<PAGE> 1
================================================================================
FORM 10-Q
----------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 1999
---------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
---------------
COMMISSION FILE NUMBER: 000-24219
---------------
VERIO INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1339720
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8005 S. CHESTER STREET, SUITE 200
ENGLEWOOD, COLORADO 80112
(Address of principal executive offices)
(Zip Code)
303/645-1900
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the registrant's Common Stock outstanding as of
August 11, 1999 was 38,108,024.
================================================================================
<PAGE> 2
VERIO INC.
FORM 10-Q
JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets-- December 31, 1998 and June 30, 1999
(unaudited).................................................................. 2
Condensed Consolidated Statements of Operations-- Three Months Ended
June 30, 1998 and June 30, 1999 (unaudited).................................. 3
Condensed Consolidated Statements of Operations-- Six Months Ended
June 30, 1998 and June 30, 1999 (unaudited).................................. 4
Condensed Consolidated Statement of Stockholders' Equity-- Six Months
Ended June 30, 1999 (unaudited).............................................. 5
Condensed Consolidated Statements of Cash Flows-- Six Months Ended
June 30, 1998 and June 30, 1999 (unaudited).................................. 6
Notes to Condensed Consolidated Financial Statements............................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................ 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk............... 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 19
Item 2. Changes in Securities and Use of Proceeds................................. 19
Item 3. Defaults Upon Senior Securities........................................... 19
Item 4. Submission of Matters to a Vote of Security Holders....................... 19
Item 5. Other Information......................................................... 20
Item 6. Exhibits and Reports on Form 8-K.......................................... 20
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
VERIO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ----------
(unaudited)
<S> <C> <C>
Current assets:
Cash, cash equivalents and securities available for sale (note 3) ................ $ 577,387 $ 293,516
Restricted cash and securities (note 5) .......................................... 13,629 6,791
Trade receivables, net of allowance for doubtful accounts of $4,763 and $6,533 ... 15,084 23,971
Prepaid expenses and other ....................................................... 7,831 8,388
------------ ----------
Total current assets ....................................................... 613,931 332,666
Restricted cash and securities (note 5) ............................................ 1,176 1,650
Investments in affiliates and others, at cost (note 2) ............................. 8,298 18,902
Prepaid marketing expense (note 2) ................................................. -- 18,400
Equipment and leasehold improvements:
Internet access and computer equipment ........................................... 66,408 106,231
Furniture, fixtures and computer software ........................................ 5,823 7,373
Leasehold improvements ........................................................... 4,887 11,203
------------ ----------
77,118 124,807
Less accumulated depreciation and amortization ................................... (26,672) (42,820)
------------ ----------
Net equipment and leasehold improvements ....................................... 50,446 81,987
Other assets:
Goodwill, net of accumulated amortization of $21,614 and $46,267 (note 4) ........ 236,696 469,825
Debt issuance costs, net of accumulated amortization of $1,710 and $3,165 ........ 18,542 17,967
Other, net (note 2) .............................................................. 4,623 25,903
------------ ----------
Total assets ............................................................... $ 933,712 $ 967,300
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ................................................................. $ 10,501 $ 6,977
Accrued expenses ................................................................. 14,228 44,540
Accrued interest payable ......................................................... 9,634 8,979
Lines of credit, notes payable and current portion of long-term debt (note 5) .... 3,329 933
Current portion of capital lease obligations ..................................... 5,848 9,378
Deferred revenue ................................................................. 12,512 17,056
------------ ----------
Total current liabilities .................................................. 56,052 87,863
Long-term debt, less current portion, net of discount (note 5) ..................... 668,177 672,291
Capital lease obligations, less current portion .................................... 6,441 11,436
Other long-term liabilities (note 2) ............................................... -- 10,156
------------ ----------
Total liabilities .......................................................... 730,670 781,746
------------ ----------
Minority interests in subsidiaries (note 2) ........................................ 361 --
Stockholders' equity:
Preferred stock, undesignated; 12,500,000 shares authorized; no shares issued
and outstanding................................................................. -- --
Common stock $.001 par value; 250,000,000 shares authorized; 66,292,020 and
75,625,748 shares issued and outstanding (post split), at December 31, 1998
and June 30, 1999 (note 6)...................................................... 66 76
Additional paid-in capital ....................................................... 376,131 449,799
Accumulated deficit .............................................................. (173,516) (264,321)
------------ ----------
Total stockholders' equity ................................................. 202,681 185,554
------------ ----------
Commitments and contingencies (note 5)
Total liabilities and stockholders' equity ................................. $ 933,712 $ 967,300
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
VERIO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------------
1998 1999
---------- ----------
(unaudited)
<S> <C> <C>
Revenue:
Internet connectivity:
Dedicated ............................................... $ 12,644 $ 23,102
Dial-up ................................................. 5,739 6,153
Enhanced services and other ................................ 10,158 32,681
---------- ----------
Total revenue ...................................... 28,541 61,936
Costs and expenses:
Cost of service ............................................ 13,318 20,139
Sales and marketing ........................................ 7,198 14,702
General and administrative ................................. 20,654 31,040
Depreciation and amortization .............................. 8,698 25,126
---------- ----------
Total costs and expenses ........................... 49,868 91,007
---------- ----------
Loss from operations ............................... (21,327) (29,071)
Other income (expense):
Interest income ............................................ 3,567 4,232
Interest expense and other ................................. (8,677) (20,854)
---------- ----------
Loss before minority interests ..................... (26,437) (45,693)
Minority interests ........................................... 143 --
---------- ----------
Net loss ........................................... (26,294) (45,693)
Accretion of preferred stock to liquidation value ............ (22) --
---------- ----------
Net loss attributable to common
stockholders ..................................... $ (26,316) $ (45,693)
========== ==========
Weighted average number of common shares
outstanding-- basic and diluted (post split, see note 6) ... 36,486 74,894
========== ==========
Loss per common share-- basic and diluted: ................... $ (0.72) $ (0.61)
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
VERIO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1998 1999
---------- ----------
(unaudited)
<S> <C> <C>
Revenue:
Internet connectivity:
Dedicated ............................................... $ 22,544 $ 44,572
Dial-up ................................................. 9,886 12,766
Enhanced services and other ................................ 17,309 59,722
---------- ----------
Total revenue ...................................... 49,739 117,060
Costs and expenses:
Cost of service ............................................ 22,854 39,545
Sales and marketing ........................................ 12,178 29,533
General and administrative ................................. 35,673 59,845
Depreciation and amortization .............................. 15,079 46,740
---------- ----------
Total costs and expenses ........................... 85,784 175,663
---------- ----------
Loss from operations ............................... (36,045) (58,603)
Other income (expense):
Interest income ............................................ 5,217 9,010
Interest expense and other ................................. (14,228) (41,212)
---------- ----------
Loss before minority interests and
extraordinary item ............................... (45,056) (90,805)
Minority interests ........................................... 545 --
---------- ----------
Loss before extraordinary item ..................... (44,511) (90,805)
Extraordinary item-- loss related to debt repurchase
(note 5) .................................................. (10,101) --
---------- ----------
Net loss ........................................... (54,612) (90,805)
Accretion of preferred stock to liquidation value ............ (87) --
---------- ----------
Net loss attributable to common
stockholders ..................................... $ (54,699) $ (90,805)
========== ==========
Weighted average number of common shares
outstanding-- basic and diluted (post split, see note 6) ... 19,602 73,903
========== ==========
Loss per common share-- basic and diluted:
Loss per common share before extraordinary item ............ $ (2.28) $ (1.23)
Extraordinary item ......................................... (0.51) --
---------- ----------
Loss per common share .............................. $ (2.79) $ (1.23)
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
VERIO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------ PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ---------- ---------- ---------- ----------
BALANCES AT DECEMBER 31, 1998 (post split, see
<S> <C> <C> <C> <C> <C>
note 6) .............................................. 66,292,020 $ 66 $ 376,131 $ (173,516) $ 202,681
Issuance of common stock for:
Exercise of options .................................... 1,631,790 2 4,777 -- 4,778
Exercise of warrants ................................... 1,096,150 2 757 -- 758
Employee purchases ..................................... 169,438 -- 1,125 1,125
Exercise of warrants issued pursuant to
a non-cash exchange of notes ......................... 146,658 -- 564 -- 564
Stock issued pursuant to the acquisition of Best Internet
Communications, Inc. (note 2) ........................ 6,289,692 6 50,318 -- 50,321
Issuance of common stock options and
warrants in business combinations (note 2) ............. -- -- 15,187 -- 15,187
Stock option related compensation and
severance costs (note 6) ............................... -- -- 945 -- 945
Net loss ................................................. -- -- -- (90,805) (90,805)
---------- ---------- ---------- ---------- ----------
BALANCES AT JUNE 30, 1999 (unaudited) .................... 75,625,748 $ 76 $ 449,799 $ (264,321) $ 185,554
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 7
VERIO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1998 1999
---------- ----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................................. $ (54,612) $ (90,805)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization ...................................... 15,079 46,740
Minority interests' share of losses ................................ (545) --
Stock option related compensation and severance costs .............. 2,001 1,345
Extraordinary item-- loss related to debt repurchase ............... 10,101 --
Changes in operating assets and liabilities, excluding
effects of business combinations:
Receivables ...................................................... (2,264) (4,810)
Prepaid expenses and other current assets ........................ (247) (8,456)
Accounts payable ................................................. (1,885) (4,395)
Accrued expenses ................................................. (1,626) 12,099
Accrued interest payable ......................................... 4,824 (232)
Deferred revenue ................................................. (847) (784)
---------- ----------
Net cash used by operating activities ......................... (30,021) (49,298)
---------- ----------
Cash flows from investing activities:
Acquisition of equipment and leasehold improvements ................ (8,124) (21,459)
Acquisition of net assets in business combinations and
investments in affiliates and others, net of cash acquired ....... (63,917) (207,637)
Change in restricted cash and securities ........................... 19,839 6,697
Other .............................................................. (588) (10,559)
---------- ----------
Net cash used by investing activities ......................... (52,790) (232,958)
---------- ----------
Cash flows from financing activities:
Proceeds from lines of credit, notes payable and
long-term debt .................................................. 169,731 --
Repayments of lines of credit and notes payable .................... (57,729) (3,580)
Repayments of capital lease obligations ............................ (1,316) (4,696)
Proceeds from issuance of common and preferred stock, net
of issuance costs ................................................. 222,129 6,661
---------- ----------
Net cash provided (used) by financing activities .............. 332,815 (1,615)
---------- ----------
Net increase (decrease) in cash and cash
equivalents and securities available for sale ............... 250,004 (283,871)
Cash, cash equivalents and securities available for sale:
Beginning of period ................................................ 72,586 577,387
---------- ----------
End of period ...................................................... $ 322,590 $ 293,516
========== ==========
Supplemental disclosures of cash flow information:
Cash paid for interest ............................................. $ 9,987 $ 40,858
========== ==========
Supplemental disclosures of non-cash investing and financing
activities:
Equipment acquired through capital lease obligations ................ $ 6,363 $ 11,990
========== ==========
Acquisition of net assets in business combinations through
issuance of common stock and common stock options and warrants .... $ 28,663 $ 65,508
========== ==========
Other liabilities incurred for:
Prepaid marketing expense and acquisition of customers through AOL
agreement ......................................................... $ -- $ 25,000
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 8
VERIO INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Verio Inc. ("Verio" or the "Company") was incorporated on March 1, 1996.
Since then, Verio has rapidly established a global presence by acquiring and
growing Internet service providers with a business customer focus. Verio is the
world-wide leader in hosting domain-based Web sites, based on the number of
domain names that we host, and a leading provider of high speed connectivity and
enhanced services such as electronic commerce and virtual private networks to
small and medium sized businesses. Verio commenced operations in April 1996 and
had no activity other than the sale of common stock to founders prior to April
1, 1996. Verio operates in one business segment and has operations in the United
States and Europe. International operations were not significant in 1998 or the
six months ended June 30, 1999.
The accompanying unaudited financial information as of June 30, 1999 and the
three and six-month periods ended June 30, 1998 and 1999 has been prepared in
accordance with generally accepted accounting principles for interim financial
information. All significant adjustments, consisting of only normal and
recurring adjustments, which, in the opinion of management, are necessary for a
fair presentation of the results of the three and six months ended June 30, 1998
and 1999 have been included. Operating results for the three and six-month
period ending June 30, 1999 are not necessarily indicative of the results that
may be expected or the full year.
The accompanying consolidated financial statements include the accounts of
Verio and our majority owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation. The preparation of
financial statements requires our management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates. Certain reclassifications have been
made to the 1998 financial statements to conform with the 1999 financial
statement presentation.
Subsequent to June 30, 1999, the Company announced a two-for-one stock split
that will become effective on August 20, 1999, for stockholders of record at the
close of business on August 3, 1999 (the "Stock Split"). The Stock Split will be
effected in the form of a dividend. The effect of the Stock Split is reflected
in the accompanying financial statements for all periods presented.
(2) BUSINESS COMBINATIONS, INVESTMENTS IN AFFILIATES AND ASSET ACQUISITIONS
During the six months ended June 30, 1999, Verio completed two business
combinations for cash and common stock. Each of these acquisitions was accounted
for using the purchase method of accounting, and represents the acquisition of
stock. Outstanding stock options and warrants of the acquired businesses were
included in the determination of the purchase prices based on fair values. The
results of operations for the two acquired businesses are included in Verio's
consolidated statement of operations from the dates of acquisition. Summary
information regarding the business combinations is as follows:
<TABLE>
<CAPTION>
OWNERSHIP
INTEREST APPROXIMATE
BUSINESS NAME ACQUISITION DATE PURCHASED PURCHASE PRICE
------------- ---------------- --------- --------------
(in thousands)
<S> <C> <C> <C>
Best Internet Communications, Inc... January 5, 1999 100% $ 241,505
Web Communications, LLC....... February 19, 1999 100% 8,000
---------
$ 249,505
Acquisition costs.......................................................... 3,986
---------
$ 253,491
=========
</TABLE>
The aggregate purchase price, including acquisition costs, was allocated based
upon fair values as follows:
<TABLE>
<S> <C>
Equipment................................ $ 15,278
Goodwill................................. 248,447
Net current liabilities.................. (10,234)
---------
Total purchase price.............. $ 253,491
=========
</TABLE>
In January 1999, Verio completed the acquisition of all the outstanding
common stock of Best Internet Communications, Inc. (which does business as Hiway
Technologies, Inc. and which we refer to as "Hiway") for total consideration of
approximately $241.5 million, including $176.0 million in cash and approximately
4.9 million fully diluted shares of common stock (9.8 million shares after
7
<PAGE> 9
taking into account the Stock Split. In February 1999, Verio also completed the
acquisition of Web Communications, LLC for approximately $8.0 million in cash.
For the six months ended June 30, 1998, on a pro forma basis, assuming the
Hiway acquisition occurred on January 1, 1998, total revenue would have
increased to $68.2 million, net loss attributable to common stockholders would
have increased to $65.1 million and loss per share would have decreased to $2.51
(as adjusted to give effect to the Stock Split) due to the additional common
stock issued pursuant to the Hiway acquisition purchase agreement.
Investment in affiliates at June 30, 1999 represents the Company's
cost-based investments, primarily in V-I-A Internet, Inc. and NorthPoint
Communications, Inc.
Effective March 4, 1999, Verio entered into an agreement with America
Online, Inc. ("AOL"). Under this three-year agreement, Verio will purchase
advertising promotions from AOL to promote Verio's Web hosting and related
business-focused commerce products and services on AOL's four key U.S. on-line
media properties. Verio's promotional rights with respect to our Web hosting and
designated electronic commerce products and services are exclusive during this
period on these four specified sites. AOL also will transition its Prime Host
and CompuServe BusinessWeb hosting customers to Verio. Verio agreed to make
guaranteed payments totaling $42.5 million over the first two years of the
agreement, with AOL participating in future revenue under specified
circumstances defined in the agreement. The first payment of $17.5 million was
made in March 1999. The payments to AOL have been allocated to subscribers and
prepaid advertising costs based on the estimated fair value of the assets
acquired.
Subsequent to June 30, 1999 we acquired all of the outstanding stock of
digitalNATION, Inc. for $100.0 million in cash.
(3) CASH, CASH EQUIVALENTS AND SECURITIES AVAILABLE FOR SALE
Verio considers all highly liquid debt instruments with original maturities
of three months or less to be cash equivalents. Verio's securities available for
sale consist of readily marketable debt securities with remaining maturities of
more than 90 days at the time of purchase which are carried at cost which
approximates market value. The balances of securities available for sale were
$143,963,000 and $102,457,000 at December 31, 1998 and June 30, 1999,
respectively.
(4) OTHER ASSETS
Goodwill consists of the excess of cost over the fair value of net assets
acquired and is generally amortized using a straight-line method over a 10-year
period. Debt issuance costs are amortized over the life of the debt. Other
intangibles consist primarily of the costs associated with customer acquisitions
and non-compete agreements and are amortized over a three-year period.
(5) DEBT
On November 25, 1998, Verio completed the private placement of $400.0
million principal amount of senior notes due 2008 (the "November 1998 Notes").
The November 1998 Notes are redeemable at the option of Verio commencing
December 1, 2003. The November 1998 Notes mature on December 1, 2008. Interest
on the November 1998 Notes, at the annual rate of 11-1/4%, is payable
semi-annually in arrears on June 1 and December 1 of each year, commencing June
1, 1999. The November 1998 Notes are senior unsecured obligations of Verio
ranking equally in right of payment with all existing and future unsecured and
senior indebtedness. The November 1998 Notes contain terms that are
substantially similar to the March 1998 Notes and the 1997 Notes (each as
defined below).
On March 25, 1998, Verio completed the private placement of $175.0 million
principal amount of senior notes due 2005 (the "March 1998 Notes"). The March
1998 Notes are redeemable at the option of Verio commencing April 1, 2002. The
March 1998 Notes mature on April 1, 2005. Interest on the March 1998 Notes, at
the annual rate of 10-3/8%, is payable semi-annually in arrears on April 1 and
October 1 of each year, commencing October 1, 1998. The March 1998 Notes are
senior unsecured obligations of Verio ranking equally in right of payment with
all existing and future unsecured and senior indebtedness. The March 1998 Notes
contain terms that are substantially similar to the 1997 Notes. Verio used
approximately $54.5 million of the proceeds plus accrued interest to repurchase
$50.0 million principal amount of the 1997 Notes. As a result, Verio was
refunded approximately $13.3 million from the escrow account for the 1997 Notes,
of which approximately $1.9 million was used to pay accrued and unpaid interest.
This transaction resulted in an extraordinary loss of $10.1 million.
8
<PAGE> 10
In June 1997, Verio completed a debt offering of $150.0 million, 13-1/2%
Senior Notes due 2004 (the "1997 Notes") and warrants to purchase 2,112,480
shares of common stock (4,224,960 shares giving effect to the Stock Split) at
$.01 per share, expiring on June 15, 2004, which were valued at approximately
$12.7 million based on Verio's most recent equity offering. Interest on the 1997
Notes is payable semi-annually on June 15 and December 15 of each year. The
value attributed to the warrants was recorded as debt discount and is being
amortized to interest expense using the interest method over the term of the
1997 Notes. Upon closing, Verio deposited U.S. Treasury securities in an escrow
account in an amount that, together with interest on the securities, will be
sufficient to fund the first five interest payments (through December 1999) on
the 1997 Notes. This restricted cash and securities balance totaled $6.8 million
at June 30, 1999. The 1997 Notes are redeemable on or after June 15, 2002 at
103% of the face value, decreasing to face value at maturity. The indenture
covering the 1997 Notes includes various covenants restricting the payment of
dividends, additional indebtedness, disposition of assets, and transactions with
affiliates.
Subsequent to June 30, 1999, Verio replaced its earlier $70.0 million
revolving credit facility with a new $100.0 million revolving credit facility.
The $100.0 million facility is secured by substantially all the stock of Verio's
subsidiaries and by the 15 year capacity agreement with Qwest Communications
Corporation, and matures on June 30, 2002. Interest on borrowings is at 2% above
the London Interbank Offered Rate, and there is a commitment fee of 1/2 of 1%
per annum on the unused portion of the facility. There are no borrowings
outstanding under this facility.
(6) STOCKHOLDERS' EQUITY
The Stock Split is reflected in the accompanying financial statements for
all periods presented.
Stock-Based Compensation Plans
Verio has established Incentive Stock Option Plans (the "Plans"). At the
discretion of our board of directors (the "Board"), Verio may grant stock
options to employees of Verio and our controlled subsidiaries. Prior to Verio's
initial public offering ("IPO"), the option price was determined by the Board at
the time the option was granted, with such price being not less than the fair
market value of Verio's common stock at the date of grant, as determined by the
Board. Typically, this determination was based on Verio's other equity
offerings. Options granted subsequent to the IPO are granted at fair value based
on the trading price for Verio's common stock on The Nasdaq National Market
("NASDAQ") at the time of grant. Because option grants were made at strike
prices based on a current fair market value determination, Verio had not
recorded compensation expense related to the granting of stock options in 1996,
1997 and through February 28, 1998. With respect to certain option grants made
subsequent to February 28, 1998 and before the completion of the IPO, Verio
granted options to employees with exercise prices that subsequently were
determined to be less than the fair value per share based upon Verio's estimated
price per share in the IPO. Accordingly, Verio is recognizing compensation
expense totaling approximately $7.5 million, as adjusted for forfeitures, pro
rata over the forty-eight month vesting period of the options. This compensation
expense totaled approximately $0.9 million for the six months ended June 30,
1999. There were 9.8 million shares of options and warrants (19.6 million shares
giving effect to the Stock Split) outstanding at June 30, 1999 with a weighted
average exercise price of $18.75 per share ($9.38 per share giving effect to the
Stock Split).
