<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 16, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
VERIO INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 84-1339720
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
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)
CARLA H. DONELSON, ESQ.
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
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)
With a copy to:
GAVIN B. GROVER, ESQ.
MORRISON & FOERSTER LLP
425 MARKET STREET
SAN FRANCISCO, CALIFORNIA 94105-2482
(415) 268-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this registration statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, check the following box:
[ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
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If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS TO BE OFFERING PRICE AGGREGATE REGISTRATION
OF SECURITIES TO BE REGISTERED(1) REGISTERED PER SHARE OFFERING PRICE FEE
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6.75% Series A Convertible Preferred Stock, par value
$0.001 per share(2)...................................... 7,200,000 $ 48.50(3) $349,200,000.00 (3) $97,078
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Common Stock, par value $0.001 per share, issuable upon
conversion of the 6.75% Series A Convertible Preferred
Stock(4)................................................. 7,456,261 N.A. N.A. (5)
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Common Stock, par value $0.001 per share, that may be
paid as dividends on the 6.75% Series A Convertible
Preferred Stock or that may be delivered in exchange for
funds held in a deposit account on behalf of the holders
of the 6.75% Series A Convertible Preferred Stock........ 1,705,346 $37.9375(6) $ 64,696,563.875(6) $17,986
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Common Stock, par value $0.001 per share(7).............. 332,704 $37.9375(6) $ 12,621,958.00 (6) $ 3,509
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</TABLE>
(1) The securities covered by this registration statement may be sold or
otherwise distributed separately or together with other securities covered
by this registration statement. This registration statement covers offers,
sales and other distributions of the securities listed in this table from
time to time at prices to be determined, and shares of 6.75% Series A
Convertible Preferred Stock so offered or sold that are convertible into
shares of Common Stock.
(2) Including the accompanying interest in any deposit account.
(3) Estimated solely for calculating the registration fee pursuant to Rule
457(c) based on the average of the bid and asked prices of the registrant's
6.75% Series A Convertible Preferred Stock as quoted on the Portal Market on
November 11, 1999.
(4) Pursuant to Rule 416, an indeterminate number of additional shares of Common
Stock are registered hereunder which may be issued in the event that
applicable antidilution provisions with respect to conversion of the 6.75%
Series A Convertible Preferred Stock become operative.
(5) Pursuant to Rule 457(i), a registration fee is not required in connection
with the registration of Common Stock issuable upon conversion of the 6.75%
Series A Convertible Preferred Stock.
(6) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) based on the average of the high and low prices of
the registrant's Common Stock, as quoted on the Nasdaq National Market on
November 10, 1999.
(7) Represents Common Stock issued pursuant to the exercise of certain warrants
assumed by the registrant and carrying certain registration rights for the
holders thereof, which such registration rights have been invoked by certain
of such holders.
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 COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
The information in this prospectus is not complete and may be changed. The
securities described herein cannot be sold until the registration statement
filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and is not soliciting
an offer to buy these securities in any state where the offer or sale is
not permitted.
SUBJECT TO COMPLETION AND AMENDMENT
PRELIMINARY PROSPECTUS, DATED NOVEMBER 16, 1999
PROSPECTUS
[VERIO LOGO]
7,200,000 SHARES OF 6.75% SERIES A CONVERTIBLE PREFERRED STOCK
7,456,261 SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THE
6.75% SERIES A CONVERTIBLE PREFERRED STOCK
1,705,346 SHARES OF COMMON STOCK THAT MAY BE PAID AS DIVIDENDS ON THE
6.75% SERIES A CONVERTIBLE PREFERRED STOCK OR THAT MAY BE DELIVERED IN
EXCHANGE FOR FUNDS TO BE HELD IN A DEPOSIT ACCOUNT ON BEHALF OF THE
HOLDERS OF THE 6.75% SERIES A CONVERTIBLE PREFERRED STOCK
332,704 SHARES OF COMMON STOCK ISSUED UPON THE EXERCISE OF CERTAIN
WARRANTS ASSUMED BY VERIO INC.
This prospectus is being used in connection with the offering from time to
time by certain holders, who we refer to as selling stockholders, of (1) 6.75%
Series A convertible preferred stock, par value $0.001 per share, which we refer
to as the convertible preferred stock, (2) common stock, par value $0.001 per
share, issuable upon conversion of the convertible preferred stock, (3) common
stock (i) that may be paid as dividends on the convertible preferred stock from
time to time during the two-year period from the date that the convertible
preferred stock was originally issued by us or (ii) that may be delivered at our
option through, at the latest, August 1, 2000, in exchange for funds held in a
deposit account on behalf of the holders of our convertible preferred stock, and
(4) common stock, originally issued pursuant to the exercise of certain warrants
assumed by us, where such common stock is held by certain holders who have
invoked their contractual registration rights with us. This prospectus is also
being used in connection with the issuance by us (1) of shares of common stock
that may be paid by us, in lieu of cash, as dividends on the convertible
preferred stock from time to time during the two-year period from the date that
the convertible preferred stock was originally issued by us, and (2) of shares
of common stock that may be issued by us at our option through, at the latest,
August 1, 2000, in exchange for funds held in the deposit account on behalf of
the holders of the convertible preferred stock.
The convertible preferred stock was issued by us to certain initial
purchasers in a private placement on July 20, 1999, and, subsequently, was
resold, in part or in its entirety, by the initial purchasers thereof in private
sales pursuant to exemptions from registration under the Securities Act of 1933,
as amended. The 332,704 shares of common stock held by certain selling
stockholders were issued upon the exercise of warrants that were assumed by us
on January 5, 1999, as part of the merger of Purple Acquisition, Inc., our
wholly-owned subsidiary, with and into Best Internet Communications, Inc.
The initial purchasers of the convertible preferred stock deposited funds
into an account, called the deposit account, established with a deposit agent,
from which quarterly cash payments of $0.8438 per share will be made or which
may be used to purchase shares of common stock from us for distribution to
holders of the convertible preferred stock in lieu of cash payments. The funds
placed in the deposit account by the initial purchasers of the convertible
preferred stock will, together with the earnings on those funds, be sufficient
to make the required payments, in cash or stock, to the holders of the
convertible preferred stock through August 1, 2000. Dividends will not start to
accrue until after the deposit account expires on August 1, 2000, or is earlier
terminated. As a result, we do not expect to make dividend payments until
November 1, 2000, unless the deposit account is terminated before August 1,
2000. Holders of the convertible preferred stock are entitled to received
cumulative dividends at an annual rate of 6.75% of the liquidation preference,
payable quarterly on each November 1, February 1, May 1 and August 1, commencing
on November 1, 2000, or earlier if the deposit account is terminated before the
expected deposit account expiration date of August 1, 2000, out of assets
legally available therefor, when, as and if declared by our board of directors.
The selling stockholders are holders of shares of our convertible preferred
stock or certain holders of our common stock. Shares of common stock also are
reserved for issuance upon conversion of the shares of our convertible preferred
stock. Selling stockholders may offer for sale the convertible preferred stock
or common stock at various times at market prices prevailing at the time of sale
or at privately negotiated prices. The selling stockholders may sell the
convertible preferred stock or common stock to or through underwriters,
broker-dealers or agents, who may receive compensation in the form of discounts,
concessions or commissions. We may offer on each of February 1, May 1, and
August 1, 2000, common stock in exchange for funds held in the deposit account
on behalf of the holders of the convertible preferred stock if we deliver notice
to the deposit agent, on or prior to 10 business days before the applicable
quarterly payment date, instructing the deposit agent to purchase from us the
number of whole shares of our common stock determined by dividing the aggregate
quarterly cash payment amount in the deposit account by either (a) ninety-seven
percent (97%) of the market value of our common stock, if (1) the shares of
common stock are issued pursuant to a registration statement, (2) a shelf
registration statement registering the resale of such shares is effective, or
(3) such shares are eligible for immediate resale pursuant to Rule 144(k) under
the Securities Act, as amended, or (b) in all other cases, ninety-three percent
(93%) of the market value of our common stock. (Market value of our common stock
in each case is
(prospectus continued on following page)
THIS INVESTMENT INVOLVES RISKS. SEE THE "RISK FACTORS" SECTION BEGINNING ON
PAGE 2.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
This prospectus is dated , 1999.
<PAGE> 3
determined as of the date of notice by us to the deposit agent.) We may provide
to you, where required, specific terms of any such offering of our common stock,
or any other securities sold under this prospectus, in a prospectus supplement.
The selling stockholders will receive all of the net proceeds from the sale
of the shares, except for those shares of common stock that we deliver in
exchange for funds held in the deposit account on behalf of the holders of our
convertible preferred stock. We are filing the registration statement of which
this prospectus and any prospectus supplements are a part to satisfy our
contractual obligations relating to the issuance of our convertible preferred
stock. We will pay all expenses (other than selling commissions and fees and
stock transfer taxes) of the registration and sale of the convertible preferred
stock and the common stock. The registration of these shares does not
necessarily mean that any of the selling stockholders will offer or sell their
shares.
Holders of the convertible preferred stock may convert their shares of
convertible preferred stock into shares of common stock at any time, unless
previously redeemed. Such shares will be converted into shares of common stock
at a conversion price of $48.313 per share of common stock for each share of
convertible preferred stock, subject to adjustments in certain events. Our
common stock is traded on the Nasdaq National Market under the symbol "VRIO." On
November 15, 1999, the last reported sale price of our common stock was $40.50
per share.
We may redeem the convertible preferred stock at a redemption price of
102.0000% of the liquidation preference, plus accumulated and unpaid dividends
on or after August 1, 2001, but prior to August 1, 2002, if the trading price of
the common stock equals or exceeds $144.8438 per share for a specified trading
period -- which we refer to as the provisional redemption. In addition to the
foregoing payments, holders will receive an additional payment equal to the
present value of the dividends that would thereafter have been payable on the
convertible preferred stock through and including August 1, 2002. Except in the
circumstances described above, we may not redeem the convertible preferred stock
prior to August 1, 2002. Beginning on August 1, 2002, we may redeem the
convertible preferred stock initially at a redemption price of 103.8571% of the
liquidation preference and thereafter at prices declining to 100.0000% on and
after August 1, 2006, plus, in each case, all accumulated and unpaid dividends.
We may effect any redemption, in whole or in part, by delivering cash, shares of
our common stock or a combination thereof. Our ability to redeem shares is
limited by the terms of the indentures governing our previously issued notes,
our credit facility and applicable law.
We do not intend to apply for listing of the convertible preferred stock on
any securities exchange or for quotation through any automated quotation system.
The convertible preferred stock is eligible for trading in the Private
Offerings, Resale and Trading through Automated Linkages ("Portal") Market of
the National Association of Securities Dealers, Inc. The convertible preferred
stock is not expected to remain eligible for trading in the Portal Market and
there is currently neither a public market for our convertible preferred stock
nor an anticipation that there will be one.
Our principal executive offices are located at 8005 South Chester Street,
Suite 200, Englewood, Colorado 80112, and our telephone number is (303)
645-1900.
You should read this prospectus and any prospectus supplements carefully
before you decide to invest.
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TABLE OF CONTENTS
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PAGE
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THE COMPANY................................................. 1
FORWARD-LOOKING STATEMENTS.................................. 1
RISK FACTORS................................................ 2
USE OF PROCEEDS............................................. 18
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS........................................... 19
SELLING STOCKHOLDERS........................................ 19
DESCRIPTION OF THE SERIES A CONVERTIBLE PREFERRED STOCK..... 24
DESCRIPTION OF CAPITAL STOCK................................ 37
FEDERAL TAX CONSIDERATIONS.................................. 43
PLAN OF DISTRIBUTION........................................ 49
LEGAL OPINIONS.............................................. 51
EXPERTS..................................................... 51
WHERE YOU CAN FIND MORE INFORMATION ABOUT US................ 51
</TABLE>
i
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This prospectus, and any prospectus supplements issued in relation to it,
contain trademarks of Verio and its affiliates, and may contain trademarks,
tradenames and service marks of other parties. Unless we indicate otherwise,
references to "Verio" or to "we" or "us" are to Verio Inc. and its subsidiaries.
Information contained on Verio's Internet sites is not a part of this prospectus
or any prospectus supplement issued subsequently.
THE COMPANY
Verio is the world's largest operator of Web sites for businesses and a
leading provider of comprehensive Internet services with an emphasis on serving
the small and medium sized business market. Currently, we offer customers a
broad range of Internet solutions, including:
- telecommunication circuits -- permitting our customers to make
connections to and transmissions over the Internet;
- Web hosting services -- providing our customers with a presence on the
Internet in the form of a Web site;
- electronic commerce -- enabling our customers to conduct transactions
with their customers and vendors over the Internet;
- secure Internet communication links -- permitting our customers to
establish "virtual private networks" in order to engage in private and
secure Internet communication with their employees, vendors, customers
and suppliers; and
- other enhanced value Internet services.
We were incorporated in March 1996 and our principal executive offices are
located in Colorado. The address of our principal executive offices is 8005
South Chester Street, Suite 200, Englewood, Colorado 80112, and our telephone
number is (303) 645-1900.
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FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements," as such term is
defined in the Private Securities Litigation Reform Act of 1995. These
statements can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should," or "anticipates" or the negative
thereof or other variations thereon or comparable terminology, or by discussions
of strategy that involve risks and uncertainties. The safe harbor provisions of
the Securities Exchange Act of 1934, as amended, and the Securities Act of 1933,
as amended, apply to forward-looking statements made by us. These
forward-looking statements involve risks and uncertainties, including those
identified within "Risk Factors" beginning on page 2 and elsewhere in, or
incorporated by reference into, this prospectus. The actual results that we
achieve may differ materially from any forward-looking statements, due to such
risks and uncertainties. These forward-looking statements are based on current
expectations, and we assume no obligation to update this information. Readers
are urged to carefully review and consider the various disclosures made by us in
this prospectus, any subsequent prospectus supplement and in our other reports
filed with the Securities and Exchange Commission that attempt to advise
interested parties of the risks and factors that may affect our business.
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RISK FACTORS
An investment in Verio involves a high degree of risk. In addition to the
other information included in this prospectus and any subsequent prospectus
supplement, you should carefully consider the following risk factors in
determining whether or not to purchase the securities offered under this
prospectus and any subsequent prospectus supplement. These matters should be
considered in conjunction with the other information included or incorporated by
reference in this prospectus or any subsequent prospectus supplement. 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 Verio, our
directors or our officers primarily with respect to the future operating
performance of Verio. Prospective purchasers of our securities 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".
WE HAVE A HISTORY OF LOSSES AND LIMITED OPERATING AND FINANCIAL DATA
We have incurred net losses since our inception in March 1996. For the
period from inception to December 31, 1996, we had a loss of $(5.1) million, and
for the years ended December 31, 1997 and 1998, and the nine months ended
September 30, 1999, we had losses of $(46.1) million, $(122.0) million and
$(137.5) million, respectively. Because we have a relatively short operating
history, there is little operating and financial data about us, which makes an
evaluation of our business operations and prospects more difficult. We have
experienced annual growth in revenue from approximately $2.4 million from the
period of our inception to December 31, 1996; to approximately $35.7 million in
1997; to approximately $120.7 million in 1998; and to approximately $185.4
million for the nine months ended September 30, 1999.
WE EXPECT CONTINUING LOSSES AND CANNOT ASSURE YOU THAT WE WILL BECOME PROFITABLE
We expect to continue to operate at a net loss in the near term as we
continue to use significant amounts of cash for our acquisition and integration
efforts, build out our national network operations, expand and enhance our
product and service offerings, and further establish our brand name recognition.
The extent to which we experience negative cash flow will depend upon a number
of factors, including the following:
- the number and size of any additional acquisitions and investments;
- the expense and time required to integrate prior and future acquired
operations;
- the time and effort required to capture operating efficiencies;
- our ability to generate increased revenues;
- the amount of our expenditures at the corporate and national level; and
- potential regulatory developments that may affect our operations.
In order to achieve profitability, Verio must develop and market products
and services that gain broad commercial acceptance. We cannot assure you that
our products and services will ever achieve broad commercial acceptance or that
we will achieve profitability. Although we have experienced significant growth
in revenues on an annual basis, this growth rate is not necessarily indicative
of future operating results. We cannot assure you that we will achieve or
sustain positive operating cash flow or generate net income in the future.
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WE HAVE SUBSTANTIAL LIABILITIES WHICH MAY IMPACT OUR FUTURE OPERATIONS AND
AFFECT OUR ABILITY TO MEET OUR DEBT OBLIGATIONS
We have substantial amounts of outstanding debt and other liabilities. At
September 30, 1999, our total long-term liabilities were approximately $694.2
million, representing 59% of our total capitalization. In addition, we have a
$100.0 million revolving credit facility from a group of financial institutions.
We have not drawn any funds under this credit facility.
High levels of debt have had and could have several important effects on
our future operations. Some of these consequences include the following:
- A substantial portion of our cash flow from operations must be used to
pay interest on our debt and will not be available for other business
purposes. Of the $54.4 million cash flow used by our operations for the
nine months ended September 30, 1999, $43.2 million, or approximately
79%, was used to pay interest on our debt. Of this amount, 16% was used
for interest on the $100.0 million outstanding principal amount of
13 1/2% Senior Notes due 2004 -- which we refer to as the 1997 Notes; 21%
was used for interest on the $175.0 million outstanding principal amount
of 10 3/8% Senior Notes due 2005 -- which we refer to as the March 1998
Notes; 54% was used for interest on the $400.0 million outstanding
principal amount of 11 1/4% Senior Notes due 2008 -- which we refer to as
the November 1998 Notes; and 9% was used for interest on capital leases
and other obligations. Interest on our debt continues to be a significant
use of cash.
- Covenants imposed under certain of our financing agreements limit our
ability to pursue our business strategy, borrow additional funds to grow
our business, acquire and dispose of assets, and make capital
expenditures and may otherwise restrict our operations and growth.
Our ability to meet our debt and other obligations and to reduce our total
debt depends on our future operating performance and on economic, financial,
competitive, regulatory and other factors. In addition, we may need to incur
additional indebtedness in the future. Many of these factors are beyond our
control. We believe that our existing current assets combined with working
capital from our operations, our existing credit facility, capital lease
financings and proceeds of future equity or debt financings will be adequate to
meet our existing financial obligations. We cannot assure you, however, that our
business will generate sufficient cash flow or that future financings will be
available to provide sufficient proceeds to meet these obligations or to service
our total debt. In particular, our cash flow may not be sufficient to pay:
- $13.5 million in annual interest on the 1997 Notes (interest on these
notes is paid from an escrow account until June 2000);
- $18.2 million in annual interest on the March 1998 Notes;
- $45.0 million in annual interest on the November 1998 Notes;
- up to $24.3 million in annual dividends we may pay on our convertible
preferred stock, plus any additional dividends owed thereon depending on
certain contingencies, beginning in November 2000; or
- any debt obligations we may incur under the credit facility, if drawn
upon.
WE ARE SUBJECT TO RESTRICTIVE COVENANTS THAT LIMIT OUR FLEXIBILITY
Our $100.0 million revolving credit facility may only be used if we meet
certain financial tests. Our credit facility and other debt instruments contain
customary covenants limiting our flexibility, including covenants limiting our
ability to incur additional debt, make liens, make investments, consolidate,
merge or acquire other businesses and sell assets, pay dividends and other
distributions, make capital expenditures and enter into transactions with
affiliates. Such covenants may make it difficult for us to pursue our business
strategies. Failure to comply with the terms of the credit facility would
entitle the secured lenders to foreclose on certain of our assets, including the
capital stock of our subsidiaries. The secured lenders would be repaid from the
proceeds of the liquidation of those assets before the assets would be available
3
<PAGE> 8
for distribution to other creditors and, lastly, to the holders of Verio's
capital stock. Our ability to satisfy the financial and other restrictive
covenants may be affected by events beyond our control.
IT IS UNLIKELY THAT INVESTORS WILL RECEIVE A RETURN ON OUR COMMON STOCK THROUGH
THE PAYMENT OF CASH DIVIDENDS
We have never declared or paid cash dividends on our common stock and have
no intention of doing so in the foreseeable future. In addition, although we
have the option of paying dividends in cash, our ability to pay cash dividends
is substantially restricted under various covenants and conditions contained in
our debt instruments. In any event, under Delaware law we are permitted to pay
dividends on our capital stock only out of our surplus, or if we have no
surplus, out of our net profits for the year in which a dividend is declared or
for the immediately preceding fiscal year. Surplus is defined as the excess of a
company's total assets over the sum of its total liabilities and convertible
preferred stock plus the par value of its outstanding capital stock. At
September 30, 1999, we had a stockholders' equity of approximately $492.3
million. We have had a history of losses and expect to operate at a net loss for
the next several years. These net losses will reduce our stockholders' equity.
For the nine months ended September 30, 1999, we had a net loss attributable to
common stockholders of $137.5 million. We cannot predict what the value of our
assets or the amount of our liabilities will be in the future.
PAYMENT OF DIVIDENDS AND ADDITIONAL DIVIDENDS IN SHARES OF COMMON STOCK MAY NOT
RESULT IN STATED DIVIDEND YIELD
In the event dividends or additional dividends, if any, on our convertible
preferred stock are paid in shares of common stock, the number of shares of
common stock to be issued on each dividend payment date will be determined by
dividing the total dividend and additional dividends, if any, to be paid on each
share of convertible preferred stock by the Market Value Amount, as defined
under "Description of the Series A Convertible Preferred Stock -- General," on
the record date for such dividend. If the market value applicable in determining
the Market Value Amount is higher than the market value for the common stock on
the dividend payment date and you sell at such lower price, your actual dividend
yield could be lower than the stated dividend yield on the convertible preferred
stock. In addition, you are likely to incur commissions and other transaction
costs in connection with the sale of such common stock.
THE CONVERTIBLE PREFERRED STOCK IS SUBORDINATED TO ALL OUR LIABILITIES
In the event of bankruptcy, liquidation or reorganization of Verio, our
assets will be available to pay obligations on the convertible preferred stock
only after all indebtedness and other liabilities, including our existing senior
notes and all subsequent series of preferred stock of Verio which rank senior to
the convertible preferred stock, have been paid. There may not be sufficient
assets remaining to pay amounts due on any or all of the convertible preferred
stock then outstanding. While we consider the funds placed in the deposit
account to be the property of the purchasers of the convertible preferred stock
and not our property, in a bankruptcy proceeding, our creditors or a trustee in
bankruptcy could claim that those funds constitute property of our bankrupt
estate. If that were to occur, access to the funds in the deposit account by the
purchasers of the convertible preferred stock would be denied until all our
indebtedness had been paid in full. As of September 30, 1999, the convertible
preferred stock is junior in right of payment to $670.8 million total
indebtedness and other obligations of Verio, of which $2.0 million is attributed
to our subsidiaries.
