchange Commission (the "SEC") on May 11, 1998.
On May 12, 1998, the Company commenced the Offering. The Offering was
consummated on May 15, 1998 after the Company had sold all of the 5,500,000
shares of Common Stock registered under the Registration Statement. All of the
shares sold were sold by the Company. The assumed offering price was $23 per
share for an aggregate price of the offering amount registered of $126.5 million
and the shares were sold at a price to the public of $23 per share for an
aggregate offering price of $126.5 million.
From the effective date of the Registration Statement to May 15, 1998, the
Company paid an aggregate of $8,250,000 in underwriting discounts and
commissions. In addition, the following table sets forth an estimate of all
expenses incurred in connection with the Offering, other than underwriting
discounts and commissions. All of the amounts shown are estimated except for the
registration fees of the SEC, the National Association of Securities Dealers,
Inc. (the "NASD") and the Nasdaq National Market. None of the amounts shown were
paid directly or indirectly to any director, officer, general partner of the
Company or their associates, persons owning 10 percent or more of any class of
equity securities of the Company, or an affiliate of the Company.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Item Amount
- ----------------------------------------------------------------------------
<S> <C>
SEC Registration Fee $ 42,916
- ----------------------------------------------------------------------------
NASD Filing Fee 15,048
- ----------------------------------------------------------------------------
Nasdaq National Market Application Fee 95,000
- ----------------------------------------------------------------------------
Printing 350,000
- ----------------------------------------------------------------------------
Legal Fees and Expenses 350,000
- ----------------------------------------------------------------------------
Accounting Fees and Expenses 375,000
- ----------------------------------------------------------------------------
NASD and Blue Sky Fees and Expenses 2,000
- ----------------------------------------------------------------------------
Transfer Agent and Registrar Fees and Expenses 2,000
- ----------------------------------------------------------------------------
Miscellaneous 18,036
----------
- ----------------------------------------------------------------------------
Total $1,250,000
==========
- ----------------------------------------------------------------------------
</TABLE>
After deducting the underwriting discounts and commissions and the Offering
expenses described above, net proceeds to the Company from the Offering were
approximately $117.0 million. The entire amount is expected to be used to
further the Company's acquisition and investment strategy, to continue the
development and implementation of the national backbone, customer care center,
network operations center and billing and accounting services and to fund the
Company's general working capital requirements. None of the net proceeds of the
Offering were paid directly or indirectly to any director, officer, general
16
<PAGE> 18
partner of the Company or their associates, persons owning 10 percent or more of
any class of equity securities of the Company, or an affiliate of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a)-(c) Effective January 21, 1998, by written consent in accordance with
Section 228 of the Delaware General Corporation Law ("DGCL"), a majority of the
stockholders of the Company voted in favor of the following proposals:
(1) the amendment of the 1996 Stock Option Plan of the Company to
increase the number of shares of Common Stock of the Company
reserved for issuance thereunder from two million three hundred
fifty thousand (2,350,000) shares to three million twenty-five
thousand (3,025,000) shares;
(2) the amendment of the 1997 California Stock Option Plan of the
Company (the "California Plan") to increase the number of shares
of Common Stock of the Company reserved for issuance thereunder
from four hundred thousand (400,000) shares to seven hundred
twenty-five thousand (725,000) shares; and
(3) the amendment to the Restated Certificate of Incorporation of the
Company to amend the definition of "Reserved Employee Stock"
contained in Article Four, Section 6 of the Certificate of
Incorporation to reflect an increase of one million (1,000,000)
shares, so that a total of three million seven hundred fifty
thousand (3,750,000) shares of Common Stock will be included in
the definition of "Reserved Employee Stock."
Stockholders holding 1,230,000 shares of Common Stock, 6,0233,333
shares of Series A Preferred Stock, 9,044,782 shares of Series B Preferred Stock
and 2,459,905 shares of Series C Preferred Stock voted in favor of the above
proposals. Stockholders holding 27,933 shares of Common Stock, 10,000 shares of
Series A Preferred Stock, 983,552 shares of Series B Preferred Stock and 40,095
shares of Series C Preferred Stock withheld their votes on the above proposals.
17
<PAGE> 19
(d) Not Applicable.