(7) SUBSEQUENT EVENTS
Stock Split
The Stock Split, which was announced by the Company subsequent to June 30,
1999, is reflected in the accompanying financial statements for all periods
presented.
Convertible Preferred Stock Offering
Subsequent to June 30, 1999, Verio issued 7.2 million shares of its 6.75%
Series A Convertible Preferred Stock, with a liquidation preference of $50.00
per share, for approximate net proceeds of $323.6 million. The shares of
preferred stock are convertible to shares of conversion stock at a conversion
price of $96.5625 per share ($48.2813 per share giving effect to the Stock
Split). The convertible preferred stock may be redeemed at a redemption premium
of 102.0% 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
our common stock equals or exceeds $144.8438 per share ($72.4219 per share
giving effect to the Stock Split) for a specified period. In addition to the
payments described above, holders will receive a 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 as
described below, 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 premium of
9
<PAGE> 11
103.8571% of the liquidation preference and thereafter at prices declining to
100.0% on and after August 1, 2006, plus, in each case, all accumulated and
unpaid dividends. Verio may effect any redemption, in whole or in part, by
delivering cash, shares of our common stock or a combination thereof. At the
closing of this offering, the initial purchasers of the convertible preferred
stock deposited approximately $24.3 million into an account from which quarterly
cash payments will be made, or which may be used to purchase shares of our
common stock from us for delivery to holders in lieu of cash payments. The
deposit account will expire on August 1, 2000 unless it is earlier terminated.
Credit Facility
Subsequent to June 30, 1999, Verio replaced its earlier $70.0 million
revolving credit facility and replaced it with a new $100.0 million revolving
credit facility. The $100.0 million facility is secured by substantially all the
stock of Verio's subsidiaries and by the Qwest agreement and matures on June 30,
2002. Interest on borrowings is at 2% above the London Interbank Offered Rate,
and there is a commitment fee of 1/2 of 1% per annum on the unused portion of
the facility. There are no borrowings outstanding under this facility.
digitalNATION Acquisition
In addition, subsequent to June 30, 1999, Verio acquired all of the
outstanding stock of digitalNATION, Inc. for $100.0 million in cash.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Our Company was founded in March 1996. Since then, we have rapidly
established a global presence by acquiring, and growing Internet service
providers with a business customer focus. We are the world-wide leader in
hosting domain-based Web sites based on the number of domain names that we host,
and a leading provider of high speed connectivity, and enhanced services such as
electronic commerce and virtual private networks based on secure Internet
communications link, to small and medium sized businesses. We currently serve
over 260,000 customer accounts, including over 265,000 hosted Web sites, and had
total revenue of approximately $117.1 million for the six months ended June 30,
1999.
Between March 1996 and May 1997, we raised private common equity and
preferred stock totaling approximately $100.0 million from a variety of sources,
primarily venture capital funds. This funding was used to invest in and acquire
Internet service providers, to fund operations and to start building a national
infrastructure including a national network, network operations center, billing,
customer care and financial reporting systems. In June 1997 and March 1998 we
raised additional funds totaling $325.0 million by issuing senior notes to
institutional investors. This additional funding, together with the issuance of
preferred stock and granting of options, was used to continue our acquisition
and investment strategy, to acquire the remaining equity interests not already
owned by us in substantially all of the entities in which we made investments
prior to our initial public offering, and to repurchase $50.0 million of the
1997 Notes.
In May 1998 we completed an initial public offering of common stock for net
proceeds of approximately $120.8 million. At the same time, Nippon Telegraph and
Telephone Corporation invested approximately $100.0 million in us by purchasing
common stock. As a result of the initial public offering, all of our then
outstanding preferred stock converted to common stock. The funds we received in
the IPO and from NTT were used to continue making acquisitions and to fund
operations. In November 1998, we raised $400.0 million by issuing additional
senior notes to institutional investors. We completed our most recent capital
raising effort in July 1999, when we sold $360.0 million of our Series A
convertible preferred stock to institutional investors. We expect to continue to
use the proceeds of these offerings to further our strategic acquisition and
investment strategy and to fund our operations.
Since inception, we have completed over 50 acquisitions, all using the
purchase method of accounting. As a result, we have recorded significant amounts
of goodwill, which totaled $516.1 million, gross, at June 30, 1999. We have
undertaken to consolidate the ownership and management of the acquired
operations into geographic and product based operating units. In addition, we
are integrating their network operations, customer support, marketing efforts,
financial and accounting systems, and other back-office functions onto our
national systems, in order to be more efficient. Although we have incurred and
are incurring significant costs in these consolidation efforts, we expect to
recognize substantial long term cost savings as a result. We have incurred net
losses since we were formed. For the period from inception to December 31, 1996,
the years ended December 31, 1997 and 1998 and the six months ended June 30,
1999, we reported net losses of $(5.1) million, $(46.3) million, $(122.0)
million and $(90.8) million, respectively.
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RESULTS OF OPERATIONS
The following table presents operating data, as a percentage of total
revenue, for the three and six months ended June 30, 1998 and 1999. This
information is from our Condensed Consolidated Financial Statements included in
this Form 10-Q. This information should be read in conjunction with the Notes to
Condensed Consolidated Financial Statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Internet connectivity ............................................ 64% 47% 65% 49%
Enhanced services and other ...................................... 36% 53% 35% 51%
Total revenue ............................................ 100% 100% 100% 100%
Costs and expenses:
Cost of service .................................................. 47% 33% 46% 34%
Sales and marketing .............................................. 25% 24% 24% 25%
General and administrative ....................................... 72% 50% 72% 51%
Depreciation and amortization .................................... 31% 40% 30% 40%
Total costs and expenses ................................. 175% 147% 172% 150%
Loss from operations ..................................... (75%) (47%) (72%) (50%)
Other income (expense):
Interest income .................................................. 12% 7% 10% 7%
Interest expense and other ....................................... (30%) (34%) (29%) (35%)
Loss before minority interests and extraordinary item .... (93%) (74%) (91%) (78%)
Minority interests ................................................. 1% -- 1% --
Loss before extraordinary item ........................... (92%) (74%) (90%) (78%)
Extraordinary item--loss related to debt repurchase ................ -- -- (20%) --
Net loss ................................................. (92%) (74%) (110%) (78%)
</TABLE>
Revenue
Most of our revenue is received from business customers who purchase
high-speed Internet connectivity, Web hosting products, and other enhanced value
Internet services. Verio offers a broad range of connectivity options to its
customers including dedicated, digital subscriber line, integrated services
digital network, frame relay and dialup connections. Connectivity customers
typically sign a contract for one year of service and pay fixed, recurring
monthly service charges plus a one-time setup fee under those agreements. These
charges vary depending on the type of service, the length of the contract, and
local market conditions. Our Web hosting customers also typically sign one year
service contracts and pay fixed, recurring monthly service charges plus a
one-time setup fee. These charges vary depending on the amount of disk space and
transit required by the customer. Other enhanced services include:
o e-commerce;
o secure Internet communication links permitting our customers to engage in
private and secure Internet communication with their employees, vendors,
customers and suppliers;
o security services;
o specialized facility leases for our customers with the resources and desire
to house their own equipment and software in one of our secure, controlled
facilities;
o consulting; and,
o the sales of equipment and customer circuits.
Revenue for all products is recognized as the service is provided. Amounts
billed relating to future periods are recorded as deferred revenue and amortized
monthly as services are rendered.
In 1997 and 1998, connectivity services generated approximately two-thirds
of total revenue. In 1999 and beyond, revenue from Web hosting and other
Internet enhanced value services is expected to represent 50% or more of total
revenue. The increase in revenue from Web hosting and other enhanced value
Internet services is primarily the result of acquisitions we made beginning at
the end of 1997 and through 1999 (including Hiway) that have been concentrated
in these businesses. We have experienced some seasonality in our internal
revenue growth, with the period of higher growth being the fall and winter.
Verio's focus is on services that generate recurring revenue from small and
mid-sized business customers. Revenue from business customers currently
represents approximately 90% of revenue, and approximately 85% of revenue is
recurring. No single customer represents more than 2% of revenue.
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<PAGE> 14
Three months ended June 30, 1998 compared to the three months ended June 30,
1999
Total revenue increased 117% from $28.5 million for the three months ended
June 30, 1998 to $61.9 million for the three months ended June 30, 1999.
Acquisitions completed after June 30, 1998 contributed significantly to this
increase.
Six months ended June 30, 1998 compared to the six months ended June 30, 1999
Total revenue increased 135% from $49.7 million for the six months ended
June 30, 1998 to $117.1 million for the six months ended June 30, 1999.
Acquisitions completed after June 30, 1998 contributed significantly to this
increase.
Cost of Service
Cost of service consists primarily of local telecommunications expense and
Internet access expense. Local telecommunications expense is primarily the cost
of transporting data between Verio's local points of presence and a national
point of presence. Internet access expense is the cost that we pay to lease
fiber capacity that we use to carry our customers' data between national points
of presence on the Internet. Most of the Internet businesses and operations we
have acquired were party to various local telecommunications and Internet access
contracts with third parties when we acquired them. We are in the process of
converting that traffic carried by third parties to our own network. In March
1998, we signed a 15 year capacity agreement with Qwest Communications
Corporation in order to fix and reduce the per-unit costs we incur to lease
fiber. That capacity agreement was amended in 1999 to further reduce the
per-unit costs and to increase our commitment, which is now to spend a minimum
of $160 million over the first 10 years of the capacity agreement. While we will
continue to use a variety of fiber providers for our national network, we expect
to use Qwest for the majority of our fiber requirements.
As Verio continues to grow, we expect our cost of service to continue to
increase in absolute dollars. However, we also expect cost of service to
decrease as a percentage of total revenue, as Verio's revenue mix shifts to
higher margin Web hosting and other enhanced value Internet services, as traffic
is shifted from third party networks to the Verio network, and as more traffic
is carried by Qwest.
Three months ended June 30, 1998 compared to the three months ended June 30,
1999
Cost of service increased $6.8 million or 51% from $13.3 million for the
three months ended June 30, 1998 to $20.1 million for the three months ended
June 30, 1999, primarily due to acquisitions. However, as a percentage of
revenue, cost of service decreased from 47% for the three months ended June 30,
1998 to 33% for the three months ended June 30, 1999 due in part to the
reduction of per unit costs to lease fiber.
Six months ended June 30, 1998 compared to the six months ended June 30, 1999
Cost of service increased $16.7 million, from $22.8 million for the six
months ended June 30, 1998 to $39.5 million for the six months ended June 30,
1999, primarily due to acquisitions. However, as a percentage of revenue, cost
of service decreased from 46% for the six months ended June 30, 1998 to 34% for
the six months ended June 30,1999 due in part to the reduction of per unit costs
to lease fiber.
Sales and Marketing Expense
Sales and marketing expense consists primarily of salaries, commissions and
advertising.
Three months ended June 30, 1998 compared to the three months ended June 30,
1999
Sales and marketing expense increased $7.5 million, or 104%, from $13.3
million for the quarter ended June 30, 1998 to $20.1 million for the three
months ended June 30, 1999 due to increases in the number of direct sales
representatives, indirect channel managers and marketing personnel and increased
national brand advertising. However, as a percent of revenue, sales and
marketing expense remained flat for the three months ended June 30, 1998
compared to the three months ended June 30, 1999.
Six months ended June 30, 1998 compared to the six months ended June 30, 1999
Sales and marketing expense increased $17.4 million, or 143%, from $12.2
million for the six months ended June 30, 1998 to $29.5 million for the six
months ended June 30, 1999 due to increases in the number of direct sales
representatives, indirect channel
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<PAGE> 15
managers and marketing personnel and increased national brand advertising.
However, as a percent of revenue, sales and marketing expense remained flat for
the six months ended June 30, 1998 compared to the six months ended June 30,
1999
General and Administrative Expense
General and administrative expense consists primarily of salaries and
related benefits, and includes the expenses of general management, engineering,
customer care, accounting, billing and office space.
In 1998 Verio incurred significant one-time expenses in connection with the
operational consolidation and integration of its acquisitions. These expenses
included approximately $1.9 million primarily related to severance costs in
connection with the elimination of approximately 250 positions which are no
longer necessary due to the efficiencies of the national services. These
terminations have begun and will continue into the fourth quarter of 1999. The
remaining liability for unpaid severance costs totaled approximately $0.9
million at June 30, 1999.
General and administrative expenses are expected to continue to increase in
absolute dollars but to decrease as a percentage of total revenue as revenue
growth continues to outpace general expenses. Verio's scalable systems limit the
number of additional personnel, and the need for additional office space to
support incremental revenue. We expect these systems will result in the ability
to add significant additional revenue at low incremental costs. Although we
expect to continue to reduce our operating losses as a percentage of revenue,
there can be no assurance that we will be able to do so, or that the rate of any
reduction in losses will be as rapid as we expect. One-time integration expenses
are expected to continue as the integration of previously acquired companies is
not yet complete, and due to the cost of integrating future acquisitions.
Three months ended June 30, 1998 compared to the three months ended June 30,
1999
General and administrative expense increased $10.4 million, from $20.7
million for the three months ended June 30, 1998 to $31.1 million for the three
months ended June 30, 1999, primarily due to acquisitions. However, as a
percentage of revenue, general and administrative expense decreased from 72% to
50%, which was the result of efficiencies being realized by combining the
operations of numerous acquisitions and lower general and administrative costs
required to support enhanced services.
Six months ended June 30, 1998 compared to the six months ended June 30, 1999
General and administrative expense increased $24.2 million, from $35.7
million for the six months ended June 30, 1998 to $59.9 million for the six
months ended June 30, 1999, primarily due to acquisitions. However, as a
percentage of revenue, general and administrative expense decreased from 72% to
51%, which was the result of efficiencies being realized by combining the
operations of numerous acquisitions and lower general and administrative costs
required to support enhanced services.
Depreciation and Amortization
Depreciation is provided over the estimated useful lives of assets ranging
from 3 to 5 years using the straight-line method. The excess of cost over the
fair value of net assets acquired, or goodwill, is amortized using the
straight-line method over a ten-year period. Debt issuance costs are amortized
over the life of the debt. Other intangibles consist primarily of the costs
associated with customer acquisitions and non-compete agreements and are
amortized over a three-year period or the life of the agreement. Additional
acquisitions and investments are expected to cause depreciation and goodwill
amortization to increase significantly in the future.
Other Expenses
Three months ended June 30, 1998 compared to the three months ended June 30,
1999
Interest expense and other increased from $8.7 million for the three months
ended June 30, 1998 to $20.9 million for the three months ended June 30, 1999,
primarily as a result of the issuance of the November 1998 Notes. Interest
income increased from $3.6 million for the three months ended June 30, 1998 to
$4.2 million for the three months ended June 30, 1999 due to increased cash
balances resulting from this debt offering. See "-- Liquidity and Capital
Resources."
Six months ended June 30, 1998 compared to the six months ended June 30, 1999
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Interest expense and other increased from $14.2 million for the six months
ended June 30, 1998 to $41.2 million for the six months ended June 30, 1999,
primarily as a result of the issuance of the March 1998 Notes and the November
1998 Notes. Interest income increased from $5.2 million for the six months ended
June 30, 1998 to $9.0 million for the six months ended June 30, 1999 due to
increased cash balances resulting from these debt offerings and the equity
offering relating to Verio's initial public offering. See "-- Liquidity and
Capital Resources."
During the six months ended June 30, 1998, an extraordinary loss of $10.1
million was recorded in connection with the refinancing of $50.0 million of the
1997 Notes. See "-- Liquidity and Capital Resources."
CASH FLOW ANALYSIS
Six Months Ended June 30, 1998 and 1999
Acquisitions, and the issuance of the March 1998 Notes and the November 1998
Notes explain the most significant changes in cash balances and cash flows. The
acquisition of Hiway in January 1999 resulted in a cash outflow of approximately
$176.0 million, and also caused amortization to increase approximately $12.0
million between the two periods. The issuance of $175.0 million of 10-3/8% debt
in March 1998, and $400.0 million of 11-1/4% debt in November 1998 caused cash
balances and net loss to increase significantly. Cash paid for interest was
$30.0 million for the six months ended June 30, 1999, compared to $8.6 million
for the six months ended June 30, 1998. We also paid $17.5 million in cash to
AOL related to a three-year strategic marketing agreement and customer
acquisition that we entered into during the six months ended June 30, 1999. The
extraordinary charge in the six months ended June 30, 1998 relates to the
repurchase of $50.0 million of the 1997 Notes. Cash flows used by operations as
a percentage of revenue improved from (60%) to (42%) from the six months ended
June 30, 1998 to the six months ended June 30, 1999. Cash used in working
capital was $2.0 million for the six months ended June 30, 1998 and $6.6 million
for the six months ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our business strategy has required and is expected to continue to require
substantial capital to fund acquisitions and investments, capital expenditures,
and operating losses.
In 1996, we raised approximately $78.1 million from the sale of preferred
stock and approximately $1.1 million from the sale of common stock. In 1997, we
raised approximately $20.0 million from the sale of preferred stock, and issued
680,000 shares of preferred stock (which, giving effect to the Stock Split,
would be convertible into 1.4 million shares of common stock) in connection with
an acquisition.
On June 24, 1997, we completed the placement of $150.0 million principal
amount of the 1997 Notes and attached warrants. One hundred and fifty thousand
units were issued, each consisting of $1,000 principal amount of notes and eight
warrants. The 1997 Notes mature on June 15, 2004 and interest, at the annual
rate of 13-1/2%, is payable semi-annually in arrears on June 15 and December 15
of each year. Each warrant entitles the holder thereof to purchase 1.76 shares
(3.52 shares giving effect to the Stock Split) of Verio's common stock at a
price of $.01 per share $.005 per share giving effect to the Stock Split), for a
total of 2,112,480 shares of common stock (4,224,960 shares giving effect to the
Stock Split). The warrants and the 1997 Notes were separated on December 15,
1997. Concurrent with the completion of the sale of the 1997 Notes, we were
required to deposit funds into an escrow account in an amount that together with
interest is sufficient to fund the first five interest payments. The final
interest payment is due on December 15, 1999. The 1997 Notes are redeemable at
our option commencing June 15, 2002. The 1997 Notes are senior unsecured
obligations ranking equally in right of payment with all existing and future
unsecured and senior indebtedness.
On March 25, 1998, we completed the placement of $175.0 million principal
amount of the March 1998 Notes. The March 1998 Notes are senior unsecured
obligations ranking equally in right of payment with all existing and future
unsecured and senior indebtedness, and mature on April 1, 2005. Interest on the
March 1998 Notes, at the annual rate of 10-3/8%, is payable semi-annually in
arrears on April 1 and October 1 of each year, commencing October 1, 1998. The
March 1998 Notes are redeemable at our option commencing April 1, 2002. Verio
used approximately $54.5 million of the proceeds from the March 1998 Notes to
repurchase $50.0 million principal amount of 1997 Notes. Upon consummation of
the sale of the March 1998 Notes and the repurchase, $13.3 million of escrowed
interest funds were released to us.
At various times during the first four months of 1998, we issued 1,534,513
additional shares of Series D-1 preferred stock (which, giving effect to the
Stock Split would be convertible into 6.2 million shares of common stock) in
connection with the purchases of substantially all the remaining unowned
interests in our subsidiaries and affiliates.
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<PAGE> 17
Subsequent to June 30, 1999, Verio replaced its earlier $70.0 million
revolving credit facility with a new $100.0 million revolving credit facility
with a group of commercial lending institutions. This facility is secured by
substantially all of the stock of our subsidiaries and by the Qwest capacity
agreement. The credit facility requires no payments of principal until its
maturity on June 30, 2002. The terms of the credit facility provide for
borrowings at a margin of 2% above the London Interbank Offered Rate. There is a
commitment fee of 1/2 of 1% per annum on the undrawn amount of the credit
facility. We have made no borrowings under the credit facility.
The credit facility contains a number of other restrictions, including
limitations on our ability to:
o engage in businesses other than the Internet service business;
o place liens on our assets; and
o pay dividends.
In addition, under the credit facility, our indebtedness (less cash) may not
exceed 2.35 times our annualized pro forma revenue for the most recent quarter.
We currently have the ability to borrow the full $100.0 million commitment. We
are required to pay back any amounts borrowed under the credit facility with the
proceeds of new indebtedness, certain asset sales, free cash flow in excess of
$5.0 million in any quarter, or the net proceeds from insurance claims.
In May 1998, we completed our initial public offering, selling an aggregate
of 5,735,000 shares (11,470,000 million shares giving effect to the Stock Split)
of common stock, including the partial exercise of the over-allotment option by
the initial purchasers in the initial public offering, for net proceeds of
approximately $120.8 million, after deducting underwriting discounts,
commissions and expenses. Concurrently with our initial public offering, we
completed the sale of 4,493,877 shares (8,987,754 million shares giving effect
to the Stock Split) of common stock to an affiliate of Nippon Telegraph and
Telephone Corporation for net proceeds of approximately $100.0 million.
On November 25, 1998, we sold $400.0 million principal amount of the
November 1998 Notes, for net proceeds of approximately $389.0 million. Interest
at the annual rate of 11-1/4%, is payable semi-annually in arrears on June 1 and
December 1 of each year, commencing June 1, 1999. We have the option of
redeeming the November 1998 Notes starting from December 1, 2003.