OUR EARNINGS HAVE BEEN INSUFFICIENT TO PAY OUR COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
Our earnings were insufficient to pay our combined fixed charges and
preferred stock dividends during those periods and by the amounts set forth in
the table below, although our combined fixed charges and
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preferred stock dividends included substantial non-cash charges for
depreciation, amortization and non-cash interest expense on some of our debt:
<TABLE>
<CAPTION>
EARNINGS NON-CASH
DEFICIENCY CHARGES
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(IN THOUSANDS)
<S> <C> <C>
Period from inception to December 31, 1996.................. $ (5,825) $ 784
Fiscal year ended December 31, 1997......................... $ (48,253) $11,468
Fiscal year ended December 31, 1998......................... $(112,423) $48,516
Nine months ended September 30, 1999........................ $(137,537) $94,779
</TABLE>
We anticipate that earnings will be insufficient to cover our combined
fixed charges and preferred stock dividends for the next several years. In order
for us to meet our debt obligations, we will need to substantially improve our
operating results. We cannot assure you that our operating results will be of
sufficient magnitude to enable us to meet our debt and preferred stock
obligations. In the absence of such operating results, we could face substantial
liquidity problems and may be required to raise additional financing through the
issuance of debt or equity securities. We cannot assure you, however, that we
would be successful in raising such financing on acceptable terms or otherwise.
OUR CONVERTIBLE PREFERRED STOCK HAS NEVER BEEN PUBLICLY TRADED
There has been no public trading market for the convertible preferred
stock. We do not intend to list the convertible preferred stock on any national
securities exchange. The convertible preferred stock is eligible for trading in
the Portal Market; however, no assurance can be given as to the liquidity of, or
trading market for, the convertible preferred stock. Accordingly, there can be
no assurance that any market for the convertible preferred stock will be
maintained. If an active market for the convertible preferred stock fails to
develop or be sustained, the trading price of such convertible preferred stock
could be materially adversely affected.
THE MARKET PRICE AND TRADING VOLUME OF OUR COMMON STOCK ARE VOLATILE
The market price of our common stock has fluctuated significantly in the
past, and is likely to continue to be highly volatile. In addition, the trading
volume in our common stock has fluctuated, and significant price variations can
occur as a result. We cannot assure you that the market price of our common
stock will not fluctuate or decline significantly in the future. In addition,
the U.S. equity markets have from time to time experienced significant price and
volume fluctuations that have particularly affected the market prices for the
stocks of technology and telecommunications companies. These broad market
fluctuations may materially adversely affect the market price of our common
stock in the future. Such variations may be the result of changes in our
business, operations or prospects, announcements of technological innovations
and new products by competitors, new contractual relationships with strategic
partners by us or our competitors, proposed acquisitions by us or our
competitors, financial results that fail to meet public market analyst
expectations, regulatory considerations and domestic and international market
and economic conditions.
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD ADVERSELY AFFECT OUR
STOCK PRICE AND OUR ABILITY TO RAISE FUNDS IN NEW EQUITY OFFERINGS
No prediction can be made as to the effect, if any, that future sales of
shares of common stock or the availability for future sale of shares of common
stock or securities convertible into or exercisable for our common stock will
have on the market price of common stock prevailing from time to time. Sale, or
the availability for sale, of substantial amounts of common stock by existing
stockholders under Rule 144, through the exercise of registration rights or the
issuance of shares of common stock upon the exercise of stock options or
warrants or the conversion of our convertible preferred stock, or the perception
that such sales or issuances could occur, could adversely affect prevailing
market prices for our common stock and
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could materially impair our future ability to raise capital through an offering
of equity securities. See "Description of Capital Stock."
WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS THAT COULD DELAY OR PREVENT AN
ACQUISITION AND COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK
Our certificate of incorporation and bylaws, certain provisions of Delaware
law and the certificate of designation governing the convertible preferred stock
may make it difficult in some respects to cause a change in control of Verio and
replace incumbent management. In addition, Nippon Telegraph and Telephone
Corporation has the right to designate a member of our board of directors and is
subject to certain standstill and other limitations on its ability to make
further acquisitions of our stock that could delay, defer or prevent a change of
control. The existence of these provisions may collectively have a negative
impact on the price of the common stock, may discourage third-party bidders from
making a bid for Verio, or may reduce any premiums paid to stockholders for
their common stock. In addition, the board of directors has the authority to fix
the rights and preferences of, and to issue shares of, our preferred stock,
which may have the effect of delaying or preventing a change in control of Verio
without action by our stockholders. See "Description of Capital
Stock -- Anti-Takeover Provisions."
WE MAY BE UNABLE TO RAISE ADDITIONAL FUNDS THAT WE WILL NEED TO REMAIN
COMPETITIVE
We depend on a number of different financing sources to fund our growth and
continued losses from operations. However, we cannot assure you that we will be
able to raise such funds on favorable terms or at all. In the event that we are
unable to obtain such additional funds on acceptable terms or otherwise, we may
be unable or determine not to take advantage of new opportunities or take other
actions that otherwise might be important to our operations.
We expect to make significant capital expenditures in order to maintain our
competitive position and continue to meet the increasing demands for service
quality, availability and competitive pricing. In addition to our continuing
acquisition efforts, we currently expect that our significant capital
expenditures will include the following:
- network equipment;
- network operating and data centers;
- network monitoring equipment;
- information technology systems; and
- customer support systems.
We believe that we will have a reasonable degree of flexibility to adjust
the amount and timing of these capital expenditures. However, we may need to
raise additional funds in order to take advantage of unanticipated
opportunities, such as acquisition opportunities that may arise in the U.S. and
internationally. In addition, we may need to raise additional funds to develop
new products or otherwise respond to changing business conditions or
unanticipated competitive pressures. We may be required to delay or abandon some
of our planned future expansion or expenditures if we fail to raise sufficient
funds.
OUR OPERATING RESULTS FLUCTUATE DUE TO A VARIETY OF FACTORS AND ARE NOT A
MEANINGFUL INDICATOR OF FUTURE PERFORMANCE
Our operating results have fluctuated in the past and may fluctuate
significantly in the future, depending upon a variety of factors, including the
incurrence of capital costs and the introduction of new products and services.
Additional factors that may contribute to variability of operating results
include:
- the pricing and mix of services we offer;
- our customer retention rate;
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- changes in pricing policies and product offerings by our competitors;
- growth in demand for network and Internet access services;
- one-time costs associated with acquisitions and the consolidation and
integration of our acquired operations; and
- general telecommunications services' performance and availability.
We also have experienced seasonal variation in Internet use. Accordingly,
our revenue streams may fluctuate. In response to competitive pressures, we may
take certain pricing or marketing actions that could have a material adverse
effect on our business, financial condition and results of operations.
Therefore, we believe that period-to-period comparisons of our operating results
are not necessarily meaningful and cannot be relied upon as indicators of future
performance. If our operating results in any future period fall below the
expectations of securities analysts and investors, the market price of our
securities would likely decline.
OUR SUCCESS IS HIGHLY DEPENDENT ON THE GROWTH OF OUR EXISTING INTERNET ACCESS
AND WEB HOSTING CORE SERVICES, AND ON OUR ABILITY TO EXPAND OUR SERVICE
OFFERINGS AND DISTRIBUTION CHANNELS
While we continue to pursue acquisitions and investments both in the U.S.
and internationally, our success is highly dependent on the growth of our
existing Internet access and Web hosting core service platforms. We expect to
drive this internal growth by expanding and enhancing our product service base
with additional enhanced value Internet service capabilities and by establishing
further distribution capabilities. We may develop these further product and
distribution capabilities internally, but we primarily plan to form strategic
relationships with various vendors and distribution partners. Accordingly, it
will be important that we either develop these capabilities internally or
identify suitable potential product and service vendors and distributors with
whom we are able to complete agreements on acceptable terms. We expect that
competition for strategic relationships with key vendors and potential
distributors could be significant, and that we may have to compete with other
companies with greater financial and other resources to obtain these important
relationships. We cannot assure you that we will be able to identify suitable
partnering candidates or be able to complete agreements on acceptable terms with
these parties. Once implemented, we cannot assure you that any additional
service capabilities that we launch will achieve general commercial acceptance
or generate significant revenue, or that any particular distribution channels
will prove to be effective.
OUR SUCCESS DEPENDS ON OUR ABILITY TO SUCCESSFULLY INTEGRATE THE OPERATIONS WE
HAVE ACQUIRED AND MAY ACQUIRE IN THE FUTURE
A key element of our business strategy is to grow through acquisitions, and
our success depends in large part on our ability to integrate the operations and
management of the independent Internet operations we have acquired and those we
may acquire in the future. To integrate our newly acquired Internet operations
successfully, we must:
- install and standardize adequate operational and control systems;
- deploy standard equipment and telecommunications facilities;
- employ qualified personnel to provide technical and marketing support in
new as well as existing locations;
- eliminate redundancies in overlapping network systems and personnel;
- incorporate acquired technology and products into our existing service
offerings;
- implement and maintain uniform standards, procedures and policies;
- standardize marketing and sales efforts under the common Verio brand; and
- continue the expansion of our managerial, operational, technical and
financial resources.
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The process of consolidating and integrating acquired operations takes a
significant period of time, places a significant strain on our managerial,
operating and financial resources, and could prove to be even more expensive and
time-consuming than we have predicted. We may increase expenditures in order to
accelerate the integration and consolidation process with the goal of achieving
longer-term cost savings and improved profitability.
The key integration challenges we face in connection with our acquisitions
include:
- acquired operations, facilities, equipment, service offerings, networks,
technologies, brand names, and sales, marketing and service development
efforts may not be effectively integrated with our existing operations;
- anticipated cost savings and operational benefits may not be realized;
- in the course of integrating an acquired operation, we may discover facts
or circumstances that we did not know at the time of the acquisition that
adversely impact our business or operations, or make the integration more
difficult or expensive;
- integration efforts may divert our resources from our existing business;
- standards, controls, procedures and policies may not be maintained;
- employees who are key to the acquired operations may choose to leave; and
- we may experience unforeseen delays and expenses.
WE FACE RISKS ASSOCIATED WITH ACQUISITIONS GENERALLY
We expect to continue our acquisition and expansion strategy. Future
acquisitions could materially adversely affect our operating results as a result
of dilutive issuances of equity securities and the incurrence of additional
debt. In addition, the purchase price for many of these acquired businesses
likely will significantly exceed the current fair values of the net assets of
the acquired businesses. As a result, material goodwill and other intangible
assets would be required to be recorded which would result in significant
amortization charges in future periods. These charges, in addition to the
financial impact of such acquisitions, could have a material adverse effect on
our business, financial condition and results of operations.
We have recorded all business acquisitions under the purchase method of
accounting. With the acquisition, on January 5, 1999, of Best Internet
Communications, Inc. (d/b/a Hiway Technologies, Inc.), which we refer to as
Hiway, we recorded gross goodwill totaling approximately $240.5 million, which
is being amortized over a ten-year period from the acquisition date. On July 13,
1999, we acquired all of the outstanding stock of Computer Services Group, Inc.
(which does business as digitalNATION) for $100.0 million in cash, the goodwill
associated with which is being amortized over a ten-year period from the
acquisition date. We cannot assure you of the number, timing or size of future
acquisitions, or the effect that any such acquisitions might have on our
operating or financial results.
THE FINANCIAL INFORMATION CONCERNING BUSINESSES WE ACQUIRE MAY BE INACCURATE
Many of the Internet businesses we have acquired did not have audited
financial statements, and this may be true for subsequent acquisitions as well.
These companies have had varying degrees of internal controls and detailed
financial information. Therefore, the financial information included in this
prospectus or incorporated by reference includes financial information
concerning certain recently completed acquisitions for which audited financial
statements may not be available. Our subsequent audits of these recently
acquired companies may reveal significant issues with respect to revenues,
expenses and liabilities, contingent or otherwise, of any of these providers.
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OUR RAPID GROWTH PUTS A SIGNIFICANT STRAIN ON OUR RESOURCES
As a result of our acquisition strategy, we have been growing rapidly and
expect to continue to grow rapidly. This rapid growth has placed, and is likely
to continue to place, a significant strain on our managerial, operating,
financial and other resources, including our ability to ensure customer
satisfaction. For example, as our customer base grows, and the need for high
capacity Internet data transmission capability expands, we will need to acquire
substantial network capacity to support their needs. Our expansion efforts also
require significant time commitments from our senior management and place a
strain on their ability to manage our existing business. We also may be required
to manage multiple relationships with third parties as we expand our enhanced
value service offerings, including Web hosting. Our future performance will
depend, in part, upon our ability to manage this growth effectively. To that
end, we will have to undertake the following improvements, among others:
- implement additional management information systems capabilities;
- further develop our operating, administrative and financial and
accounting systems and controls;
- improve coordination between our engineering, accounting, finance,
marketing and operations; and
- hire and train additional personnel.
WE DEPEND UPON THIRD-PARTY CHANNEL PARTNERS FOR SALES OF OUR PRODUCTS AND
SERVICES
We depend on third-party channel partners to stimulate demand for our
products and services both where we do not have a direct sales force and as an
alternative means for generating sales to customers. These channel partners
include computer and telecommunications providers, Internet companies and
portals, value-added resellers, original equipment manufacturers, systems
integrators, Web designers and advertising agencies. Many of our channel partner
distribution relationships involve untested or novel modes of distributing our
products and services, and not all of these channel partners have been
successful in meeting our objectives for generating additional sales of our
products and services. If we fail to gain commercial acceptance in certain
markets, channel partners may discontinue their relationships with us or we may
fail to achieve a return on our investment in certain channel partner
distribution arrangements. Conflicts may develop between our direct sales force
efforts and those of our channel partners as well as among different channel
partners. The loss of channel partners, the failure of such parties to perform
under agreements with us, or the inability to attract other channel partners
with the expertise and industry experience required to market our products and
services could adversely affect us. Furthermore, sales through channel partners
are usually at discounted rates or may require us to incur additional sales and
marketing expenses. Therefore, the resulting revenues and gross margins will be
less than if we had sold the same services directly.
WE FACE RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND EXPANSION
We provide Web hosting services to customers in over 170 countries. For the
year ended December 31, 1998, and for the nine months ended September 30, 1999,
we estimate that approximately 10% of our total revenues was from international
operations. We expect to continue to expand in these and other international
markets. However, the rate of development and adoption of the Internet has been
slower outside the U.S., and the cost of transmitting data over the Internet
outside the U.S. has been higher, which may adversely affect our ability to
expand operations, and may increase our costs of operations internationally. We
cannot assure you that acceptance of the Internet or demand for Internet access,
Web hosting and other enhanced value Internet services will increase
significantly in any international markets.
We may need to enter into joint ventures or other outsourcing agreements
with third parties, acquire complementary businesses or operations, or establish
or maintain new operations outside the U.S. in order to conduct our foreign
operations successfully. However, we cannot assure you that we will be able to
obtain the permits and operating licenses required to operate, to hire and train
employees or to market, sell
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and deliver high quality services in these markets. In addition, certain risks
inherent in doing business on an international level include:
- unexpected changes in or delays resulting from regulatory requirements,
tariffs, customs, duties and other trade barriers;
- difficulties in staffing and managing foreign operations;
- longer payment cycles and problems in collecting accounts receivable;
- political instability, expropriation, nationalization, war, insurrection
and other political risks;
- fluctuations in currency exchange rates and foreign exchange controls
which restrict or prohibit repatriation of funds;
- technology export and import restrictions or prohibitions;
- employment laws and practices in foreign countries;
- delays from customs brokers or government agencies;
- differences in technology standards;
- seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world; and
- potentially adverse tax consequences.
We cannot assure you that these factors will not have an adverse effect on
our future international operations. In addition, changes in existing foreign
laws or administrative practice relating to taxation, foreign exchange,
regulatory or other matters could adversely affect us. For example, the European
Union recently enacted its own privacy regulations. Future decisions, laws,
regulations and other activities regarding regulation and content liability may
significantly affect our business. Certain foreign governments, such as Germany,
have enforced laws and regulations related to content distributed over the
Internet that are more strict than those currently in place in the U.S. This
could adversely affect our investment in international operations such as
WWW -- Service Online -- Dienstleistungen GmbH.
Effective January 1, 1999, 11 of the 15 member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and the euro, and adopted the euro as their common legal currency. We
have not commenced any assessment of the effects or potential impact that the
euro conversion would have on us.
WE FACE A HIGH LEVEL OF COMPETITION IN THE INTERNET SERVICES INDUSTRY
The tremendous growth and potential market size of the Internet access
market and the absence of substantial barriers to entry have attracted many new
start-ups as well as existing businesses from the telecommunications, cable and
technology industries. As a result, the market for Internet access and related
services is extremely competitive. We anticipate that competition will continue
to intensify as the use of the Internet grows. Current and prospective
competitors include:
- other independent providers of Web hosting and other enhanced value
Internet services;
- national, regional and local Internet service providers;
- global, national and regional long distance and local exchange
telecommunications companies;
- cable television companies;
- direct broadcast satellite and wireless communications providers; and
- on-line service providers.
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We believe that the following are the primary competitive factors in this
market:
- a secure and reliable national network with sufficient capacity, quality
of service and scalability to support continued growth;
- a knowledgeable and effective sales force, and broad and effective
distribution channels;
- knowledgeable and capable technical support personnel, and prompt and
efficient customer care services;
- Internet system engineering and other technical expertise;
- competitive prices;
- timely introductions of new products and services;
- sufficient financial resources; and
- a recognized and trusted brand name.
Many of our competitors have significantly greater market presence, brand
recognition, and financial, technical, network capacity and personnel resources
than we do. All of the major long distance companies, also known as
interexchange carriers, offer Internet access services and compete with us. The
recent sweeping reforms in the federal regulation of the telecommunications
industry have created greater opportunities for local exchange carriers,
including the regional bell operating companies, to enter the Internet access
market. In order to address the Internet access requirements of the current
business customers of long distance and local carriers, many carriers are
integrating horizontally through acquisitions of or joint ventures with Internet
service providers, or by wholesale purchase of Internet access from Internet
service providers. In addition, many of the major cable companies and other
alternative service providers -- such as those companies utilizing wireless
terrestrial and satellite-based service technologies -- have announced their
plans to offer Internet access and related services. Accordingly, we expect that
we will experience increased competition from traditional and emerging
telecommunications providers. Many of these companies, in addition to their
substantially greater network coverage, market presence, and financial,
technical and personnel resources, also have large existing commercial customer
bases. Furthermore, they may have the ability to bundle Internet access with
basic local and long distance telecommunications services. This bundling of
services may have an adverse effect on our ability to compete effectively with
them and may result in pricing pressure on us that would adversely affect our
business, financial condition and results of operations.
The recent deployment and further planned deployment of broadband services
or high capacity data transmission capabilities by cable and telephone companies
through new technologies such as cable modems and various digital subscriber
lines also creates further competitive pressure on our business. While these
providers initially targeted the residential consumer, more recently a number of
digital subscriber lines providers also have announced their intent to offer
services to our target business market. This may significantly affect the
pricing of our Internet access service offerings. Although we offer for sale
digital subscriber line services to business customers in a large number of
markets, there are numerous providers of digital subscriber lines competing with
these product offerings, and several providers have launched their services in
conjunction with Internet service providers, allowing those providers to offer
Internet access over digital subscriber lines circuits. These circuits, which
provide higher speed and lower latency Internet connections than a standard
dialup phone connection, compete with our dedicated connectivity offerings.
As we continue to expand internationally, we will encounter new
competitors. In some cases, we will be forced to compete with and buy services
from government-owned or subsidized telecommunications providers. Some of these
providers may enjoy a monopoly on telecommunications services essential to our
business. We cannot assure you that we will be able to purchase these services
at a reasonable price or at all. In addition to the risks associated with our
local competitors, foreign competitors may pose an even greater risk, as they
may possess a better understanding of their local markets and better working
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relationships with local infrastructure providers and others. We cannot assure
you that we can obtain similar levels of local knowledge. Failure to obtain that
knowledge and those relationships could place us at a significant competitive
disadvantage.
WE DEPEND UPON OUR NETWORK INFRASTRUCTURE
Our success depends upon our ability to implement and expand our national
network infrastructure and support services at an acceptable cost. This may
require us to enter into additional agreements with providers of infrastructure
capacity and equipment and support services. We cannot assure you that any of
these agreements can be obtained on satisfactory terms and conditions. We also
anticipate that future expansions and adaptations of our 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 our
customers' product and service requirements. This will require substantial
financial, operational and managerial resources. We cannot assure you that we
will be able to expand or adapt our network infrastructure to meet the
industry's evolving standards or our customers' growing demands and changing
requirements on a timely or cost-effective basis, or at all. Also, we may not be
able to deploy successfully any expanded and adapted network infrastructure.
OUR NETWORK SYSTEM COULD FAIL, WHICH COULD NEGATIVELY IMPACT OUR REVENUES
Our success depends upon our ability to deliver reliable, high-speed access
to the Internet and upon the ability and willingness of our telecommunications
providers to deliver reliable, high-speed telecommunications service through
their networks. Our network, and other networks providing services to us, are
vulnerable to damage or cessation of operations from fires, earthquakes, severe
storms, power losses, telecommunications failures and similar events,
particularly if the events occur within a high-traffic location of the network.
We have designed our network to minimize the risk of such system failure, for
instance, with redundant circuits among point of presence facilities to allow
traffic rerouting. In addition, we perform lab and field testing before
integrating new and emerging technology into the network, and we engage in
capacity planning. Nonetheless, we cannot assure you that we will not experience
failures or shutdowns relating to individual point of presence facilities or
even catastrophic failure of the entire network.
While historically we have not, as a general matter, offered our customers
a service-level warranty, our customers are increasingly requiring that we
provide a standard service-level warranty for our services. Many of our
competitors have begun to do so. As a result, in order to remain competitive, we
now expect to implement a standard policy under which we offer such a warranty
to our customers. To the extent that we provide such a service-level warranty in
the future, we could experience a material decline in our revenues in connection
with any significant system downtime experienced by our customers or other
material changes associated with such warranty coverage. In addition, certain of
the companies we acquired did offer various warranties under their customer
contracts. For example, Hiway historically has offered its customers a
service-level warranty under which Hiway commits that a customer's Web site will
be available at least 99.9% of the time in each calendar month for as long as
the customer is using the services. If uptime falls below this level in any
month, the customer is entitled to certain service credits for that month. By
acquiring Hiway, we inherited these warranty obligations.
We carry business personal property insurance at both scheduled locations
and unscheduled locations, with a blanket property limit of $10.0 million per
location, and business interruption insurance with a blanket limit of $2.0
million per location. This insurance may not be adequate or available to
compensate us. In addition, we generally attempt to limit our liability to
customers by contractually disclaiming liability or limiting liability to a
usage credit based upon the amount of time that the system was down. We cannot
assure you, however, that such limitations of liability will be enforceable. In
any event, significant or prolonged system failures or shutdowns could damage
our reputation and cause us to lose our customers.
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ALTHOUGH WE HAVE IMPLEMENTED NETWORK SECURITY MEASURES, OUR NETWORK MAY
EXPERIENCE SECURITY BREACHES
We have implemented certain network security measures, such as limiting
physical and network access to our routers. Nonetheless, we cannot assure you
that our network infrastructure will not be vulnerable to computer viruses,
break-ins and similar disruptive problems caused by our customers or other
Internet users. Computer viruses, break-ins or other problems caused by third
parties could lead to interruptions, delays or cessation in service to our
customers. Furthermore, such incidents could deter potential customers and
adversely affect existing customer relationships.
Security problems represent an ongoing threat to public and private data
networks. Attacks upon the security of Internet sites and infrastructure
continue to be reported to organizations such as the CERT Coordination Center at
Carnegie Mellon University, which facilitates responses of the Internet
community to computer security events. Addressing problems caused by computer
viruses or break-ins or other problems caused by third parties could have a
material adverse effect on us, and the cost of eliminating these security
breaches could be prohibitively expensive.