ITEM 5. OTHER INFORMATION
Since March 31, 1998, the Company has completed the acquisition of five Internet
service providers ("ISPs") and the acquisition of the remaining equity (each, a
"Buyout") of two ISPs in which the Company did not initially acquire 100%
ownership. Two of the recent acquisitions (STARnet, L.L.C. and Computing
Engineers, Inc. (d/b/a Worldwide Access)) expand the Company's Midwest presence,
two (LINet, Inc. and Matrix Online Media Inc. (d/b/a SpaceLab)) joined the
Northeast operations, and one, (Florida Internet, Inc.), located in Florida, is
the Company's first acquisition in the Southeast region. As a result of these
further acquisitions, the Company now serves 36 of the top 50 Metropolitan
Statistical Areas ("MSAs") in the U.S. The two Buyouts include Structured
Network Systems, Inc. in the Northwest region, and Compute Intensive, Inc. in
the Company's Southern California region.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See attached exhibit index.
(b) Reports on Form 8-K
No such reports were filed during the quarter ended March 31, 1998
18
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1 -- Not Applicable.
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.
3.5* -- Second Restated Certificate of Incorporation of the Registrant.
4.1** -- Specimen Stock Certificate of the Registrant.
10.1** -- Indenture, dated as of June 24, 1997, by and among the Registrant
and First Trust National Association (as trustee).
10.2** -- Warrant Agreement, dated as of June 24, 1997, by and between First
Trust National Association and the Registrant.
10.3** -- Common Stock Registration Rights Agreement, dated as of June 17,
1997, by and among the Registrant, Brooks Fiber Properties, Inc.,
Norwest Equity Partners V, Providence Equity Partners, Centennial
Fund V, L.P., Centennial Fund IV, L.P. (as investors) and Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
and Lazard Freres & Co. LLC (collectively, the "Initial
Purchasers").
10.4** -- Registration Rights Agreement, dated as of June 17, 1997, by and
among the Registrant and the Initial Purchasers.
10.5** -- Lease Agreement, dated as of June 20, 1997, by and between the
Registrant and Highland Park Ventures, LLC, with respect to the
property in Englewood, Colorado, including the First Amendment to
Lease Agreement, dated as of December 16, 1997.
10.6** -- Lease Agreement, dated as of May 24, 1997, by and between the
Registrant and IM Joint Venture, with respect to the property in
Dallas, Texas, as amended.
10.7** -- Form of Indemnification Agreement between the Registrant and each
of its officers and directors.
10.8** -- Amended and Restated Stockholders Agreement, dated as of May 20,
1997, by and between the Registrant, the Series A Purchasers, the
Series B Purchasers, the Series C Purchasers and members of the
Registrant's management.
10.9** -- The Registrant's 1996 Stock Option Plan as amended.
10.10** -- The Registrant's 1997 California Stock Option Plan, as amended.
10.11** -- The Registrant's 1998 Employee Stock Purchase Plan, as amended.
10.12** -- The Registrant's 1998 Stock Incentive Plan, as amended.
10.13** -- Form of Compensation Protection Agreement between the Registrant
and each of its officers.
10.14** -- Master Service Agreement, dated as of August 23, 1996, by and
between the Registrant and MFS Datanet, Inc.
10.15** -- Agreement for Terminal Facility Collocation Space, dated August 8,
1996, by and between MFS Telecom, Inc. and the Registrant.
10.16** -- Bilateral Peering Agreement, dated May 19, 1997, between AT&T
Corp. and the Registrant.
</TABLE>
- ----------------
* Filed herewith.
** Incorporated by reference from the Company's Registration Statement on Form
S-1 declared effective by the Securities and Exchange Commission on May 11,
1998, File No. 333-47099.
+ Document for which confidential treatment has been granted.
20
<PAGE> 21
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
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 Salomon Brothers Inc, Lazard Freres &
Co. LLC, Chase Securities Inc. and BancBoston Securities Inc.
10.25**/+ -- Capacity and Services Agreement, dated as of March 31, 1998, by
and among the Registrant and Qwest Communications Corporation.
10.26** -- Credit Agreement, dated as of April 6, 1998, by and among the
Registrant, The Chase Manhattan Bank (as administrative agent) and
Fleet National Bank (as documentation agent).
10.27** -- Stock Purchase and Master Strategic Relationship Agreement, dated
as of April 7, 1998, by and among the Registrant and Nippon
Telegraph and Telephone Corporation ("NTT"), a Japanese
corporation.
10.28**/+ -- Investment Agreement, dated as of April 7, 1998, by and among the
Registrant and NTT.
10.29**/+ -- Outside Service Provider Agreement, dated as of April 7, 1998, by
and among the Registrant and NTT America, Inc.
10.30**/+ -- Master Services Agreement, dated as of June 13, 1997, by and
between the Registrant and MCI Telecommunications Corporation
("MCI").