The 1997 Notes, the March 1998 Notes and the November 1998 Notes contain
terms, other than the rate of interest, that are substantially similar. The
terms of the indentures governing these Notes impose significant limitations on
our ability to incur additional indebtedness unless we have issued additional
equity, or if our Consolidated Pro Forma Interest Coverage Ratio, as defined in
the indentures, is greater than or equal to 1.8 to 1.0 prior to June 30, 1999,
or 2.5 to 1.0 on or after that date, and if the ratio of our total debt to
earnings before interest, taxes, depreciation and amortization is not higher
than 6:1.
The indentures contain a number of other restrictions, including, among
others, limitations on our ability to:
o engage or make investments in businesses other than the Internet service
business;
o place liens on or dispose of our assets; and
o pay dividends.
If a change of control with respect to Verio occurs, we are required to make
an offer to purchase all the Notes then outstanding at a price equal to 101% of
the respective principal amount of the notes, plus accrued and unpaid interest.
We are in compliance with the provisions of all of our debt agreements.
As of June 30, 1999, we had approximately $302.0 million in cash and cash
equivalents and short-term investments (including $8.4 million of restricted
cash). Our business plan currently anticipates investments of approximately
$140.0 million over the next 12 months for capital expenditures, acquisitions,
operating losses and working capital.
Our Company is highly leveraged and has significant debt service
requirements. At June 30, 1999 our long-term liabilities were $693.9 million,
and the annual interest expense associated with the 1997 Notes, March 1998 Notes
and November 1998 Notes is
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approximately $76.7 million. The interest expense and principal repayment
obligations associated with our debt could have a significant effect on our
future operations.
Subsequent to June 30, 1999, the Company announced the Stock Split that will
become effective on August 20, 1999, for stockholders of record at the close of
business on August 3, 1999. The effect of the Stock Split is reflected in the
accompanying financial statements for all periods presented.
Subsequent to June 30, 1999, we issued 7.2 million shares of 6.75% Series A
Convertible Preferred Stock, with a liquidation preference $50.00 per share, for
approximate net proceeds of $323.6 million. The shares of preferred stock are
convertible to shares of conversion stock at a conversion price of $96.5625 per
share ($48.2813 per share giving effect to the Stock Split). The convertible
preferred stock may be redeemed at a redemption premium of 102.0% 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 our common stock
equals or exceeds $144.8438 per share ($72.4219 per share giving effect to the
Stock Split) for a specified period. In addition to the payments described
above, holders will receive a 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 as described below, 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 premium of 103.8571% of the liquidation preference and thereafter at
prices declining to 100.0% on or after August 1, 2006, plus, in each case, all
accumulated and unpaid dividends. Verio may effect any redemption, in whole or
in part, by delivering cash, shares of our common stock or a combination
thereof. At the closing of this offering, the initial purchasers of the
convertible preferred stock deposited approximately $24.3 million into an
account form which quarterly cash payments will be made, or which may be used to
purchase shares of our common stock from us for delivery to holders in lieu of
cash payments. The deposit account will expire an August 1, 2000 unless it is
earlier terminated.
Since we achieved 100% ownership of substantially all of our subsidiaries
and affiliates in the second quarter of 1998, we have focused considerable
effort on, and incurred significant expense in connection with, the integration
of our operations and management. We expect to continue to incur integration
costs related to our network, customer care, billing and financial systems.
While we anticipate that these expenses will continue to be significant, we also
expect to derive significant long-term benefits as a result of lower incremental
costs for local telecommunications expense, Internet access expense, and general
and administrative expenses as our revenue increases.
Our anticipated expenditures are inherently uncertain and will vary widely
based on many factors including operating performance and working capital
requirements, the cost of additional acquisitions and investments, the
requirements for capital equipment to operate our business, and our ability to
raise additional funds. Accordingly, we may need significant amounts of cash in
excess of our plan, and no assurance can be given as to the actual amounts of
our future expenditures. We are constantly evaluating potential acquisition and
other investment opportunities which could significantly affect our cash needs.
We intend to use a significant portion of our cash for acquisitions, and will
have to increase revenue without a commensurate increase in costs to generate
sufficient cash to enable us to meet our debt service obligations. There can be
no assurance that we will have sufficient financial resources if operating
losses continue to increase or additional acquisition or other investment
opportunities become available.
We expect to meet our capital needs for the next 12 months with cash on
hand, and subsequently with the proceeds from the sale, or issuance of capital
stock, the credit facility, lease financing and additional debt. We regularly
examine financing alternatives based on prevailing market conditions, and expect
to access the capital markets from time to time based on our current and
anticipated cash needs and market opportunities. Over the longer term, we will
be dependent on increased operating cash flow, and, to the extent cash flow is
not sufficient, the availability of additional financing, to meet our debt
service obligations. Insufficient funding may require us to delay or abandon
some of our planned future expansion or expenditures, which could have a
material adverse effect on our growth and ability to realize economies of scale.
In addition, our operating flexibility with respect to certain business
activities is limited by covenants associated with our indebtedness. There can
be no assurance that such covenants will not adversely affect our ability to
finance our future operations or capital needs or to engage in business
activities that may be in our interest.
THE YEAR 2000 ISSUE
The year 2000 issue results from computer programs and systems using
only two digits instead of four to identify the year. Systems that do not
property recognize this date could generate wrong data or fail. The year 2000
issue is widespread and complex, as virtually every company's computer
operations potentially could be affected in some way.
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We rely upon computer systems, software applications, hardware and
other circuitry which may contain date-sensitive technology in our operations
and administrative support systems. Most of these technologies are
standard-purchased systems that may or may not have been customized for our own
particular applications while other technologies were internally developed. We
also rely upon various vendors and suppliers including telecommunications
providers with which we have interconnection, peering and resale agreements.
Many of our business systems are being replaced as part of our efforts
to integrate our acquisitions. As we evaluate new systems for purchase, we
assess whether they are year 2000 compliant. We are currently engaged in a
phased process utilizing outside consultants and designated employees to
evaluate our internal status with respect to the year 2000 issue. The costs and
expenses of these outside consultants and employees have not been material. To
date, we have not discovered any year 2000 issues that would adversely affect
us. We cannot assure that all year 2000 issues were discovered or that we will
not discover additional year 2000 issues that could adversely affect us.
In the fourth quarter of 1998, we conducted a systems assessment of our
national systems in Denver, Colorado, Dallas, Texas and regional networks and
systems in our eastern operating region, including both information technology
systems and non-information technology systems such as hardware containing
embedded technology, for year 2000 compliance. The network systems of our other
operating regions have similar technology. No significant issues were
identified. Starting in January 1999, we have applied the knowledge gained from
such system assessment to our other operating regions and rolled out the
company-wide year 2000 compliance program. In May 1999, we completed an
inventory of all of our other regions and operating units which included network
components, business systems and hardware containing embedded technology. The
costs incurred in conducting the inventory were not material.
Prior to our acquisition of Hiway, Hiway hired outside consultants to
evaluate their systems for year 2000 compliance. Though issues were noted in the
internally developed provisioning systems, none were evaluated as material and
remediation activities were completed in the second quarter of 1999.
A broader risk assessment of the specific hardware and software
components within each of our systems, including the Verio network, data
centers, network operations center and customer support center, is being
conducted and is expected to be completed in early third quarter 1999. In
conjunction with such assessment, we are implementing remedial actions,
including code level remediation, system upgrades or complete system replacement
of non-compliant items expected to be completed by the end of the third quarter
of 1999. To date, the costs incurred have not been material. Future costs are
difficult to estimate; however, we do not currently anticipate that such costs
will be material.
Many of our hardware and software platforms are already compliant.
Verio has migrated business operations of acquired companies to national
services on year 2000 compliant systems for finance, billing, customer
operations and network management. In addition, Verio has been consolidating
legacy systems in order to provide consistent provisioning of services; and
centralized domain name services, mail, authentication and news. Our vendors
have informed us that these systems are comprised of the latest commercial
hardware and software components and are year 2000 compliant. All of these
systems are currently operational and have been subjected to extensive testing
within the Verio network. Customer migrations to these systems are currently
underway and are scheduled for completion in the third quarter of 1999.
We will perform end to end testing of our supplied services under
various scenarios to verify expected performance of the network under various
year 2000 date failure modes. The purpose of the testing will be to ensure
continuity of service to customers, not specific elemental, component or
compliance status. This phase is expected to be final verification of any
required updates to Verio's systems and is expected to be completed in the third
quarter of 1999. A regression prevention plan will be executed throughout 1999
to ensure new issues are not introduced into Verio's systems.
We also will develop a contingency plan in the event any critical
systems remain non-compliant by January 1, 2000. We will attempt to quantify the
impact, if any, of the failure to complete any necessary corrective action. We
cannot currently estimate the magnitude of such impact.
We have begun to survey, among others, critical vendors, suppliers and
financial institutions for year 2000 compliance. We are in the process of
evaluating the year 2000 preparedness of our telecommunications providers, on
which we rely for the network services crucial to our business. In order to
reduce any adverse impact, we maintain diverse providers for such network
services. However, failure of any one provider may have a material impact on
Verio's operations. We expect to complete this survey early in
18
<PAGE> 20
the third quarter of 1999. At this time we cannot estimate the effect, if any,
that non-compliant systems at these entities could have on us; it is, however,
possible that the impact will be material.
FORWARD-LOOKING STATEMENTS
The statements included in the discussion and analysis above that are not
historical or factual are "forward-looking statements" (as such term is defined
in the Private Securities Litigation Reform Act of 1995). The safe harbor
provisions provided in Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended, apply to
forward-looking statements made by Verio. 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. Management cautions the reader that these
forward-looking statements addressing the timing, costs and scope of our
acquisition of, or investments in, existing affiliates, the revenue and
profitability levels of the affiliates in which we invest, the anticipated
reduction in operating costs resulting from the integration and optimization of
those affiliates, and other matters contained herein or therein from time to
time regarding matters that are not historical facts, are only predictions. No
assurance can be given that future results indicated, whether expressed or
implied, will be achieved. While sometimes presented with numerical specificity,
these projections and other forward-looking statements are based upon a variety
of assumptions relating to the business of Verio, which, although considered
reasonable by Verio, may not be realized. Because of the number and range of the
assumptions underlying Verio's projections and forward-looking statements, many
of which are subject to significant uncertainties and contingencies that are
beyond the reasonable control of Verio, some of the assumptions will not
materialize and unanticipated events and circumstances may occur subsequent to
the date of this report. These forward-looking statements are based on current
expectations, and Verio assumes no obligation to update this information.
Therefore, the actual experience of Verio and results achieved during the period
covered by any particular projections or forward-looking statements may differ
substantially from those projected. Consequently, the inclusion of projections
and other forward-looking statements should not be regarded as a representation
by Verio, or any other person that these estimates and projections will be
realized and actual results may vary materially. There can be no assurance that
any of these expectations will be realized or that any of the forward-looking
statements contained in this report will prove to be accurate.
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
No significant changes in the quantitative and qualitative disclosures about
market risk have occurred from the discussion contained in our report on Form
10-K for the year ended December 31, 1998, which was filed with the Commission
on March 31, 1999.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Verio Inc. is party to various legal proceedings that have arisen in
the ordinary course of our business, none of which is material.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) On July 23, 1999, Verio announced a two-for-one stock split for
stockholders of record at the close of business on August 3, 1999. The payment
date for the stock split, which will be effected in the form of a dividend, will
be on August 20, 1999. Following the stock split, Verio will have approximately
75.4 million shares of common stock outstanding.
(b) Not Applicable
(c) Not Applicable
(d) Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
19
<PAGE> 21
(a) The Company held its 1999 Annual Meeting of Stockholders on June 17,
1999.
(b) There were 37,314,173 shares of common stock of the Company
outstanding as of the record date and 73.4%, or 27,399,383 shares of
common stock were represented at such meeting, in person or by
proxy, which constituted a quorum. The matters voted upon at the
Annual Meeting and the results of the voting as to each such matter
are set forth below:
(i) The following individuals were elected as Class I directors of the
Company, for terms to expire at the Annual Meeting to be held in the year 2002:
<TABLE>
<CAPTION>
Votes For Votes Withheld
<S> <C> <C>
Arthur L. Cahoon 27,346,497 52,886
Paul J. Salem 26,631,856 767,527
Herbert R. Hribar 26,658,637 740,746
</TABLE>
(ii) Approval of an amendment to the Company's Restated Certificate of
Incorporation to increase the authorized number of shares of capital stock of
the Company from 137,500,000 shares to 262,500,000 shares, of which 250,000,000
shares will be common stock, par value $.001 per share, and 12,500,000 shares
will be undesignated preferred stock, par value $.001 per share:
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Votes
<S> <C> <C> <C> <C>
23,124,399 4,171,122 15,164 88,698
</TABLE>
(iii) The ratification of the appointment by the Board of Directors of KPMG
LLP as independent auditors of the Company for the fiscal year ending December
31, 1999.
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Votes
<S> <C> <C> <C> <C>
27,364,191 14,884 20,308 0
</TABLE>
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See attached exhibit index.
(b) Reports on Form 8-K
None.
20
<PAGE> 22
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VERIO INC.
Date: August 16, 1999 /s/ PETER B. FRITZINGER
-------------------------------
Peter B. Fritzinger
Chief Financial Officer
Date: August 16, 1999 /s/ CARLA HAMRE DONELSON
-------------------------------
Carla Hamre Donelson
Vice President, General Counsel
and Secretary
21
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
1.1 Purchase Agreement, dated July 14, 1999, by and between Verio
Inc. and Salomon Smith Barney Inc., Donaldson, Lufkin & Jenrette
Securities Corporation, Credit Suisse First Boston Corporation,
Deutsche Bank Securities Inc. and First Union Capital Markets
Corp. (the "Initial Purchasers")
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
4.1 Deposit Agreement, dated as of July 20, 1999, by and among Verio
Inc. and Norwest Bank Minnesota, N.A.
4.2 Registration Rights Agreement, dated as of July 20, 1999, by and
among Verio Inc. and the Initial Purchasers
4.3 Certificate of Designations (see Exhibit 3.1)
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 1.1
VERIO INC.
6,000,000 Shares
6.75% SERIES A CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
New York, New York
July 14, 1999
SALOMON SMITH BARNEY INC.
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
CREDIT SUISSE FIRST BOSTON CORPORATION
DEUTSCHE BANK SECURITIES INC.
FIRST UNION CAPITAL MARKETS CORP.
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Verio Inc., a Delaware corporation (the "Company"), proposes to
issue and to sell to Salomon Smith Barney Inc., Donaldson, Lufkin & Jenrette
Securities Corporation (together with Salomon Smith Barney Inc., the
"Representatives"), Credit Suisse First Boston Corporation, Deutsche Bank
Securities Inc. and First Union Capital Markets Corp., a division of Wheat First
Securities, Inc. (together, the "Initial Purchasers"), severally and not
jointly, an aggregate of 6,000,000 shares (the "Firm Shares") of its 6.75%
Series A Convertible Preferred Stock, liquidation preference of $50.00 per share
(the "Convertible Preferred Stock"), as set forth on Schedule I hereto (the
"Offering"). The Company also proposes to issue and to sell to the Initial
Purchasers, severally and not jointly, not more than an additional 1,200,000
shares of the Convertible Preferred Stock (the "Additional Shares") upon the
terms and conditions set forth herein. The Firm Shares and the Additional Shares
are herein referred to collectively as the "Shares". The Shares may be converted
into shares of common stock, par value $0.001 per share, of the Company (the
"Common Stock") in accordance with the terms of the Certificate of Designation
(as defined below).
The sale of the Shares to the Initial Purchasers will be made
without registration of the Shares under the Securities Act of 1933, as amended
(the "Securities Act"), in reliance upon exemptions from the registration
requirements of the Securities Act. The Initial Purchasers have advised the
Company that the Initial Purchasers will offer and sell the Shares
<PAGE> 2
purchased by them hereunder in accordance with Section 4 of this agreement (this
"Agreement" or the "Purchase Agreement") as soon as they deem advisable.
In connection with the sale of the Shares, the Company has
prepared a preliminary offering memorandum, dated July 1, 1999 (including any
information incorporated by reference therein, the "Preliminary Memorandum"),
and a final offering memorandum, dated July 14, 1999 (including any information
incorporated by reference therein, the "Final Memorandum"). Each of the
Preliminary Memorandum and the Final Memorandum sets forth certain information
concerning the Company, the Shares and the Common Stock. The Company hereby
confirms that it has authorized the use of the Preliminary Memorandum and the
Final Memorandum, and any amendment or supplement thereto, in connection with
the offer and sale of the Shares by the Initial Purchasers. Unless stated to the
contrary, all references herein to the Final Memorandum are to the Final
Memorandum at the Execution Time (as defined below) and are not meant to include
any amendment or supplement subsequent to the Execution Time. All references in
this Agreement to financial statements and schedules and other information that
is "contained", "included" or "state", or words of similar import, in the
Preliminary Memorandum or Final Memorandum shall be deemed to mean and include
all such financial statements and schedules and other information which are
incorporated by reference in the Preliminary memorandum or Final Memorandum, as
the case may be.
The Shares are to be issued pursuant to a Certificate of
Designation (the "Certificate of Designation") to the Certificate of
Incorporation of the Company. The holders of the Shares and the shares of Common
Stock issued as dividends (including through the mechanics of the Deposit
Agreement) and upon conversion of the Shares (collectively, the Subject
Securities") will be entitled to the benefits of the Registration Rights
Agreement (the "Registration Rights Agreement") to be dated as of July 20, 1999,
among the Company and the Initial Purchasers. In addition, the holders of the
Shares will be entitled to the benefits of the Deposit Agreement (the "Deposit
Agreement") to be dated as of July 20, 1999, between the Company and the deposit
agent named therein (the "Deposit Agent").
This Agreement, the Registration Rights Agreement, the Deposit
Agreement and the Certificate of Designation are referred to herein as the
"Transaction Documents".
Capitalized terms used herein without definitions have the
respective meanings assigned to them in the Final Memorandum.
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, each Initial Purchaser as set forth
below in this Section 1.
-2-
<PAGE> 3
(a) The Preliminary Memorandum, at the date thereof, did not
contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading. The
Final Memorandum, at the date hereof, does not, and at the Closing
Date (as defined below) will not (and any amendment or supplement
thereto, at the date thereof and at the Closing Date, will not),
contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading;
provided, however, that the Company makes no representation or
warranty as to the information contained in or omitted from the
Preliminary Memorandum or the Final Memorandum, or any amendment or
supplement thereto, in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of the
Initial Purchasers specifically for inclusion therein.
(b) The documents incorporated or deemed to be incorporated by
reference in the Preliminary Memorandum and Final Memorandum, at the
time they were or hereafter are filed with the Securities and Exchange
Commission (the "Commission"), complied and will comply in all
material respects with the requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and the rules and
regulations thereunder and, when read together with the other
information in the Preliminary Memorandum or Final Memorandum, as the
case may be, at the time issued did not, and as of the Closing Date
(and, if any Additional Shares are purchased, at the Option Closing
Date (as defined below)) will not, contain any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading.
(c) The Company has been advised by The Portal Market that the
Shares have been designated Portal-eligible securities in accordance
with the rules and regulations of the National Association of
Securities Dealers, Inc. (the "NASD").
(d) None of the Company nor any of its Affiliates (as defined in
Rule 501(b) under the Securities Act) has, directly or through any
agent, sold, offered for sale, solicited offers to buy or otherwise
negotiated in respect of, any security (as defined in the Securities
Act) which could be integrated with the sale of the Shares in a manner
that would require the registration of the Shares under the Securities
Act.
(e) None of the Company nor any of its Affiliates (as defined in
Rule 501(b) under the Securities Act) or any person (other than the
Initial Purchasers, as to whom the Company makes no representation)
acting at the request of the Company has engaged, in connection with
the offering of the Shares, (A) in any form of general solicitation or
general advertising within the meaning of Rule 502(c) under the
-3-
<PAGE> 4
Securities Act, (B) in any manner involving a public offering within
the meaning of Section 4(2) of the Securities Act or (C) in any action
which would require the registration of the offering and sale of the
Shares pursuant to this Agreement or which would violate applicable
state securities or "blue sky" laws.
(f) Assuming that the representations and warranties of the
Initial Purchasers contained in Section 4 are true, correct and
complete, and assuming compliance by the Initial Purchasers with their
covenants in Section 4, and assuming that the representations and
warranties deemed to be made by "qualified institutional buyers"
("QIBs") (as defined in Rule 144A under the Securities Act) purchasing
Shares are true and correct as of the Closing Date, it is not
necessary in connection with the offer, sale and delivery of the
Shares to the Initial Purchasers in the manner contemplated by, or in
connection with the initial resale of such Shares by the Initial
Purchasers in accordance with, this Agreement to register the Shares
under the Securities Act.