WE MAY BE LIABLE TO CUSTOMERS FOR SECURITY BREACHES
The security services that we offer in connection with our customers'
networks cannot ensure complete protection from computer viruses, break-ins and
other disruptive problems. Inappropriate use of the Internet by third parties
could also potentially jeopardize the security of confidential information
stored in the computer systems of our customers. Although we attempt to limit
contractually our liability in such instances, the occurrence of these problems
may result in claims against us or liability on our part. Such claims,
regardless of their ultimate outcome, could result in costly litigation and
adversely affect our business or reputation or our ability to attract and retain
customers. Moreover, the security and privacy concerns of existing and potential
customers may inhibit the growth of the Internet service industry and our
customer base and revenues.
OUR COSTS WILL INCREASE IF WE FAIL TO MAINTAIN OUR PEERING RELATIONSHIPS
The establishment and maintenance of peering relationships with other
Internet service providers are necessary in order to exchange traffic with other
Internet service providers without paying transit costs. The basis on which the
large national Internet service providers make peering available or impose
settlement charges is evolving. Recently, companies that previously offered
peering have cut back or eliminated peering relationships and are establishing
new, more restrictive criteria for peering, requiring substantial data
transmission volume and broad national scale. Global network capabilities also
may become a requirement. We may have to comply with increasing peering
requirements in order to maintain our peering relationships. Failure to maintain
peering relationships or establish new ones, if necessary, will increase our
operating expenses.
WE DEPEND ON THE INTERNET AND INTERNET INFRASTRUCTURE DEVELOPMENT
Our products and services are targeted toward users of the Internet, which
has experienced rapid growth. Critical issues concerning the commercial use of
the Internet remain unresolved and may impact the growth of Internet use,
especially in our target business market. 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:
- 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;
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- 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 use of the Internet to date. There can be no
assurance that encryption or other technologies will 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. The adoption of the Internet
for commerce and communication, 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. If the market for Internet access services fails to
develop, develops more slowly than expected, or becomes saturated with
competitors, or if Internet access and services are not broadly accepted, our
business, financial condition and results of operations will be materially
adversely affected. In addition, the rate of development and adoption of the
Internet has been slower outside the United States, and the cost of transmitting
data over the Internet has been higher. The recent growth in the use of the
Internet has caused frequent periods of performance degradation, requiring the
upgrade of routers and switches, telecommunications links and other components
forming the infrastructure of the Internet by providers and other organizations
with links to the Internet. Any perceived degradation in the performance of the
Internet as a whole could undermine the benefits of our services. Consequently,
the emergence and growth of the market for our services is dependent on
improvements being made to the entire Internet infrastructure to alleviate
overloading and congestion.
WE MUST KEEP UP WITH TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS
The market for Internet access and related services is characterized by
rapidly changing technology, evolving industry standards, changes in customer
needs and frequent new product and service introductions. Our future success
will depend, in part, on our ability to effectively use leading technologies, to
continue to develop our technical expertise, to enhance our current services, to
develop new products and services that meet changing customer needs, and to
influence and respond to emerging industry standards and other technological
changes on a timely and cost-effective basis. We cannot assure you that we will
be successful in accomplishing these tasks or that such new technologies or
enhancements will achieve market acceptance. We believe that our ability to
compete successfully is also dependent upon the continued compatibility and
interoperability of our services with products and architectures offered by
various vendors. We cannot assure you that we will be able to effectively
address the compatibility and interoperability issues raised by technological
changes or new industry standards. In addition, we cannot assure you that
services or technologies developed by others will not render our services or
technology uncompetitive or obsolete. For example, our services rely on the
continued widespread commercial use of transmission control protocol/Internet
protocol. Alternative open and proprietary protocol standards that compete with
transmission control protocol/Internet protocol, including proprietary protocols
developed by IBM and Novell, Inc., have been or are being developed. The failure
of the market for business-related Internet solutions to continue to develop
would adversely impact our business, financial condition and results of
operations.
WE FACE POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH OUR NETWORK
The law relating to liability of Internet service providers for information
carried on or disseminated through their networks is not completely settled. A
number of lawsuits have sought to impose such liability for defamatory speech
and infringement of copyrighted materials. The U.S. Supreme Court has let stand
a
14
<PAGE> 19
lower court ruling which held that an Internet service provider was protected
from liability for material posted on its system by a provision of the
Communications Decency Act. However, the findings in that case may not be
applicable in other circumstances. Other courts have held that on-line service
providers and Internet service providers may, under certain circumstances, be
subject to damages for copying or distributing copyrighted materials. Certain
provisions of the Communications Decency Act, which imposed criminal penalties
for using an interactive computer service for transmitting obscene or indecent
communications, have been found unconstitutional by the U.S. Supreme Court.
However, on October 21, 1998, federal legislation was enacted that requires
limitations on access to pornography and other material deemed "harmful to
minors" within the meaning contained in the legislation. This legislation has
been successfully attacked in the U.S. district court as a violation of the
First Amendment. This decision is on appeal and was recently argued before the
U.S. Court of Appeals for the Third Circuit. We are unable to predict the
outcome of this appeal. In addition, the Federal Trade Commission has adopted
final rules that are to become effective April 21, 2000, regarding the
Children's Online Privacy Protection Act's prohibition of unfair and deceptive
acts and practices in connection with the collection and use of personal
information from and about children on the Internet. The rules provide that Web
sites directed at children under 13 years of age must obtain verifiable parental
consent before collecting personal information from children and must take other
measures intended to safeguard children's privacy. Additional requirements may
be imposed on Web site operations relating to the use, dissemination and
collection of personal information, and proposals to enact federal and state
legislation addressing issues relating to Internet content and liability are
submitted regularly. The imposition upon Internet service providers or Web
server hosts of potential liability for materials carried on or disseminated
through their systems could require us to implement measures to reduce our
exposure to such liability. These measures may require that we spend substantial
resources or discontinue certain product or service offerings. Any of these
actions could have a material adverse effect on our business, financial
condition and results of operations.
The law relating to the regulation and liability of Internet access
providers in relation to information carried or disseminated also is developing
in other countries. For example, the European Union has enacted its own data
privacy regulations, and Australia has imposed new obligations on Internet
service providers to block access to certain types of content. Decisions, laws,
regulations and other activities regarding regulation and content liability may
significantly affect the development and profitability of companies offering
on-line and Internet access services.
We carry an errors and omissions insurance policy. This insurance may not
be adequate or available to compensate us for all liability that may be imposed.
WE MAY BECOME SUBJECT TO GOVERNMENT REGULATION
Although we are not currently subject to direct government regulation other
than regulations applicable to businesses generally, changes in the regulatory
environment relating to the Internet connectivity market could affect our
pricing. For example, regulations at the Federal Communications Commission
require discounted Internet connectivity rates for schools and libraries. Due to
the increasingly widespread use of the Internet, it is possible that additional
laws and regulations may be adopted. Additional laws and regulations could cover
issues such as content, user pricing, privacy, libel, intellectual property
protection and infringement, and technology export and other controls. We may be
subject to similar or other laws and regulations in non-U.S. jurisdictions.
Moreover, the Federal Communications Commission continues to review its
regulatory position on the usage of the basic network and communications
facilities by Internet service providers. Although in an April 1998 report the
Federal Communications Commission determined that Internet service providers
should not be treated as telecommunications carriers and therefore not
regulated, it is expected that future Internet service provider regulatory
status will continue to be uncertain. Indeed, in that report, the Federal
Communications Commission concluded that certain services offered over the
Internet, such as phone-to-phone Internet protocol telephony, may be
functionally indistinguishable from traditional telecommunications service
offerings and their non-regulated status may have to be re-examined.
15
<PAGE> 20
Changes in the regulatory structure and environment affecting the Internet
access market, including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood of competition from regional
bell operating companies or other telecommunications companies, could adversely
affect us. Although the Federal Communications Commission has decided not to
allow local telephone companies to impose per-minute access charges on Internet
service providers, and that decision has been upheld by the reviewing court,
further regulatory and legislative consideration of this issue is likely. In
addition, some telephone companies are seeking relief through the Federal
Communications Commission and state regulatory agencies. Such rules, if adopted,
are likely to have a greater impact on consumer-oriented Internet access
providers than on business-oriented Internet service providers such as Verio.
Nonetheless, the imposition of access charges would affect our costs of serving
dialup customers and could have a material adverse effect on our business,
financial condition and results of operations.
WE DEPEND UPON SUPPLIERS, WHO ARE OFTEN OUR COMPETITORS, AND HAVE LIMITED
SOURCES OF SUPPLY FOR CERTAIN PRODUCTS AND SERVICES
We rely on other companies to supply certain key products and services that
we resell and certain components of our network infrastructure. The products and
services that we resell, and certain components that we require for our network,
are available only from limited sources. For example, we currently rely
primarily on Cisco Systems to supply routers critical to our network. We could
be adversely affected if routers from Cisco were to become unavailable on
commercially reasonable terms. Qwest, Sprint, MCI WorldCom and MFS, who sell
products and services that compete with ours, also are our primary providers of
data communications facilities and network capacity. Northpoint Communications
and Covad Communications provide us with digital subscriber line services for
resale to our customers. We also are dependent upon local exchange carriers,
which often are our competitors, to provide telecommunications services and
lease physical space to us for routers, modems and other equipment. From time to
time we experience delays in the delivery and installation of telecommunications
services, which can lead to the loss of existing or potential customers or
delays in generating revenues from sales to customers. We cannot assure you
that, on an ongoing basis, we will be able to obtain third-party products and
services cost-effectively and on the scale and within the time frames we
require, or at all. Failure to obtain or to continue to make use of such
third-party products and services would have a material adverse effect on our
business, financial condition and results of operations.
WE DEPEND ON KEY PERSONNEL AND COULD BE AFFECTED BY THE LOSS OF THEIR SERVICES
BECAUSE OF THE LIMITED NUMBER OF QUALIFIED PEOPLE IN OUR INDUSTRY
Competition for qualified employees and personnel in the Internet services
industry is intense and there are a limited number of people with knowledge of
and experience in the Internet service industry. The process of locating
personnel with the combination of skills and attributes required to carry out
our strategies is often lengthy. Our success depends to a significant degree
upon our ability to attract and retain qualified management, technical,
marketing and sales personnel and upon the continued contributions of such
people. We cannot assure you that we will be successful in attracting and
retaining qualified executives and personnel. In addition, our employees may
voluntarily terminate their employment with us at any time. The loss of the
services of key personnel or our failure to attract additional qualified
personnel could have a material adverse effect on our business, financial
condition and results of operations.
OUR BUSINESS MAY BE ADVERSELY IMPACTED BY YEAR 2000 ISSUES
The commonly referred to Year 2000 or Y2K issue results from the fact that
many computer programs and systems were developed without considering the
possible impact of a change in the century designation that will occur on
January 1, 2000. As a result, these programs and systems use only two digits
instead of four to identify the year in the date field. Systems that do not
properly recognize this date could generate wrong data, calculate erroneous
results, or fail if the issue remains uncorrected. The Year 2000
16
<PAGE> 21
problem is pervasive and complex, as virtually every company's computer
operations potentially could be affected in some way.
We have identified two main areas of potential Y2K risk in our business:
- Our internal systems or embedded chips could be disrupted or fail, which
could negatively impact our services and productivity.
- Computer systems or embedded technology of third parties, such as our
suppliers, vendors, customers, landlords, telecommunication service
providers, outsource providers, and others could be disrupted or fail,
and thereby adversely affect our operations.
In order to evaluate the potential impact of the Y2K problem on our
business, and to help ensure that our network operations and services to our
customers are not interrupted due to the Y2K problem, we undertook an extensive
inventory, assessment and remediation program to evaluate and remediate the Y2K
compliance status of our equipment, network and systems. We established a Y2K
assessment team that was responsible for overseeing this effort.
As of September 1999, Verio had assessed the compliance status of all
potentially affected systems and equipment, identified from the inventory phase
of our Y2K compliance effort, throughout our operations. Compliance status was
checked against third party information sources including public statements made
by hardware and software vendors, correspondence directly with such vendors, and
compilations of compliance information published by other parties. Verio did not
independently verify compliance of such hardware and software components
utilized within our service or independently verify the contents of the
republications.
We believe that, as a result of our detailed assessment and remediation
efforts, the Y2K issue will not pose significant operational problems for us.
However, if Y2K compliance problems have not been discovered, or if requisite
modifications or remedies have not been undertaken or made, it is possible that
the Y2K problem could have a material impact on our operations. We cannot
currently estimate the magnitude of such a possible impact.
We continue to survey, among others, critical vendors, suppliers, customers
and financial institutions for Year 2000 compliance. We have evaluated the Year
2000 preparedness of our telecommunications providers on which we rely for the
network services crucial to our business. In order to reduce potential adverse
impacts, we maintain diverse providers for such network services. However,
failure of any one provider may have a material impact on Verio's operations.
Our survey of our third party suppliers indicates they many of them are still
working on their own Year 2000 compliance issues. We are heavily dependent upon
the veracity of their testing and statements of compliance as we cannot
replicate and independently test the services supplied to us. Though most of
these suppliers indicate that their critical systems and technology are Year
2000 ready, at this time we cannot estimate the effect, if any, that non-
compliant systems supplied by these entities could have on us. It is possible
that the impact on us could be material if one or more of these systems are not
Y2K compliant by the end of the year. We continue to work with each of these
suppliers to obtain the latest information on their compliance status to assist
us in evaluating and developing contingency plans. If any of our material third
party suppliers or vendors are not Y2K ready and their non-compliance causes a
material disruption to any of their respective businesses or services, our
business, operations and/or services could be materially and adversely affected.
The most significant risks that the Y2K issues could present to us include,
without limitation, disruption, delay or cessation of operations. For example,
in the event of a widespread telecommunications failure (which we believe is our
most reasonably likely worst case Y2K scenario), the entire performance of the
Internet could potentially be affected due to its very nature as a collection of
interconnected networks. A number of individual customers may suffer from
complete outages of services, though we believe that most Internet services
would likely continue to operate, although possibly at a reduced performance
level. Other potential adverse Y2K scenarios include the failure or impairment
of software that is provided by a third party and incorporated in one of our
service platforms as a result of a Y2K problem. In that case, the particular
service that the software supports could likewise become
17
<PAGE> 22
inoperable or perform incorrectly. Further, in the event that
third-party-supplied equipment (including customer premise equipment) contains
non-Y2K-compliant technology, the systems, operations or services supported by
that equipment also could fail or be interrupted. Other potential disruptions
could include the failure of a material third party's business, a financial
institution's inability to transfer and receive funds, the interruption in
delivery of key supplies from vendors, a loss of power to our facilities, and
other interruptions in the normal course of our operations. In the event that a
failure does occur within one of these elements, our services could suffer
degradation or complete failure without warning or remedy, resulting in
substantial potential expense.
While our expenditures to date in our Year 2000 program efforts have not
been material, it is possible that the costs associated with our Y2K efforts
could increase if it is determined that additional resources are required or if
important operational or systems equipment must yet be remediated or replaced.
The total cost of our Y2K compliance program is funded through cash on hand and
we are expensing these costs, as appropriate. While the financial impact of
making all required systems changes or other remediation efforts cannot be known
precisely, it is not expected to be material to our financial position, results
of operations, or cash flows. We have not cancelled any principal information
technology projects as a result of our Y2K efforts, although we have rescheduled
and reprioritized some internal tasks in order to accommodate these efforts.
While we believe that we are adequately addressing the Y2K issue, we cannot
assure you that our Y2K compliance effort will prevent every potential
interruption or failure, or that the cost and liabilities associated with the
Y2K issue will not materially adversely impact our business, prospects,
revenues, or financial position.
USE OF PROCEEDS
We will not receive any proceeds from the sale of shares of our convertible
preferred stock and common stock by the selling stockholders or from the
issuance of common stock as dividends. To the extent that we determine to issue
shares of our common stock in exchange for funds held in the deposit account on
behalf of the holders of the convertible preferred stock, the net proceeds from
such issuance will not be in excess of the amount in the deposit account, the
aggregate amount of which as of November 11, 1999, is approximately $18.3
million, and will be used to continue the development and implementation of the
national backbone, customer care center, network operations center and billing
and accounting services, to support our general working capital purposes and to
further our acquisition and investment strategy. In that regard, we are
continually evaluating possible acquisition and investment opportunities to
strategically expand our geographic scope and product offering capabilities, and
anticipate that we will undertake and effectuate such transactions from time to
time following the date of this prospectus. We continue to evaluate additional
businesses for investment or acquisition and are currently in negotiations with
several potential third parties. Pending application of the proceeds as
described above, the net proceeds from the issuance of the common stock in
exchange for funds held in the deposit account on behalf of the holders of the
convertible preferred stock will be invested in short-term, investment-grade
securities.
18
<PAGE> 23
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The following table shows the deficiency of earnings to cover combined
fixed charges and preferred stock dividends of Verio for the last three years
and the nine month periods ended September 30, 1998, and September 30, 1999.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ------------------
1996 1997 1998 1998 1999
------ ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Deficiency of earnings to cover combined
fixed charges and preferred stock
dividends(*)................................ (5,825) (48,253) (112,423) (78,750) (137,537)
</TABLE>
- ---------------
(*) Earnings consist of net loss plus fixed charges. Fixed charges consist of
interest expense, including amortization of debt issuance costs, the portion
of rent expense considered to be interest (one-third), and preferred stock
dividends.
COMMON STOCK SPLIT AND LOSS PER COMMON SHARE
On August 20, 1999, we completed a two-for-one stock split of our common
stock. Share and per share information in historical and pro forma financial
statements issued subsequent to August 20, 1999 reflect the effects of the stock
split for all periods presented. Accordingly, certain loss per share information
included in consolidated historical and pro forma financial statements for
periods prior to the stock split, which are incorporated by reference herein,
has been adjusted for the stock split as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997 1998
------ ------- --------
<S> <C> <C> <C>
Loss per common stock share -- basic and diluted............ $(2.65) $(20.24) $ (2.85)
Weighted average common shares outstanding (in thousands)... 1,944 2,290 42,752
Loss per common share before extraordinary item -- pro
forma..................................................... (2.87)
Weighted average common shares outstanding -- pro forma (in
thousands)................................................ 52,527
</TABLE>
SELLING STOCKHOLDERS
The following table sets forth certain information, received through
November 12, 1999, with respect to the number of shares of convertible preferred
stock beneficially owned and to be registered, the number of shares of common
stock to be owned beneficially upon conversion of the convertible preferred
stock, and the number of shares of common stock owned and to be registered, by
the selling stockholders named below. The information is based on information
provided by or on behalf of the selling stockholders and, with regard to the
beneficial holdings of the selling stockholders, is accurate only to the extent
such beneficial holdings information was disclosed to us by or on behalf of the
selling stockholders. The selling stockholders and holders listed in any
supplement to this prospectus, and any transferors, pledgees, donees or
successors to these persons, may from time to time offer and sell, pursuant to
this prospectus and any subsequent prospectus supplement, any and all of these
shares. Any supplement to this prospectus may contain certain additional or
varied information about the selling stockholders and/or additional holders, and
any of their transferors, pledgees, donees or successors, and the aggregate
principal amount of the shares beneficially owned by each such person that they
are offering. Such information will be obtained from the selling stockholders.
The selling stockholders may offer all, some or none of the convertible
preferred stock or common stock listed below. Because the selling stockholders
may offer all, some or none of the convertible preferred stock or common stock,
no estimate can be given as to the amount of the convertible preferred stock or
common stock that will be held by the selling stockholders upon termination of
any such sales. In addition, the selling stockholders identified below may have
sold, transferred or otherwise disposed of all or a portion of their convertible
preferred stock or common stock since the date on which they provided the
information regarding their convertible preferred stock or common stock to us in
transactions exempt from the registration requirements of the Securities Act of
1933, as amended.
19
<PAGE> 24
Verio has filed with the SEC, under the Securities Act, a registration
statement on Form S-3 of which this prospectus, and any subsequent prospectus
supplements form a part, with respect to the resale of the shares of convertible
preferred stock from time to time in the PORTAL Market and the resale of the
shares of common stock from time to time on the Nasdaq National Market or in
privately-negotiated transactions.