10.31**/+ -- MCI Domestic (US) Public Interconnection Agreement, dated as of
June 12, 1997, by and between the Registrant and MCI, as amended.
10.32** -- The Registrant's 1998 Non-Employee Director Stock Incentive Plan.
11.1 -- Not Applicable.
15.1 -- Not Applicable.
18.1 -- Not Applicable.
19.1 -- Not Applicable.
22.1 -- Not Applicable.
23.1 -- Not Applicable.
24.1 -- Not Applicable.
27.1* -- Financial Data Schedule.
</TABLE>
- ----------------
* Filed herewith.
** Incorporated by reference from the Company's Registration Statement on Form
S-1 declared effective by the Securities and Exchange Commission on May 11,
1998, File No. 333-47099.
+ Document for which confidential treatment has been granted.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VERIO INC.
Date: May 26, 1998 /s/ Peter B. Fritzinger
-------------------------------------
Peter B. Fritzinger
Chief Financial Officer
Date: May 26, 1998 /s/ Carla Hamre Donelson
-------------------------------------
Carla Hamre Donelson
Vice President, General Counsel and
Secretary
19
<PAGE> 1
EXHIBIT 3.5
RESTATED CERTIFICATE OF INCORPORATION
OF
VERIO INC.
Verio Inc., a corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware (the "Corporation"),
DOES HEREBY CERTIFY:
1. That the name of the Corporation is Verio Inc. The Corporation was
originally incorporated under the same name; and the original Certificate of
Incorporation and the Restated Certificate of Incorporation of the Corporation
were filed with the Secretary of State of the State of Delaware on the 1st day
of March, 1996, and the 19th day of November, 1997, respectively.
2. That at a meeting of the Board of Directors of Verio Inc. duly held
on February 18, 1998, resolutions were duly adopted setting forth the proposed
amendment and restatement of the Restated Certificate of Incorporation of the
Corporation and declaring said amendment and restatement to be advisable. The
resolution setting forth the proposed amendment and restatement is as follows:
RESOLVED, that the Restated Certificate of Incorporation of
the Corporation be, and it hereby is, amended and restated in its
entirety to read as set forth in the attached Second Restated
Certificate of Incorporation.
3. That thereafter, the Directors and the stockholders of the
Corporation took action by executing a written consent in lieu of a meeting in
accordance with Section 108(c) and Section 228(a), respectively, of the General
Corporation Law of the State of Delaware.
4. That said amendment and restatement was duly adopted in accordance
with the provisions of Sections 242 and 245 of the General Corporation Law of
the State of Delaware. This Second Restated Certificate of Incorporation
restates and integrates and further amends the provisions of the Restated
Certificate of Incorporation of the Corporation.
1
<PAGE> 2
IN WITNESS WHEREOF, the Corporation has caused this Second Restated
Certificate of Incorporation to be signed by its duly authorized officer, this
26th day of May, 1998.
VERIO INC.
By: /s/ Justin L. Jaschke
------------------------------------
Justin L. Jaschke
Chief Executive Officer
2
<PAGE> 3
SECOND RESTATED CERTIFICATE OF INCORPORATION
OF
VERIO INC.
ARTICLE ONE
The name of the Corporation is Verio Inc.
ARTICLE TWO
The address of the registered office of the Corporation in the State of
Delaware is:
Corporation Service Company
1013 Service Road
Wilmington, Delaware 19805
County of New Castle
The name of the Corporation's registered agent at such address is the
Corporation Service Company.
ARTICLE THREE
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
ARTICLE FOUR
1. CAPITAL STOCK
The total number of shares of all classes of stock that the Corporation
is authorized to issue is one hundred thirty-seven million five hundred thousand
(137,500,000) shares, consisting of one hundred twenty-five million
(125,000,000) shares of Common Stock, par value ($.001) per share, and twelve
million five hundred thousand (12,500,000) shares of Preferred Stock, par value
($.001) per share.