(g) The subsidiaries of the Company listed on Schedule II hereto
(also referred to herein as the "Subsidiaries") are the only
subsidiaries of the Company that constitute "significant subsidiaries"
within the meaning of Rule 1-02(w) of Regulation S-X under the
Securities Act. The Company and each Subsidiary has been duly
organized or incorporated, as the case may be, and is validly existing
and in good standing under the laws of its jurisdiction of
organization or incorporation, with all requisite power and authority
under such laws (a) to own, lease and operate their respective
properties and to conduct their respective businesses as now conducted
and as described in the Final Memorandum and (b) to enter into,
deliver, incur and perform their respective obligations under the
Transaction Documents, except, in the case of the foregoing subclause
(a) for authorizations, approvals, orders, leases, certificates and
permits, the failure of which to possess could not reasonably be
expected to have a Material Adverse Effect (as defined below); and are
all duly qualified to do business as foreign partnerships or
corporations in good standing in all other jurisdictions where the
ownership or leasing of their respective properties or the conduct of
their respective businesses requires such qualification, except where
the failure to be so qualified could not reasonably be expected to
have a material adverse effect (i) on the business, condition
(financial or otherwise), results of operations, business affairs or
business prospects of the Company and the Subsidiaries taken as a
whole or (ii) on the ability of the Company to perform any of its
obligations under the Transaction Documents or to consummate any of
the transactions contemplated hereby or thereby (a "Material Adverse
Effect"). The Company has no internet service provider affiliates
(other than the Subsidiaries) that would individually constitute a
"significant subsidiary" of the Company within the meaning of Rule
1-02(w) of Regulation S-X under the Securities Act, if any such
internet service provider affiliate were a subsidiary of the Company.
-4-
<PAGE> 5
(h) The Company's authorized equity capitalization is as set
forth in the Final Memorandum under the caption "Description of
Capital Stock". The capital stock of the Company conforms in all
material respects to the description thereof contained in the Final
Memorandum under the caption "Description of Capital Stock". The
shares of issued and outstanding capital stock of the Company have
been duly and validly authorized and issued and are fully paid and
non-assessable. Except as set forth in the Final Memorandum, no
options, warrants or other rights to purchase, agreements or other
obligations to issue, or rights to convert any obligations into or
exchange any securities for, shares of capital stock of or ownership
interests in the Company are outstanding.
(i) The Shares being sold hereunder by the Company have been duly
and validly authorized, and, when issued and delivered to and
purchased by the Initial Purchasers pursuant to this Agreement, will
be fully paid and non-assessable. The shares of Common Stock issuable
as dividends and upon conversion or redemption of the Shares have been
duly and validly authorized and reserved for issuance and, when issued
and delivered in accordance with the provisions of the Certificate of
Designation, will be fully paid and non-assessable. The Shares being
sold hereunder conform in all material respects to the description
thereof contained in the Final Memorandum. The holders of outstanding
shares of capital stock of the Company are not entitled to preemptive
or other rights to subscribe for the Subject Securities.
(j) This Agreement has been, and, as of the Closing Date, the
Deposit Agreement, the Certificate of Designation and the Registration
Rights Agreement will have been, duly authorized, executed and
delivered by the Company, and upon such execution by the Company
(assuming the due authorization, execution and delivery by parties
thereto other than the Company), as of the Closing Date, the Deposit
Agreement and the Registration Rights Agreement will constitute the
valid and binding obligations of the Company, enforceable against the
Company in accordance with the terms hereof or thereof, subject, in
the case of each of the foregoing, to (a) applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally, (b) general principles of
equity (regardless of whether enforcement is sought in a proceeding in
equity or at law) and (c) the discretion of the court before which any
proceeding therefor may be brought (clauses (a), (b) and (c) being
referred to herein as the "Enforceability Limitations").
(k) No consent, waiver, authorization, approval, license,
qualification or order of, or filing or registration with, any court
or governmental or regulatory agency or body, domestic or foreign, is
required for the issue and sale of the Subject Securities, the
performance by the Company of its obligations under the Transaction
Documents, or for the consummation of any of the transactions
contemplated hereby or
-5-
<PAGE> 6
thereby, including, without limitation, the issuance and sale of the
Shares hereunder, except such as may be required (A) in connection
with the registration under the Securities Act of the Subject
Securities pursuant to the Registration Rights Agreement (including
any filing with the NASD), or (B) by state securities or "blue sky"
laws in connection with the offer and sale of the Shares or the
registration of the Subject Securities pursuant to the Registration
Rights Agreement.
(l) The issuance, sale and delivery of the Shares, the execution,
delivery and performance by the Company of the Transaction Documents
and the consummation by the Company of the transactions contemplated
hereby, thereby and in the Final Memorandum and the compliance by the
Company with the terms of the foregoing do not, and, at the Closing
Date, will not conflict with or constitute or result in a breach or
violation by the Company or any of the Subsidiaries of (A) any of the
terms or provisions of, or constitute a default (or an event which,
with notice or lapse of time or both, would constitute a default) by
any of the Company or the Subsidiaries or give rise to any right to
accelerate the maturity or require the prepayment of any indebtedness
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or the
Subsidiaries under any contract, indenture, mortgage, deed of trust,
loan agreement, note, lease, license, franchise agreement,
authorization, permit, certificate or other agreement or document to
which any of the Company or the Subsidiaries is a party or by which
any of them may be bound, or to which any of them or any of their
respective assets or businesses is subject (collectively, "Contracts")
(and the Company has no knowledge of any conflict, breach or violation
of such terms or provisions or of any such default, in any such case,
which has occurred or will so result), (B) the articles or by-laws
(each, an "Organizational Document") of each of the Company and the
Subsidiaries or (C) any law, statute, rule or regulation, or any
judgment, decree or order, in any such case, of any domestic or
foreign court or governmental or regulatory agency or other body
having jurisdiction over the Company or any of the Subsidiaries or any
of their respective properties or assets. Schedule III hereto lists
each Contract with respect to which any conflict, breach or violation
of the terms or provisions thereof or any default with respect thereto
could have a Material Adverse Effect (each such Contract being
referred to herein as a "Material Contract").
(m) The Deposit Agreement, the Certificate of Designation and the
Registration Rights Agreement will each conform in all material
respects to the descriptions thereof in the Final Memorandum.
(n) The audited financial statements included or incorporated by
reference in the Final Memorandum, including the notes thereto,
respectively present fairly the financial position of the Company and
its consolidated subsidiaries, NSNet, Inc.,
-6-
<PAGE> 7
Access One, Inc., STARnet, L.L.C., Computing Engineers Inc., LI Net,
Inc., NTX, Inc., and Best Internet Communications, Inc. at the dates
indicated, and the statement of operations, stockholders'
deficit/equity and cash flows of each of such persons and, where
applicable, such persons' consolidated subsidiaries for the periods
indicated, have been prepared in conformity with United States
generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods involved. The selected
financial data and the summary financial information included in the
Final Memorandum present fairly the information shown therein and have
been compiled on a basis consistent with that of the consolidated
financial statements of the Company and its subsidiaries included or
incorporated by reference in the Final Memorandum. KPMG LLP, which has
examined such financial statements as set forth in its report included
in the Final Memorandum, is an independent public accounting firm with
respect to each of such persons and, where applicable, such person's
subsidiaries within the meaning of Regulation S-X under the Securities
Act. Except as disclosed in the Final Memorandum, the pro forma
financial information relating to the Company and its Subsidiaries and
the related notes thereto included in the Final Memorandum present
fairly the information shown therein, have been prepared in all
material respects in accordance with the Commission's rules and
guidelines with respect to pro forma financial adjustments and have
been properly computed on the bases described therein, and the
assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the
transactions and circumstances referred to therein.
(o) Since the respective dates as of which information is given
in the Final Memorandum, except as otherwise specifically stated
therein, there has been no (A) material adverse change in the
business, condition (financial or otherwise), results of operations,
business affairs or business prospects of the Company and the
Subsidiaries taken as a whole, whether or not arising in the ordinary
course of business (a "Material Adverse Change"), (B) transaction
entered into by any of the Company or the Subsidiaries, other than in
the ordinary course of business, that is material to the Company and
the Subsidiaries taken as a whole or (C) dividend or distribution of
any kind declared, paid or made by the Company on its capital stock.
(p) Except as set forth in the Final Memorandum under the caption
"Business -- The Verio Organization", the Company does not own,
directly or indirectly, any material amount of shares, or any other
material amount of equity or long-term debt securities or have any
material equity interest in any firm, partnership, joint venture or
other entity. Except as set forth in the Final Memorandum, no holder
of any securities of the Company is entitled to have such securities
(other than the Subject Securities) registered under any registration
statement contemplated by the Registration
-7-
<PAGE> 8
Rights Agreement. All of the outstanding capital stock of each of the
Subsidiaries has been duly authorized and validly issued, is fully
paid and non-assessable and was not issued in violation of any
preemptive or similar rights (whether provided contractually or
pursuant to any Organizational Document).
(q) None of the Company nor the Subsidiaries is (A) in violation
of its respective Organizational Documents, (B) in default (or, with
notice or lapse of time or both, would be in default) in the
performance or observance of any obligation, agreement, covenant or
condition contained in any Contract or (C) in violation of any law,
statute, judgment, decree, order, rule or regulation of any domestic
or foreign court with jurisdiction over the Company or the
Subsidiaries or any of their respective assets or properties, or other
governmental or regulatory authority, agency or other body, other
than, in the case of clause (B) or (C), such defaults or violations
which could not, individually or in the aggregate, reasonably be
expected to have or result in a Material Adverse Effect; and any real
property and buildings held under lease by the Company or the
Subsidiaries are held by the Company or such Subsidiary, as the case
may be, under valid, subsisting and enforceable leases with such
exceptions which could not, individually or in the aggregate,
reasonably be expected to have or result in a Material Adverse Effect.
(r) Except as set forth in the Final Memorandum, each of the
Company and the Subsidiaries owns or possesses, or can acquire on
reasonable terms, adequate patents, patent rights, licenses,
trademarks, service marks, trade names, copyrights and know-how
(including trade secrets and other proprietary or confidential
information, systems or procedures) (collectively, "intellectual
property") necessary to conduct the business now or proposed to be
operated by it as described in the Final Memorandum, except where the
failure to own, possess or have the ability to acquire any such
intellectual property could not, individually or in the aggregate, be
reasonably expected to have a Material Adverse Effect; and none of the
Company nor the Subsidiaries has received any notice of infringement
of or conflict with (nor knows of any such infringement of or conflict
with) asserted rights of others with respect to any of such
intellectual property.
(s) Each of the Company and the Subsidiaries has obtained all
material consents, approvals, orders, certificates, licenses, permits,
franchises and other authorizations (collectively, the "Licenses") of
and from, and has made all declarations and filings with, all
governmental and regulatory authorities, all self-regulatory
organizations and all courts and other tribunals necessary to own,
lease, license and use its properties and assets and to conduct its
businesses in the manner described in the Final Memorandum. None of
the Company or the Subsidiaries has received any notice of proceedings
relating to the revocation or modification of, or denial of any
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<PAGE> 9
application for, any License which, if the subject of any unfavorable
decision, ruling or finding, could, individually or in the aggregate,
reasonably be expected to have or result in a Material Adverse Effect;
and no event has occurred which allows, or after notice or lapse of
time, or both, would allow, revocation or termination thereof or
result in any other material impairment of the rights of the holder of
any such License, except where such revocation or termination could
not, singly or in the aggregate, reasonably be expected to have or
result in a Material Adverse Effect; and the Licenses referred to
above place no restrictions on the Company or any of the Subsidiaries
that are not described in the Final Memorandum, except where such
restrictions could not, individually or in the aggregate, reasonably
be expected to have or result in a Material Adverse Effect.
(t) There is no legal action, suit, proceeding, inquiry or
investigation before or by any court or governmental body or agency,
domestic or foreign, now pending or, to the best knowledge of the
Company, threatened against the Company or any of the Subsidiaries or
any of their respective properties which would be required to be
disclosed in a registration statement filed under the Securities Act.
(u) Each of the Company and the Subsidiaries has filed all
necessary federal, state and foreign income and franchise tax returns,
and has paid all taxes shown as due thereon; and no tax deficiency has
been asserted against any of the Company or the Subsidiaries.
(v) Except as described in the Final Memorandum, including the
financial statements and notes thereto included therein, each of the
Company and the Subsidiaries has good and marketable title to all real
and personal property described in the Final Memorandum as being owned
by it and good and marketable title to a leasehold estate in the real
and personal property described in the Final Memorandum as being
leased by it, free and clear of all liens, charges, encumbrances or
restrictions, except to the extent the failure to have such title or
the existence of such liens, charges, encumbrances or restrictions
could not, individually or in the aggregate, reasonably be expected to
have or result in a Material Adverse Effect.
(w) None of the Company nor any of the Subsidiaries is an
"investment company" or a company "controlled by" an "investment
company" as such terms are defined in the Investment Company Act of
1940, as amended, and the rules and regulations thereunder.
(x) None of the Company nor any of the Subsidiaries nor any of
their respective directors, officers or controlling persons has taken,
directly or indirectly, any action designed, or which might reasonably
be expected, to cause or result, under the
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<PAGE> 10
Securities Act or otherwise, in, or which has constituted,
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Subject Securities.
(y) No strike, labor problem, dispute, slowdown, work stoppage or
disturbance with the employees of the Company or any of the
Subsidiaries exists or, to the best knowledge of the Company, is
threatened which could, individually or in the aggregate, reasonably
be expected to have or result in a Material Adverse Effect.
(z) The Company has insurance in such amounts and covering such
risks and liabilities as are in accordance with normal industry
practice.
(aa) The statistical and market-related data included in the
Final Memorandum are based on or derived from independent sources
which the Company believes to be reliable and accurate in all material
respects or represent the Company's good faith estimates that are made
on the basis of data derived from such sources.
(bb) The Company is, and immediately after the Closing Date will
be, Solvent. As used herein, the term "Solvent" means, with respect to
the Company on a particular date, that on such date (A) the fair
market value of the assets of the Company exceeds its respective
liabilities (including without limitation, stated liabilities and
identified contingent liabilities), (B) the present fair salable value
of the assets of the Company will exceed its respective probable
liabilities on its debts (including without limitation, stated
liabilities and identified contingent liabilities), (C) the fair
market value of the Company's total assets exceeds its total
liabilities, including identified contingent liabilities, by an amount
at least equal to the total par value of its common stock both
immediately prior to and after the Offering, (D) the Company is and
will be able to pay its debts (including without limitation, stated
liabilities and identified contingent liabilities) as such debts
mature and (E) the Company will not have unreasonably small capital
with which to conduct its present and anticipated business.
(cc) Except as described in the Final Memorandum or as would not,
individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect (A) to the Company's knowledge, each of the
Company and the Subsidiaries is in compliance with and not subject to
any known liability under applicable Environmental Laws (as defined
below); (B) to the Company's knowledge, each of the Company and the
Subsidiaries (i) has made all filings and provided all notices
required under any applicable Environmental Law, and (ii) has, and is
in compliance with, all Permits required under any applicable
Environmental Laws, and (iii) each of them is in full force and
effect; (C) to the Company's knowledge, there is no civil, criminal or
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<PAGE> 11
administrative action, or, investigation, notice or demand letter or
request for information pending or threatened against the Company or
any of the Subsidiaries under any Environmental Law; and (D) to the
Company's knowledge, no lien, charge, encumbrance or restriction has
been recorded under any Environmental Law with respect to any assets,
facility or property owned, operated, leased or controlled by the
Company or any Subsidiary.
For purposes of this Agreement, "Environmental Laws" means the
common law and all applicable federal, state and local laws or
regulations relating to the protection of the environment, including,
without limitation, laws relating to emissions, discharges, releases
or threatened releases of "hazardous substances," as defined in the
Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended.
(dd) Except as described in the Final Memorandum, none of the
Company nor any of the Subsidiaries has incurred any liability for any
prohibited transaction or funding deficiency or any complete or
partial withdrawal liability with respect to any pension, profit
sharing or other plan which is subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), to which the
Company or the Subsidiaries makes or ever has made a contribution and
in which any employee of the Company or any such Subsidiary is or has
ever been a participant, which, individually in the aggregate, could
reasonably be expected to have or result in a Material Adverse Effect.
With respect to such plans, each of the Company and the Subsidiaries
is in compliance in all respects with all applicable provisions of
ERISA, except where the failure to so comply could not, individually
or in the aggregate, reasonably be expected to have or a result in a
Material Adverse Effect.
(ee) Each of the Company and the Subsidiaries maintains a system
of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted
only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(ff) There are no transfer taxes or other similar fees or charges
under Federal law or the laws of any state, or any political
subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the issuance and sale by
the Company of the Subject Securities.
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<PAGE> 12
(gg) The Shares satisfy the eligibility requirements of Rule
144A(d)(3) under the Securities Act.
(hh) Any certificate signed by any officer of the Company and
delivered to the Initial Purchasers or to Cahill Gordon & Reindel,
counsel for the Initial Purchasers ("Counsel for the Initial
Purchasers") pursuant to the terms of this Agreement shall be deemed a
representation and warranty by the Company to the Initial Purchasers
as to the matters covered thereby.
2. Purchase and Sale of the Shares.
(a) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company agrees to
sell to each Initial Purchaser, and each Initial Purchaser agrees,
severally and not jointly, to purchase from the Company, at a purchase
price of $48.375 per share (the "Purchase Price"; strictly for
purposes of this Agreement, the Purchase Price is inclusive of the
Deposit Amount (as defined below)), the number of Firm Shares set
forth opposite such Initial Purchaser's name in Schedule I hereto. In
connection with the purchase of the Shares from the Company, each
Initial Purchaser agrees, severally and not jointly, to deposit into
an account designated in the Deposit Agreement, at the request of the
purchasers of the Shares and on their behalf, an amount equal to
approximately 6.73% of the Purchase Price ($20,193,966.00). Such
amount (the "Deposit Amount") shall be sufficient, together with the
earnings thereon, to pay any quarterly cash payment required to be
made under the Deposit Agreement through the Deposit Expiration Date
(as defined in the Deposit Agreement).
(b) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company hereby
grants an option to the several Initial Purchasers to purchase,
severally and not jointly, up to 1,200,000 Additional Shares at the
Purchase Price and upon delivery of the Deposit Amount relating to
such Additional Shares into the deposit account specified in and
pursuant to the terms of the Deposit Agreement. Said option may be
exercised only to cover over-allotments in the sale of the Firm Shares
by the Initial Purchasers. Said option may be exercised in whole or in
part at any time (but not more than once) on or before the 30th day
after the date of the Final Memorandum upon written or telephonic
notice by the Representatives (on behalf of the Initial Purchasers) to
the Company setting forth the number of Additional Shares as to which
the several Initial Purchasers are exercising the option and the date
of settlement and delivery of the related Deposit Amount. Delivery of
certificates for the Additional Shares by the Company and payment
therefor to the Company and delivery of the related Deposit Amount
shall be made as provided in Section 3 hereof. The percentage of the
Additional Shares to be
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<PAGE> 13
purchased by each Initial Purchaser shall be the same percentage of
the total number of shares of the Additional Shares to be purchased by
the several Initial Purchasers as such Initial Purchaser is purchasing
of the Firm Shares, subject to such adjustments as you in your
absolute discretion shall make to eliminate any fractional shares.
3. Delivery and Payment. Delivery of and payment for the Firm
Shares and the Additional Shares (if the option provided for in Section 2(b)
hereof shall have been exercised on or before the third business day prior to
the Closing Date) shall be made at 9:00 AM, New York City time, on July 20,
1999, or such later date as the Initial Purchasers shall designate, which date
and time may be postponed by agreement among the Initial Purchasers and the
Company or as provided in Section 9 hereof (such date and time of delivery and
payment for the Shares being herein called the "Closing Date"). The Company will
deliver against payment of the Purchase Price (including delivery of the related
Deposit Amount) by the Initial Purchasers the Shares in the form of one or more
permanent global securities in definitive form (the "Global Securities")
deposited with Norwest Shareowner Services ("Norwest") as custodian for The
Depository Trust Company (the "Depositary") and registered in the name of Cede &
Co., as nominee for the Depositary. Interests in any permanent Global Securities
will be held only in book-entry form through the Depositary, except in the
limited circumstances described in the Final Memorandum. Payment for the Shares
shall be made by the Initial Purchasers to or upon the order of the Company on
the Closing Date by wire transfer of same day funds or such other manner of
payment as may be agreed by the Company and the Initial Purchasers, to an
account previously designated to the Initial Purchasers by the Company at one or
more financial institutions acceptable to the Initial Purchasers, at the offices
of Cahill Gordon & Reindel, 80 Pine Street, New York, New York 10005, or such
other location as may be mutually agreed upon by the Company and the Initial
Purchasers, against delivery to Norwest as custodian for the Depositary of the
Global Securities representing all of the Shares.
The Company agrees to have the Global Securities available
checking by the Initial Purchasers in New York, New York, not later than 10:00
AM on the business day prior to the Closing Date.
If the option provided for in Section 2(b) hereof is exercised
after the third business day prior to the Closing Date, the Company will deliver
the Additional Shares (at the expense of the Company), in the form of one or
more permanent Global Securities deposited with Norwest as custodian for the
Depositary and registered in the name of Cede & Co. as nominee for the
Depositary, to the Initial Purchasers on the date (the "Option Closing Date")
specified by the Initial Purchasers (which shall be within three business days
after exercise of said option) against payment by the Initial Purchasers of the
purchase price thereof (including delivery of the related Deposit Amount) to or
upon the order of the Company by wire transfer payable in same-day funds to the
account specified by the Company. If settlement for the
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<PAGE> 14
Additional Shares occurs after the Closing Date, the Company will deliver to the
Initial Purchasers on the Option Closing Date, and the obligation of the Initial
Purchasers to purchaser the Additional Shares shall be conditioned upon receipt
of, supplemental opinions, certificates and letters confirming as of such date
the opinions, certificates and letters delivered on the Closing Date pursuant to
Section 6 hereof.
4. Offering of Shares. Each Initial Purchaser, severally and not
jointly, represents and warrants to and agrees with the Company that:
(a) It has not offered or sold, and will not offer or sell, any
Shares except to those it reasonably believes to be QIBs and that, in
connection with each such sale, it has taken or will take reasonable
steps to ensure that the purchaser of such Shares is aware that such
sale is being made in reliance on Rule 144A.