The shares offered by this prospectus may be offered from time to time by
the selling stockholders named below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
NUMBER OF COMMON STOCK NUMBER OF
SHARES OF BENEFICIALLY TO SHARES OF NUMBER OF
CONVERTIBLE BE OWNED AFTER CONVERTIBLE SHARES OF
PREFERRED STOCK CONVERSION OF PREFERRED STOCK COMMON STOCK
BENEFICIALLY THE CONVERTIBLE REGISTERED AS REGISTERED AS
OWNED PRIOR TO PREFERRED STOCK PART OF THIS PART OF THIS
NAME OF SELLING STOCKHOLDER(1) THIS OFFERING (2)(3) OFFERING OFFERING
- ------------------------------ --------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Deutsche Bank Securities Inc. ....... 297,600 308,193 297,600 308,193
Pacific Life Insurance Company....... 30,000 31,067 30,000 31,067
Forest Fulcrum Fund L.P. ............ 25,000 25,889 25,000 25,889
Forest Performance Fund L.P. ........ 8,000 8,284 8,000 8,284
Forest Convertible Fund L.P. ........ 6,000 6,213 6,000 6,213
Forest Alternative Strategies Fund
Series A5M......................... 500 517 500 517
Forest Alternative Strategies Fund
Series A5I......................... 1,500 1,553 1,500 1,553
Forest Global Convertible Fund Series
A5................................. 76,500 79,223 76,500 79,223
Sylvan IMA LTD. c/o Forest Investment
Mgmt. ............................. 11,000 11,391 11,000 11,391
Summer Hill Global Partners L.P. .... 1,600 1,656 1,600 1,656
Christian Science Trustees For Gifts
and Endowments..................... 6,000 6,213 6,000 6,213
Peoples Benefit Life Insurance
Company Teamsters Separate
Account............................ 144,100 149,229 144,100 149,229
General Motors Welfare Benefit Trust
(L-T Veba)......................... 61,500 63,689 61,500 63,689
The Retail Clerks Pension Trust...... 23,000 23,818 23,000 23,818
Peoples Benefit Life Insurance
Company............................ 169,400 175,430 169,400 175,430
National Electrical Benefit Fund..... 25,000 25,889 25,000 25,889
TECO Energy Retirement Plan.......... 5,000 5,177 5,000 5,177
PIMCO Total Return Fund.............. 45,000 46,601 45,000 46,601
PIMCO Convertible Bond Fund.......... 20,000 20,711 20,000 20,711
City University of New York.......... 1,386 1,435 1,386 1,435
New Orleans Firefighters............. 2,254 2,334 2,254 2,334
Shell Pension Trust.................. 2,987 3,093 2,987 3,093
Maryland State Retirement System..... 30,518 31,604 30,518 31,604
Occidental Petroleum................. 3,718 3,850 3,718 3,850
TQA Master Fund, Ltd. ............... 27,500 28,478 27,500 28,478
TQA Master Plus Fund, Ltd............ 35,000 36,245 35,000 36,245
LDG Limited.......................... 5,000 5,177 5,000 5,177
JMG Convertible Investments L.P. .... 72,500 75,080 72,500 75,080
Triton Capital Investments, LTD...... 72,500 75,080 72,500 75,080
Donaldson, Lufkin & Jenrette
Securities Corp.(4)................ 670,000 693,850 670,000 693,850
</TABLE>
20
<PAGE> 25
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
NUMBER OF COMMON STOCK NUMBER OF
SHARES OF BENEFICIALLY TO SHARES OF NUMBER OF
CONVERTIBLE BE OWNED AFTER CONVERTIBLE SHARES OF
PREFERRED STOCK CONVERSION OF PREFERRED STOCK COMMON STOCK
BENEFICIALLY THE CONVERTIBLE REGISTERED AS REGISTERED AS
OWNED PRIOR TO PREFERRED STOCK PART OF THIS PART OF THIS
NAME OF SELLING STOCKHOLDER(1) THIS OFFERING (2)(3) OFFERING OFFERING
- ------------------------------ --------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Allegheny Teledyne Inc. Pension
Plan................................. 43,000 44,530 43,000 44,530
Colgate-Palmolive Company Retirement
Trust.............................. 14,000 14,498 14,000 14,498
Golden Rule Insurance Company........ 41,000 42,459 41,000 42,459
GranGem 23 41 LLC.................... 12,000 12,427 12,000 12,427
State of Maryland Retirement Fund.... 56,200 58,200 56,200 58,200
NMS Services, Inc.(5)................ 50,000 51,779 50,000 51,779
Banc of America Securities LLC....... 357 369 357 369
NMS Services (Cayman) Inc.(6)........ 0 0 0 97,774
Lipper Convertibles, L.P............. 399,500 413,721 399,500 413,721
Allstate Insurance Company(7)........ 66,300 68,660 66,300 68,660
Fidelity Mt. Vernon Street Trust:
Fidelity Aggressive Growth
Fund(8)............................ 800,000 828,478 800,000 828,478
Fidelity Financial Trust: Fidelity
Convertible Securities Fund(8)..... 55,500 57,475 55,500 57,475
BI Partners LLC(9)................... 0 0 0 39,386
Merrill Lynch, Pierce, Fenner & Smith
Incorporated....................... 0 0 0 195,544
Tribeca Investments L.L.C. .......... 203,200 210,433 203,200 210,433
Value Line Convertible Fund, Inc. ... 5,000 5,177 5,000 5,177
Putnam Funds Trust-Putnam High Yield
Fund II............................ 143,760 148,877 143,760 148,877
Agway Inc. Employees' Retirement
Trust.............................. 3,260 3,376 3,260 3,376
Abbot Laboratories Annuity Retirement
Plan............................... 6,000 6,213 6,000 6,213
Mobile Oil Corporation............... 5,600 5,799 5,600 5,799
Strategic Global Fund-High Yield
Fixed Income (Putnam) Fund......... 6,480 6,710 6,480 6,710
Ameritech Pension Trust.............. 6,000 6,213 6,000 6,213
Southern Farm Bureau Annuity
Insurance Co....................... 6,400 6,627 6,400 6,627
Children's Hospital Corporation
Pension Plan....................... 8,500 8,802 8,500 8,802
Children's Hospital Corporation
Maintenance Employees Pension
Plan............................... 213 220 213 220
Putnam High Yield Managed Trust...... 24,200 25,061 24,200 25,061
Putnam High Yield Fixed Income Fund,
LLC................................ 10,000 10,355 10,000 10,355
CPR (USA) Inc........................ 14,000 14,498 14,000 14,498
Pell Rudman Trust Company(10)........ 4,650 4,815 4,650 4,815
ICI American Holdings Trust.......... 28,350 29,359 28,350 29,359
Zeneca Holdings Trust................ 22,950 23,766 22,950 23,766
Delaware Pers........................ 49,500 51,262 49,500 51,262
Starvest Combined Portfolio.......... 13,500 13,980 13,500 13,980
State of Oregon Equity............... 151,750 157,151 151,750 157,151
</TABLE>
21
<PAGE> 26
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
NUMBER OF COMMON STOCK NUMBER OF
SHARES OF BENEFICIALLY TO SHARES OF NUMBER OF
CONVERTIBLE BE OWNED AFTER CONVERTIBLE SHARES OF
PREFERRED STOCK CONVERSION OF PREFERRED STOCK COMMON STOCK
BENEFICIALLY THE CONVERTIBLE REGISTERED AS REGISTERED AS
OWNED PRIOR TO PREFERRED STOCK PART OF THIS PART OF THIS
NAME OF SELLING STOCKHOLDER(1) THIS OFFERING (2)(3) OFFERING OFFERING
- ------------------------------ --------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Nalco Chemical Company............... 6,500 6,731 6,500 6,731
Southern Farm Bureau Life
Insurance-FRIC..................... 12,500 12,944 12,500 12,944
Island Holdings, Inc. ............... 250 258 250 258
Nomura Securities International
Inc.(11)........................... 25,500 26,407 25,500 26,407
Public Employees' Retirement
Association of Colorado(12)........ 20,000 20,711 20,000 20,711
Jackson Investment Fund Ltd.......... 2,400 2,485 2,400 2,485
SoundShore Opportunity Holdings Fund
Ltd.(13)........................... 17,500 18,122 17,500 18,122
LLT Limited.......................... 1,500 1,553 1,500 1,553
Any other holder of convertible
preferred stock or future
transferee from any such
holder(14)(15)..................... 2,982,617 3,088,791 2,982,617 3,088,791
--------- --------- --------- ---------
Totals..................... 7,200,000 7,456,261 7,200,000 7,788,965
========= ========= ========= =========
</TABLE>
- ---------------
(1) The name of selling stockholders and the number of securities held by
selling stockholders may be amended subsequent hereto pursuant to Rule
424(b)(3) of the Securities Act of 1933, as amended.
(2) Assumes that, for each selling stockholder, the aggregate number of shares
of convertible preferred stock held by that selling stockholder is
converted to common stock pursuant to a ratio of one convertible preferred
stock equal to 1.03559763303 shares of common stock. Based upon the
aggregate conversion, a cash payment will be made in lieu of any fractional
interest.
(3) Unless otherwise indicated in the table or by footnote, all shares of
common stock beneficially owned by the selling stockholders are shares
issuable upon conversion of the convertible preferred stock.
(4) Donaldson, Lufkin & Jenrette Securities Corp. was the lead manager involved
in underwriting the convertible preferred stock in the Rule 144A offering
completed on July 20, 1999. It also was a co-manager in our 1998 offering
of 11 1/4% Senior Notes due 2008 and in our 1998 initial public offering.
(5) NMS Services, Inc. is a subsidiary of Banc of America Securities LLC.
(6) NMS Services (Cayman) Inc. is a subsidiary to Banc of America Securities
LLC.
(7) In addition to the shares registered herein, Allstate Insurance Company
beneficially owns 130,529 shares of our common stock as of November 2,
1999.
(8) In addition to the shares registered herein, Fidelity Mt. Vernon Street
Trust: Fidelity Aggressive Growth Fund owns 3,751,400 shares of our common
stock as of November 8, 1999. In addition, Fidelity Management & Research
Company, a subsidiary of FMR Corp. and an investment advisor to Fidelity
Mt. Vernon Street Trust: Fidelity Aggressive Growth Fund and Fidelity
Financial Trust: Fidelity Convertible Securities Fund, beneficially owns as
of November 5, 1999, 7,230,000 shares of our common stock as a result of
acting as investment advisor to such entities and certain others. FMR Corp.
holds indirectly, as of November 5, 1999, 7,744,300 shares of our common
stock and the entire amount of convertible preferred stock being registered
herein.
(9) BI Partners LLC beneficially owns 78,772 shares of common stock. However,
pursuant to the terms of the Best Internet Communications, Inc. Note and
Warrant Purchase Agreement, dated January 22, 1996, as amended (the terms
of which were assumed by Verio as a result of the merger
22
<PAGE> 27
on January 5, 1999, of Purple Acquisition, Inc., a wholly-owned subsidiary
of Verio, with and into Best Internet Communications, Inc. with Best
Internet Communications, Inc. as the surviving entity), BI Partners LLC may
only include in this offering up to fifty percent (50%) of the common stock
it holds, subject to certain conditions, limitations and cut-backs. Until
January 4, 1999, Thomas C. Barry, managing member of BI Partners LLC, was a
director of Best Internet Communications, Inc., a wholly-owned subsidiary
of Verio as of January 5, 1999.
(10) In addition to the shares registered herein, Pell Rudman Trust Company
beneficially owns 58,750 shares of our common stock as of November 4, 1999.
(11) In addition to the shares registered herein, Nomura Securities
International Inc. beneficially owns 34,600 shares of our common stock as
of November 8, 1999.
(12) In addition to the shares registered herein, Public Employees' Retirement
Association of Colorado beneficially owns 600,000 shares of our common
stock as of November 5, 1999.
(13) In addition to the shares registered herein, SoundShore Opportunity
Holdings Fund Ltd. beneficially owns as of November 10, 1999 an option
position for 50 Verio Inc. December 1999 25 Puts, the underlying security
of which is our common stock.
(14) Information concerning other holders of convertible preferred stock will be
set forth in prospectus supplements from time to time, if required.
(15) Assumes that any other holders of convertible preferred stock or any future
transferees from any such holders do not beneficially own any common stock
other than common stock into which the convertible preferred stock is
convertible at the conversion ratio of one convertible preferred stock
equal to 1.03559763303 shares of common stock.
Other than as noted above, none of the selling stockholders has had any
material relationship with us or our affiliates within the past three years. All
of the convertible preferred stock and common stock set forth above were
"restricted securities" under the Securities Act of 1933, as amended, prior to
this registration.
We agreed with the selling stockholders to file the registration statement
to register the resale of the shares. We agreed to prepare and file all
necessary amendments and supplements to the registration statement to keep it
effective until such time as all of the securities covered by this registration
statement may be freely sold by the selling stockholders (other than BI Partners
LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and NMS Services
(Cayman) Inc.) without registration pursuant to Rule 144(k) of the Securities
Act of 1933, as amended, assuming none of the selling stockholders is an
affiliate of Verio. With regard to BI Partners LLC, on the one hand, and Merrill
Lynch, Pierce, Fenner & Smith Incorporated and NMS Services (Cayman) Inc., on
the other hand, we have agreed only to keep the registration statement effective
for at least 180 days in the case of the former and 120 days in the case of the
latter.
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DESCRIPTION OF THE SERIES A CONVERTIBLE PREFERRED STOCK
The following summary description of the 6.75% Series A convertible
preferred stock, par value $0.001 per share, of Verio and the deposit account is
qualified in its entirety by reference to our certificate of incorporation, the
certificate of designation governing the convertible preferred stock and the
deposit agreement. Our certificate of incorporation, the certificate of
designation and the deposit agreement have been filed as exhibits to certain of
our filings with the Securities and Exchange Commission incorporated by
reference in this prospectus. Copies of the forms of the certificate of
designation and deposit agreement will be made available to prospective
investors upon request.
GENERAL
Simultaneously with the closing of the original issuance and sale of the
convertible preferred stock, the purchasers of our convertible preferred stock
deposited $24,275,155.89 into an account, which we call the deposit account, and
became entitled to a quarterly cash payment from that deposit account in an
amount equal to $0.8438 per share of convertible preferred stock, subject to the
rights described in the next paragraph which allow us to cause shares of our
common stock to be purchased in lieu of cash. The quarterly cash payment from
the deposit account is called the quarterly return amount, and payments of those
amounts commenced November 1, 1999, and will continue, subject to certain
exceptions described below, until and including August 1, 2000. After such date,
dividends will begin to accrue on the convertible preferred stock, although, as
we discuss below, they may begin to accrue at an earlier time if the deposit
account is terminated under the circumstances described below. Norwest Bank
Minnesota, N.A. holds the deposit account on behalf of the holders of the
convertible preferred stock and acts as the deposit agent for the convertible
preferred stock.
We may, prior to the date on which any quarterly return amount would
otherwise be payable, deliver notice instructing the deposit agent to purchase
from us, for transfer to each holder of our convertible preferred stock in lieu
of the quarterly return amount, that number of whole shares of our common stock
determined by dividing the quarterly return amount by,
(A) if (1) such shares of common stock are issued pursuant to a
registration statement, (2) a shelf registration statement registering the
resale of such shares is effective or (3) such shares are eligible for
immediate resale pursuant to Rule 144(k) under the Securities Act, 97% of
the market value (calculated as described below) of our common stock; or
(B) in all other cases, 93% of the market value of our common stock,
in each case as of the date of such notice. In that instance, holders of
convertible preferred stock will receive shares of our common stock rather than
a cash payment. Clause (A) or (B), as the case may be, is referred to as the
"Market Value Amount."
Market value will be calculated for all purposes, as of any date, based on
the average of the daily closing price for the five consecutive trading days
ending on the last trading day immediately prior to such date. The closing price
for each day will be the last sales price or, in case no such reported sales
take place on such day, the average of the last reported bid and asked price, in
either case on the principal national securities exchange on which our shares of
common stock are admitted to trading or listed, or if not listed or admitted to
trading on such exchange, the representative closing bid price as reported by
the Nasdaq National Market or other similar organization if the Nasdaq National
Market is no longer reporting such information, or if not available, the fair
market price as determined in good faith by our board of directors.
We describe below in more detail the terms of the convertible preferred
stock and the deposit account and the circumstances under which holders of
shares of convertible preferred stock may expect to receive payments from the
deposit account.
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RANKING
The convertible preferred stock, with respect to dividend distributions and
distributions upon liquidation, winding up and dissolution ranks:
- senior to all classes of our common stock and to each other class of
capital stock or series of preferred stock, the terms of which do not
expressly provide that it ranks senior to or on a parity with the
convertible preferred stock as to dividend distributions and
distributions upon liquidation, winding up and dissolution;
- on a parity with any additional preferred stock issued by Verio in the
future and any other class of capital stock or series of preferred stock,
the terms of which expressly provide that it ranks on a parity with the
convertible preferred stock as to dividend distributions and
distributions upon liquidation, winding up and dissolution; and
- junior to each class of capital stock or series of preferred stock, the
terms of which expressly provide that it ranks senior to the convertible
preferred stock as to dividend distributions and distributions upon
liquidation, winding up and dissolution.
The convertible preferred stock also ranks junior in right of payment to
all indebtedness and other liabilities of Verio.
DEPOSIT ACCOUNT
The funds that the purchasers of the convertible preferred stock deposited
in the deposit account have been invested in U.S. government obligations or U.S.
government guaranteed obligations, which, together with the earnings on those
funds, will be sufficient to pay the aggregate quarterly return amounts through
the deposit expiration date (August 1, 2000).
Unless, on or prior to the notice date described below, we have delivered
to the deposit agent a direction notice instructing the deposit agent to
purchase shares of common stock from us, the deposit agent will deliver to each
holder of convertible preferred stock the quarterly return amount on February 1,
May 1 and August 1, 2000 (each such date being called a deposit payment date and
the last date also being called the deposit expiration date), unless the deposit
account is terminated earlier in the manner described below. The "notice date"
will be a date occurring on or prior to the tenth business day prior to the
applicable deposit payment date or deposit expiration date, as the case may be.
If we have delivered a direction notice to the deposit agent on or prior to any
notice date, the deposit agent will, as instructed by us in the direction
notice, purchase from us, for delivery to each holder of convertible preferred
stock in lieu of all or a portion of the quarterly return amount which has not
been previously paid in cash or shares of our common stock, on the next deposit
payment date, that number of whole shares of common stock determined by dividing
such quarterly return amount by the Market Value Amount as of the notice date.
References throughout this prospectus to common stock issuable as dividends
shall be deemed to include common stock purchased from us by the deposit agent
pursuant to the deposit agreement.
At the written request of the deposit agent, we have agreed under the terms
of the deposit agreement to deliver, for and on behalf of the deposit agent, the
shares of common stock acquired by the deposit agent directly to holders of our
convertible preferred stock. The deposit agreement also provides that the
obligation to purchase shares of common stock from us is secured by the funds in
the deposit account.
In the event of any conversion of the convertible preferred stock into
shares of our common stock prior to the deposit expiration date, we will
promptly after such conversion be paid any funds remaining in the deposit
account allocable to those shares of convertible preferred stock so converted.
As a result, holders of convertible preferred stock will not receive any partial
payment from the deposit account if they convert their shares prior to the
record date for such full quarterly return amount.
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On the deposit expiration date, the deposit agreement requires the deposit
agent to deliver to the holders of convertible preferred stock any cash
remaining in the deposit account on such date (after prior application of
amounts in the deposit account as provided in the deposit agreement), unless,
prior thereto, we deliver a direction notice to the deposit agent requiring the
deposit agent to purchase from us for delivery to holders who are entitled to
the proceeds from the deposit account that number of whole shares of our common
stock determined by dividing the balance remaining in the deposit account by the
Market Value Amount as of the date of the direction notice.
Notwithstanding the foregoing, we may elect to terminate the deposit
account before the deposit expiration date if:
(1) we obtain any required amendments to the covenants under our
various debt obligations that would permit us to pay cash dividends on our
convertible preferred stock prior to the deposit expiration date; and
(2) at the time we receive such amendments or at any time thereafter,
so long as the amendments remain effective, the trading price, on any date,
for the convertible preferred stock equals or exceeds the liquidation
preference.
We will give notice to the holders of the convertible preferred stock, and
instruct the deposit agent in writing immediately to distribute the remaining
balance of the deposit account to us. If we elect early termination of the
deposit account, the convertible preferred stock will begin to accrue dividends
from the last deposit payment date preceding the election to terminate the
deposit account.
Upon the final resolution, including the final resolution of all appeals or
rights to appeal in any court, of any voluntary or involuntary dissolution,
liquidation or winding up of our company, the deposit agent will be required to
return to the holders of the convertible preferred stock any funds at the time
remaining in the deposit account (after prior application of amounts in the
deposit account as provided in the deposit agreement). While we consider the
funds placed in the deposit account to be the property of the purchasers of the
convertible preferred stock and not our property, in a bankruptcy proceeding,
our creditors or a trustee in bankruptcy could claim that those funds
constituted property of our bankrupt estate. If that claim were upheld, access
to the funds in the deposit account by the purchasers of the convertible
preferred stock would be denied until all our indebtedness had been paid in
full.
DIVIDENDS
Subject to the prior rights of holders of any preferred stock ranking
senior to, or on a parity with, the convertible preferred stock, the holders of
shares of the convertible preferred stock are entitled to receive on or after
the deposit expiration date, or earlier if the deposit account is terminated,
cumulative dividends at the rate per annum of 6.75% of the liquidation
preference per share, payable quarterly in arrears on each November 1, February
1, May 1 and August 1 -- each, a dividend payment date. Such dividends will be
paid when, as and if declared by our board of directors. We will not make any
dividend payments on the convertible preferred stock until November 1, 2000, or
earlier if the deposit account is terminated prior to the deposit expiration
date. If any such date is not a business day, such payment shall be made on the
next succeeding business day. Dividends will be paid to holders of record as
they appear on our stock register on such dates, not more than 60 days nor less
than 10 days preceding the dividend payment date, as is fixed by our board of
directors -- each, a record date. Dividends will be payable at our option:
(1) in cash;
(2) by delivery of fully paid and non-assessable shares of our common
stock to holders (determined as described below); or
(3) any combination of the foregoing.
Although we have the option of paying dividends in cash, we are restricted
from doing so by the various covenants and conditions contained in our debt
instruments. Because of these restrictions, it is
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unlikely that we will pay dividends in cash. If we pay dividends in shares of
common stock, the number of shares of common stock to be issued on each dividend
payment date will be determined by dividing the total dividend to be paid on
each share of convertible preferred stock by the Market Value Amount as of the
applicable record date. The transfer agent is authorized and directed in the
certificate of designation to aggregate any fractional shares of common stock
that are issued as dividends, sell them at the best available price and
distribute the proceeds to the holders in proportion to their respective
interests. We will pay the expenses of the transfer agent with respect to such
sale, including brokerage commissions. In the event the sale by the transfer
agent of such aggregated fractional interests would be restricted, Verio and the
transfer agent will agree upon other appropriate arrangements for the cash
realization of fractional interests. Dividends payable on the convertible
preferred stock for any period greater or less than a full quarterly dividend
period will be computed on the basis of a 360-day year consisting of twelve
30-day months.
Dividends on the convertible preferred stock will accrue whether or not we
have earnings or profits, whether or not there are funds legally available for
the payment of such dividends and whether or not dividends are declared.
Dividends will accumulate to the extent they are not paid on the dividend
payment date for the period to which they relate. No interest or sum of money in
lieu of interest will be payable in respect of any accumulated and unpaid
dividends.
We will not declare, pay or set apart for payment any dividends upon any
outstanding share of the convertible preferred stock with respect to any
dividend period unless all dividends for all preceding dividend periods have
been declared and paid, or declared and a sufficient sum set apart for the
payment of such dividend.
No dividends or distributions, other than a dividend or distribution in our
stock ranking junior to the convertible preferred stock as to dividends and upon
liquidation, dissolution or winding up, may be declared, made or paid or set
apart for payment upon any of our stock ranking junior to or ratably with the
convertible preferred stock as to dividends, nor may any of our stock ranking
junior to or ratably with the convertible preferred stock as to dividends or
upon liquidation be redeemed, purchased or otherwise acquired for any
consideration (or any monies paid to or made available for a sinking fund for
the redemption of any shares of any such stock), by us (except, (1) in general
and in all cases, by conversion into or exchange for stock of ours ranking
junior to or ratably with the convertible preferred stock as to dividends and
upon liquidation, (2) in the case that monies for such dividends, distributions,
redemptions, purchases, or other acquisitions are derived from the proceeds of
the offering of such securities or a substantially concurrent offering of
related securities, and (3) in the case that cash payments in lieu of fractional
shares are made pursuant to any stock split or warrant, option or other similar
agreement) unless full cumulative dividends have been or contemporaneously are
paid or declared and a sum sufficient for the payment thereof is set apart for
such payment on the convertible preferred stock for all dividend payment periods
terminating on or prior to the date of such declaration, payment, redemption,
purchase or acquisition.
Notwithstanding the foregoing, if full dividends have not been declared and
paid or set apart on the convertible preferred stock and any other preferred
stock ranking ratably with the convertible preferred stock as to dividends,
dividends may be declared and paid on the convertible preferred stock and such
other ratable preferred stock so long as the dividends are declared and paid pro
rata so that the amounts of dividends declared per share on the convertible
preferred stock and such other ratable preferred stock will in all cases bear to
each other the same ratio that accrued and unpaid dividends per share on the
shares of the convertible preferred stock and such other preferred stock bear to
each other; provided that if such dividends are paid in cash on the other
ratable preferred stock, dividends will also be paid in cash on the convertible
preferred stock.
The holders of shares of convertible preferred stock at the close of
business on a record date will be entitled to receive the dividend payment on
those shares on the corresponding dividend payment date notwithstanding the
subsequent conversion thereof or our default in payment of the dividend due on
that dividend payment date. Except as provided in the immediately preceding
sentence, we will make no
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payment or allowance for unpaid dividends, whether or not in arrears, on
converted shares or for dividends on the shares of our common stock issued upon
conversion.