Any of the shares of Preferred Stock may be issued from time to time in
one or more series. Subject to the limitations and restrictions set forth in
this Article Four, the Board of Directors or a Committee of the Board of
Directors, to the extent permitted by law and the bylaws of the Corporation or a
resolution of the Board of Directors, by resolution or resolutions, is
authorized to create or provide for any such series, and to fix the
designations, preferences and relative, participating, optional or other special
rights, and qualifications, limitations or
1
<PAGE> 4
restrictions thereof, including, without limitation, the authority to fix or
alter the dividend rights, dividend rates, conversion rights, exchange rights,
voting rights, rights and terms of redemption (including sinking and purchase
fund provisions), the redemption price or prices, the dissolution preferences
and the rights in respect to any distribution of assets of any wholly unissued
series of Preferred Stock and the number of shares constituting any such series,
and the designation thereof, or any of them and to increase or decrease the
number of shares of any series so created, subsequent to the issue of that
series but not below the number of shares of such series then outstanding. In
case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status which they had prior to the
adoption of the resolution originally fixing the number of shares of such
series.
There shall be no limitation or restriction on any variation between
any of the different series of Preferred Stock as to the designations,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations or restrictions thereof; and the several series
of Preferred Stock may, except as otherwise expressly provided herein, vary in
any and all respects as fixed and determined by the resolution or resolutions of
the Board of Directors or by Committee of the Board of Directors, providing for
the issuance of the various series; provided, however, that all shares of any
one series of Preferred Stock shall have the same designation, preferences and
relative, participating, optional or other special rights and qualifications,
limitations and restrictions.
Except as otherwise required by law, or as otherwise fixed by
resolution or resolutions of the Board of Directors with respect to one or more
series of Preferred Stock, the entire voting power and all voting rights shall
be vested exclusively in the Common Stock, and each stockholder of the
Corporation who at the time possesses voting power for any purpose shall be
entitled to one vote for each share of such stock standing in his name on the
books of the Corporation.
2. BOARD OF DIRECTORS
(a) Number, Qualifications and Term of Office.
(i) Except as otherwise provided herein or the General
Corporation Law of the State of Delaware, the business and affairs of
the Corporation shall be managed by or under the direction of a board
of directors consisting of one or more members.
(ii) Directors need not be stockholders of the Corporation.
(iii) The number of directors shall be fixed from time to
time, within the limits specified in the Bylaws, by a Bylaw or
amendment thereof duly adopted by the vote of a majority of the shares
entitled to vote represented at a duly held meeting at which a quorum
is present, or by the board of directors.
(iv) The directors shall be divided into three classes,
designated Class I, Class II and Class III, as nearly equal in number
as the then total number of directors permits,
2
<PAGE> 5
serving staggered terms so that the initial terms of each such class
will expire, respectively, at the first, second and third succeeding
annual meetings of the stockholders held following the initial public
offering of the Corporation's Common Stock. At each such succeeding
annual meeting of stockholders, directors elected to succeed those
directors whose terms are expiring at such meeting shall be elected for
a term of office to expire at the third succeeding annual meeting of
stockholders following such election. If the number of directors is
changed, any increase or decrease shall be apportioned among the
classes so as to maintain the number of directors in each class as
nearly equal as possible, and any additional directors of any class
elected to fill a vacancy resulting from an increase in such class
shall hold office for a term that shall coincide with the remaining
term of that class, but in no case will a decrease in the number of
directors shorten the term of any incumbent director. Notwithstanding
the foregoing, whenever the holders of any one or more classes or
series of preferred stock issued by the Corporation shall have the
right, voting separately by class or series, to elect directors at an
annual or special meeting of stockholders, the election, term of
office, filling of vacancies and other features of such directorships
shall be governed by the terms of this Certificate of Incorporation or
the Bylaws applicable thereto, and such directors so elected shall not
be divided into classes pursuant to this Section 2 unless expressly
provided by such terms.
(v) Any amendment, change or repeal of this Section 2, or any
other amendment to this Certificate of Incorporation that will have the
effect of permitting circumvention of or modifying this Section 2,
shall require the favorable vote, at a stockholders' meeting, of the
holders of at least eighty percent (80%) of the then-outstanding shares
of stock of the Corporation entitled to vote.
(vi) Except as provided in paragraph (b) below, the directors
shall be elected by a plurality vote of the shares represented in
person or by proxy at the stockholders annual meeting in each year and
entitled to vote on the election of directors. Elected directors shall
hold office until the next annual meeting for the years in which their
terms expire and until their successors shall be duly elected and
qualified. If, for any cause, the board of directors shall not have
been elected at an annual meeting, they may be elected as soon
thereafter as convenient at a special meeting of the stockholders
called for that purpose in the manner provided in this Certificate of
Incorporation or the Bylaws.