(b) Neither it nor any person acting on its behalf has made or
will make offers or sales of the Shares in the United States by means
of any form of general solicitation or general advertising within the
meaning of Regulation D in the United States.
(c) It has not offered or sold and will not offer or sell, in the
United Kingdom, by means of any document, any Shares other than to
persons whose ordinary business it is to buy or sell shares or
debentures, whether as principal or as agent (except in circumstances
which do not constitute an offer to the public within the meaning of
the Companies Act 1985 of Great Britain), (ii) it has complied and
will comply with all applicable provisions of the Financial Services
Act 1986 of the United Kingdom with respect to anything done by it in
relation to the Shares in, from or otherwise involving the United
Kingdom, and (iii) it has only issued or passed on and will only issue
or pass on in the United Kingdom any document received by it in
connection with the issue of the Shares to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1988 or is a person to
whom the document may otherwise lawfully be issued or passed on.
5. Agreements of the Company. The Company agrees with each
Initial Purchaser that:
(a) The Company will furnish to each Initial Purchaser and to
Counsel for the Initial Purchasers, without charge, during the period
referred to in paragraph (c) below, as many copies of the Preliminary
Memorandum and the Final Memorandum and any amendments and supplements
thereto as each Initial Purchaser and Counsel for the Initial
Purchasers may reasonably request.
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<PAGE> 15
(b) The Company will not at any time make any amendment or
supplement to the Preliminary Memorandum or the Final Memorandum
without the prior written consent of the Initial Purchasers.
(c) The Company will immediately notify each Initial Purchaser
and confirm such notice in writing of (x) any filing made by the
Company relating to the offering of the Shares with any securities
exchange or any other regulatory body in the United States or any
other jurisdiction and (y) prior to the completion of the placement of
the Shares by the Initial Purchasers as evidenced by a notice in
writing from the Initial Purchasers to the Company, any material
changes in or affecting the earnings, business affairs or business
prospects of the Company and its Subsidiaries that (i) make any
statement in the Final Memorandum false or misleading in any material
respect or (ii) are not disclosed in the Final Memorandum. In such
event or if at any time prior to completion of the placement of the
Shares by the Initial Purchasers to purchasers who are not its
affiliates (as determined by the Initial Purchasers) any other event
shall occur or condition shall exist as a result of which it is
necessary, in the opinion of the Initial Purchasers or Counsel for the
Initial Purchasers, to amend or supplement the Final Memorandum in
order that the Final Memorandum, as then amended or supplemented, will
not include an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in
the light of the circumstances existing at the time it is delivered to
a purchaser, not misleading or if in the opinion of the Initial
Purchasers or Counsel for the Initial Purchasers, such amendment or
supplement is necessary to comply with applicable law, the Company
will, subject to paragraph (b) of this Section 5, promptly prepare, at
its own expense, such amendment or supplement as may be necessary to
correct such untrue statement or omission or to effect such compliance
(in form and substance agreed upon by the Initial Purchasers and
Counsel for the Initial Purchasers), so that as so amended or
supplemented, the statements in the Final Memorandum will not include
an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light
of the circumstances existing at the time it is delivered to a
purchaser, not misleading or so that such Final Memorandum as so
amended or supplemented will comply with applicable law, as the case
may be, and furnish to the Initial Purchasers such number of copies of
such amendment or supplement as the Initial Purchasers may reasonably
request. The Company agrees to notify the Initial Purchasers in
writing to suspend use of the Final Memorandum as promptly as
practicable after the occurrence of an event specified in this
paragraph (c), and the Initial Purchasers hereby agree upon receipt of
such notice from the Company to suspend use of the Final Memorandum
until the Company has amended or supplemented the Final Memorandum to
correct such misstatement or omission or to effect such compliance.
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<PAGE> 16
(d) Neither the Company nor any of its Affiliates (as defined in
Rule 501(b) under the Securities Act) will solicit any offer to buy or
offer or sell the Shares by means of any form of general solicitation
or general advertising (as such terms are used in Regulation D under
the Securities Act), or in any manner involving a public offering
within the meaning of Section 4(2) of the Securities Act prior to the
effectiveness of a registration statement with respect to the Subject
Securities.
(e) Neither the Company nor any of its Affiliates (as defined in
Rule 501(b) under the Securities Act) will offer, sell or solicit
offers to buy or otherwise negotiate in respect of any security (as
defined in the Securities Act) which could be integrated with the sale
of the Shares in a manner that would require the registration of the
Shares under the Securities Act.
(f) The Company will use its reasonable best efforts in
cooperation with the Initial Purchasers to (i) permit the Shares to be
eligible for clearance and settlement through DTC and (ii) permit the
Shares to be designated as securities eligible for trading in The
Portal Market in accordance with the rules and regulations of the
NASD.
(g) Prior to the Closing Date, the Company will furnish to each
Initial Purchaser, if and as soon as they have been prepared, a copy
of any unaudited interim consolidated financial statements of the
Company for any period subsequent to the period covered by the most
recent financial statements of the Company appearing in the Final
Memorandum which have been prepared in the ordinary course of
business.
(h) The Company will arrange for the registration and
qualification of the Shares for offering and sale under the applicable
securities or "blue sky" laws of such states and other jurisdictions
as the Initial Purchasers may designate in connection with the resale
of the Shares as contemplated by this Agreement and the Final
Memorandum and will continue such qualifications in effect for as long
as may be necessary to complete the distribution of the Shares;
provided that in no event shall the Company be obligated to (i)
qualify as a foreign corporation or as a dealer in securities in any
jurisdiction where it would not otherwise be required to so qualify
but for this Section 5(h), (ii) file any general consent to service of
process in any jurisdiction where it is not at the Closing Date then
so subject or (iii) subject itself to taxation in any such
jurisdiction if it is not so subject. The Company will file such
statements and reports as may be required by the laws of each
jurisdiction in which the Shares have been qualified as above
provided. The Company shall promptly advise the Initial Purchasers of
the receipt by the Company of any notification with respect to the
suspension of the qualification or exemption from qualification of the
Shares for offering or sale in
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<PAGE> 17
any jurisdiction or the institution, threatening or contemplation of
any proceeding for such purpose.
(i) The Company will reserve and keep available at all times,
free of any preemptive rights, shares of Common Stock for the purpose
of enabling the Company to satisfy all obligations to issues shares of
Common Stock as dividends with respect to the Shares or upon
conversion of the Shares.
(j) The Company will file the Certificate of Designation prior to
the Closing Date with the Secretary of State of the State of Delaware,
and the Certificate of Designation shall have become effective on or
prior to the Closing Date in accordance with the General Corporation
Law of the State of Delaware.
(k) The Company will use the proceeds received from the Offering
in the manner specified in the Final Memorandum under the heading "Use
of Proceeds".
(l) The Company will not, and will not permit any of its
Affiliates (as defined in Rule 501(b) under the Securities Act) to,
resell any Shares that have been acquired by any of them.
(m) The Company will not, without the prior written consent of
Salomon Smith Barney Inc., for a period of 90 days after the date
hereof, offer, sell or contract to sell, or otherwise dispose of (or
enter into any transaction which is designed to, or might reasonably
be expected to, result in the disposition (whether by actual
disposition or effective economic disposition due to cash settlement
or otherwise) by the Company or any affiliate of the Company or any
person in privity with the Company or any affiliate of the Company)
directly or indirectly, or announce the offering of, any other shares
of Common Stock or any securities convertible into, or exchangeable
for, shares of Common Stock; provided that (i) the Company may issue
and sell Common Stock pursuant to any employee stock option plan,
stock ownership plan or dividend reinvestment plan of the Company in
effect at the date hereof, (ii) the Company may issue Common Stock
issuable upon the conversion of securities or the exercise of warrants
outstanding at the date hereof, (iii) the Company may issue Common
Stock (or securities convertible into, or exchangeable for, shares of
Common Stock) as consideration or partial consideration for the
acquisition of all or substantially all of an Internet Service
Business (as defined in the Indenture, dated as of March 25, 1998, by
and between the Company and First Trust National Association, as
trustee), whether by stock purchase, merger, purchase of all or
substantially all of the assets of such person or otherwise, (iv) the
Company may issue and sell Common Stock (or securities convertible
into, or exchangeable for, shares of Common Stock) in connection with
the formation or furtherance of a strategic alliance and (v) the
Company may issue
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<PAGE> 18
Common Stock (or securities convertible into, or exchangeable for,
shares of Common Stock) as consideration or partial consideration for
the acquisition of all or substantially all of an Internet Service
Business having at least one class of capital stock which is at the
time of such acquisition registered pursuant to Section 12(b) or 12(g)
of the Exchange Act, whether by stock purchase, merger, purchase of
all or substantially all of the assets of such person or otherwise;
provided, further, that in connection with any issuance or issuance
and sale permitted under clauses (iii) or (iv) of the previous
proviso, the Company agrees not to grant any rights exercisable prior
to the date that is 90 days after the date of this Agreement with
respect to the registration under the Act of any shares of Common
Stock (or securities convertible into, or exchangeable for, shares of
Common Stock) issued in connection with such transaction.
6. Conditions to the Obligations of the Initial Purchasers. The
obligations of the Initial Purchasers to purchase the Shares and deliver the
Purchase Price and related Deposit Amount shall be subject to the accuracy of
the representations and warranties on the part of the Company contained herein
at the date and time that this Agreement is executed and delivered by the
parties hereto (the "Execution Time"), and the Closing Date, to the accuracy of
the statements of the Company made in any certificates pursuant to the
provisions hereof, to the performance by the Company of its obligations
hereunder and to the following additional conditions:
(a) (i) At the Closing Date, the Initial Purchasers shall have
received the opinion of Morrison & Foerster LLP, counsel to the
Company, dated as of the Closing Date, in the form set forth below and
otherwise reasonably satisfactory to the Initial Purchasers and
Counsel for the Initial Purchasers, to the effect that:
(1) The Company has been duly incorporated and is validly
existing under the laws of the State of Delaware, with corporate
power and authority to own, lease and operate its assets and
properties and conduct its business as described in the Final
Memorandum and to enter into and perform its obligations under
this Agreement and each of the other Transaction Documents;
(2) (A) The authorized, issued and outstanding capital stock
of the Company is as set forth in the Final Memorandum under the
caption "Description of Capital Stock"; (B) the shares of issued
and outstanding capital stock of the Company have been duly and
validly authorized and issued and are fully paid and
non-assessable; (C) the Shares being sold hereunder by the
Company have been duly and validly authorized, and, when issued
and delivered to and purchased by the Initial Purchasers pursuant
to this Agreement, will be fully paid and non-assessable; (D) the
shares of Common Stock issuable as dividends and upon conversion
of the Shares have been duly and validly
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<PAGE> 19
authorized and reserved for issuance and, when issued and
delivered in accordance with the provisions of the Certificate of
Designation, will be fully paid and non-assessable; (E) the
holders of outstanding shares of capital stock of the Company are
not entitled to preemptive or other rights to subscribe for the
Subject Securities; (F) the certificates for the Shares are in
valid and sufficient form; and (G) except as set forth in the
Final Memorandum, no options, warrants or other rights to
purchase, agreements or other obligations to issue, or rights to
convert any obligations into or exchange any securities for,
shares of capital stock of or ownership interests in the Company
are outstanding;
(3) Each of the Subsidiaries has been duly incorporated and
is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, has corporate
power and authority to own, lease and operate its properties and
to conduct its business as described in the Final Memorandum; all
of the issued and outstanding capital stock of each of the
Subsidiaries has been duly authorized and validly issued, is
fully paid and non-assessable and, to such counsel's knowledge
and information, except as set forth in the Final Memorandum
under the caption "Business-- The Verio Organization", is owned
by the Company directly, free and clear of any security interest,
mortgage, pledge, lien, encumbrance, claim or equity;
(4) The Company has the requisite corporate power and
authority to execute, deliver and perform its obligations under
this Agreement, the Deposit Agreement and the Registration Rights
Agreement;
(5) No consent, waiver, approval, authorization, license,
qualification or order of or filing or registration with any
court or governmental or regulatory agency or body is required
for the execution and delivery by the Company of this Agreement,
the Deposit Agreement or the Registration Rights Agreement or for
the issue and sale of the Shares, or the performance by the
Company of its obligations under the Transaction Documents, or
for the consummation of any of the transactions contemplated
hereby or thereby, except such as may be required (A) in
connection with the registration under the Securities Act of the
Subject Securities under the Registration Rights Agreement, and
(B) by state securities or "blue sky" laws in connection with the
purchase and distribution of the Shares by the Initial Purchasers
(as to which such counsel need express no opinion);
(6) The issuance, sale and delivery of the Shares, the
execution, delivery and performance by the Company of this
Agreement, the Deposit Agreement and the Registration Rights
Agreement (in each case assuming due
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<PAGE> 20
authorization and execution by each party other than the
Company), and the consummation by the Company of the transactions
contemplated hereby and thereby and the compliance by the Company
with the terms of the foregoing do not, and, at the Closing Date,
will not, conflict with or constitute or result in a breach or
violation by the Company or any of the Subsidiaries of (A) any
provision of the Certificate of Incorporation or By-laws of the
Company, (B) any of the terms or provisions of, or constitute a
default (or an event which, with notice or lapse of time or both,
would constitute a default) by the Company, or give rise to any
right to accelerate the maturity or require the prepayment of any
indebtedness under, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of
the Company or any Subsidiary under any Material Contract
identified in Schedule III hereto (provided that such counsel
need not express an opinion as to any potential violation of any
financial covenant contained in any Material Contract) or (C) any
law, statute, rule, or regulation or any order, decree or
judgment known to such counsel to be applicable to the Company or
any Subsidiary, of any court or governmental or regulatory agency
or body or arbitrator known to such counsel to have jurisdiction
over the Company or any of the Subsidiaries or any of their
respective properties or assets;
(7) The Purchase Agreement has been duly authorized,
executed and delivered by the Company;
(8) The statements in the Final Memorandum under the
headings "Offering Memorandum Summary - The Offering",
"Description of the Convertible Preferred Stock", "Description of
Capital Stock", and "Certain Related Party Transactions," insofar
as such statements purport to summarize certain provisions of the
Certificate of Designation, the Shares, the Common Stock, the
Deposit Agreement, the Registration Rights Agreement, the
Company's authorized and outstanding capital stock and certain
agreements to which the Company is a party, provide a fair
summary of such provisions of such agreements and instruments;
(9) The statements in the Final Memorandum under the caption
"Federal Tax Considerations" fairly and accurately summarize the
material United States federal tax consequences of owning the
Shares;
(10) Each of the Deposit Agreement and the Registration
Rights Agreement has been duly authorized, executed and delivered
by the Company and (assuming due authorization and execution by
each party thereto other than the Company) constitutes a valid
and binding agreement of the Company,
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<PAGE> 21
enforceable against the Company in accordance with its terms,
except as such enforceability may be limited by (a) with respect
to the Deposit Agreement and the Registration Rights Agreement,
the Enforceability Limitations, and (b) with respect to the
Registration Rights Agreement, as to rights of indemnification
and contribution, principles of public policy or federal or state
securities laws relating thereto;
(11) To the knowledge of such counsel, other than as
described in the Final Memorandum, no legal, regulatory or
governmental proceedings are pending to which the Company is a
party or to which the property or assets of the Company are
subject which, individually or in the aggregate, could reasonably
be expected to have a Material Adverse Effect or which,
individually or in the aggregate, could have a material adverse
effect on the power or ability of the Company to perform its
obligations under the Transaction Documents or to consummate the
transactions contemplated thereby or by the Final Memorandum and
to the knowledge of such counsel, no such material proceedings
have been threatened against the Company or with respect to any
of its respective assets or properties;
(12) Assuming (a) the accuracy of, and compliance with, the
representations, warranties and covenants of the Company in
subsections 1(c) and 1(d) of the Purchase Agreement, (b) the
accuracy of, and compliance with, the representations, warranties
and covenants of the Initial Purchasers in Section 4 of the
Purchase Agreement, (c) the compliance by the Initial Purchasers
with the offering and transfer procedures and restrictions
described in the Final Memorandum and (d) receipt by the
purchasers to whom the Initial Purchasers initially resell the
Shares of a copy of the Final Memorandum prior to such sale, it
is not necessary in connection with the offer, sale and delivery
of the Shares or in connection with the initial resale of such
Shares in the manner contemplated by the Purchase Agreement and
the Final Memorandum to register the Shares under the Securities
Act, it being understood that no opinion is expressed as to any
subsequent resale of any Shares; and
(13) When the Shares are issued and delivered pursuant to
this Agreement, such Shares will not be of the same class (within
the meaning of Rule 144A) as securities of the Company which are
listed on a national securities exchange registered under Section
6 of the Exchange Act or quoted in a U.S. automated inter-dealer
quotation system.
In addition, such counsel shall state that such counsel has
participated in conferences with representatives of the Initial
Purchasers, officers and other representatives of the Company and
representatives
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<PAGE> 22
of the independent certified accountants of the Company, at which
conferences the contents of the Preliminary Memorandum and Final
Memorandum and the business and affairs of the Company and the
Subsidiaries were discussed, and although such counsel has not
independently verified and does not pass upon or assume any
responsibility for the accuracy, completeness or fairness of the
statements contained in the Final Memorandum (except and only to the
extent set forth in subclauses (8) and (9) above), on the basis of the
foregoing (relying as to materiality to the extent such counsel deemed
appropriate upon the representations and opinions of officers and
other representatives of the Company), no facts have come to the
attention of such counsel which lead such counsel to believe that the
Final Memorandum at the date thereof or as of the Closing Date,
contained or contains an untrue statement of a material fact or
omitted or omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading (it being understood that such counsel need
not express any comment with respect to the financial statements,
including the notes thereto and supporting schedules, or any other
financial or statistical data set forth or referred to in the Final
Memorandum).
In rendering such opinions, such counsel (A) need not express any
opinion with regard to the application of laws of any jurisdiction
other than the Federal law of the United States, the General
Corporation Law of the State of Delaware and the laws of the State of
New York and (B) may rely, as to matters of fact, to the extent they
deem proper on representations or certificates of responsible officers
of the Company and certificates of public officials.
References to the Final Memorandum in this subsection (a)(i)
include any supplements thereto at or prior to the Closing Date.
(ii) At the Closing Date, the Initial Purchasers shall have
received the opinion of Carla Hamre Donelson, Esq., General Counsel to
the Company, dated as of the Closing Date, in the form set forth below
and otherwise reasonably satisfactory to the Initial Purchasers and
Counsel for the Initial Purchasers, to the effect that:
(1) To the knowledge of such counsel, other than as
described in the Final Memorandum, no legal, regulatory or
governmental proceedings are pending to which any of the
Subsidiaries is a party or to which the property or assets of the
Subsidiaries are subject which, individually or in the aggregate,
could reasonably be expected to have a Material Adverse Effect or
which, individually or in the aggregate, could have a material
adverse effect on the power or ability of the Company to perform
its obligations under the Transaction Documents or to consummate
the transactions contemplated thereby or by
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<PAGE> 23
the Final Memorandum and to the knowledge of such counsel, no
such material proceedings have been threatened against the
Subsidiaries or with respect to any of their respective assets or
properties;
(2) To the best knowledge of such counsel, the Company is
duly qualified as a foreign corporation to transact business and
is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the
failure so to qualify or to be in good standing would not result
in a Material Adverse Effect;
(3) To the best knowledge of such counsel, each of the
Subsidiaries is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in
which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business,
except where the failure so to qualify or to be in good standing
individually or in the aggregate would not result in a Material
Adverse Effect; and
(4) None of the Company or the Subsidiaries is in violation
of its respective Organizational Documents; to the knowledge of
such counsel, no default by the Company or any of the
Subsidiaries exists in the due performance or observance of any
material obligation, agreement, covenant or condition contained
in any Material Contract which could reasonably be expected to
have a Material Adverse Effect; and to the knowledge of such
counsel, none of the Company nor the Subsidiaries is in breach or
violation of any law, statute, rule or regulation, or any
judgment, decree or order of any governmental or regulatory
agency or other body having jurisdiction over the Company or any
of the Subsidiaries or any of their respective properties or
assets such that any such breach or violation could reasonably be
expected to have a Material Adverse Effect.
In addition, such counsel shall state that such counsel has
participated in conferences with representatives of the Initial
Purchasers, officers and other representatives of the Company and
representatives of the independent certified accountants of the
Company, at which conferences the contents of the Preliminary
Memorandum and Final Memorandum and the business and affairs of the
Company and the Subsidiaries were discussed, and although such counsel
has not independently verified and does not pass upon or assume any
responsibility for the accuracy, completeness or fairness of the
statements contained in the Final Memorandum, on the basis of the
foregoing (relying as to materiality to the extent such counsel deemed
appropriate upon the representations and opinions of officers and
other representatives of the Company), no facts
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<PAGE> 24
have come to the attention of such counsel which lead such counsel to
believe that the Final Memorandum at the date thereof or as of the
Closing Date, contained or contains an untrue statement of a material
fact or omitted or omits to state a material fact necessary to make
the statements therein, in the light of the circumstances under which
they were made, not misleading (it being understood that such counsel
need not express any comment with respect to the financial statements,
including the notes thereto and supporting schedules, or any other
financial or statistical data set forth or referred to in the Final
Memorandum).