CONVERSION RIGHTS
Each share of convertible preferred stock is convertible at any time at the
option of the holder into such number of shares of our common stock as equals
the liquidation preference divided by a conversion price of $48.2813, adjusted
as described in the following paragraphs. We refer to the conversion price as
adjusted as the conversion price in this prospectus. All accumulated and unpaid
dividends (if declared) on the convertible preferred stock, which have
accumulated since the deposit expiration date, or the date on which the deposit
account is terminated, if earlier, to the date of conversion, may, at our
election, be paid in cash or by issuing that whole number of shares of our
common stock equal to the amount of accumulated and unpaid dividends divided by
the Market Value Amount as of the conversion date. If shares of convertible
preferred stock are earlier called for redemption, the conversion right will
terminate at the close of business on the date immediately prior to the date
fixed for redemption and will be lost if not exercised prior to that time,
unless we default in payment of our redemption obligation. Fractional shares of
common stock will not be delivered upon conversion, but a cash adjustment will
be paid in respect of such fractional interest based on the then current market
price of the common stock (based on the last reported sales price of our common
stock at the close of business on the trading day immediately prior to the date
of conversion).
The conversion price is subject to adjustment upon certain events,
including:
- any redemption payment or payment of a dividend or other distribution
payable in shares of our common stock to all holders of any class of
capital stock of our company, other than the issuance of shares of our
common stock in connection with the payment (1) in redemption for, of
dividends on, or the conversion of, the convertible preferred stock or
(2) to all holders of the convertible preferred stock based upon the
number of shares of our common stock into which the convertible preferred
stock is then convertible;
- any issuance to all holders of shares of our common stock of rights,
options or warrants entitling them to subscribe for or purchase shares of
our common stock or securities convertible into or exchangeable for
shares of our common stock at less than market value as of the date of
issuance; provided, however, that no adjustment will be made with respect
to such a distribution if the holder of shares of the convertible
preferred stock would be entitled to receive such rights, options or
warrants upon conversion at any time of shares of the convertible
preferred stock into our common stock and provided, further, that if such
rights, options or warrants are only exercisable upon the occurrence of
certain triggering events, then the conversion price will not be adjusted
until such triggering events occur;
- any subdivision, combination or reclassification of our common stock;
- any distribution consisting exclusively of cash or other transaction for
which the penultimate paragraph below is applicable, which specifies that
no antidilution adjustment shall be made to all holders of shares of our
common stock in an aggregate amount that, combined together with (1) all
other such cash distributions made within the then preceding 12 months in
respect of which no adjustment has been made and (2) any cash and the
fair market value of other consideration paid or payable in respect of
any tender offer by us or any of our subsidiaries for shares of our
common stock concluded within the then preceding 12 months in respect of
which no adjustment has been made, exceeds 15% of our market
capitalization (defined as the product of the then current market price
of our common stock times the number of shares of our common stock then
outstanding on the record date of such distribution) immediately prior to
such distribution;
- the completion of a tender or exchange offer which we or any of our
subsidiaries make for shares of our common stock that involves an
aggregate consideration that, together with (1) any cash and other
consideration payable in a tender or exchange offer by us or any of our
subsidiaries for shares
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of any of our common stock expiring within the then preceding 12 months
in respect of which no adjustment has been made and (2) the aggregate
amount of any such cash distributions referred to in the fourth bullet
point of this paragraph to all holders of shares of our common stock
within the then preceding 12 months in respect of which no adjustments
have been made, exceeds 15% of our market capitalization immediately
prior to the expiration of such tender offer; or
- a distribution to all holders of our common stock consisting of evidences
of indebtedness, shares of capital stock other than our common stock or
assets, including securities, but excluding those dividends and those
issuances of rights, options, warrants and other distributions for which
an adjustment to the conversion price as referred to above is applicable
(other than in connection with a merger effected solely to reflect a
change in the jurisdiction of incorporation of our company).
No adjustment of the conversion price will be required to be made:
(1) until cumulative adjustments amount to one percent of such price;
and
(2) with respect to rights or warrants issued pursuant to certain
employee benefit plans.
We also may from time to time decrease the conversion price by any amount
for any period of at least 20 days, so long as the decrease is irrevocable
during such period, in which case we shall give at least 15 days' notice of such
decrease. In addition to the foregoing adjustments, we are permitted to make
such reductions in the conversion price as we determine to be advisable in order
that any stock dividend, subdivision of shares, distribution of rights to
purchase stock or securities or distribution of securities convertible into or
exchangeable for stock made by Verio to our stockholders will not be taxable to
the recipients. In the event we elect to make such a reduction in the conversion
price, we will comply with the requirements of Rule 14e-1 under the Securities
Exchange Act of 1934, and any other securities laws and regulations thereunder,
if and to the extent that such laws and regulations are applicable in connection
with the reduction of the conversion price. See "Federal Tax Considerations."
In the event that we distribute rights or warrants (other than those
referred to in the second bullet point of the second preceding paragraph) to all
holders of our common stock, so long as any such rights or warrants have not
expired or been redeemed by us, the holder of any shares of convertible
preferred stock surrendered for conversion will be entitled to receive upon such
conversion, in addition to the shares of our common stock then issuable upon
such conversion, which we call the conversion shares, a number of rights or
warrants to be determined as follows: (1) if such conversion occurs on or prior
to the date for the distribution to the holders of rights or warrants of
separate certificates evidencing such rights or warrants, called the
distribution date, the same number of rights or warrants to which a holder of a
number of shares of our common stock equal to the number of conversion shares is
entitled at the time of such conversion in accordance with the terms and
provisions applicable to the rights or warrants, and (2) if such conversion
occurs after such distribution date, the same number of rights or warrants to
which a holder of the number of shares of our common stock into which such
convertible preferred stock was convertible immediately prior to such
distribution date would have been entitled on such distribution date in
accordance with the terms and provisions of and applicable to the rights or
warrants.
Except as stated above, the conversion price will not be adjusted for the
issuance of common stock, or any securities convertible into or exchangeable for
common stock or carrying the right to purchase any of the foregoing, in exchange
for cash, property or services.
In case of:
(1) any merger or consolidation of our company, other than a merger or
consolidation in which we are the continuing corporation and in which the
common stock outstanding immediately prior to the merger or consolidation
is not exchanged for cash, securities or other property of another
corporation;
(2) any sale or transfer to another corporation of the property of
Verio as an entirety or substantially as an entirety; or
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(3) any statutory exchange of securities with another corporation,
other than in connection with a merger or acquisition,
there will be no adjustment of the conversion price. Each share of the then
outstanding convertible preferred stock will, without the consent of the holder
of any convertible preferred stock, become convertible only into the kind and
amount of securities, cash or other property receivable upon such merger,
consolidation, sale, transfer or statutory exchange by a holder of the number of
shares of common stock into which such convertible preferred stock was
convertible immediately prior to such merger, consolidation, sale, transfer or
statutory exchange, assuming such holder of common stock failed to exercise his
rights of election, if any, as to the kind or amount of securities, cash or
other property receivable upon such merger, consolidation, sale, transfer or
statutory exchange. In the case of a merger of our company with or into another
company or any other transaction of the type mentioned above that results in the
payment of cash to the holders of our common stock, the effect of these
provisions would be that thereafter each share of convertible preferred stock
would be convertible at the conversion price in effect at such time into the
same amount of cash per share into which each share of convertible preferred
stock would have been convertible had such share been converted into common
stock immediately prior to the effective date of such cash merger or
transaction. Depending upon the terms of such cash merger or transaction, the
aggregate amount of cash into which such shares of convertible preferred stock
would be converted could be more or less than the liquidation preference with
respect to such convertible preferred stock.
Holders of convertible preferred stock at the close of business on a record
date will be entitled to receive the dividend payable on such shares on the
corresponding dividend payment date notwithstanding the conversion of such
shares following such record date and prior to such dividend payment date.
However, convertible preferred stock surrendered for conversion during the
period between the close of business on any record date and the opening of
business on the corresponding dividend payment date -- except shares converted
after the issuance of a notice of redemption with respect to a redemption date
during such period or coinciding with such dividend payment date, which will be
entitled to such dividend -- must be accompanied by payment of an amount equal
to the dividend payable on such shares on such dividend payment date. A holder
of convertible preferred stock on a record date who, or whose transferee,
tenders any such shares for conversion into shares of common stock on such
dividend payment date will receive the dividend payable by Verio on such shares
of convertible preferred stock on such date. The converting holder need not
include payment of the amount of such dividend upon surrender of convertible
preferred stock for conversion. Except as provided above, we will make no
payment or allowance for unpaid dividends, whether or not in arrears, on
converted shares or for dividends on the common stock issued upon such
conversion.
CHANGE OF CONTROL
Notwithstanding the foregoing, upon certain cash changes of control of
Verio, holders of convertible preferred stock will, if the market value of our
common stock at such time is less than the conversion price, have a one time
option, upon not less than 30 days' notice nor more than 60 days' notice, to
convert all of their outstanding shares of convertible preferred stock into
shares of our common stock at an adjusted conversion price equal to the greater
of (1) the market value of our common stock as of such date of the cash change
of control and (2) $49.0208. In lieu of issuing the shares of our common stock
issuable upon conversion in the event of a cash change of control, we may, at
our option, make a cash payment equal to the market value of such common stock
otherwise issuable.
Our certificate of designation for the convertible preferred stock defines
such a cash change of control as any of the following events:
- our company consolidates with or merges with or into any person or
conveys, transfers or leases all or substantially all, computed on a
consolidated basis, of our assets to any person, or any corporation
consolidates with or merges into or with our company, in any such event
pursuant to a transaction in which our outstanding voting stock is
changed into or exchanged for consideration in
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which 50% or less of the value received by holders of such stock consists
of common stock that has been admitted for listing on a national
securities exchange or quoted on the Nasdaq National Market; or
- our company is liquidated or dissolved or adopts a plan of liquidation or
dissolution.
The phrase "all or substantially all" of the assets of our company is
likely to be interpreted by reference to applicable state law at the relevant
time, and will be dependent on the facts and circumstances existing at such
time. As a result, there may be a degree of uncertainty in ascertaining whether
a sale or transfer is of "all or substantially all" of our assets.
LIQUIDATION RIGHTS
Upon any liquidation, dissolution or winding up of Verio, and subject to
the rights of creditors of Verio and holders of any preferred stock senior or on
a parity in right of payment in the event of a liquidation, dissolution or
winding up of Verio, the holders of shares of convertible preferred stock are
entitled to receive a liquidation preference of $50.00 per share, plus an amount
equal to any accrued and unpaid dividends to the date of payment before any
distribution of assets is made to holders of common stock or any other stock
that ranks junior to the convertible preferred stock as to liquidation rights.
The holders of convertible preferred stock and all series or classes of Verio's
stock issued after the date of the issuance of the convertible preferred stock
that rank on a parity as to liquidation rights with the convertible preferred
stock are entitled to share ratably, in accordance with the respective
preferential amounts payable on such stock, in any distribution which is not
sufficient to pay in full the aggregate of the amounts to which such holders are
entitled. After payment in full of the liquidation preference of the shares of
the convertible preferred stock, the holders of such shares will not be entitled
to participate in any distribution of our remaining assets. A merger,
consolidation, or other business combination of our company with or into another
company or other entity, a statutory exchange of securities with another company
and a sale or transfer of all or part of our assets for cash, securities or
other property will not be considered a liquidation, dissolution or winding up
of Verio unless such merger, consolidation, combination, exchange, sale or
transfer shall be in connection with a liquidation, dissolution or winding up of
Verio.
REDEMPTION
Provisional Redemption
The convertible preferred stock is not subject to any sinking fund or other
similar provisions. We may redeem the convertible preferred stock at a
redemption price of 102.0000% of the liquidation preference, plus accumulated
and unpaid dividends, if any, whether or not declared, to the redemption
date -- which we refer to in this prospectus as the provisional redemption
date -- on or after August 1, 2001, but prior to August 1, 2002 -- which we
refer to in this prospectus as the provisional redemption -- if the trading
price of the common stock equals or exceeds $144.8438 per share for 20 trading
days within any 30 trading day period.
If we undertake a provisional redemption, holders of convertible preferred
stock that we call for redemption will also receive a payment -- which we call
the additional payment -- in an amount equal to the present value of the
aggregate value of the dividends that would thereafter have been payable on the
convertible preferred stock, whether or not declared, for the period from the
provisional redemption date to August 1, 2002 -- which we call the additional
period. The present value will be calculated using the bond equivalent yield on
U.S. Treasury notes or bills having a term nearest in length to that of the
additional period as of the day immediately preceding the date on which a notice
of provisional redemption is mailed.
Optional Redemption
Except in the foregoing circumstances, we may not redeem the convertible
preferred stock prior to August 1, 2002. Beginning on August 1, 2002, we may
redeem shares of convertible preferred stock, during the twelve-month periods
commencing on August 1 of the years indicated below, at the following
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redemption prices, expressed as a percentage of the liquidation preference per
share, plus in each case all accumulated and unpaid dividends, whether or not
declared, to the redemption date.
<TABLE>
<CAPTION>
REDEMPTION PRICE
YEAR PER SHARE
- ---- ----------------
<S> <C>
2002................................................. 103.8571%
2003................................................. 102.8929%
2004................................................. 101.9286%
2005................................................. 100.9643%
2006 and thereafter.................................. 100.0000%
</TABLE>
Redemption Procedures
We may effect any provisional or optional redemption, in whole or in part,
at our option, by payment of the redemption price, including any additional
payment, in cash, through delivery of fully paid and non-assessable shares of
our common stock or a combination thereof, subject to applicable law, by
delivering notice to the holders of the convertible preferred stock not less
than 20 nor more than 60 days prior to the scheduled redemption date.
In the event that fewer than all the outstanding shares of convertible
preferred stock are to be redeemed, the shares to be redeemed will be determined
pro rata or by lot. If we elect to make redemption payments in shares of our
common stock, the number of shares of our common stock that we distribute will
be calculated by dividing the redemption payment, including any additional
payment, by the Market Value Amount as of the redemption notice date. From and
after the applicable redemption date, unless we default in the payment of the
redemption price, including any additional payment, dividends on the shares of
convertible preferred stock to be redeemed on such redemption date shall cease
to accumulate, such shares shall no longer be deemed to be outstanding, and all
rights of the holder thereof as stockholders, except the right to receive the
redemption price, including any additional payment, will cease. If any dividends
on the convertible preferred stock are in arrears, no shares of convertible
preferred stock will be redeemed unless all outstanding shares of convertible
preferred stock are simultaneously redeemed.
Our ability to redeem any shares of convertible preferred stock is, and may
continue to be, limited by the terms of our other financing arrangements and
applicable law. In fact, we would currently be prohibited by the terms of our
credit facility and our outstanding senior notes from redeeming the convertible
preferred stock.
VOTING RIGHTS
The holders of the convertible preferred stock will have no voting rights
except as described below or as required by law. In exercising any such vote,
each outstanding share of convertible preferred stock will be entitled to one
vote, excluding shares held by Verio or any entity controlled by Verio, which
shares will have no voting rights.
If the dividends on the convertible preferred stock are in arrears for six
quarters, whether or not consecutive, the number of directors of Verio will be
increased by two, and the holders of the convertible preferred stock -- voting
separately as a class with the holders of any outstanding shares of stock on a
parity as to dividends with the convertible preferred stock on which like voting
rights have been conferred and are exercisable -- will be entitled to elect such
two additional directors to the board of directors at any meeting of
stockholders of Verio at which directors are to be elected. A special meeting
will be scheduled at the direction of 25% of the holders of convertible
preferred stock for this purpose. Such voting rights will continue until such
time as the dividend arrearage on the convertible preferred stock has been paid
in full or sums set aside for payment thereof.
In addition, so long as any convertible preferred stock is outstanding, we
will not, without the affirmative vote or consent of the holders of at least a
majority of all outstanding shares of convertible
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preferred stock, voting separately as a class, amend, alter or repeal any
provision of our certificate of incorporation or bylaws so as to affect
materially and adversely the relative rights, preferences, qualifications,
limitations or restrictions of the convertible preferred stock. The certificate
of designation also provides that, except as set forth above, (1) the creation,
authorization or issuance of any shares or series of preferred stock, or (2) the
increase or decrease in the amount of authorized capital stock of any class,
including any preferred stock, shall not require the consent of the holders of
convertible preferred stock and shall not be deemed to affect adversely the
rights, preferences, privileges or voting rights of the convertible preferred
stock.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of convertible preferred stock shall have
been redeemed or called for redemption upon proper notice, and we shall have
reserved sufficient shares of common stock, or set aside sufficient cash, to
effect such redemption.
REGISTRATION RIGHTS; ADDITIONAL DIVIDENDS
Pursuant to a registration rights agreement, we have agreed for the benefit
of the holders of the convertible preferred stock and common stock issued or
issuable as dividends or upon conversion of the convertible preferred stock and
common stock purchased from the deposit account -- which we refer to as the
subject securities -- that:
(1) we would, at our cost, within 120 days after the first date on
which any convertible preferred stock was issued -- which we refer to in
this prospectus as the Closing Date -- file a shelf registration statement
with the Securities and Exchange Commission with respect to resales of the
convertible preferred stock and the common stock issuable upon conversion
and the issuance and resale of the common stock issuable by us as
dividends;
(2) we will use our reasonable best efforts to cause such shelf
registration statement to be declared effective under the Securities Act
within 210 days after the Closing Date; and
(3) we will keep the shelf registration statement continuously
effective and useable under the Securities Act generally until the date on
which any subject securities received or receivable by non-affiliates of
Verio may be freely sold by such holders without restriction pursuant to
Rule 144(k) or any successor provision promulgated by the Securities and
Exchange Commission under the Securities Act or otherwise.
If the shelf registration statement:
(1) has not been filed with the Securities and Exchange Commission on
or prior to 120 days, or has not been declared effective by the Securities
and Exchange Commission within 210 days, after the Closing Date; or
(2) is filed and declared effective but thereafter ceases to be
effective, without being succeeded immediately by a replacement shelf
registration statement filed and declared effective, or useable for the
offer and sale of Transfer Restricted Securities, as defined below, for a
period of time exceeding any suspension period defined below,
each such event referred to in clauses (1) and (2) above being referred to in
this prospectus as a registration default, then additional dividends will accrue
on the convertible preferred stock constituting Transfer Restricted Securities
held by each holder who has complied with its obligations under the registration
rights agreement. The additional dividend with respect to the first quarterly
period immediately following the occurrence and continuation of a registration
default will accrue at a rate of 0.25% per quarterly period. The rate of the
additional dividend will increase by an additional 0.25% per quarterly period
with respect to each subsequent quarterly period until all registration defaults
have been cured. After all registration defaults have been cured, the rate at
which dividends accrue on the convertible preferred stock will return to 6.75%
per annum. The amount of additional dividends that accrue for any
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quarterly period may be paid, at our option, in cash, by delivery of fully paid
and non-assessable shares of our common stock or a combination thereof. If we
elect to pay the additional dividends in shares of our common stock, the number
of shares that we distribute will be calculated by dividing the additional
dividend amount by the Market Value Amount as of the record date.
"Transfer Restricted Securities" means each share of convertible preferred
stock, each share of common stock issued or issuable as a dividend or upon
conversion of the convertible preferred stock and each share of common stock
purchased from the deposit account until the date on which such security (a) has
been transferred pursuant to the shelf registration statement or another
registration statement covering such security which has been filed with the
Securities and Exchange Commission pursuant to the Securities Act, in either
case after such registration statement has become effective under the Securities
Act, (b) has been transferred pursuant to Rule 144 under the Securities Act, or
any similar provision then in force, (c) may be freely sold or transferred
pursuant to Rule 144(k) under the Securities Act, or any similar provision then
in force, or (d) in the opinion of counsel to Verio may be freely sold without
restriction under the Securities Act by the holder thereof.
We will provide or cause to be provided to each holder of convertible
preferred stock, or the common stock issuable as a dividend or upon conversion
of the convertible preferred stock, copies of this prospectus and any subsequent
prospectus supplement, which will be a part of the shelf registration statement,
notify or cause to be notified to each such holder when the shelf registration
statement for such convertible preferred stock or common stock has become
effective and take certain other actions as are required to permit unrestricted
resales of such convertible preferred stock and common stock. A holder of
convertible preferred stock or the common stock issuable as a dividend or upon
conversion of the convertible preferred stock that sells such securities
pursuant to a shelf registration statement is required to be named as a selling
security holder in the related prospectus and to deliver a prospectus and any
subsequent prospectus supplement to purchasers, will be subject to certain of
the civil liability provisions under the Securities Act in connection with such
sales, and will be bound by the provisions of the registration rights agreement
that are applicable to such holder, including certain indemnification and
contribution rights or obligations with respect to the information supplied by
such holder. We have distributed a questionnaire to each beneficial holder of
convertible preferred stock as of a specified date to obtain certain information
regarding such selling security holders for inclusion in this prospectus. We
will pay all expenses of the shelf registration statement.
We will be permitted to suspend the use of any prospectus which is a part
of the shelf registration statement for a suspension period not to exceed 60
days in any 90-day period and not to exceed 90 days in any 12-month period under
certain circumstances relating to pending corporate developments, public filings
with the Securities and Exchange Commission and similar events. If we suspend
the use of such prospectus for a period that exceeds the periods specified in
the foregoing sentence, additional dividends will begin to accrue on the
convertible preferred stock at the rates described above.
BOOK-ENTRY, DELIVERY AND FORM
The convertible preferred stock sold was issued in the form of one or more
global securities. The global securities were deposited with, or on behalf of,
the Depository Trust Company, which we refer to as the Depositary, and
registered in the name of the Depositary or its nominee. Except as provided
below, the global securities may be transferred, in whole and not in part, only
to the Depositary or another nominee of the Depositary. Investors may hold their
beneficial interests in the global securities directly through the Depositary if
they have an account with the Depositary or indirectly through organizations
which have accounts with the Depositary.
Shares of convertible preferred stock that are issued as described below
under "Certificated Convertible Preferred Stock" will be issued in definitive
form. Upon the transfer of convertible preferred stock in definitive form, such
convertible preferred stock will, unless the global securities has previously
been exchanged for convertible preferred stock in definitive form, be exchanged
for an interest in the global securities representing the liquidation preference
of convertible preferred stock being transferred.
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The Depositary has advised us as follows: The Depositary 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 New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934, as amended. The Depositary was created to hold securities of
institutions that have accounts with the Depositary -- which we refer to as
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 Depositary'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 Depositary's book-entry system is also available to
others such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a participant, whether directly or
indirectly.
Upon the issuance of the global securities, the Depositary credited, on its
book-entry registrations and transfer system, the liquidation preference of the
convertible preferred stock represented by such global securities to the
accounts of participants. The accounts credited were designated by the initial
purchasers of such convertible preferred stock. Ownership of beneficial
interests in the global securities is limited to participants or persons that
may hold interests through participants. Ownership of beneficial interests in
the global securities are shown on, and the transfer of those ownership
interests will be effected only through, records maintained by the Depositary,
with respect to participants' interest, and such participants, with respect to
the owners of beneficial interests in the global securities other than
participants. The laws of some jurisdictions may require that certain purchasers
of securities take physical delivery of such securities in definitive form. Such
limits and laws may impair the ability to transfer or pledge beneficial
interests in the global securities.
So long as the Depositary, or its nominee, is the registered holder and
owner of the global securities, the Depositary or such nominee, as the case may
be, will be considered the sole legal owner and holder of the related
convertible preferred stock for all purposes of such convertible preferred stock
and the certificate of designation covering the convertible preferred stock.