(b) Vacancies. Except as otherwise provided by the Certificate of
Incorporation or any amendments thereto, vacancies and newly created
directorships resulting from any increase in the number of authorized directors
may be filled by a majority of the directors then in office, although less than
a quorum, or by a sole remaining director, and each director so elected shall
hold office for the unexpired portion of the term of the director whose place
shall be vacant, and until his successor shall have been duly elected and
qualified. A vacancy in the board of directors shall be deemed to exist under
this paragraph (b) in the case of the death, removal or resignation of any
director, or if the stockholders fail at any meeting of stockholders at which
directors are to be elected to elect the number of directors then constituting
the whole board.
3
<PAGE> 6
(c) Resignation. Any director may resign by delivering his written
resignation to the Corporation at its principal office, addressed to the
president or secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event. When one or more directors shall resign from the board, effective
at a future date, a majority of the directors then in office, including those
who have so resigned, shall have power to fill such vacancy or vacancies, the
vote thereon to take effect when such resignation or resignations shall become
effective, and each director so chosen shall hold office for the unexpired
portion of the term of the director whose place shall be vacated and until his
successor shall have been duly elected and qualified.
ARTICLE FIVE
The Corporation is to have perpetual existence.
ARTICLE SIX
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors of the Corporation is expressly authorized to
make, alter or repeal the Bylaws of the Corporation.
ARTICLE SEVEN
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws of the Corporation may provide. The books of the
Corporation may be kept outside the State of Delaware at such place or places as
may be designated from time to time by the Board of Directors or in the Bylaws
of the Corporation. Elections of directors need not be by written ballot unless
the Bylaws of the Corporation shall so provide.
ARTICLE EIGHT
The Corporation shall indemnify, to the fullest extent permitted by
Section 145 of the General Corporation Law of Delaware, as amended from time to
time, all officers and directors of the Corporation whom it may indemnify
pursuant thereto. The personal liability of a director of the Corporation to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director shall be limited to the fullest extent permitted by the
General Corporation Law of the State of Delaware, as it now exists or may
hereafter be amended. The Corporation may indemnify, to the fullest extent
permitted by Section 145 of the General Corporation Law of Delaware, as amended
from time to time, any or all employees or agents of the Corporation whom it may
indemnify pursuant thereto. Any repeal or modification of this Article by the
stockholders of the Corporation shall not adversely affect any right or
protection of an officer or director of the Corporation existing at the time of
such repeal or modification.
4
<PAGE> 7
ARTICLE NINE
The Corporation expressly elects to be governed by Section 203 of the
General Corporation Law of the State of Delaware.
ARTICLE TEN
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed herein and by the laws of the State of Delaware, and all
rights conferred upon stockholders herein are granted subject to this
reservation, provided, that any amendment, alteration, change or repeal of any
provision of this Certificate of Incorporation that will have the effect of
permitting circumvention of or modifying Article Four, Section 2 and Article
Eleven, shall require the favorable vote, at a stockholders' meeting, of the
holders of at least 80% of the then-outstanding shares of stock of the
Corporation entitled to vote.
ARTICLE ELEVEN
Notwithstanding anything in this Certificate of Incorporation to the
contrary, any action required or permitted to be taken by a vote of the
stockholders of the Corporation may not be taken by written consent.
5
<PAGE> 8
IN WITNESS WHEREOF, Verio Inc. has caused this Restated Certificate of
Incorporation to be signed by Justin L. Jaschke, its Chief Executive Officer,
this 26th day of May, 1998.
By: /s/ Justin L. Jaschke
-------------------------------
Chief Executive Officer
6
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 160,396
<SECURITIES> 0
<RECEIVABLES> 11,538
<ALLOWANCES> 1,470
<INVENTORY> 0
<CURRENT-ASSETS> 189,161
<PP&E> 42,504
<DEPRECIATION> 10,746
<TOTAL-ASSETS> 359,785
<CURRENT-LIABILITIES> 28,149
<BONDS> 268,476
97,315
25,271
<COMMON> 16,341
<OTHER-SE> (79,857)
<TOTAL-LIABILITY-AND-EQUITY> 359,785
<SALES> 21,198
<TOTAL-REVENUES> 21,198
<CGS> 9,536
<TOTAL-COSTS> 9,536
<OTHER-EXPENSES> 19,999
<LOSS-PROVISION> 201
<INTEREST-EXPENSE> 5,551
<INCOME-PRETAX> (18,282)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,282)
<DISCONTINUED> 0
<EXTRAORDINARY> (10,101)
<CHANGES> 0
<NET-INCOME> (28,383)
<EPS-PRIMARY> (22.44)
<EPS-DILUTED> (22.44)
</TABLE>