In rendering such opinions, such counsel (A) need not express any
opinion with regard to the application of laws of any jurisdiction
other than the Federal law of the United States, the General
Corporation Law of the State of Delaware and the laws of the State of
Colorado and (B) may rely, as to matters of fact, to the extent she
deems proper on representations or certificates of responsible
officers of the Company and certificates of public officials.
References to the Final Memorandum in this subsection (a)(ii)
include any supplements thereto at or prior to the Closing Date.
(b) The Initial Purchasers shall have received the opinion, dated
as of the Closing Date, of Cahill Gordon & Reindel, Counsel for the
Initial Purchasers, with respect to certain matters as are customarily
covered by such opinions.
In rendering such opinions, such counsel (A) need not express any
opinion with regard to the application of laws of any jurisdiction
other than the Federal laws of the United States, the General
Corporation Law of the State of Delaware and the laws of the State of
New York and (B) may rely, as to matters of fact, to the extent they
deem proper on representations or certificates of responsible officers
of the Company and certificates of public officials.
In addition, such counsel shall state that such counsel has
participated in conferences with representative of the Initial
Purchasers, officers and other representatives of the Company and
representatives of the independent accountants for the Company at
which conferences the contents of the Preliminary Memorandum and Final
Memorandum and related matters were discussed, and although such
counsel has not verified and does not pass upon and does not assume
any responsibility for the accuracy, completeness or fairness of the
statements contained in the Final Memorandum, on the basis of the
foregoing (relying as to materiality to the extent such counsel deemed
appropriate upon the representations and opinions of officers and
other representatives of the Company), no facts have come to the
attention of such counsel which lead such counsel to believe that the
Final Memorandum, at the date thereof or as of the Closing
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<PAGE> 25
Date, contained or contains an untrue statement of a material fact or
omitted to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading (it being understood that such counsel need express no
comment with respect to the financial statements, including the notes
thereto, or any other financial or statistical data set forth or
referred to in the Final Memorandum).
(c) The following conditions contained in clauses (i) and (ii) of
this subsection (c) shall have been satisfied at and as of the Closing
Date, and the Company shall have furnished to the Initial Purchasers a
certificate of the Company, signed by the Chairman of the Board or the
President and the principal financial or accounting officer of the
Company, dated the Closing Date, to the effect that the signers of
such certificate have carefully examined the Final Memorandum, any
amendment or supplement to the Final Memorandum and this Agreement and
that:
(i) the representations and warranties of the Company in
this Agreement are true and correct in all material respects on
and as of the Closing Date with the same effect as if made on the
Closing Date, and the Company has complied with all the
agreements and satisfied all the conditions on its part to be
performed or satisfied hereunder in all material respects at or
prior to the Closing Date; and
(ii) since the date of the most recent financial statements
included in the Final Memorandum (exclusive of any amendment or
supplement thereto), there has been no Material Adverse Change,
whether or not in the ordinary course of business. As used in
this subparagraph, the term "Final Memorandum" means the Final
Memorandum in the form first used to confirm sales of the Shares.
(d) At the Execution Time and at the Closing Date, KPMG LLP shall
have furnished to the Initial Purchasers a letter or letters, dated
respectively as of the Execution Time and as of the Closing Date, in
form and substance satisfactory to the Initial Purchasers, confirming
that they are independent accountants within the meaning of the
Securities Act and the Exchange Act and the applicable published rules
and regulations thereunder and Rule 101 of the Code of Professional
Conduct of the American Institute of Certified Public Accountants (the
"AICPA") and containing statements and information of the type
ordinarily included in accountants' "comfort letters" to Initial
Purchasers with respect to financial statements and certain financial
information contained in the Final Memorandum, in form and substance
satisfactory to Counsel for the Initial Purchasers.
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<PAGE> 26
All references in this Section 6(d) to the Final Memorandum shall
be deemed to include any amendment or supplement thereto at the date
of the letter.
(e) At the Execution Time, the Company shall have furnished to
the Representatives a letter agreement substantially in the form of
Exhibit A hereto addressed to the Representatives from each executive
officer of the Company and from Mr. Steven C. Halstedt and Mr. Arthur
L. Cahoon. With respect to Mr. Cahoon, the letter agreement shall
apply only to 50% of the shares of Common Stock owned by him as of the
date hereof.
(f) Subsequent to the Execution Time or, if earlier, the dates as
of which information is given in the Final Memorandum, there shall not
have been (i) any change or decrease specified in the letter or
letters referred to in paragraph (d) of this Section 6 or (ii) any
change, or any development involving a prospective change, in or
affecting the business or properties of the Company and its
subsidiaries the effect of which, in any case referred to in clause
(i) or (ii) above, is, in the judgment of the Initial Purchasers, so
material and adverse as to make it impractical or inadvisable to
market the Shares as contemplated by the Final Memorandum.
(g) On or prior to the Closing Date, the Company shall have
furnished to the Initial Purchasers such further information,
certificates and documents as the Initial Purchasers may reasonably
request.
(h) The Company and the Deposit Agent shall have entered into the
Deposit Agreement.
(i) The Company and the Initial Purchasers shall have entered
into the Registration Rights Agreement.
(j) The Certificate of Designation shall have become effective in
accordance with the provisions of the General Corporation Law of the
State of Delaware.
If any of the conditions specified in this Section 6 shall not
have been fulfilled when and as provided in this Agreement, or if any of the
opinions and certificates mentioned above or elsewhere in this Agreement shall
not be in all material respects reasonably satisfactory in form and substance to
the Initial Purchasers and Counsel for the Initial Purchasers, this Agreement
and all obligations of the Initial Purchasers hereunder may be canceled at, or
at any time prior to, the Closing Date by the Initial Purchasers. Notice of such
cancellation shall be given to the Company in writing or by telephone or
telegraph confirmed in writing.
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<PAGE> 27
The documents required to be delivered by this Section 6 will be
delivered at the office of Counsel for the Initial Purchasers, at 80 Pine
Street, New York, New York, on the Closing Date.
7. Reimbursement of Expenses. (a) Whether or not any sale of the
Shares is consummated, the Company agrees to pay and bear all costs and expenses
incident to the performance of all of its obligations under this Agreement,
including (i) the preparation and printing of the Preliminary Memorandum, the
Final Memorandum and any amendments or supplements thereto and the cost of
furnishing copies thereof to the Initial Purchasers, (ii) the preparation,
issuance, printing and distribution of the Subject Securities and any survey of
state securities or "blue sky" laws or legal investment memoranda, (iii) the
delivery to the Initial Purchasers of the Shares and the delivery to the holders
of the Shares the Common Stock issuable as dividends or upon conversion or
redemption of the Shares, (iv) the fees and disbursements of the Company's
counsel and accountants, (v) the qualification of the Subject Securities under
the applicable state securities or "blue sky" laws in accordance with the
provisions of Section 5(h) hereof and any filing for review of the offering with
the NASD, if required, including filing fees and reasonable fees and
disbursements of counsel to the Initial Purchasers in connection therewith and
in connection with the preparation of any survey of state securities or "blue
sky" laws or legal investment memoranda, (vi) any fees and expenses relating to
maintaining the Deposit Account, (vii) the fees and expenses of the Deposit
Agent, including the fees and disbursements of counsel for the Deposit Agent,
(viii) all expenses (including travel expenses) of the Company and the Initial
Purchasers in connection with any meetings with prospective investors in the
Shares and (ix) all expenses and listing fees in connection with the application
for designation of the Shares as Portal-eligible securities and to permit the
Shares to be eligible to clearance through The Depository Trust Company.
(b) If the sale of the Shares provided for herein is not
consummated because any condition to the obligations of the Initial Purchasers
set forth in Section 6 hereof is not satisfied, because of any termination
pursuant to Section 10 hereof or because of any refusal, inability or failure on
the part of the Company to perform any agreement herein or comply with any
provision hereof other than by reason of a default by any of the Initial
Purchasers in payment for the Shares on the Closing Date (including the deposit
of the related Deposit Amount), the Company will reimburse the Initial
Purchasers severally upon demand for all reasonable out-of-pocket expenses
(including reasonable fees and disbursements of counsel) that shall have been
incurred by them in connection with the proposed purchase and sale of the
Shares.
8. Indemnification and Contribution. (a) The Company agrees to
indemnify and hold harmless each Initial Purchaser, the directors, officers,
employees and agents of each Initial Purchaser and each person who controls any
Initial Purchaser within the meaning of either the Securities Act or the
Exchange Act against any and all losses, claims, damages or
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<PAGE> 28
liabilities, joint or several, to which they or any of them may become subject
under the Securities Act, the Exchange Act or other Federal or state statutory
law or regulation, at common law or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of a material fact
contained in the Preliminary Memorandum or the Final Memorandum or in any
amendment thereof or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and agree to reimburse
each such indemnified party, as incurred, for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made in
the Preliminary Memorandum or the Final Memorandum, or in any amendment thereof
or supplement thereto, in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Initial Purchasers
specifically for inclusion therein. This indemnity agreement will be in addition
to any liability which the Company may otherwise have.
The foregoing indemnity with respect to any untrue statement
contained in or any omission from the Preliminary Memorandum shall not inure to
the benefit of any Initial Purchaser (or any affiliate or person who controls
such Initial Purchaser within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) from whom the person asserting such loss,
liability, claim, damage or expense purchased any of the Shares that are the
subject thereof if such person was not sent or given a copy of the Final
Memorandum (or any amendment or supplement thereto), if the Company shall have
previously furnished copies thereof to the Initial Purchasers in accordance with
this Agreement, at or prior to the written confirmation of the sale of such
Shares to such person and the untrue statement contained in or the omission from
the Preliminary Memorandum was corrected in the Final Memorandum (or any
amendment or supplement thereto).
(b) Each Initial Purchaser severally and not jointly agrees to
indemnify and hold harmless the Company, its directors, officers and each person
who controls the Company within the meaning of either the Securities Act or the
Exchange Act to the same extent as the foregoing indemnity from the Company to
each Initial Purchaser, but only with reference to written information relating
to such Initial Purchaser furnished to the Company by or on behalf of such
Initial Purchaser specifically for inclusion in the Preliminary Memorandum or
the Final Memorandum (or in any amendment or supplement thereto). This indemnity
agreement will be in addition to any liability which any Initial Purchaser may
otherwise have. The Company acknowledges that the statements set forth in the
last paragraph of the cover page
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<PAGE> 29
and in the table and the second, seventh, eighth, ninth, tenth and eleventh
paragraphs after the table under the heading "Plan of Distribution" in the
Preliminary Memorandum and the Final Memorandum (insofar as such statements
relate to the Initial Purchasers) constitute the only information furnished in
writing by or on behalf of the Initial Purchasers for inclusion in the
Preliminary Memorandum or the Final Memorandum (or in any amendment or
supplement thereto).
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party (i)
will not relieve it from liability under paragraph (a) or (b) above unless and
to the extent it did not otherwise learn of such action and such failure results
in the forfeiture by the indemnifying party of substantial rights and defenses
and (ii) will not, in any event, relieve the indemnifying party from any
obligations to any indemnified party other than the indemnification obligation
provided in paragraph (a) or (b) above. The indemnifying party shall be entitled
to appoint counsel of the indemnifying party's choice at the indemnifying
party's expense to represent the indemnified party in any action for which
indemnification is sought (in which case the indemnifying party shall not
thereafter be responsible for the fees and expenses of any separate counsel
retained by the indemnified party or parties except as set forth below);
provided, however, that such counsel shall be satisfactory to the indemnified
party. Notwithstanding the indemnifying party's election to appoint counsel to
represent the indemnified party in an action, the indemnified party shall have
the right to employ separate counsel (including local counsel), and the
indemnifying party shall bear the reasonable fees, costs and expenses of such
separate counsel if (i) the use of counsel chosen by the indemnifying party to
represent the indemnified party would present such counsel with a conflict of
interest, (ii) the actual or potential defendants in, or targets of, any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, (iii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of the institution of such action or (iv) the indemnifying party
shall authorize the indemnified party to employ separate counsel at the expense
of the indemnifying party. An indemnifying party will not, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any pending or threatened claim,
action, suit or proceeding in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified parties are actual or
potential parties to such claim or action) unless such settlement, compromise or
consent includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding.
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<PAGE> 30
(d) In the event that the indemnity provided in paragraph (a) or
(b) of this Section 8 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company on the one hand and the Initial
Purchasers on the other hand agree to contribute to the aggregate losses,
claims, damages and liabilities (including legal or other expenses reasonably
incurred in connection with investigating or defending same) (collectively,
"Losses") to which the Company or one or more of the Initial Purchasers, as
applicable, may be subject in such proportion as is appropriate to reflect the
relative benefits received by the Company or the Initial Purchasers from the
offering of the Shares; provided, however, that in no case shall any Initial
Purchaser be responsible for any amount in excess of the purchase discount or
commission applicable to the Shares purchased by such Initial Purchaser
hereunder. If the allocation provided by the immediately preceding sentence is
unavailable for any reason, the Company and the Initial Purchasers shall
contribute in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company or the Initial
Purchasers, as applicable, in connection with the statements or omissions which
resulted in such Losses as well as any other relevant equitable considerations.
Benefits received by the Company shall be deemed to be equal to the total net
proceeds from the Offering received by it (before deducting expenses), and
benefits received by the Initial Purchasers shall be deemed to be equal to the
total purchase discounts and commissions received by the Initial Purchasers from
the Company in connection with the purchase of the Shares hereunder. Relative
fault shall be determined by reference to whether any alleged untrue statement
or omission relates to information provided by the Company or the Initial
Purchasers. The Company and the Initial Purchasers agree that it would not be
just and equitable if contribution were determined by pro rata allocation or any
other method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
paragraph (d), no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 8 each person who controls an
Initial Purchaser within the meaning of either the Securities Act or the
Exchange Act and each director, officer, employee and agent of an Initial
Purchaser shall have the same rights to contribution as such Initial Purchaser,
and each person who controls the Company within the meaning of either the
Securities Act or the Exchange Act and each officer and director of the Company
shall have the same rights to contribution as the Company subject in each case
to the applicable terms and conditions of this paragraph (d).
9. Default by an Initial Purchaser. If any one or more Initial
Purchasers shall fail to purchase and pay for any of the Shares agreed to be
purchased by such Initial Purchaser hereunder and deliver the related Deposit
Amount and such failure to do any of the foregoing shall constitute a default in
the performance of its or their obligations under this Agreement, the remaining
Initial Purchasers shall be obligated severally to take up and pay for (in the
respective proportions which the number of Shares set forth opposite their names
in
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Schedule I hereto bears to the aggregate number of Shares set forth opposite the
names of all the remaining Initial Purchasers) the Shares which the defaulting
Initial Purchaser or Initial Purchasers agreed but failed to purchase; provided,
however, that in the event that the aggregate number of Shares which the
defaulting Initial Purchaser or Initial Purchasers agreed but failed to purchase
shall exceed 10% of the aggregate number of Shares set forth in Schedule I
hereto, the remaining Initial Purchasers shall have the right to purchase all,
but shall not be under any obligation to purchase any, of the Shares, and if
such non-defaulting Initial Purchasers do not purchase all the Shares, this
Agreement will terminate without liability to any non-defaulting Initial
Purchaser or the Company. In the event of a default by any Initial Purchaser as
set forth in this Section 9, the Closing Date shall be postponed for such
period, not exceeding seven days, as the Initial Purchasers shall determine in
order that the required changes in the Final Memorandum or in any other
documents or arrangements may be effected. Nothing contained in this Agreement
shall relieve any defaulting Initial Purchaser of its liability, if any, to the
Company or any non-defaulting Initial Purchaser for damages occasioned by its
default hereunder.
10. Termination. This Agreement shall be subject to termination
in the absolute discretion of the Initial Purchasers, by notice given to the
Company prior to delivery of and payment for the Shares, if prior to such time
(i) trading in any of the Company's securities shall have been suspended by the
Commission or trading in securities generally on the New York Stock Exchange or
the Nasdaq National Market shall have been suspended or limited or minimum
prices shall have been established on either of such exchanges, (ii) a banking
moratorium shall have been declared either by Federal or New York State
authorities or (iii) there shall have occurred any outbreak or escalation of
hostilities, declaration by the United States of a national emergency or war or
other calamity or crisis the effect of which on financial markets is such as to
make it, in the judgment of the Initial Purchasers, impracticable or inadvisable
to proceed with the offering or delivery of the Shares as contemplated by the
Final Memorandum.
11. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers, and of the Initial Purchasers set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation made by or on behalf of the Initial Purchasers or the Company
or any of the officers, directors or controlling persons referred to in Section
8 hereof, and will survive delivery of and payment for the Shares. The
provisions of Sections 7 and 8 hereof shall survive the termination or
cancellation of this Agreement.
12. Notices. All communications hereunder will be in writing and
effective only on receipt, and, if sent to the Initial Purchasers, will be
mailed, delivered or telegraphed and confirmed to them, care of Salomon Smith
Barney Inc., at 388 Greenwich Street, New
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<PAGE> 32
York, New York 10013; if sent to the Company, will be mailed, delivered or
telegraphed and confirmed to it at Verio Inc., 8005 South Chester Street, Suite
200, Englewood, Colorado 80112, Attention: Carla Hamre Donelson, Esq.; with a
copy to Morrison & Foerster LLP, 425 Market Street, San Francisco, CA 94105,
Attention: Gavin Grover, Esq.
13. Successors. This Agreement will inure to the benefit of and
be binding upon the parties hereto and their respective successors and the
officers and directors and controlling persons referred to in Section 8 hereof,
and no other person will have any right or obligation hereunder.
14. Applicable Law. This Agreement will be governed by and
construed in accordance with the laws of the State of New York.
15. Business Day. For purposes of this Agreement, "business day"
means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on
which banking institutions in the City of New York, New York are authorized or
obligated by law, executive order or regulation to close.
16. Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original, but all such
counterparts will together constitute one and the same instrument.
[Signature Page Follows]
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<PAGE> 33
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this Agreement and your acceptance shall represent a binding agreement between
the Company and the Initial Purchasers.
Very truly yours,
VERIO INC.
By: /s/ Carla Hamre Donelson
------------------------------------
Name: Carla Hamre Donelson
Title: Vice President, General
Counsel and Secretary
The foregoing Agreement is hereby
confirmed and accepted as of the date first
above written.
Salomon Smith Barney Inc.
Donaldson, Lufkin & Jenrette Securities
Corporation
Credit Suisse First Boston Corporation
Deutsche Bank Securities Inc.
First Union Capital Markets Corp.
By: Salomon Smith Barney Inc.,
as Representative of the
Initial Purchasers
By: /s/ Mark W. Barber
------------------------------------
Name: Mark W. Barber
Title: Vice President
By: Donaldson, Lufkin & Jenrette Securities Corporation,
as Representative of the
Initial Purchasers
By: /s/ Colin Knudsen
------------------------------------
Name: Colin Knudsen
Title: Managing Director
S-1
<PAGE> 34
SCHEDULE I
<TABLE>
<CAPTION>
Number of Shares
Initial Purchasers To Be Purchased
- ------------------ ----------------
<S> <C>
Salomon Smith Barney Inc................................ 2,160,000
Donaldson, Lufkin & Jenrette Securities Corporation..... 2,160,000
Credit Suisse First Boston Corporation.................. 720,000
Deutsche Bank Securities Inc............................ 480,000
First Union Capital Markets Corp........................ 480,000
---------
Total 6,000,000
</TABLE>
<PAGE> 35
SCHEDULE II
Subsidiaries
<TABLE>
<CAPTION>
Percentage
Organized Ownership
Name of Entity Under Laws of of Company
- -------------- ------------- ----------
<S> <C> <C>
Best Internet Communications,
Inc. (d/b/a Hiway Technologies) California 100
digitalNATION, Inc. Virginia 100
</TABLE>
II-1
<PAGE> 36
SCHEDULE III
Material Contracts
1. Indenture, dated as of June 24, 1997, by and among Verio Inc.
and First Trust National Association (as trustee).
2. Warrant Agreement, dated as of June 24, 1997, by and between
First Trust National Association and Verio Inc.
3. Common Stock Registration Rights Agreement, dated as of June
17, 1997, by and among Verio Inc., Brooks Fiber Properties, Inc., Norwest Equity
Partners V, Providence Equity Partners, Centennial Fund V, L.P., Centennial Fund
IV, L.P. (as investors) and the initial purchasers named therein.
4. Registration Rights Agreement, dated as of June 17, 1997, by
and among Verio Inc. and the initial purchasers named therein.
5. Lease Agreement, dated as of June 20, 1997, by and between
Verio Inc. and Highland Park Ventures, LLC, with respect to the property in
Englewood, Colorado, including the First Amendment to Lease Agreement, dated as
of December 16, 1997.
6. Lease Agreement, dated as of May 24, 1997, by and between
Verio Inc. and IM Joint Venture, with respect to the property in Dallas, Texas,
as amended.
7. Form of Indemnification Agreement between Verio Inc. and each
of its officers and directors.
8. Amended and Restated Stockholders Agreement, dated as of May
20, 1997, by and between Verio Inc., the Series A Purchasers, the Series B
Purchasers, the Series C Purchasers and members of the management of Verio Inc.
9. The 1996 Stock Option Plan of Verio Inc.
10. The 1997 California Stock Option Plan of Verio Inc..
11. The 1998 Employee Stock Purchase Plan of Verio Inc..
12. The 1998 Stock Incentive Plan of Verio Inc.
III-1
<PAGE> 37
13. Form of Compensation Protection Agreement between Verio Inc.
and each of its officers.
14. Master Service Agreement, dated as of August 23, 1996, by and
between Verio Inc. and MFS Datanet, Inc.