Except as provided below, owners of beneficial interest in the global securities
will not be entitled to have the convertible preferred stock represented by the
global securities registered in their names, will not receive or be entitled to
receive physical delivery of certificated convertible preferred stock in
definitive form and will not be considered to be the owners or holders of any
convertible preferred stock under the global securities. We understand that
under existing industry practice, in the event an owner of a beneficial interest
in the global securities desires to take any action that the Depositary, as the
holder of the global securities, is entitled to take, the Depositary will
authorize the participants to take such action, and that the participants will
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 in respect of dividends and redemption payments on convertible
preferred stock represented by the global securities registered in the name of
and held by the Depositary or its nominee will be made to the Depositary or its
nominee, as the case may be, as the registered owner and holder of the global
securities.
We expect that the Depositary or its nominee, upon receipt of any payment
in respect of dividends and redemption payments on the global securities, will
credit participants' accounts with payments in amount proportionate to their
respective beneficial interests in the liquidation preference of the global
securities as shown on the records of the Depositary or its nominee. We also
expect that payments by participants to owners of beneficial interest in the
global securities held through such participants will be governed by standing
instructions and customary practices and will be the responsibility of such
participants. We will not have any responsibility or liability for any aspect of
the records relating to, or payments made on account of, beneficial ownership
interests in the global securities for any convertible preferred stock or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interest or for any other aspect of the relationship between the
Depositary and its participants or
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the relationship between such participants and the owners of beneficial interest
in the global securities owning through such participants.
Unless and until it is exchanged in whole or in part for certificated
convertible preferred stock in definitive form, the global securities may not be
transferred except as a whole (a) by the Depositary to a nominee of the
Depositary, (b) by a nominee of the Depositary to the Depositary or (c) by a
nominee of the Depositary to another nominee of the Depositary.
Although the Depositary has agreed to the foregoing procedures in order to
facilitate transfers of interests in the global securities among participants of
the Depositary, it is under no obligations to perform or continue to perform
such procedures, and such procedures may be discontinued at any time. Neither
Verio's transfer agent nor Verio will have any responsibility for the
performance by the Depositary or its participants or indirect participants of
their respective obligations under the rules and procedures governing their
operations.
CERTIFICATED CONVERTIBLE PREFERRED STOCK
The convertible preferred stock represented by the global securities is
exchangeable for certificated convertible preferred stock in definitive form of
like tenor as such convertible preferred stock if (1) the Depositary notifies us
that it is unwilling or unable to continue as Depositary for the global
securities and a successor is not promptly appointed or if at any time the
Depositary ceases to be a clearing agency registered under the Exchange Act or
(2) we in our discretion at any time determine not to have all of the
convertible preferred stock represented by the global securities. Any
convertible preferred stock that is exchangeable pursuant to the preceding
sentence is exchangeable for certificated convertible preferred stock issuable
in authorized denominations and registered in such names as the Depositary shall
direct. Subject to the foregoing, the global securities are not exchangeable,
except for global securities of the same aggregate denominations to be
registered in the name of the Depositary or its nominee. In addition, such
certificates will bear a legend restricting transfer of such certificates,
subject, with respect to such convertible preferred stock, to the provision of
such legend, unless we determine that such certificates will not bear such
legend in accordance with applicable law. In connection with the provisions set
forth above, after transfer of any convertible preferred stock or common stock
issued as a dividend on or upon conversion of the convertible preferred stock
during the period of effectiveness of this registration statement, the
requirement that any such convertible preferred stock or common stock be issued
in global form shall cease to apply and such shares of convertible preferred
stock or common stock, as the case may be, will be available to the transferee
in global or fully registered certificated form.
OTHER PROVISIONS
The shares of convertible preferred stock and the common stock issuable by
us as dividends and upon conversion of the convertible preferred stock, when
issued, were or will be duly and validly issued, fully paid and non-assessable.
The holders of shares of convertible preferred stock and such shares of common
stock have no preemptive rights with respect to any securities of Verio.
The registrar, transfer agent, conversion agent, and dividend disbursing
agent for the convertible preferred stock and the transfer agent and registrar
for the common stock issuable as dividends and upon conversion of the
convertible preferred stock will be Norwest Shareowner Services.
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<PAGE> 41
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock is based upon our
certificate of incorporation, our bylaws, our warrants outstanding, and the
registration rights relating to certain of our shares. The description is not
complete and is qualified in its entirety by reference to all of these
documents, each of which has been filed with the Securities and Exchange
Commission.
AUTHORIZED CAPITAL STOCK
Our authorized capital stock consists of 137,500,000 shares, consisting of
125,000,000 shares of common stock, par value $0.001 per share, and 12,500,000
shares of preferred stock, par value $0.001 per share. As of September 30, 1999,
there were 76,894,000 shares of common stock outstanding and 7,200,000 shares of
6.75% Series A convertible preferred stock outstanding.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any then outstanding preferred stock,
holders of our common stock are entitled to receive ratably such dividends as
may be declared by the board out of funds that are legally available. In the
event of a liquidation, dissolution or winding up of Verio, holders of our
common stock are entitled to share ratably in all assets remaining after payment
of liabilities and the liquidation of preferences of any outstanding shares of
preferred stock, if any. Holders of our common stock have no preemptive rights
or rights to convert their shares into any other securities. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and non-assessable. The rights
of holders of common stock are subject to, and may be adversely affected by, the
rights of any series of preferred stock which we may issue in the future. The
common stock is admitted for trading on the Nasdaq National Market under the
symbol "VRIO." The transfer agent for the common stock is Norwest Shareowner
Services.
PREFERRED STOCK
The board has the authority to issue from time to time up to 12,500,000
shares of preferred stock in one or more series and to fix the powers,
designations, preferences and relative, participating, optional or other rights
thereof, including dividend rights, conversion rights, voting rights, redemption
terms, liquidation preferences -- any or all of which may be greater than the
rights of the common stock -- and the number of shares constituting each such
series, without any further vote or action by our stockholders. Except for the
6.75% Series A convertible preferred stock, there are no other shares of
preferred stock outstanding.
WARRANTS
As of September 30, 1999, we had warrants outstanding to purchase an
aggregate of approximately 2,003,000 shares of common stock at an exercise price
per share of $0.01. These warrants were issued in connection with the issuance
of the 1997 Notes and are currently exercisable by the holders. Holders of these
warrants also are entitled to certain registration rights. See "-- Registration
Rights."
In addition, in connection with our acquisition of Hiway, each former Hiway
warrant was assumed by Verio. Such warrant became a warrant to purchase, at the
same aggregate exercise price and on substantially the same terms and conditions
as such Hiway warrant, that number of shares of our common stock which the
holder would have been entitled to receive had such warrant been exercised prior
to the completion of the acquisition, and had the total consideration we paid
been entirely in shares of our common stock. As of September 30, 1999, we had
warrants outstanding to purchase an aggregate of approximately 1,306,228 shares
of common stock resulting from our assumption of former Hiway warrants. The
exercise price for these warrants range from $3.53 to $3.85 per share. Holders
of these former Hiway warrants also are entitled to certain registration rights.
See "-- Registration Rights."
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ANTI-TAKEOVER PROVISIONS
Delaware Takeover Statute
As a Delaware corporation, we are subject to the provisions of Section 203
of the Delaware General Corporation Law, as amended from time to time. Section
203 provides, with certain exceptions, that a publicly-held corporation is
prohibited from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder unless:
- prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder; or
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (x) by persons who are
directors and also officers, and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
- at or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
A "business combination" includes (1) any merger or consolidation involving
the corporation and the interested stockholder, (2) any sale, transfer, pledge
or other disposition of 10% or more of the assets of the corporation involving
the interested stockholder, (3) subject to certain exceptions, any transaction
that results in the issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder, (4) any transaction involving the
corporation that has the effect of increasing the proportionate share of the
stock of any class or series of the corporation beneficially owned by the
interested stockholder, or (5) the receipt by the interested stockholder of the
benefit of any loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation. Subject to certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock. Section 203 could have the effect of delaying,
deterring or preventing a future takeover or change in control of Verio. It also
may render the removal of directors and management more difficult.
In addition, our certificate of incorporation and bylaws, as amended and
restated, contain provisions that are intended to enhance the likelihood of
continuity and stability in the composition of our board and of the policies
formulated by our board which may discourage a future unsolicited takeover of
Verio. These provisions also may have the effect of discouraging or preventing
certain types of transactions involving an actual or threatened change of
control of Verio, including unsolicited takeover attempts, even though such a
transaction may offer our stockholders the opportunity to sell their stock at a
price above the prevailing market price.
Restated Certificate of Incorporation and Bylaws
Certain provisions of our certificate of incorporation and bylaws could
have the effect of discouraging potential acquisition proposals or making a
tender offer or delaying or preventing a change of control of Verio. In
particular, our certificate of incorporation and bylaws, as applicable, among
other things:
(1) provide that all stockholder actions must be effected at a duly
called meeting and not by a consent in writing, and an affirmative vote of
the holders of 80% of our capital stock would be required to amend such
provision;
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(2) provide that our board of directors will be divided into three
classes of directors (disregarding the effect of any voting rights of
holders of convertible preferred stock), as nearly equal in number as is
reasonably possible, serving staggered terms so that directors' initial
terms will expire at the first, second and third succeeding annual meeting
of the stockholders following our initial public offering, respectively. At
each such succeeding annual meeting, directors elected to succeed those
directors whose terms are expiring at such meeting shall be elected for a
three-year term of office. A vote of at least 80% of our capital stock
would be required to amend such provision;
We believe that a classified board of directors will help to assure the
continuity and stability of our board of directors and our business strategies
and policies, since a majority of the directors at any given time will have had
prior experience as directors of Verio. We also believe that this, in turn, will
permit our board of directors to more effectively represent the interest of
stockholders. With a classified board of directors, at least two annual meetings
of stockholders, instead of one, will generally be required to effect a change
in the majority of the board. As a result, a provision relating to a classified
board may discourage proxy contests for the election of directors or purchases
of a substantial block of our common stock because its provisions could operate
to prevent obtaining control of the board in a relatively short period of time.
Under Delaware law, a director on a classified board may be removed by the
stockholders of the corporation only for cause;
(3) provide that special meetings of the stockholders may be called
only by the President or, at the direction of the board, the Secretary of
Verio. Advance written notice is required, which generally must be received
by the Secretary not less than 30 days nor more than 60 days prior to the
meeting, by a stockholder of a proposal or director nomination which such
stockholder desires to present at a meeting of stockholders. Any amendment
of this provision would require a vote of at least 80% of our capital
stock;
(4) does not include a provision for cumulative voting in the election
of directors. Under cumulative voting, a minority stockholder holding a
sufficient number of shares may be able to ensure the election of one or
more directors. The absence of cumulative voting may have the effect of
limiting the ability of minority stockholders to effect changes in the
board and, as a result, may have the effect of deterring a hostile takeover
or delaying or preventing changes in control or management of Verio;
(5) provide that vacancies on our board may be filled by a majority of
directors in office, although less than a quorum, and not by the
stockholders; and
(6) allow us to issue up to 5,300,000 shares of currently undesignated
preferred stock with rights senior to those of the common stock and that
otherwise could adversely affect the rights and powers, including voting
rights, of the holders of common stock. In certain circumstances, such
issuance could have the effect of decreasing the market price of the common
stock, as well as having the anti-takeover effect discussed above.
These provisions are intended to enhance the likelihood of continuity and
stability in the composition of our board and in the policies formulated by
them, and to discourage certain types of transactions that may involve an actual
or threatened change of control of Verio. These provisions are designed to
reduce our vulnerability to an unsolicited acquisition proposal and to
discourage certain tactics that may be used in proxy fights. However, such
provisions could have the effect of discouraging others from making tender
offers for our shares that could result from actual or rumored takeover
attempts. Such provision also may have the effect of preventing changes in our
management.
REGISTRATION RIGHTS
Initial Investors
Pursuant to a stockholders agreement we entered into with certain of our
initial investors, the initial investors are entitled to certain demand and
piggyback registration rights with respect to the registration of
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certain registrable securities -- as defined in the stockholders
agreement -- held by the initial investors under the Securities Act. The initial
investors owning 25% or more of the registrable securities may require that we
register their registrable securities under the Securities Act, subject to the
right of the board to defer such registration for a period of up to 180 days. In
addition, if we propose to register securities under the Securities Act, other
than a registration statement on Form S-8 or S-4, whether or not for our own
account, then any of the initial investors has a right, subject to quantity
limitations determined by underwriters if the offering involves an underwriting,
to request that we register such investor's registrable securities. We will bear
all registration expenses incurred in connection with up to two long-form and
all short-form and piggyback registrations. Each initial investor will pay for
its own selling expenses on a pro rata basis. These registration rights are
subject to certain conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares included in such
registration.
Buyouts and Acquisitions
We also entered into certain investment agreements with the recipients of
shares of our Series D-1 preferred stock in connection with our prior buyouts
and acquisition of certain Internet service providers. The Series D-1 preferred
stock were automatically converted into shares of common stock upon the closing
of our initial public offering in May 1998. Pursuant to the investment
agreements, some of the holders are entitled to certain piggyback registration
rights with respect to the registration of certain registrable securities -- as
defined in the investment agreements -- held by such holders under the
Securities Act. At any time after a lock-up termination date, as defined in the
investment agreements, if we propose to register any of our securities under the
Securities Act, other than a registration statement on Form S-8 or S-4, whether
or not for our own account, such holders are entitled to notice of such
registration and are entitled to include their registrable securities therein.
All such rights granted under the investment agreements shall terminate upon the
earliest to occur of:
(1) the second anniversary of our initial public offering;
(2) such time as all such registrable securities may be immediately
sold pursuant to Rule 144 within any 90-day period; or
(3) upon any sale of such registrable securities pursuant to a
registration statement or Rule 144.
The investment agreements provide that the lock-up obligation expires in
one-third increments on the sixth, twelfth and eighteenth month anniversaries of
our initial public offering. We are required to bear all registration expenses,
other than underwriting discounts and commissions, incurred in connection with
any such registrations. We are not responsible for any expenses of any counsel
retained to act on behalf of any holder participating in such registration. All
of these registration rights are subject to certain conditions and limitations,
including, in particular, that if the underwriters of an offering seek to limit
the number of shares included in such offering, all holders of demand and
piggyback registration rights, other than the piggyback registration rights held
by these holders, shall include their shares in such offering in priority to
these holders.
1997 Notes
In connection with the issuance of the 1997 Notes, the holders of a number
of the warrants, warrant shares and registrable securities -- as defined in a
registration rights agreement entered into in connection with the issuance of
the 1997 Notes -- equivalent to a majority of the warrant shares subject to the
originally issued warrants, will be entitled to require Verio to effect one
registration under the Securities Act subject to certain limitations. These
holders also will have the right to include such registrable securities in any
registration statement under the Securities Act filed by Verio, other than:
(1) a registration statement on Form S-8 or S-4;
(2) a registration statement filed in connection with an offer of
securities solely to existing security holders; or
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(3) a demand registration, whether or not for our own account.
These registrations rights are subject to certain conditions and
limitations, among them the right of the underwriters of an offering to limit
the number of shares included in such registration.
Nippon Telegraph and Telephone Corporation
Pursuant to the investment agreement entered into with Nippon Telegraph and
Telephone Corporation, after May 15, 1999, Nippon Telegraph and Telephone
Corporation and any transferee of its rights may require, on up to three
occasions, that we effect a registration statement under the Securities Act with
respect to:
(1) at least 25% of the shares of common stock that it purchased,
including any securities issued or issuable by way of a distribution, stock
split or the like -- which we refer to as the NTT Registrable Securities;
or
(2) NTT Registrable Securities with an anticipated aggregate net
offering price of at least $25.0 million, unless we are eligible at such
time to effect a registration statement on Form S-3, in which case the
aggregate net offering price must be at least $15.0 million.
We must effect any such registration as promptly as practicable, subject,
in certain circumstances, to our right to defer such demand for registration for
specified periods. In addition, if we propose to register our securities under
the Securities Act, or another holder of common stock exercises its demand
registration rights, then Nippon Telegraph and Telephone Corporation has a
right, subject to certain cutbacks determined by the underwriters in the event
of an underwritten offering, to include the NTT Registrable Securities in any
such offering. We will bear all registration expenses, subject to certain
exceptions, other than selling expenses which must be paid by Nippon Telegraph
and Telephone Corporation. In the event that any shares of our common stock that
it purchased are included in a registration statement, we have agreed to
indemnify Nippon Telegraph and Telephone Corporation against certain losses for
which Nippon Telegraph and Telephone Corporation may become liable under the
Securities Act.
Hiway Acquisition
In connection with our acquisition of Hiway, we entered into a registration
rights agreement with certain principal affiliate shareholders of Hiway. We also
agreed, as part of our assumption of the former Hiway warrants, to honor the
registration rights obligations contained in such warrants. In both cases, we
agreed to grant the specified shareholders and warrant holders certain piggyback
registration rights, and with regard to the certain warrant holders, demand
registration rights, with respect to the registration of certain registrable
securities -- as defined in the registration rights agreement and former Hiway
warrants -- under the Securities Act.
If at any time we propose to register any common stock under the Securities
Act, then each specified shareholder and warrant holder has the right, subject
to certain limitations, including, to the extent applicable, certain specific
limitations addressed below, to request that we register its registrable
securities. With respect to certain warrant holders, this right does not apply
if we register on a Form S-8 or S-4, although with respect to certain other
warrant holders the piggyback registration right is inapplicable only when we
make a registration relating solely to employee benefit plans or a Rule 145
transaction. With respect to the specified shareholders, this piggyback
registration right does not apply if we register on a Form S-8 or S-4, or any
other form for a limited purpose, or any registration statement covering only
securities proposed to be issued in exchange for securities or assets of another
entity, in connection with an offering of our common stock.
Pursuant to the terms of the former Hiway warrants, prior to the
effectiveness of any registration statement, we may terminate the filing or,
under the terms of certain former Hiway warrants, delay the effectiveness of the
applicable registration statement. Under the terms of the registration rights
agreement
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with the specified shareholders, subject to certain limitations, we may delay
the filing or effectiveness of, or suspend, the applicable registration
statement, and require that all specified shareholders immediately cease sale of
our common stock pursuant to the registration statement, in any period during
which we are engaged in any activity or transaction required to be disclosed by
Verio pursuant to the Securities Act.
All these piggyback registration rights terminate upon the earlier to occur
of:
(1) such time as all such registrable securities may be immediately
sold pursuant to Rule 144 and/or (for the specified shareholders) Rule 145
under the Securities Act within any 90-day period; or
(2) upon any sale of such registrable securities pursuant to a
registration statement or Rule 144 and/or (for the specified shareholders)
Rule 145 under the Securities Act.
We will bear all registration expenses, other than underwriting discounts
and commissions and, for the warrant holders, certain other expenses, incurred
in connection with any such registrations, except for any expenses of any
counsel retained by any specified shareholder or individual warrant holder in
connection with such registration.
These registration rights are subject to certain limitations and
conditions. In particular, with regard to certain warrant holders, they may
register up to no more than 50% of their registrable securities in a particular
registration statement, depending upon the total number of shares of common
stock to be registered. Additionally, if the managing underwriter of an offering
seeks to limit the number of shares included in such offering, then the managing
underwriter may, with regard to certain warrant holders, limit or exclude such
warrant holders' registrable securities in the registration statement and, with
regard to certain other warrant holders, Verio shall include the shares sought
to be registered in the following order:
(A) Verio and any holders of demand registration rights shall be
entitled to register all securities that Verio or such holders propose to
sell for their own account;
(B) to the extent that inclusion would not have a material adverse
effect, registrable securities of the warrant holders and other equity and
debt securities requested for inclusion in the offering by holders of such
other securities shall be included pro rata on the basis of the relative
number of registrable securities, other equity securities and the principal
amount of debt securities requested to be included in such offering.
With regard to the specified shareholders, if the underwriters of an
offering seek to limit the number of shares included in such offering, then the
underwriters will apportion the shares sought to be registered as follows:
(1) Verio and any holders of demand registration rights shall be
entitled to register all securities that Verio or such holders propose to
sell for their own account;
(2) any holders of piggyback registration rights as and to the extent
that such registration rights have priority over the registration rights
granted to the specified shareholders; and
(3) any specified shareholder, together with any holders of other
piggyback registration rights as and to the extent that such piggyback
registration rights rank equally with the piggyback registration rights
granted to the specified shareholders, shall be entitled to register, on a
proportionate basis, up to that number of registrable securities and other
shares of common stock that is equal to the remaining shares of common
stock that the lead managing underwriter will permit to be registered after
giving effect to the apportionment in clauses (1) and (2) above, in
connection with such offering. This is subject to any conflicting cut-back
priority provided to MCI WorldCom pursuant to a registration rights
agreement dated June 17, 1997 and based on the number of shares of common
stock owned by each specified shareholder.
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Finally, certain warrant holders also retain the right to cause us to file
a shelf registration with respect to the registrable securities, provided that
(A) we shall only be required to effect one registration for all such warrant
holders possessing this right and (B) we shall not be required to effect such a
registration other than in accordance with Rule 415 on Form S-3.
FEDERAL TAX CONSIDERATIONS
The following is a summary of certain material U.S. federal tax
considerations relevant to the purchase, ownership and disposition of our
convertible preferred stock and common stock. This summary is based on the
current provisions of the Internal Revenue Code of 1986, Treasury regulations
and judicial and administrative authority, all of which are subject to change,
possibly on a retroactive basis. This summary applies only to investors who hold
our convertible preferred stock or common stock as capital assets, within the
meaning of section 1221 of the Internal Revenue Code, and does not discuss the
tax consequences to special classes of investors, such as dealers in securities
or currencies, financial institutions, tax-exempt entities, life insurance
companies, persons holding our convertible preferred stock or common stock as a
part of a hedging, short sale or conversion transaction or a straddle, investors
whose functional currency is not the United States dollar, persons who hold our
convertible preferred stock or common stock through partnerships or other
pass-through entities, or, except as specifically noted, certain U.S.
expatriates. State, local and foreign tax consequences of ownership of our
convertible preferred stock and common stock are not summarized.
We have not requested, and do not intend to request, any rulings from the
Internal Revenue Service concerning the federal tax consequences of an
investment in our convertible preferred stock or common stock. You are advised
to consult with your own tax advisor regarding the consequences of acquiring,
holding or disposing of our convertible preferred stock or common stock in light
of current tax laws, your particular investment circumstances, and the
application of state, local and foreign tax laws.
When we refer in this summary to a "United States Holder," we mean a
beneficial owner of convertible preferred stock or common stock that is:
- a citizen or resident of the United States for United States federal
income tax purposes;
- a corporation created or organized in the United States or under the laws
of the United States or of any political subdivision thereof;
- an estate whose income is includible in gross income for United States
federal income tax purposes regardless of its source; or
- a trust if a court within the United States is able to exercise primary
supervision of the administration of the trust and one or more United
States persons has the authority to control all substantial decisions of
the trust.
When we refer in this summary to a "Non-United States Holder," we mean a
beneficial owner of convertible preferred stock or common stock that is not a
United States Holder.
UNITED STATES HOLDERS
Deposit Account
Although there is no authority directly applicable to the treatment of the
deposit account, we believe that the treatment described below is appropriate
because the cash is intended to not be subject to the claims of our creditors,
and we will not be entitled to receive the cash in the deposit account except
under limited circumstances.