15. Agreement for Terminal Facility Collocation Space, dated
August 8, 1996, by and between MFS Telecom, Inc. and Verio Inc.
16. Bilateral Peering Agreement, dated May 19, 1997, between AT&T
Corp. and Verio Inc.
17. Master Lease Agreement, dated November 17, 1997, by and
between Insight Investments Corp. and Verio Inc.
18. Master Lease Agreement, dated October 27, 1997, by and
between Cisco Capital Systems Corporation and Verio Inc.
19. Lateral Exchange Networks Interconnection Agreement, dated
February 3, 1997, by and between Sprint Communications Company L.P. and Verio
Inc.
20. Cover Agreement, dated September 30, 1996, by and between
Verio Inc. and Sprint.
21. Amendment One to Cover Agreement, dated November 7, 1996, by
and between Verio Inc. and Sprint.
22. Amendment Two to Cover Agreement, dated March 2, 1998, by and
between Verio Inc. and Sprint.
23. Indenture, dated as of March 25, 1998, by and among Verio
Inc. and First Trust National Association (as trustee).
24. Registration Rights Agreement, dated as of March 25, 1998, by
and among Verio Inc. and the initial purchasers named therein.
25. Capacity and Services Agreement, dated as of March 31, 1998,
by and among Verio Inc. and Qwest Communications Corporation.
III-2
<PAGE> 38
26. Credit Agreement, dated as of April 6, 1998, by and among
Verio Inc., The Chase Manhattan Bank (as administrative agent) and Fleet
National Bank (as documentation agent).
27. Stock Purchase and Master Strategic Relationship Agreement,
dated as of April 7, 1998, by and among Verio Inc. and Nippon Telegraph and
Telephone Corporation ("NTT"), a Japanese corporation.
28. Investment Agreement, dated as of April 7, 1998, by and among
Verio Inc. and NTT.
29. Outside Service Provider Agreement, dated as of April 7,
1998, by and among Verio Inc. and NTT America, Inc.
30. Master Services Agreement, dated as of June 13, 1997, by and
between Verio Inc. and MCI Telecommunications Corporation ("MCI").
31. MCI Domestic (US) Public Interconnection Agreement dated as
of June 12, 1997, by and between Verio Inc. and MCI, as amended.
32. Verio Inc.'s 1998 Non-Employee Director Stock Incentive Plan.
33. Interconnection Agreement, effective as of April 1, 1998 by
and between Verio Inc. and UUNET Technologies, Inc.
34. Indenture, dated as of November 25, 1998, by and among Verio
Inc. and the U.S. Bank Trust National Association (as trustee).
35. Registration Rights Agreement, dated as of November 25, 1998,
by and among Verio Inc. and the initial purchasers named therein.
III-3
<PAGE> 39
EXHIBIT A
[Form of Lock-up Agreement]
Verio Inc.
8005 South Chester Street
Suite 200
Englewood, Colorado 80012
July [ ], 1999
Salomon Smith Barney Inc.
Donaldson, Lufkin & Jenrette Securities Corporation
Credit Suisse First Boston Corporation
Deutsche Bank Securities Inc.
First Union Capital Markets Corp.
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Re: Agreement not to sell or otherwise
dispose of securities of Verio Inc.
Ladies and Gentlemen:
The undersigned understands that Verio Inc. (the "Company") has
circulated an offering memorandum to potential investors in connection with the
offering (the "Offering") by the Company of its 6.75% Series A Convertible
Preferred Stock. The undersigned further understands that the Company proposes
to enter into a purchase agreement (the "Purchase Agreement") with Salomon Smith
Barney Inc. and Donaldson, Lufkin & Jenrette Securities Corporation as
Representatives for the several Initial Purchasers named in the Purchase
Agreement (collectively, the "Initial Purchasers"), in connection with the
Offering.
In recognition of the benefit that such Offering will confer upon
the undersigned, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and in order to induce the Company
and the Initial Purchasers to enter
<PAGE> 40
into the Purchase Agreement and to proceed with the Offering, the undersigned
hereby agrees, that, should the Offering be consummated, for a period of 90 days
after the date of the Purchase Agreement relating to the Offering, the
undersigned will not, without the prior written consent of Salomon Smith Barney
Inc., directly or indirectly, (i) offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, or otherwise dispose of or
transfer any shares of capital stock of the Company or any securities
convertible into or exchangeable or exercisable for such capital stock, whether
now owned or hereafter acquired by the undersigned or with respect to which the
undersigned has or hereafter acquires the power of disposition, (ii) enter into
any swap or any other agreement or any transaction that transfers, in whole or
in part, directly or indirectly, the economic consequence of ownership of any
shares of capital stock of the Company or any securities convertible into or
exchangeable or exercisable for such capital stock, whether any such swap
transaction is to be settled by delivery of such capital stock or other
securities, in cash or otherwise or (iii) file (or participate in the filing of)
a registration statement with the Securities and Exchange Commission in respect
of shares of capital stock of the Company or any securities convertible into or
exercisable or exchangeable for such capital stock or, in any of clauses (i)
through (iii), publicly announce an intention to effect such a transaction.
Sincerely,
-----------------------------------
Name:
-2-
<PAGE> 1
EXHIBIT 3.1
VERIO INC.
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
PURSUANT TO SECTION 151 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
Verio Inc. (the "Company"), a corporation organized and existing under
the General Corporation Law of the State of Delaware, does hereby certify that,
the board of directors of the Company (the "Board of Directors") and pursuant to
authority conferred upon the Finance Committee (the "Finance Committee") of the
Board of Directors by the Company's Restated Certificate of Incorporation, as
amended (hereinafter referred to as the "Restated Certificate of
Incorporation"), and pursuant to the provisions of Sections 141(c)(1) and 151 of
the General Corporation Law of the State of Delaware, the Finance Committee duly
approved and adopted the following resolution which resolution remains in full
force and effect on the date hereof:
RESOLVED that, the Board of Directors and pursuant to the authority
vested in the Finance Committee by the Board of Directors and by the Restated
Certificate of Incorporation, the Finance Committee, hereby designate, create,
authorize and provide for the issuance of shares of Series A 6.75% Convertible
Preferred Stock, par value $0.001 per share, with a liquidation preference of
$50.00 per share, having the designations, powers, preferences, relative,
participating, optional and other special rights and the qualifications,
limitations and restrictions thereof as follows:
1. DESIGNATION
There is hereby created out of the authorized and unissued shares of
Preferred Stock of the Company a series of Preferred Stock designated as the
"Series A 6.75% Convertible Preferred Stock" (the "Convertible Preferred
Stock"). The number of shares constituting the Convertible Preferred Stock shall
be 7,200,000. The liquidation preference of the Convertible Preferred Stock
shall be $50.00 per share (the "Liquidation Preference").
Capitalized terms used herein but not defined shall have the meanings
assigned to them in Section 13.
2. RANKING
The Convertible Preferred Stock will, with respect to dividend
distributions and distributions on liquidation, winding up and dissolution,
rank: (i) senior to all classes of Common Stock, and to each other class of
Capital Stock of the Company or series of Preferred Stock of the Company
established hereafter by the Board of Directors of the Company, 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 of the Company (collectively referred
to,
1
<PAGE> 2
together with all classes of Common Stock of the Company, as "Junior Stock");
(ii) on a parity with any additional Preferred Stock issued by the Company in
the future and any other class of Capital Stock of the Company or series of
Preferred Stock of the Company established hereafter by the Board of Directors
of the Company, the terms of which expressly provide that such class or series
will rank on a parity with the Convertible Preferred Stock as to dividend
distributions and distributions on liquidation, winding up and dissolution
(collectively referred to as "Parity Stock"); and (iii) junior to each class of
Capital Stock of the Company or series of Preferred Stock of the Company
established hereafter by the Board of Directors of the Company, the terms of
which expressly provide that such class or series will rank senior to the
Convertible Preferred Stock as to dividend distributions and distributions on
liquidation, winding up and dissolution of the Company (collectively referred to
as "Senior Stock").
3. DIVIDENDS; ADDITIONAL DIVIDENDS
(i) General. Subject to the rights of holders of Senior Stock and
Parity Stock, the Holders of the outstanding shares of Convertible Preferred
Stock will be entitled to receive on or after the Deposit Expiration Date, or
earlier if the Deposit Account is terminated (whichever is applicable, the
"Regular Dividend Commencement Date"), when, as and if declared by the Board of
Directors of the Company, out of funds legally available therefor, cumulative
dividends on each share of the Convertible Preferred Stock at a rate per annum
equal to 6.75% of the Liquidation Preference per share, accumulating from the
Regular Dividend Commencement Date, payable quarterly in arrears, on each
November 1, February 1, May 1 and August 1 (each, a "Dividend Payment Date").
The Company will not make any dividend payments on the Convertible Preferred
Stock until the first Dividend Payment Date that occurs more than 10 days after
the Regular Dividend Commencement Date. Dividends shall be paid to the Holders
of record as they appear on the stock register of the Company on each record
date established by the Board of Directors of the Company (the "Dividend Payment
Record Date") not more than 60 days nor less than 10 days preceding a Dividend
Payment Date. Notwithstanding anything to the contrary herein contained, the
Company shall not be required to declare or pay a dividend if another person
(including, without limitation, any of its subsidiaries) pays an amount to the
Holders equal to the amount of such dividend on behalf of the Company and, in
such event, the dividend will be deemed paid for all purposes.
(ii) Additional Dividends. (a) In addition to the dividends
described in the preceding sentence, Holders of outstanding shares of
Convertible Preferred Stock will be entitled to Additional Dividends, when, as
and if declared by the Board of Directors of the Company, out of funds legally
available therefor, with respect to the shares of Convertible Preferred Stock
constituting Transfer Restricted Securities, which Additional Dividends shall
accrue if any of the following events occur (each such event in clauses (1) and
(2) below being herein called a "Registration Default"):
(1) if by November 17, 1999, the Shelf Registration
Statement has not been filed with the Commission, or has not been declared
effective by the Commission by February 15, 2000; or
2
<PAGE> 3
(2) if after the Shelf Registration Statement is
filed and declared effective (A) the Shelf Registration Statement thereafter
ceases to be effective, without being succeeded immediately by a replacement
shelf registration statement filed and declared effective; or (B) the Shelf
Registration Statement or the related prospectus ceases to be usable for a
period of time exceeding any Suspension Period applicable to Transfer Restricted
Securities in connection with resales of Transfer Restricted Securities in
accordance with and during the periods specified herein either (x) any event
occurs as a result of which the related prospectus forming part of such Shelf
Registration Statement would include any untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein in the
light of the circumstances under which they were made not misleading, or (y) it
shall be necessary to amend such Shelf Registration Statement or supplement the
related prospectus, to comply with the Securities Act or the Exchange Act or the
respective rules thereunder.
(b) Additional Dividends shall accrue on the shares of
Convertible Preferred Stock with respect to the first quarterly period
immediately following the occurrence and continuation of a Registration Default
at a rate of 0.25% per quarterly period. The rate of the Additional Dividends
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
will accrue on the Convertible Preferred Stock will return to the regular
dividend rate of 6.75% per annum.
(c) The Company shall be permitted to suspend the use of the
prospectus which is a part of the Shelf Registration Statement for a period (a
"Suspension Period") not to exceed 60 days in any 90-day period, or to the
extent of multiple Suspension Periods not to exceed 90 days in any 12-month
period, if the Board of Directors determines, in its good faith judgment that
the disclosure of an event or development, or the filing of a required filing
with the Commission would have a material adverse impact on the Company, or if
the disclosure of an event or development or the filing of a required filing
with the Commission otherwise related to a material business transaction that
has not yet been publicly disclosed.
(d) Any amounts of Additional Dividends due pursuant to
clauses (1) or (2) of paragraph (a) above will be payable on the regular
Dividend Payment Dates with respect to the Convertible Preferred Stock. The
amount of Additional Dividends will be determined by multiplying the Additional
Dividends rate by the aggregate liquidation preference of the outstanding shares
of Convertible Preferred Stock, multiplied by a fraction, the numerator of which
is the number of days such Additional Dividend rate was applicable during such
period (determined on the basis of a 360-day year comprised of twelve 30-day
months), and the denominator of which is 360.
(iii) Form of Payment. Any dividend or Additional Dividend on the
Convertible Preferred Stock shall be, at the option of the Company, payable (a)
in cash, (b) through the issuance of a number of shares of Common Stock
(hereinafter referred to as "Dividend Common Stock") equal to the total dividend
or Additional Dividend amount divided by the applicable Market Value Amount as
of the applicable Dividend
3
<PAGE> 4
Payment Record Date, or (c) any combination of (a) and (b). The Transfer Agent
shall have the authority to aggregate any fractional shares of Common Stock that
are issued as dividends or Additional Dividends, and to sell them at the best
available price and distribute the proceeds to the Holders thereof in proportion
to their respective interests. The Company shall reimburse the Transfer Agent
for any expenses incurred with respect to such sale, including brokerage
commissions. If the Company is not entitled to pay cash for fractional shares,
it shall pay cash to the Holder for the fractional shares when it becomes
legally and contractually able to pay such cash.
(iv) Accrual of Dividends. Dividends and Additional Dividends
shall accrue whether or not the Company has earnings or profits, whether or not
there are funds legally available for the payment of such dividends or
Additional Dividends and whether or not dividends or Additional Dividends, as
the case may be, are declared. The Company shall not declare, pay or set apart
for payment any dividends upon an outstanding share of Convertible Preferred
Stock with respect to any dividend period unless all dividends for all preceding
dividend periods have been declared and paid upon all outstanding shares of
Convertible Preferred Stock, or declared and a sufficient sum set apart for the
payment of such dividend.
(v) Accumulation. Dividends and Additional Dividends, if any,
shall accumulate to the extent such dividends or Additional Dividends 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 or Additional Dividends.
(vi) Pro Rata Payment. All dividends and Additional Dividends paid
with respect to shares of the Convertible Preferred Stock pursuant to Sections
3(i) and (ii) above shall be paid pro rata to the Holders entitled thereto so
that the amount of dividends paid per share on the Convertible Preferred Stock
is the same.
(vii) No Payment of Dividends. No dividends or distributions shall
be declared, made or paid upon, or any sum set apart for the payment of
dividends upon, any outstanding share of Junior Stock or Parity Stock, nor shall
any shares of Junior Stock or Parity Stock be redeemed, purchased or otherwise
acquired or retired for any consideration (or any monies paid to or made
available for a sinking fund for the redemption of any such securities) by the
Company or its subsidiaries unless full cumulative dividends on all the
outstanding shares of Convertible Preferred Stock have been paid or declared, or
declared and a sum sufficient for the payment thereof set apart for such payment
for all dividend periods terminating on or prior to the date of such
declaration, payment, redemption, purchase or acquisition. Notwithstanding the
foregoing, the following shall be permitted: (a) in the case of Junior Stock, a
dividend payable solely in shares of Junior Stock or options, warrants or rights
to purchase Junior Stock, or in the case of Parity Stock, a dividend payable
solely in shares of Junior Stock or Parity Stock or options, warrants or rights
to purchase Junior Stock or Parity Stock; (b) 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 (c) in the case that cash
4
<PAGE> 5
payments in lieu of fractional shares are made by the Company pursuant to any
stock split, warrant, option or other similar agreement.
(viii) Parity Stock. Notwithstanding anything in this Certificate
of Designation to the contrary, if full dividends have not been declared and
paid or set apart on the Convertible Preferred Stock and any Parity Stock,
dividends may be declared and paid on the Convertible Preferred Stock and Parity
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
Parity Stock shall in all cases bear to each other the same ratio that accrued
and unpaid dividends per share on the shares of Convertible Preferred Stock and
such Parity Stock bear to each other, provided, that if such dividends are paid
in cash on such Parity Stock, dividends will also be paid in cash on the
Convertible Preferred Stock.
(ix) Computation of Dividend Payment. Dividends and Additional
Dividends payable on the Convertible Preferred Stock for any period greater or
less than a full quarterly dividend period shall be computed on the basis of a
360-day year consisting of twelve 30-day months. If a Dividend Payment Date is
not a Business Day, payment of dividends and Additional Dividends shall be made
on the next succeeding Business Day, and dividends and Additional Dividends
accruing for the intervening period shall be paid on the next succeeding
Dividend Payment Date.
4. CONVERSION
(i) General. Subject to and upon compliance with this Section 4
and Section 5, each share of Convertible Preferred Stock will be convertible at
the option of the Holder thereof into such number of fully paid and
non-assessable shares of Common Stock as equals the Liquidation Preference
divided by the Conversion Price of $96.5625, adjusted as described in this
Section 4 and Section 5. All accumulated and unpaid dividends (if declared) on
the Convertible Preferred Stock, which have accumulated since the Regular
Dividend Commencement Date and for which the applicable Dividend Payment Date is
prior to the date of conversion, may at the Company's election, be paid in cash
or by issuing that whole number of fully paid and non-assessable shares of
Common Stock equal to the amount of accumulated and unpaid dividends divided by
the Market Value Amount as of the conversion date, or any combination of the
two. In case a share of Convertible Preferred Stock is earlier called for
redemption, such conversion right in respect of the share of Convertible
Preferred Stock so called shall terminate at the close of business on the date
immediately prior to the applicable Redemption Date and will be lost if not
exercised prior to that time, unless the Company defaults in making the payment
due upon redemption.
(ii) Procedures for Conversion. (a) To convert the Convertible
Preferred Stock, the Holder of one or more shares of Convertible Preferred Stock
to be converted shall surrender the certificate or certificates representing
such shares at the offices of the Transfer Agent or at any of the offices or
agencies to be maintained for such purpose by the Company accompanied by the
funds, if any, required by paragraph (ii)(c) below and accompanied by written
notice of conversion in the form of
5
<PAGE> 6
Exhibit B. Such notice shall also state the name or names, together with the
address or addresses, in which the certificate or certificates for shares of
Common Stock which shall be issuable in such conversion shall be issued. Each
certificate representing one or more shares of Convertible Preferred Stock
surrendered for conversion shall, unless the shares issuable on conversion are
to be issued in the same name as the name in which such shares are registered,
be accompanied by instruments of transfer, in form satisfactory to the Company,
duly executed by the Holder or his duly authorized attorney and an amount
sufficient to pay any transfer or similar tax. As promptly as practicable after
the surrender of certificates representing such shares of Convertible Preferred
Stock and the receipt of such notice, instruments of transfer and funds, if any,
as aforesaid, the Company shall issue and shall deliver at such office or agency
to such Holder, or as designated in such Holder's written instructions, a
certificate or certificates for the number of full shares of Common Stock
issuable upon the conversion of such shares of Convertible Preferred Stock in
accordance with the provisions of this Section 4 and a check or cash in respect
of any fractional interest in a share of Common Stock arising upon such
conversion, as provided in paragraph (iii) below.
(b) Each conversion shall be deemed to have been effected
immediately prior to the close of business on the date on which certificates
representing such shares of Convertible Preferred Stock shall have been
surrendered and such notice (and any applicable instruments of transfer and any
required taxes) received by the Company as aforesaid, and the person or persons
in whose name or names any certificate or certificates for shares of Common
Stock shall be issuable upon such conversion shall be deemed to have become the
holder or holders of record of the shares represented thereby at such time on
such date. Such conversion shall be at the Conversion Price in effect at such
time on such date, unless the stock transfer books of the Company shall be
closed on that date, in which event such person or persons shall be deemed to
have become such holder or holders of records at the close of business on the
next succeeding day on which such stock transfer books are open, but such
conversion shall be at the Conversion Price in effect on the date upon which
certificates representing such shares of Convertible Preferred Stock shall have
been surrendered and such notice received by the Company.
(c) Holders of Convertible Preferred Stock at the close of
business on a Dividend Payment Record Date will be entitled to receive an amount
equal to the dividend and Additional Dividend, if any, payable on such shares on
the corresponding Dividend Payment Date notwithstanding the conversion of such
shares following such Dividend Payment Record Date and prior to such Dividend
Payment Date; provided, however, that the Convertible Preferred Stock
surrendered for conversion during the period between the close of business on
any Dividend Payment Record Date and the opening of business on the
corresponding Dividend Payment Date (except shares converted after the issuance
of a Redemption Notice with respect to a Redemption Date during such period or
coinciding with such Dividend Payment Date, which will be entitled to such
dividend and Additional Dividend, if any) must be accompanied by payment of an
amount equal to the dividend and Additional Dividend, if any, payable on such
shares on such Dividend Payment Date. A Holder of Convertible Preferred Stock on
a Dividend Payment Record Date who (or whose transferee) tenders any such shares
6
<PAGE> 7
for conversion into shares of Common Stock on the corresponding Dividend Payment
Date will receive the dividend payable by the Company on such shares of
Convertible Preferred Stock on such date, and the converting Holder need not
include payment of the amount of such dividend upon surrender of Convertible
Preferred Stock for conversion. Except as provided herein, the Company 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.
(iii) Fractional Shares. No fractional shares of Common Stock
shall be issued upon the conversion of a share of Convertible Preferred Stock.
If more than one share of Convertible Preferred Stock shall be surrendered for
conversion at one time by the same Holder, the number of full shares of Common
Stock which shall be issuable upon conversion thereof shall be computed on the
basis of the aggregate shares of Convertible Preferred Stock so surrendered.
Instead of any fractional share of Common Stock which would otherwise be
issuable upon conversion of any shares of Convertible Preferred Stock, the
Company shall pay a cash adjustment in respect of such fraction based on the
Trading Price on the Trading Day immediately prior to the date of conversion. If
the Company is not entitled to pay cash for fractional shares, it shall pay cash
to the Holder for the fractional shares when it becomes legally and
contractually able to pay such cash.