Pursuant to the terms of the deposit agreement, each holder of convertible
preferred stock will be treated by us as owning a pro-rata portion of the cash
deposited in the deposit account. Accordingly, each holder of convertible
preferred stock should not treat its portion of the cash deposited in the
deposit account as part of the cost of the convertible preferred stock for
purposes of determining the holder's adjusted tax basis in such stock.
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Cash distributions of $0.8438 per share of convertible preferred stock on
each deposit payment date for each quarterly period should be treated as
withdrawals by the holders of the convertible preferred stock of amounts
deposited in the deposit account. Income earned on the cash deposited in the
deposit account, if any, should be included in income by each holder of shares
of convertible preferred stock pro rata in proportion to the number of shares of
convertible preferred stock held by such holder. Each holder should include such
amounts in income in the same manner as though the holder directly owned a pro
rata share of the cash in the deposit account. Distributions of common stock by
the deposit agent to the holders of the convertible preferred stock following
our election to transfer common stock to the deposit agent should be treated as
a purchase by each holder of convertible preferred stock of such common stock
for an amount equal to the convertible preferred stockholder's share of the cash
deposited in the deposit account allocated to such purchase. To the extent that
the fair market value of the common stock exceeds the amount paid for such
common stock, the excess should be treated as a distribution on the convertible
preferred stock.
In the event that we exercise our right to have the deposit account paid to
us, the holders of the convertible preferred stock should be treated as having
made an additional payment to us with respect to their convertible preferred
stock, and, accordingly, should receive an increase in the tax basis of their
convertible preferred stock.
Distributions
We have the right to pay distributions on the convertible preferred stock
in cash or in shares of our common stock. If we distribute our common stock, the
amount of the distribution for federal income tax purposes will be the fair
market value of the common stock on the date the distribution is paid, and the
distribution will be subject to federal income tax to the same extent as a cash
distribution.
A distribution on the convertible preferred stock or common stock will be
treated as a dividend to the extent of our current or accumulated earnings and
profits attributable to the distribution as determined under U.S. federal income
tax principles. The amount of our earnings and profits at any time will depend
upon our future actions and financial performance. If the amount of the
distribution exceeds our current and accumulated earnings and profits
attributable to the distribution, the distribution will be treated as a
nontaxable return of capital and will be applied against and reduce your
adjusted tax basis in the convertible preferred stock, but not below zero. The
reduction in tax basis will increase the amount of any gain, or reduce the
amount of any loss, which you would otherwise realize on the sale or other
taxable disposition of the convertible preferred stock. If the distribution
exceeds both our current and accumulated earnings and profits attributable to
the distribution and your adjusted tax basis in your convertible preferred
stock, the excess will be treated as capital gain and will be either long-term
or short-term capital gain depending on your holding period for the convertible
preferred stock.
Corporate investors in our convertible preferred stock generally should be
eligible for the 70% dividends-received deduction with respect to the portion of
any distribution on the stock taxable as a dividend. However, corporate
investors should consider certain provisions that may limit the availability of
a dividend received deduction, including the 46-day holding period required by
section 246(c) of the Internal Revenue Code, the rules of section 246A which
reduce the dividends-received deduction of dividends on certain debt-financed
stock, and the rules in section 1059 of the Internal Revenue Code that reduce
the basis of stock in respect of certain extraordinary dividends, as well as the
effect of the dividends-received deduction on the determination of alternative
minimum tax liability.
Optional redemption for common stock or cash
If we redeem our convertible preferred stock for common stock, the exchange
should constitute a recapitalization within the meaning of Section 368(a)(1)(E)
of the Internal Revenue Code. You will not recognize gain or loss on the
exchange unless some of the common stock is received in discharge of dividend
arrearages, in which case the redemption will be treated as a distribution on
the convertible preferred stock to the extent of the dividends in arrears. The
amount constituting a distribution will be
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taxed as a dividend to the extent of our current or accumulated earnings and
profits attributable to the distribution at the time, in accordance with the
treatment described above for distributions. Your tax basis in our common stock
received pursuant to the redemption generally will equal your tax basis in the
convertible preferred stock surrendered in exchange, and your holding period for
the common stock generally will include the period you held your convertible
preferred stock. However, the tax basis of common stock received in discharge of
dividend arrearages will be its fair market value on the date received and the
holding period of that stock will commence on the day after its receipt.
If we redeem our convertible preferred stock for cash, the redemption will
be taxable to you. The redemption generally will be treated as a sale or
exchange if you do not own, actually or constructively within the meaning of
section 318 of the Internal Revenue Code, any stock of Verio other than the
redeemed convertible preferred stock. If you do own, actually or constructively,
other stock of Verio, a cash redemption of your convertible preferred stock may
be taxable in accordance with the treatment described above for distributions.
Such treatment as a distribution will not apply if the redemption (1) is
"substantially disproportionate" with respect to you under section 302(b)(2) of
the Internal Revenue Code, or (2) is "not essentially equivalent to a dividend"
under section 302(b)(1) of the Internal Revenue Code. A distribution to you will
be "not essentially equivalent to a dividend" if it results in a meaningful
reduction in your stock interest in Verio, which should be the case if your
proportionate ownership interest, taking into account any actual ownership of
common stock and any stock constructively owned, is reduced, your relative stock
interest in Verio is minimal, and you exercise no control over our business
affairs.
If a cash redemption of your convertible preferred stock is treated as a
sale or exchange, it will result in capital gain or loss equal to the difference
between the amount of cash received and the your adjusted tax basis in the
convertible preferred stock redeemed, except to the extent that the redemption
price includes unpaid dividends which we declare prior to the redemption. The
capital gain or loss will be long term if you have held the convertible
preferred stock for more than one year. Any cash you receive in discharge of
dividend arrearages on the convertible preferred stock will be treated as a
distribution on the convertible preferred stock to the extent of the dividends
in arrears, taxable in accordance with the treatment described above for
distributions.
If the cash you receive on redemption of your convertible preferred is
taxed as a dividend, your tax basis (reduced for amounts, if any, treated as
return of capital) in the redeemed convertible preferred stock will be
transferred to any remaining other Verio stock you own, subject, in the case of
a corporate taxpayer, to reduction or possible gain recognition under section
1059 of the Internal Revenue Code in an amount equal to the nontaxed portion of
such dividend. If you do not actually own any other Verio stock, having a
remaining stock interest only constructively, you may lose the benefit of your
tax basis in the convertible preferred stock but the tax basis may be shifted to
the stock of the related person whose stock you constructively own.
Under certain circumstances, section 305(c) of the Internal Revenue Code
requires that any excess of the redemption price of preferred stock over its
issue price be treated as constructively distributed on a periodic basis prior
to actual receipt. However, these rules do not apply if you and Verio are not
"related" within the meaning of Treasury regulations under section 305(c), there
are no plans, arrangements or agreements that effectively require or are
intended to compel us to redeem the convertible preferred stock, and our
exercise of the right to redeem would not reduce the yield of the convertible
preferred stock, as determined under the regulations. We intend to take the
position that the existence of our optional redemption rights does not result in
a constructive distribution under section 305(c). The preferred stock will also
be issued with a liquidation premium, since the liquidation preference will
exceed the proceeds received by Verio after excluding amounts deposited in the
deposit account. Although the regulations under section 305(c) do not
specifically address the treatment of liquidation premiums, we believe that a
similar rationale should apply to such premiums.
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Conversion
You generally will not recognize gain or loss on conversion of shares of
convertible preferred stock into our common stock, except with respect to any
cash paid in lieu of fractional shares of common stock. However, you may
recognize gain or dividend income to the extent there are dividends in arrears
on such stock at the time of conversion into common stock. Your tax basis in the
common stock received upon conversion of convertible preferred stock generally
will be equal to your tax basis in the converted preferred stock and the holding
period of the common stock generally will include your holding period for the
converted preferred stock. However, the tax basis of any common stock received
on conversion which is treated as a dividend will be equal to its fair market
value on the date of the distribution and the holding period of that common
stock will commence on the day after its receipt.
You may be deemed to have received a constructive distribution of stock
taxable as a dividend if the conversion ratio of the convertible preferred stock
is adjusted to reflect a cash or property distribution on our common stock or to
prevent dilution in the case of certain issuances of rights or warrants to
purchase common stock at below market prices. Although an adjustment to the
conversion price made pursuant to a bona fide reasonable adjustment formula
which has the effect of preventing the dilution of your interest in Verio
generally will not be considered to result in a constructive distribution of
stock, certain of the possible adjustments may trigger this rule. If a
nonqualifying adjustment is made, or if we fail to make an adjustment in certain
cases, you might be deemed to have received a taxable stock dividend. If so, the
amount of the dividend to be included in income would be the fair market value
of the additional common stock to which you would be entitled by reason of the
increase in your proportionate equity interest in Verio.
Sale or other taxable disposition
If you sell or dispose of your convertible preferred stock or common stock
in a taxable transaction other than a redemption or conversion by us, you will
recognize capital gain or loss equal to the difference between the amount of
cash and the fair market value of property received and your tax basis in the
convertible preferred stock or common stock. The gain or loss will be long-term
capital gain or loss if your holding period for the stock exceeds one year. For
corporate taxpayers, long-term capital gains are taxed at the same rate as
ordinary income. For individual taxpayers, net capital gains -- the excess of
the taxpayer's net long-term capital gains over net short-term capital
losses -- are subject to a maximum tax rate of 20% if the stock is held for more
than one year.
NON-UNITED STATES HOLDERS
Deposit Account
Because we will treat cash distributions from the deposit account as
non-taxable withdrawals, a Non-United States Holder generally will not be
subject to United States tax on such distributions. Distributions from the
deposit account attributable to interest earned on amounts held in the deposit
account and invested in United States government obligations also should be
exempt from United States withholding tax as portfolio interest provided that
the Non-United States Holder provides us a properly completed Internal Revenue
Service Form W-8.
Distributions
Distributions received by you as a Non-United States Holder in respect of
the convertible preferred stock, whether in cash or shares of common stock, and
distributions in respect of common stock, to the extent considered dividends for
U.S. federal income tax purposes, generally will be subject to withholding of
United States federal income tax at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty, unless the dividend is effectively
connected with your conduct of a trade or business within the United States or,
where a tax treaty applies, is attributable to a United States permanent
establishment you maintain. If the dividend is effectively connected with your
conduct of a trade or business within the United States or, where a tax treaty
applies, is attributable to your United States
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permanent establishment, the dividend will be subject to federal income tax on a
net income basis at applicable graduated individual or corporate rates and will
be exempt from the 30% withholding tax.
In addition to the graduated rate described above, dividends received by a
corporate Non-United States Holder that are effectively connected with a United
States trade or business or, where a tax treaty applies, is attributable to your
United States permanent establishment, may, under certain circumstances, be
subject to an additional "branch profits tax" at a 30% rate or at a lower rate
specified by an applicable income tax treaty.
For purposes of obtaining a reduced rate of withholding under an income tax
treaty, you will be required to provide certain information concerning your
country of residence and entitlement to tax treaty benefits. If you claim
exemption from withholding with respect to dividends effectively connected with
your conduct of a business within the United States, you must provide
appropriate certification, currently, Internal Revenue Service Form 4224, to
Verio or its paying agent. If you are eligible for a reduced rate of U.S.
federal withholding tax you may obtain a refund of any excess withheld amounts
by timely filing an appropriate claim for refund.
If a distribution exceeds our current and accumulated earnings and profits
attributable to the distribution, it will be treated first as a return of your
tax basis in the stock to the extent of your basis and then as gain from the
sale of a capital asset which would be taxable as described below. Any
withholding tax on distributions in excess of our current and accumulated
earnings and profits is refundable to you upon the timely filing of an
appropriate claim for refund with the Internal Revenue Service.
Under currently applicable Treasury regulations, dividends paid to an
address outside the United States are presumed to be paid to a resident of such
country, unless the payor has knowledge to the contrary, for purposes of the
withholding discussed above, and, under the current interpretation of these
Treasury regulations, for purposes of determining the applicability of a tax
treaty rate. Under Treasury regulations currently scheduled to be effective with
respect to dividends paid after December 31, 2000, a Non-United States Holder of
Verio stock who wishes to claim the benefit of an applicable treaty rate, and to
avoid backup withholding as discussed below, will be required to satisfy
applicable certification and other requirements.
Disposition of convertible preferred stock or common stock
Generally, you will not be subject to United States federal income tax on
any gain recognized upon the sale or other disposition of convertible preferred
stock or common stock. However, you will be subject to federal income tax on the
gain if:
(1) the gain is effectively connected with your United States trade
or, if a tax treaty applies, attributable to your United States permanent
establishment;
(2) you are an individual who is a former citizen of the United States
who lost such citizenship within the preceding ten-year period, or former
long-term resident of the United States who relinquished United States
residency on or after February 6, 1995, and the loss of citizenship or
permanent residency had as one of its principal purposes the avoidance of
United States tax; or
(3) you are a non-resident alien individual, are present in the United
States for 183 days or more days in the taxable year of disposition and
either (a) have a "tax home" in the United States for United States federal
income tax purposes or (b) the gain is attributable to an office or other
fixed place of business you maintain in the United States.
You will also be subject to federal income tax on the gain from sale of our
convertible preferred stock if we are or have been a "United States real
property holding corporation" -- which we refer to in this prospectus as
USRPHC -- within the meaning of section 897(c)(2) of the Internal Revenue Code
at any time you held the stock, or within the five-year period preceding the
sale of the stock if you hold the stock for more than five years. You would also
be subject to federal income tax on sale of our common stock if we were a USRPHC
during the specified time periods; however, since our common stock is traded on
an
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established securities market, you would be subject to tax only if you hold,
directly or indirectly, common stock with a fair market value in excess of 5% of
the fair market value of all Verio common stock outstanding. Verio believes it
is not now a USRPHC, that it has not been an USRPHC at any time since it was
formed, and that it is unlikely to become a USRPHC. Nevertheless, since our
convertible preferred stock will not be traded on an established securities
market, on the sale or other taxable disposition of our convertible preferred
stock, the purchaser would be required to withhold 10% of the proceeds of such
disposition, unless Verio were to provide a certification that it is not a
USRPHC, and has not been a USRPHC during a specific period, or another exemption
applied.
Redemption and conversion of convertible preferred stock
As a Non-United States Holder, you generally will not recognize any gain or
loss for United States federal income tax purposes upon conversion of
convertible preferred stock into common stock, except with respect to any cash
paid in lieu of fractional shares of common stock, which would be subject to the
rules described under "Disposition of convertible preferred stock or common
stock." However, you may recognize gain or dividend income to the extent there
are dividends in arrears on the convertible preferred stock at the time of
conversion into common stock.
A redemption of convertible preferred stock for cash will be an event which
will constitute either a dividend to the extent of our current and accumulated
earnings and profits or a sale or exchange. See "United States
Holders -- Optional redemption for common stock or cash." To the extent the
redemption is treated as a dividend, the tax consequences are described in
"Non-United States Holders -- Distributions," and to the extent the redemption
is treated as a sale or exchange, the tax consequences are described in
"Non-United States Holders -- Disposition of convertible preferred stock or
common stock."
Federal estate taxes
If you are an individual Non-United States Holder, convertible preferred
stock or common stock you hold or are treated as owning at the time of your
death will be included in your United States gross estate for United States
federal estate tax purposes and may be subject to United States federal estate
tax, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Verio generally will be required to report to certain holders of its
convertible preferred stock or common stock and to the Internal Revenue Service
the amount of any dividends paid to the holder in each calendar year and the
amounts of tax withheld, if any, with respect to such payments. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which a Non-United States
Holder resides under the provisions of an applicable income tax treaty.
Each holder of convertible preferred stock or common stock -- other than an
exempt holder such as a corporation, tax-exempt organization, qualified pension
or profit-sharing trust, individual retirement account, or a nonresident alien
individual who provides certification as to his or her status as a
nonresident -- will be required to provide, under penalties of perjury, a
certification setting forth the holder's name, address, correct federal taxpayer
identification number and a statement that the holder is not subject to backup
withholding. If a nonexempt holder fails to provide the required certification,
we will be required to withhold 31% of the amount otherwise payable to the
holder, and remit the withheld amount to the Internal Revenue Service as a
credit against the holder's federal income tax liability. You should consult
your own tax advisor regarding your qualification for exemption from backup
withholding and the procedure for obtaining any applicable exemption.
Payment of the proceeds of a sale of convertible preferred stock or common
stock by or through a United States office of a broker is subject to both backup
withholding and information reporting unless the beneficial owner certifies
under penalties of perjury that it is a Non-United States Holder or otherwise
establishes an exemption. In general, backup withholding and information
reporting will not apply to a
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<PAGE> 53
payment of the proceeds of a sale of convertible preferred stock or common stock
by or through a foreign office of a broker. If, however, such broker is, for
United States federal income tax purposes a United States person, a "controlled
foreign corporation" for U.S. federal tax purposes, or a foreign person that
derives 50% or more of its gross income for a certain period from the conduct of
a trade or business in the United States, or, for taxable years beginning after
December 31, 2000, a foreign partnership in which one or more United States
persons, in the aggregate, own more than 50% of the income or capital interests
in the partnership or if the partnership is engaged in a trade or business in
the United States, such payments will be subject to information reporting, but
not backup withholding, unless (1) such broker has documentary evidence in its
records that the beneficial owner is a Non-United States Holder and certain
other conditions are met, or (2) the beneficial owner otherwise establishes an
exemption.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against the holder's United States federal income tax
liability provided the required information is furnished to the Internal Revenue
Service.
THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION AND IS NOT TAX ADVICE.
ACCORDINGLY, EACH PROSPECTIVE HOLDER OF CONVERTIBLE PREFERRED STOCK OR COMMON
STOCK SHOULD CONSULT ITS TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO IT
OF THE CONVERTIBLE PREFERRED STOCK AND COMMON STOCK, INCLUDING THE APPLICABILITY
AND EFFECT OF ANY STATE, LOCAL OR FOREIGN INCOME TAX LAWS, AND ANY RECENT OR
PROSPECTIVE CHANGES IN APPLICABLE TAX LAWS.
PLAN OF DISTRIBUTION
We will not receive any proceeds from any sales of the convertible
preferred stock or common stock by selling stockholders. The shares of common
stock issuable by us in lieu of cash as dividends on the convertible preferred
stock and the shares of common stock issuable by us at our option through, at
the latest, August 1, 2000, in exchange for funds held in the deposit account on
behalf of the holders of the convertible preferred stock may be issued by us to
holders of record of such convertible preferred stock in accordance with the
terms under which the convertible preferred stock have been issued. See
"Description of the Series A Convertible Preferred Stock -- Deposit Account" and
"Description of the Series A Convertible Preferred Stock -- Dividends".
Shares of our preferred stock and common stock held by the selling
stockholders and covered hereby may be offered and sold from time to time in one
or more transactions (which may involve crosses or block transactions) by the
selling stockholders. The selling stockholders will act independently of us in
making decisions with respect to the timing, manner and size of each sale. The
selling stockholders, which term includes their transferees, pledgees or donees
or their successors, may sell the shares being offered hereby as follows:
- on any of the United States securities exchanges or quotation services
where the convertible preferred stock or common stock is listed or quoted
at the time of sale, including the Nasdaq National Market where our
common stock is listed;
- in transactions otherwise than on such exchanges or services;
- in the over-the-counter market;
- in negotiated transactions or otherwise, including an underwritten
offering;
- in connection with short sales of our shares;
- by pledge or by grant of a security interest in the shares to secure
debts and other obligations;
- through the writing of options, whether such options are listed on an
options exchange or otherwise;
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<PAGE> 54
- in connection with the writing of non-traded and exchange-traded call
options or put options, in hedge transactions and in settlement of other
transactions in standardized or over-the-counter options;
- through the distribution of the shares by any selling stockholder to its
partners, members or stockholders; or
- in a combination of any of the above transactions.
In connection with the sale of the convertible preferred stock or common
stock or otherwise, the selling stockholders may enter into hedging transactions
with broker-dealers or other financial institutions which may in turn engage in
short sales of the convertible preferred stock or common stock and deliver these
securities to close out such short positions, or loan or pledge the convertible
preferred stock or common stock to broker-dealers that in turn may sell these
securities.
The selling stockholders may sell their shares at market prices prevailing
at the time of sale, at prices related to such prevailing market prices, at
negotiated prices or at fixed prices. Each of the selling stockholders reserves
the right to accept and, together with their agents from time to time, to
reject, in whole or in part, any proposed purchase of the convertible preferred
stock or common stock to be made directly or through agents.
The selling stockholders are subject to the provisions of the Exchange Act
of 1934, as amended, and the rules thereunder relating to stock manipulation,
particularly Regulation M, and are not to engage in any transaction in violation
of such provisions.
The selling stockholders may sell their shares directly to purchasers or
may use underwriters, broker-dealers or agents to sell their shares.
Underwriters, broker-dealers or agents who sell the shares may receive
compensation in the form of discounts, concessions, or commissions from the
selling stockholders or they may receive compensation from purchasers of the
shares for whom they acted as agents or to whom they sold the shares as
principal, or both. (The compensation as to a particular underwriter, broker-
dealer or agent will not be in excess of eight percent (8%) of the selling price
of the shares sold by the particular underwriter, broker-dealer or agent.) The
selling stockholders and any underwriters, broker-dealers or agents that
participate in the sale of the convertible preferred stock or common stock may
be deemed to be "underwriters" within the meaning of the Securities Act of 1933,
as amended. Any discounts, commissions, concessions or profits received by such
underwriters, broker-dealers or agents on any resale of the shares may be
underwriting discounts and commissions under the Securities Act of 1933, as
amended. Selling stockholders who are "underwriters" within the meaning of the
Securities Act of 1933, as amended, will be subject to the prospectus delivery
requirements of the Securities Act.
We will pay all fees and expenses incurred in connection with preparing and
filing this prospectus and any prospectus supplement and the registration
statement and any amendments thereto. The selling stockholders will pay any
brokerage commissions and similar selling expenses, if any, attributable in
connection with the sale of the shares of common stock including stock transfer
taxes due or payable in connection with the sale of the shares.
We have agreed to keep the registration statement, of which this prospectus
and any subsequent prospectus supplement constitute a part, effective until such
time as all of the securities covered by this registration statement may be
freely sold by the selling stockholders (other than BI Partners LLC, Merrill
Lynch, Pierce, Fenner & Smith Incorporated and NMS Services (Cayman) Inc.)
without registration pursuant to Rule 144(k) of the Securities Act, assuming
none of the selling stockholders is an affiliate of Verio. With regard to BI
Partners LLC, on the one hand, and Merrill Lynch, Pierce, Fenner & Smith
Incorporated and NMS Services (Cayman) Inc., on the other hand, we have agreed
only to keep the registration statement effective for at least 180 days in the
case of the former and 120 days in the case of the latter. There can be no
assurance that the selling stockholders will sell all or any of the shares of
convertible preferred stock or common stock offered hereunder.
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<PAGE> 55
Under the securities laws of certain states, the securities may be sold in
such states only through registered or licensed brokers or dealers.
Selling stockholders may also resell all or a portion of the securities in
open market transactions in reliance upon Rule 144 under the Securities Act of
1933, as amended, provided they meet the criteria and conform to the
requirements of such Rule. In addition, any securities covered by this
prospectus which qualify for sale pursuant to Rule 144A of the Securities Act,
as amended, may be sold under Rule 144A rather than pursuant to this prospectus.
A selling stockholder may not sell any convertible preferred stock or common
stock by other means not described in this prospectus.
We entered into registration rights agreements (including registration
rights obligations under the former Hiway warrants) for the benefit of the
selling stockholders to register their convertible preferred stock and/or common
stock under applicable federal and state securities laws under certain
circumstances and at certain times. Pursuant to such registration rights
agreements and obligations, Verio has agreed to indemnify the selling
stockholders, and the selling stockholders have agreed to indemnify Verio, and
each of Verio and the selling stockholders has agreed to indemnify certain other
persons named and/or described in the registration rights agreements and
obligations (which generally includes each underwriter (if any) that
participates in the offering or sale of the securities and each person (if any)
who controls such underwriter), in each case against certain liabilities,
including certain liabilities arising under the Securities Act of 1933, as
amended, in connection with the offer and sale of the convertible preferred
stock and common stock.
LEGAL OPINIONS
The validity of the shares of convertible preferred stock and common stock
offered hereby will be passed upon by Morrison & Foerster LLP, San Francisco,
California.
EXPERTS
The consolidated financial statements of Verio and its subsidiaries as of
December 31, 1997 and 1998 and for the period from inception (March 1, 1996) to
December 31, 1996, and the years ended December 31, 1997 and 1998 and the
financial statements of NSNet, Inc. as of December 31, 1996 and 1997 and for the
years ended December 31, 1996 and 1997 and the period from January 1, 1998 to
February 27, 1998; Access One, Inc. as of December 31, 1997 and for the year
ended December 31, 1997 and the period from January 1, 1998 to February 27,
1998; STARnet, L.L.C. as of December 31, 1997 and for the year ended December
31, 1997 and the period from January 1, 1998 to April 14, 1998; Computing
Engineers Inc. as of December 31, 1996 and 1997 and for the years ended December
31, 1996 and 1997 and the period from January 1, 1998 to April 15, 1998; LI Net,
Inc. as of April 30, 1997 and January 31, 1998 and for the years ended April 30,
1996 and 1997, the nine months ended January 31, 1998 and the period from
February 1, 1998 to April 9, 1998; NTX, Inc. as of and for the nine months ended
June 30, 1998; and Best Internet Communications, Inc. and its subsidiaries as of
and for the year ended December 31, 1998, have been incorporated by reference
herein and in the registration statement in reliance upon the reports of KPMG
LLP, independent certified public accountants, incorporated by reference herein,
and upon the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
We have filed with the Securities and Exchange Commission, or the SEC, a
registration statement on Form S-3 under the Securities Act of 1933. This
prospectus, and any subsequent prospectus supplement, do not contain all of the
information in the registration statement. We have omitted from this prospectus
certain parts of the registration statement, as permitted by the rules and
regulations of the SEC. This prospectus provides you only with a general
description of the offered securities. Each time offered securities are to be
sold, we will provide, if required, a prospectus supplement that will contain
specific information about the terms of that offering. The prospectus supplement
may also add, update or change
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<PAGE> 56
any information contained in this prospectus. You should read both this
prospectus and any prospectus supplement together with the additional
information described under this heading.
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may inspect and copy the registration statement,
including exhibits, and any reports, statements or other information that we
file at the SEC's public reference rooms at 450 Fifth Street, N.W., Washington,
D.C. 20549. You can call the SEC at 1-800-SEC-0330 for further information about
the public reference rooms. In addition, the SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and information statements,
and other information regarding issuers that file electronically with the SEC.
Our common stock is quoted on The Nasdaq National Market. Reports, proxy and
information statements and other information concerning us may be inspected at
The Nasdaq Stock Market, Reports Section, at 1735 K Street, N.W., Washington,
D.C. 20006.
The SEC allows us to "incorporate by reference" information into this
prospectus and any subsequent prospectus supplement, which means that we can
disclose important information to you by referring you to another document filed
separately with the SEC. This prospectus incorporates by reference documents
which are not presented in this prospectus or delivered to you with it. The
information incorporated by reference is an important part of this prospectus
and any subsequent prospectus supplement and information that we file
subsequently with the SEC will automatically update this prospectus and any
outstanding prospectus supplements. We incorporate by reference the documents
listed below (and amendments thereto) that we previously filed with the SEC.
These documents contain important information about us and our finances. The
information in certain of these documents was provided prior to our two-for-one
stock split completed on August 20, 1999. Accordingly, all share numbers and
operative share price information in such documents should be adjusted to give
effect to such stock split.
(i) Our annual report on Form 10-K for our fiscal year ended December
31, 1998. This report contains the audited and consolidated financial
statements for us and our subsidiaries as of December 31, 1997 and 1998 and
for the period from inception (March 1, 1996) to December 31, 1996 and the
years ended December 31, 1997 and 1998;
(ii) Our current report on Form 8-K dated January 11, 1999;
(iii) Our quarterly report on Form 10-Q for our fiscal quarter ended
March 31, 1999;
(iv) Our quarterly report on Form 10-Q for our fiscal quarter ended
June 30, 1999;
(v) Our quarterly report on Form 10-Q for our fiscal quarter ended
September 30, 1999;
(vi) The following sections contained in our registration statement on
Form S-4 (registration number 333-70727) dated January 15, 1999, as
amended: "Management," "Certain Transactions," "Description of Capital
Stock," and pro forma condensed combined financial statements and the
financial statements of certain acquired affiliates appearing on pages F-5
to F-18 and F-137 to F-183; and
(vii) The description of our common stock contained in our
registration statement on Form 8-A dated May 8, 1998, filed under the
Exchange Act, as amended, including any amendment or report filed for the
purpose of updating such description.
We are also incorporating by reference in this prospectus and any
subsequent prospectus supplement all reports and other documents that we file
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act of 1934, as
amended, after the date of this prospectus and prior to the termination of the
offering of the convertible preferred stock and common stock hereunder. These
reports and documents will be incorporated by reference in and considered to be
a part of this prospectus and any subsequent prospectus supplement as of the
date of filing such reports and documents.
We will provide without charge to each person to whom a copy of this
prospectus is delivered, including any beneficial owner, upon written or oral
request, a copy of the information that has been or may be incorporated by
reference in this prospectus, other than exhibits to the relevant documents
which we will send to you for a reasonable fee. Direct any request for copies to
the office of the Secretary, at our
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<PAGE> 57
corporate headquarters, located at 8005 South Chester Street, Suite 200,
Englewood, Colorado 80112 (telephone number (303) 645-1900).
Any statement contained in a document which is incorporated by reference in
this prospectus or in any subsequent prospectus supplement will be modified or
superseded for purposes of this prospectus or any subsequent prospectus
supplement to the extent that a statement contained herein or incorporated
herein or in any prospectus supplement or in any document that we file after the
date of this prospectus that also is incorporated by reference herein or in any
subsequent prospectus supplement modifies or supersedes such prior statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this prospectus or any
subsequent prospectus supplement. Subject to the foregoing, all information
appearing in this prospectus is qualified in its entirety by the information
appearing in the documents incorporated by reference herein.
You should rely only on the information contained or incorporated by
reference in this prospectus or any applicable prospectus supplement. We have
not authorized anyone to provide you with any other information. These
securities may only be offered in states where the offer is permitted and the
selling stockholders are not making an offer of these securities in any state
where the offer is not permitted. You should not assume that the information in
this prospectus or any applicable prospectus supplement is accurate as of any
date other than the dates on the front of those documents.
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<PAGE> 58
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an estimate, subject to future contingencies, of the
expenses to be incurred by us in connection with the issuance and distribution
of the securities being registered:
<TABLE>
<S> <C>
Registration Fee............................................ $118,573
Legal Fees and Expenses*.................................... $ 50,000
Accounting Fees and Expenses*............................... $ 15,000
Printing and Engraving Fees*................................ $ 5,000
Listing Fees*............................................... $ 17,500
Miscellaneous*.............................................. $ 5,000
--------
Total............................................. $211,073
========
</TABLE>
- ---------------
* Estimated pursuant to instruction to Item 511 of Regulation S-K.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145(a) of the Delaware General Corporation Law (the "DGCL")
provides in relevant part that "a corporation shall have the power to indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interest of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was
unlawful." With respect to derivative actions, Section 145(b) of the DGCL
provides in relevant part that "[a] corporation shall have the power to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor...[by reason of his service in
one of the capacities specified in the preceding sentence] against expenses
(including attorneys' fees) actually and reasonably incurred by the person in
connection with the defense or settlement of such action or suit if the person
acted in good faith and in a manner the person reasonably believed to be in or
not opposed to the best interest of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper."
Verio's Second Restated Certificate of Incorporation provides that each
person who is or was or who had agreed to become a director or officer of Verio
or who had agreed at the request of Verio's Board of Directors or an officer of
Verio to serve as an employee or agent of Verio or as a director, officer,
employee or agent or another corporation, partnership, joint venture, trust or
other enterprise, shall be indemnified by Verio to the full extent permitted by
the DGCL or any other applicable laws. Such Second Restated Certificate of
Incorporation also provides that Verio may enter into one or more agreements
with any person which provides for indemnification greater or different than
that provided in such Certificate, and that no amendment or repeal of such
Certificate shall apply to or have any effect on the right to indemnification
permitted or authorized thereunder for or with respect to claims asserted before
or after
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<PAGE> 59
such amendment or repeal arising from acts or omissions occurring in whole or in
part before the effective date of such amendment or repeal.
Verio's Bylaws provide that Verio shall indemnify to the fullest extent
authorized by law any person made or threatened to be made a party to an action
or a proceeding, whether criminal, civil, administrative or investigative, by
reason of the fact that he, his testator or intestate was or is a director,
officer or employee of Verio or any predecessor of Verio or serves or served any
other enterprise as a director, officer or employee at the request of Verio or
any predecessor of Verio.
Verio has entered into indemnification agreements with its directors and
certain of its officers.
Verio has purchased and maintains insurance on behalf of any person who is
or was a director or officer against loss arising from any claim asserted
against him and incurred by him in any such capacity, subject to certain
exclusions.
See also the undertakings set out in response to Item 17 herein.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 -- Certificate of Designations of the Powers, Preferences
and Relative, Participating, Optional and Other Special
Rights of Series A 6.75% Convertible Preferred Stock and
Qualifications, Limitations and Restrictions Thereof
dated July 20, 1999. Exhibit 3.1 to Verio's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999
is incorporated herein by reference.
4.1 -- Certificate of Designations (see Exhibit 3.1 to this
registration statement).
4.2 -- Registration Rights Agreement, dated as of July 20, 1999,
by and among Verio Inc., Salomon Smith Barney Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation,
Credit Suisse First Boston Corporation, Deutsche Bank
Securities Inc. and First Union Capital Markets Corp.
Exhibit 4.2 to Verio's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999 is incorporated herein by
reference.
4.3 -- Deposit Agreement, dated as of July 20, 1999, by and
between Verio Inc. and Norwest Bank Minnesota, N.A.
Exhibit 4.1 to Verio's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999, is incorporated herein
by reference.
5.1 -- Opinion of Morrison & Foerster LLP together with consent.
8.1 -- Opinion of Morrison & Foerster LLP regarding tax matters
together with consent.
12.1 -- Statement regarding Computation of Ratios.
23.1 -- Consent of Morrison & Foerster LLP (contained in the
opinions of counsel filed as Exhibit 5.1 and Exhibit 8.1
to this registration statement).
23.2 -- Consent of KPMG LLP, independent public accountants.
24.1 -- Powers of Attorney (see page II-5 of the registration
statement).
</TABLE>
II-2
<PAGE> 60
ITEM 17. UNDERTAKINGS
(a) 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 the 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 the 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 Securities and Exchange 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 the registration statement
or any material change to such information in the registration
statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed
with or furnished to the Securities and Exchange Commission by the
registrant pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement 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) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-3
<PAGE> 61
(d) The undersigned registrant hereby undertakes that for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
of 1933 shall be deemed to be part of this registration statement as of the time
it was declared effective.
(e) The undersigned registrant hereby undertakes that for the purpose of
determining any liability under the Securities Act of 1933, 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.
II-4
<PAGE> 62
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Englewood, Colorado on November 16, 1999.
VERIO INC.
By: /s/ JUSTIN L. JASCHKE
----------------------------------
Justin L. Jaschke
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Justin L. Jaschke, Peter B. Fritzinger and Carla
Hamre Donelson, and each of them, each with full power to act without the other,
his true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for such person and in his name, place and
stead, in any and all capacities, to sign any or all further amendments or
supplements (including post-effective amendments filed pursuant to Rule 462(b)
of the Securities Act of 1933) to this Form S-3 registration statement and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto each of
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully as to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that each of said attorneys-in-fact
and agents, or his substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ STEVEN C. HALSTEDT Chairman of the Board November 16, 1999
- -----------------------------------------------------
Steven C. Halstedt
/s/ JUSTIN L. JASCHKE Chief Executive Officer and November 16, 1999
- ----------------------------------------------------- Director
Justin L. Jaschke
/s/ HERBERT R. HRIBAR President, Chief Operating November 16, 1999
- ----------------------------------------------------- Officer and Director
Herbert R. Hribar
/s/ JAMES C. ALLEN Director November 16, 1999
- -----------------------------------------------------
James C. Allen
/s/ TRYGVE E. MYHREN Director November 16, 1999
- -----------------------------------------------------
Trygve E. Myhren
/s/ PAUL J. SALEM Director November 16, 1999
- -----------------------------------------------------
Paul J. Salem
</TABLE>
II-5
<PAGE> 63
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ YUKIMASA ITO Director November 16, 1999
- -----------------------------------------------------
Yukimasa Ito
/s/ ARTHUR L. CAHOON Director November 16, 1999
- -----------------------------------------------------
Arthur L. Cahoon
/s/ PETER B. FRITZINGER Chief Financial Officer November 16, 1999
- ----------------------------------------------------- (Principal Accounting
Peter B. Fritzinger Officer)
</TABLE>
II-6
<PAGE> 64
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 -- Certificate of Designations of the Powers, Preferences
and Relative, Participating, Optional and Other Special
Rights of Series A 6.75% Convertible Preferred Stock and
Qualifications, Limitations and Restrictions Thereof
dated July 20, 1999. Exhibit 3.1 to Verio's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999
is incorporated herein by reference.
4.1 -- Certificate of Designations (see Exhibit 3.1 to this
registration statement).
4.2 -- Registration Rights Agreement, dated as of July 20, 1999,
by and among Verio Inc., Salomon Smith Barney Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation,
Credit Suisse First Boston Corporation, Deutsche Bank
Securities Inc. and First Union Capital Markets Corp.
Exhibit 4.2 to Verio's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999 is incorporated herein by
reference.
4.3 -- Deposit Agreement, dated as of July 20, 1999, by and
between Verio Inc. and Norwest Bank Minnesota, N.A.
Exhibit 4.1 to Verio's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999 is incorporated herein by
reference.
5.1 -- Opinion of Morrison & Foerster LLP together with consent.
8.1 -- Opinion of Morrison & Foerster LLP regarding tax matters
together with consent.
12.1 -- Statement regarding Computation of Ratios.
23.1 -- Consent of Morrison & Foerster LLP (contained in the
opinions of counsel filed as Exhibit 5.1 and Exhibit 8.1
to this registration statement).
23.2 -- Consent of KPMG LLP, independent public accountants.
24.1 -- Powers of Attorney (see page II-5 of the registration
statement).
</TABLE>
<PAGE> 1
EXHIBIT 5.1
November 16, 1999
Verio Inc.
8005 South Chester Street, Suite 200
Englewood, Colorado 80112
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form
S-3 of Verio Inc., a Delaware corporation (the "Company"), to be filed with the
Securities and Exchange Commission (the "Registration Statement"), relating to
the registration under the Securities Act of 1933, as amended, of up to
7,200,000 shares of the Company's 6.75% Series A Convertible Preferred Stock,
$0.001 par value per share (the "Convertible Preferred Stock"), up to 7,456,261
shares of the Company's Common Stock, $0.001 par value per share (the "Common
Stock"), issuable upon conversion of the Convertible Preferred Stock (the
"Conversion Stock"), up to 1,705,346 shares of the Company's Common Stock that
may be paid as dividends on the Convertible Preferred Stock (the "Dividend
Stock") or that may be delivered in exchange for funds held in a deposit account
on behalf of the holders of the Company's Convertible Preferred Stock (the
"Deposit Stock"), and 332,704 shares of the Company's Common Stock where such
Common Stock is held by certain holders who have invoked their contractual
registration rights with the Company ("Piggyback Registration Stock"). The
Convertible Preferred Stock, Conversion Stock, Dividend Stock, Deposit Stock and
Piggyback Registration Stock may be sold to the public by the selling
stockholders named in the Registration Statement; the Dividend Stock may be
issued and paid by the Company to the holders of the Convertible Preferred
Stock; and the Deposit Stock may be sold by the Company to Norwest Bank
Minnesota, N.A., as Deposit Agent (the "Deposit Agent"), for delivery directly
to the holders of the Convertible Preferred Stock, pursuant to the terms of that
certain Deposit Agreement, dated as of July 20, 1999, by and between the Company
and the Deposit Agent.
As counsel to the Company, we have examined the proceedings taken by
the Company in connection with the issuance or possible future issuance, as the
case may be, by the Company of the Convertible Preferred Stock, Conversion
Stock, Dividend Stock, Deposit Stock and Piggyback Registration Stock.
We are of the opinion that:
1) The shares of the Convertible Preferred Stock and Piggyback
Registration Stock issued, sold and delivered by the Company have been duly
authorized and have been legally issued, are fully paid and are nonassessable.
<PAGE> 2
2) Upon conversion of the Convertible Preferred Stock, the Conversion
Stock, when issued by the Company in the manner described in the Registration
Statement, will be duly authorized and legally issued, fully paid and
nonassessable.
3) If, when and as issued by the Company in the manner described in the
Registration Statement and in accordance with the resolutions adopted by the
Board of Directors of the Company, the Dividend Stock will be legally issued,
fully paid and nonassessable.
4) If, when and as issued and sold by the Company in the manner
described in the Registration Statement and in accordance with the resolutions
adopted by the Board of Directors of the Company, the Deposit Stock will be
legally issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to all references to us in the Registration
Statement, the prospectus constituting a part thereof and any supplements and
amendments thereto.
Very truly yours,
/s/ Morrison & Foerster LLP
<PAGE> 1
EXHIBIT 8.1
November 16, 1999
Verio Inc.
8005 South Chester Street, Suite 200
Englewood, Colorado 80112
Ladies and Gentlemen:
We have acted as counsel to Verio Inc. ("Verio"), a Delaware
corporation, in connection with the offering (a) from time to time by certain
holders of (1) 6.75% Series A convertible preferred stock, par value $0.001 per
share, of Verio ("Convertible Preferred Stock"), (2) common stock, par value
$0.001 per share, of Verio ("Common Stock") issuable upon conversion of the
Convertible Preferred Stock, (3) Common Stock that may be paid as dividends on
the Convertible Preferred Stock or that may be delivered by Verio in exchange
for funds held in a deposit account on behalf of the holders of the Convertible
Preferred Stock, and (4) Common Stock where such Common Stock is held by certain
holders who have invoked their contractual registration rights with Verio, and
(b) at Verio's option (1) of shares of Common Stock that may be paid by Verio,
in lieu of cash, as dividends on the Convertible Preferred Stock from time to
time during the two-year period from the date that the Convertible Preferred
Stock was issued by Verio, and (2) of shares of Common Stock that may be issued
by Verio at its option through, at the latest, August 1, 2000, in exchange for
funds held in the deposit account on behalf of the holders of the Convertible
Preferred Stock (hereinafter, the "Offering"). The Offering is described in the
Registration Statement of Verio on Form S-3 (the "Registration Statement") filed
on the date hereof with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), which includes a prospectus of Verio (the "Prospectus"). In that
connection, we have reviewed the Prospectus and such other materials as we have
deemed necessary or appropriate for purposes of our opinion, and we have assumed
the truth and accuracy thereof.
The conclusion expressed herein represents our judgment of the proper
treatment of certain aspects of the Offering under the income tax laws of the
United States based upon the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury Regulations, rulings and other pronouncements of the Internal
Revenue
<PAGE> 2
Verio, Inc.
November 16, 1999
Page 2
Service (the "IRS") currently in effect, and judicial decisions, all of which
are subject to change, prospectively or retroactively. No assurance can be given
that such changes will not take place, or that such changes would not affect the
conclusion expressed herein. Furthermore, our opinion represents only our best
judgment of how a court would conclude if presented with the issues addressed
herein and is not binding upon either the IRS or any court. Thus, no assurance
can be given that a position taken in reliance on our opinion will not be
challenged by the IRS or rejected by a court.
Our opinion relates solely to the tax consequences of the Offering
under the federal income tax laws of the United States, and we express no
opinion (and no opinion should be inferred) regarding the tax consequences of
the Offering under the laws of any other jurisdiction. This opinion addresses
only the specific issue set forth below, and does not address any other tax
consequences that may result from the Offering or any other transaction.
Based upon and subject to the foregoing, it is our opinion that the
discussion contained in the Registration Statement under the caption "Federal
Tax Considerations", to the extent that it pertains to matters of law or legal
conclusions, is correct in all material respects.
This opinion is being furnished in connection with the Registration
Statement. You may rely upon and refer to the foregoing opinion in the
Prospectus. In addition, we hereby consent to the inclusion of this opinion as
an exhibit to the Prospectus. Any variation or difference in any fact from those
set forth or assumed either herein or in the Prospectus may affect the
conclusions stated herein.
We hereby consent to the use of our name in the Prospectus and to the
filing of this opinion as an Exhibit to the Registration Statement. In giving
this consent, we do not admit that we come within the category of persons whose
consent is required under Section 7 of the Securities Act or the rules and
regulations of the Commission thereunder.
Very truly yours,
/s/ Morrison & Foerster LLP
<PAGE> 1
EXHIBIT 12.1
VERIO INC.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Nine months
Year Ended December 31, Ended September 30,
------------------------------- --------------------
1996 1997 1998 1998 1999
-------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Pre-tax loss from continuing operations before
adjustment for minority interests in
consolidated subsidiaries or income or loss
from equity investees $ (5,802) (47,993) (112,336) (78,663) (132,744)
Add:
Interest on debt 115 11,826 35,946 22,860 61,677
Interest portion of rentals 43 619 1,349 1,012 1,901
Amortization of debt issuance costs 175 178 1,358 817 1,791
-------- ------- -------- ------- --------
Earnings available for combined fixed charges
and preferred stock dividends $ (5,469) (35,370) (73,683) (53,974) (67,375)
======== ======= ======== ======= ========
Fixed charges:
Interest on debt 115 11,826 35,946 22,860 61,677
Interest portion of rentals (1/3 interest expense) 43 619 1,349 1,012 1,901
Amortization of debt issuance costs 175 178 1,358 817 1,791
Preferred stock dividend requirements of Verio 23 260 87 87 4,793
-------- ------- -------- ------- --------
Total fixed charges $ 356 12,883 38,740 24,776 70,162
======== ======= ======== ======= ========
Ratio of earnings to combined fixed charges and
preferred stock dividends -- -- -- -- --
Deficiency $ (5,825) (48,253) (112,423) (78,750) (137,537)
======== ======= ======== ======= ========
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Verio Inc.:
We consent to the use of our reports incorporated herein by reference
and to the reference to our firm under the heading "Experts" in the Prospectus.
/s/ KPMG LLP
KPMG LLP
Denver, Colorado
November 16, 1999