(iv) Adjustment of Conversion Price. The Conversion Price shall be
adjusted from time to time by the Company as follows, each a "Conversion Price
Triggering Event" (the variables have the definitions set forth in paragraph (v)
below) :
(a) If the Company shall make any redemption payment or
payment of a dividend or other distribution payable in shares of Common Stock to
all holders of any class of Capital Stock of the Company, other than the
issuance of shares of 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 Common Stock into which the Convertible Preferred Stock is
then convertible. The Conversion Price in effect immediately prior to such event
shall be adjusted pursuant to the formula: X/Y multiplied by CP=ACP.
(b) If the Company shall make any issuance to all holders of
shares of Common Stock of rights, options or warrants entitling them to
subscribe for or purchase shares of Common Stock or securities convertible into
or exchangeable for shares of 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
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. The
Conversion Price in effect immediately prior to such event shall be adjusted
pursuant to the formula: X/(X+U((MV-EP)/MV)) multiplied by CP=ACP. If any
options, warrants or other rights
7
<PAGE> 8
of the nature described in this paragraph (iv)(b) ("Rights") expire without
exercise or conversion, the Conversion Price will be readjusted to the
Conversion Price which would otherwise be in effect had the adjustment made upon
the issuance of such Rights been made on the basis of delivery of only the
number of shares of Common Stock actually delivered upon the exercise or
conversion of such Rights.
(c) In the case of any subdivision, combination or
reclassification of the Common Stock. The Conversion Price in effect immediately
prior to such event shall be adjusted pursuant to the formula: X/Y multiplied by
CP=ACP.
(d) If the Company shall make any distribution consisting
exclusively of cash excluding any cash distributed in a transaction for which
Section 4(x) below is applicable (which specifies that no anti-dilution
adjustment shall be made) to all holders of shares of Common Stock (which
distribution is not also being made to the Holders of Convertible Preferred
Stock based on the number of shares of Common Stock into which the Convertible
Preferred Stock is then convertible) 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 the Company or any of its subsidiaries for shares
of Common Stock concluded within the then-preceding 12 months in respect of
which no adjustment has been made, exceeds 15% of the Company's market
capitalization (as defined in paragraph (v) below) immediately prior to such
distribution. The Conversion Price in effect immediately prior to such event
shall be adjusted pursuant to the formula: CP-((Cash-15% MC)/C)=ACP. There will
be no adjustment to the Conversion Price if (Cash-15% MC) is less than or equal
to zero.
(e) In the case of the completion of a tender or exchange
offer made by the Company or any of its subsidiaries for shares of Common Stock
that involves an aggregate consideration that, together with (1) any cash and
other consideration payable in a tender or exchange offer by the Company or any
of its subsidiaries for shares of 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 sub-paragraph
(d) above to all holders of shares of Common Stock within the then-preceding 12
months in respect of which no adjustments have been made, exceeds 15% of the
Company's market capitalization (as defined in paragraph (v) below) immediately
prior to the expiration of such tender or exchange offer. If the foregoing event
occurs and if the tender offer price or exchange offer price per share is
greater than the Market Value, the Conversion Price in effect immediately prior
to such event shall be adjusted pursuant to the formula: CP-((TPur multiplied by
(TOff/S-MV))/(#Sh-TPur))=ACP. There will be no adjustment to the Conversion
Price if TOff/S is less than or equal to the Market Value or if TPur multiplied
by TOff/S is less than 15% MC.
(f) If the Company shall make a distribution to all holders of
Common Stock (which distribution is not also being made to the Holders of the
Convertible Preferred Stock based on the number of shares of Common Stock into
which
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<PAGE> 9
the Convertible Preferred Stock is then convertible) consisting of evidences of
indebtedness, shares of Capital Stock of the Company other than 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 the Company). The Conversion Price in effect immediately
prior to such event shall be adjusted pursuant to the formula:
CP-(Value/#Sh)=ACP.
(v) Variables. In the preceding descriptions, the variables
have the following definitions:
"C" equals the total number of shares of Convertible Preferred Stock
outstanding at the time of the Conversion Price Triggering Event;
"U" equals the number of shares of Common Stock underlying all rights,
options or warrants issued to holders of Common Stock pursuant to paragraph
(iv)(b) above entitling such holders to subscribe for or purchase shares of
Common Stock or securities convertible into or exchangeable for shares of Common
Stock issued in the Conversion Price Triggering Event;
"X" equals the total number of shares of Common Stock outstanding
immediately prior to the Conversion Price Triggering Event (excluding
unexercised options, warrants or rights);
"Y" equals the total number of shares of Common Stock outstanding
immediately after the Conversion Price Triggering Event (excluding unexercised
options, warrants or rights);
"Cash" equals any distribution consisting exclusively of cash
(excluding any cash distributed upon a merger or consolidation to which
paragraph (x) below applies) to all holders of shares of Common Stock in an
aggregate amount that, combined together with (1) all other such all-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 the Company or
any of its subsidiaries for shares of any class of Common Stock concluded within
the then-preceding 12 months in respect of which no adjustment has been made
pursuant to paragraph (iv)(d);
"EP" equals the exercise price or other consideration to be paid by the
holder upon the conversion or exchange of "U";
"MC" or "market capitalization" equals the product of the then current
Trading Price of the Common Stock times the number of shares of the Common Stock
then outstanding on the record date of such distribution;
"MV" equals the Market Value per share of the Common Stock as of the
date of conversion or exchange of "U";
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<PAGE> 10
"#Sh" equals the number of shares of Common Stock receiving the
distribution contemplated in paragraph (iv)(f) or subject to the tender offer
contemplated in paragraph (iv)(e);
"TOff" equals the aggregate consideration that, together with (1) any
cash or other consideration payable in a tender or exchange offer by the Company
or any of its subsidiaries for shares of 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 all-cash distributions referred to in paragraph
(iv)(d) to all holders of shares of Common Stock within the then-preceding 12
months in respect of which no adjustments have been made;
"TOff/S" equals the TOff per share;
"TPur" equals the number of shares purchased in the tender offer;
"Value" equals the aggregate fair market value of the distribution
described in paragraph (iv)(f), as determined in good faith by the Board of
Directors of the Company;
"CP" equals the Conversion Price immediately prior to the Conversion
Price Adjustment Event;
"ACP" equals the Conversion Price immediately after the Conversion
Price Adjustment Event.
An adjustment made pursuant to paragraph (iv) shall become effective:
(A) in the case of a Conversion Price Adjustment Event described in paragraph
(iv)(a), (b), (d) or (f), immediately following the close of business on the
record date for the determination of holders of Common Stock entitled to
participate in such event; or (B) in the case of a Conversion Price Adjustment
Event described in paragraph (iv)(c), the close of business on the day upon
which such corporate action becomes effective; or (C) in the case of a
Conversion Price Adjustment Event described in paragraph (iv)(e), the close of
business on the day of the completion of such tender offer or exchange offer.
(vi) De Minimis Adjustments. No adjustment in the Conversion Price
shall be required (a) unless such adjustment would require an increase or
decrease of at least 1% in such price and (b) with respect to rights or warrants
issued pursuant to certain of the Company's employee benefit plans; provided,
however, that any adjustments which by reason of this paragraph (vi) are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this paragraph (vi) shall be made
by the Company and shall be made to the nearest cent or to the nearest
one-hundredth of a share, as the case may be. No adjustment need be made for a
change in the par value or no par value of the Common Stock.
(vii) Reductions in Conversion Price. The Company shall be
entitled to make such reductions in the Conversion Price, in addition to those
required by this Section 4, as the Company in its discretion shall determine to
be advisable in order that any stock dividends, subdivision of shares,
distribution of rights to purchase stock or
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<PAGE> 11
securities or distribution of securities convertible into or exchangeable for
stock hereafter made by the Company to its stockholders shall not be taxable to
the recipients. In the event the Company elects to make such a reduction in the
Conversion Price, the Company will comply with the requirements of Rule 14e-1
under the Exchange Act, 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. Whenever the Conversion Price is so
decreased, the Company shall mail to Holders of record of shares of Convertible
Preferred Stock a notice of the decrease at least 15 days before the date the
decreased Conversion Price takes effect, and such notice shall state the
decreased Conversion Price.
(viii) Decreases in Conversion Price. The Company from time to
time may decrease the Conversion Price by an amount determined by the Board of
Directors or the Finance Committee and described in a notice as hereinafter
provided for any period of time if the period is at least 20 days and if the
decrease is irrevocable during such period. Whenever the Conversion Price is so
decreased, the Company shall mail to Holders of record of shares of Convertible
Preferred Stock a notice of the decrease at least 15 days before the date the
decreased Conversion Price takes effect, and such notice shall state the
decreased Conversion Price and the period it will be in effect.
(ix) Distribution of Rights or Warrants. In the event that, after
the issuance of the Convertible Preferred Stock, the Company distributes rights
or warrants (other than those referred to in paragraph (iv)(b) above) pro rata
to all holders of shares of Common Stock, so long as any such rights or warrants
have not expired or been redeemed by the Company, 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 Common Stock then
issuable upon such conversion (the "Conversion Shares"), a number of rights or
warrants to be determined as follows:
(a) if such conversion occurs on or prior to the date (a
"Distribution Date") for the distribution to the holders of rights or warrants
of separate certificates evidencing such rights or warrants, the same number of
rights or warrants to which a holder of a number of shares of 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
(b) 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 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.
(x) Merger or Consolidation. (a) In case of:
(1) any merger or consolidation of the Company with
or into another Person (other than a consolidation or merger in which the
Company is the resulting or continuing Person and which does not result in any
reclassification or
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<PAGE> 12
exchange of Common Stock outstanding immediately prior to the merger or
consolidation for cash, securities or other property of another Person); or
(2) any sale, transfer or other disposition to
another Person of all or substantially all of the assets of the Company (other
than the sale, transfer, assignment or distribution of shares of Capital Stock
or assets to a subsidiary of the Company) computed on a consolidated basis; or
(3) any statutory exchange of securities with another
Person, other than in connection with a merger or acquisition,
(any of the events described in this paragraph (x)(a) being referred to as a
"Transaction"), there will be no adjustment to the Conversion Price and each
share of Convertible Preferred Stock then outstanding shall, without the consent
of any Holder of Convertible Preferred Stock (except as expressly required by
applicable law), become convertible only into the kind and amount of shares of
stock or other securities (of the Company or another issuer), cash or other
property receivable upon such Transaction by a holder of the number of shares of
Common Stock into which such share of Convertible Preferred Stock could have
been converted immediately prior to the effective date of such Transaction,
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 Transaction. Depending upon the terms of such cash
Transaction, the aggregate amount of cash into which such shares of Convertible
Preferred Stock would be converted may be more or less than the Liquidation
Preference with respect to such Convertible Preferred Stock.
(b) The provisions of this paragraph (x) similarly shall apply
to successive Transactions. The provisions of this paragraph (x) shall be the
sole right of Holders of Convertible Preferred Stock in connection with any
Transaction (and the provisions of Section 5 to the extent applicable) and,
except as expressly provided by applicable law and Section 8, such Holders shall
have no separate vote thereon.
(xi) Notice of Adjustment. Whenever the Conversion Price is
adjusted as provided in this Section 4 or Section 5, the Company shall promptly
file with the Transfer Agent an Officers' Certificate setting forth the
Conversion Price after such adjustment and setting forth a brief statement of
the facts requiring such adjustment. Promptly after delivery of such
certificate, the Company shall prepare a notice of such adjustment of the
Conversion Price setting forth the adjusted Conversion Price and the date on
which each adjustment becomes effective and shall mail such notice of such
adjustment of the Conversion Price to each Holder of Convertible Preferred Stock
at such Holder's last address appearing on the register of holders maintained
for that purpose within 20 days of the effective date of such adjustment.
Failure to deliver such notice shall not affect the legality or validity of any
such adjustment.
(xii) Deferred Issuance. In any case in which this Section 4
provides that an adjustment shall become effective immediately after a record
date for an event, the Company may defer until the occurrence of such event
issuing to the Holder of any
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<PAGE> 13
share of Convertible Preferred Stock converted after such record date and before
the occurrence of such event the additional Common Stock issuable upon such
conversion by reason of the adjustment required by such event over and above the
Common Stock issuable upon such conversion before giving effect to such
adjustment.
(xiii) Treasury Stock. For purposes of this Section 4, the number
of shares of Common Stock at any time outstanding shall not include shares held
in the treasury of the Company but shall include shares issuable in respect of
scrip certificates issued in lieu of fractions of Common Stock. The Company
shall not pay any dividend or make any distribution on Common Stock held in the
treasury of the Company.
(xiv) Shares in Reserve. The Company shall at all times reserve
and keep available, free from preemptive rights, out of its authorized but
unissued shares of Common Stock (or out of its authorized shares of Common Stock
held in the treasury of the Company), for the purpose of effecting the
conversion of the Convertible Preferred Stock, the full number of shares of
Common Stock then issuable upon the conversion of all outstanding shares of
Convertible Preferred Stock.
(xv) Payment of Taxes. The Company will pay any and all document,
stamp or similar issue or transfer taxes that may be payable in respect of the
issue or delivery of Common Stock on conversion of the Convertible Preferred
Stock pursuant hereto. The Company shall not, however, be required to pay any
tax which may be payable in respect of any transfer involved in the issue and
delivery of shares of Common Stock in a name other than that of the holder of
the share of Convertible Preferred Stock or the shares of Convertible Preferred
Stock to be converted, and no such issue or delivery shall be made unless and
until the Person requesting such issue has paid to the Company the amount of any
such tax, or has established to the satisfaction of the Company that such tax
has been paid.
5. CHANGE OF CONTROL
Notwithstanding any other provision in the preceding paragraphs to the
contrary, if any Cash Change of Control occurs, then the Holders shall, if the
Market Value of the Common Stock at such time is less than the Conversion Price,
have an option (to be exercised no more than once), upon not less than 30 days
nor more than 60 days notice, to convert their outstanding shares of Convertible
Preferred Stock into Common Stock at an adjusted Conversion Price equal to the
greater of (i) the Market Value of the Common Stock as of the date of the
effectiveness of the Cash Change of Control and (2) $49.0208. In lieu of issuing
shares of Common Stock issuable upon conversion in the event of a Cash Change of
Control, the Company will have the option to make a cash payment equal to the
Market Value of any Common Stock otherwise issuable.
6. LIQUIDATION RIGHTS
(i) Rights. Upon any voluntary or involuntary liquidation,
dissolution or winding up of the Company, subject to the rights of the Company's
creditors and holders of Senior Stock and Parity Stock, each Holder of
Convertible Preferred Stock
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<PAGE> 14
shall be entitled to payment, out of the assets of the Company available for
distribution to its stockholders, of an amount equal to the Liquidation
Preference per share of Convertible Preferred Stock held by such Holder, plus an
amount equal to all accrued and unpaid dividends and Additional Dividends (if
any) thereon to the date fixed for liquidation, dissolution or winding up,
before any distribution is made on any Junior Stock, including, without
limitation, the Common Stock. If, upon any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the amounts payable with respect to
the Convertible Preferred Stock and all Parity Stock are not paid in full, the
Convertible Preferred Stock and the Parity Stock will share equally and ratably
(in proportion to the respective Liquidation Preference amounts that would be
payable on such shares of Convertible Preferred Stock and the Parity Stock,
respectively, if all amounts payable thereon had been paid in full) in any
distribution of assets of the Company to which each is entitled. After payment
of the full amount of the Liquidation Preference and an amount equal to all
accrued and unpaid dividends and Additional Dividends, if any, with respect to
the outstanding shares of Convertible Preferred Stock, the Holders of shares of
Convertible Preferred Stock will not be entitled to any further participation in
any distribution of assets of the Company.
(ii) Construction. For the purposes of this Section 6, a merger,
consolidation or other business combination of the 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 the Company's assets for cash,
securities or other property shall not be deemed a liquidation, dissolution or
winding up of the Company unless such merger, consolidation, combination,
exchange, sale or transfer shall be in connection with a liquidation,
dissolution or winding up of the Company.
7. REDEMPTION
(i) Provisional Redemption. The Convertible Preferred Stock may
not be redeemed under any circumstances prior to August 1, 2001. The Company
may, at its option and to the extent permitted by applicable law, redeem the
Convertible Preferred Stock, in whole or in part, at a Redemption Price of
102.0000% of the Liquidation Preference (plus an amount equal to any accumulated
and unpaid dividends and Additional Dividends, if any, whether or not declared,
to the date fixed for such redemption (the "Provisional Redemption Date")) on or
after August 1, 2001 but prior to August 1, 2002 (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 the Company undertakes
a Provisional Redemption, Holders of Convertible Preferred Stock that the
Company calls for redemption will also receive a payment (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) from the Provisional Redemption Date to August
1, 2002 (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.
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<PAGE> 15
(ii) Optional Redemption. Except as set forth in paragraph (i)
above, the Convertible Preferred Stock may not be redeemed at the option of the
Company prior to August 1, 2002. Beginning on August 1, 2002, the Convertible
Preferred Stock may be redeemed at the option of the Company, in whole or in
part, during the twelve-month periods commencing on August 1 of the years
indicated below (the "Optional Redemption"), at the following Redemption Prices,
expressed as a percentage of the Liquidation Preference per share, plus in each
case, an amount equal to all accumulated and unpaid dividends and Additional
Dividends, if any, whether or not declared, to the Redemption Date.
<TABLE>
<CAPTION>
Year Redemption Price
Per Share
<S> <C>
2002............................... 103.8571%
2003............................... 102.8929%
2004............................... 101.9286%
2005............................... 100.9643%
2006 and thereafter................ 100.0000%
</TABLE>
(iii) Redemption Procedures.
(a) The Company may effect any Provisional Redemption or
Optional Redemption, by delivery of a Redemption Notice to Holders not less than
20 days nor more than 60 days prior to the date set for such Provisional
Redemption or Optional Redemption.
(b) In the event that fewer than all the outstanding shares of
the Convertible Preferred Stock are to be redeemed, the shares to be redeemed
will be determined pro rata or by lot, except that the Company may redeem such
shares held by any Holder of fewer than 100 shares (or shares held by Holders
who would hold fewer than 100 shares as a result of such redemption), as may be
determined by the Company.
(c) The Redemption Price due to any Holder of shares of
Convertible Preferred Stock (including an amount equal to any accumulated and
unpaid dividends and Additional Dividends, if any, and including any Additional
Payment) shall be, at the option of the Company, payable (a) in cash, (b)
through the issuance of a number of shares of Common Stock equal to the total
amount due on such shares divided by the applicable Market Value Amount as of
the date of the Redemption Notice, or (c) any combination of (a) and (b).
(d) From and after the applicable Redemption Date (unless the
Company shall be in default of payment of the Redemption Price (including an
amount equal to any accumulated and unpaid dividends and Additional Dividends,
if any, and including any Additional Payment), dividends on the shares of the
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 Holders thereof as stockholders of the Company (except the right
to receive the Redemption Price (including
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<PAGE> 16
an amount equal to any accumulated and unpaid dividends and Additional
Dividends, if any, and including any Additional Payment) will cease.
(e) If any dividends or Additional Dividends, if any, on the
Convertible Preferred Stock are in arrears, no shares of the Convertible
Preferred Stock will be redeemed unless all outstanding shares of the
Convertible Preferred Stock are simultaneously redeemed.
(f) In the event the Company shall elect to redeem shares of
the Convertible Preferred Stock pursuant to paragraph (i) or (ii) above, as
applicable, the Company must provide the Holders with the Redemption Notice as
described in sub-paragraph (a) above and:
(1) (A) On or before any Redemption Date, each Holder
of shares of Convertible Preferred Stock to be redeemed shall surrender the
certificate or certificates representing such shares of Convertible Preferred
Stock (properly endorsed or assigned for transfer, if the Company shall so
require and the Redemption Notice shall so state), to the Company or the
Redemption Agent (if appointed) in the manner and at the place designated in the
Redemption Notice or arrange for the appropriate book-entry transfer if a global
certificate has been issued.
(B) On the Redemption Date, the Company or the
Redemption Agent, as applicable, shall pay or deliver to the Holder whose name
appears on such certificate or certificates as the registered owner thereof, the
full Redemption Price (including an amount equal to any accumulated and unpaid
dividends and Additional Dividends, if any, and including any Additional
Payment) due such Holder in cash, in fully paid and nonassessable shares of
Common Stock or in a combination thereof (subject, in each case, to applicable
law).
(C) The shares represented by each certificate to
be surrendered shall be automatically (and without any further action of the
Company or the Holder) canceled as of the Redemption Date (whether or not
certificates for such shares are returned to the Company) and returned to the
status of authorized but unissued shares of Preferred Stock of no series.
(D) If fewer than all the shares represented by
any such certificate are to be redeemed, a new certificate shall be issued
representing the unredeemed shares, without cost to the Holder, together with
the amount of cash, if any, in lieu of fractional shares to the extent the
Company is legally and contractually entitled to pay cash for said fractional
shares. If the Company is not entitled to pay cash for fractional shares, it
shall pay cash to the Holder for the fractional shares when it becomes legally
and contractually able to pay such cash.
(2) If a Redemption Notice shall have been given as
provided in this Section 7, dividends on the shares of Convertible Preferred
Stock so called for redemption shall cease to accrue, such shares shall no
longer be deemed to be outstanding, and all rights of the Holders thereof as
stockholders of the Company with
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<PAGE> 17
respect to shares so called for redemption (except for the right to receive from
the Company the Redemption Price (including an amount equal to any accumulated
and unpaid dividends and Additional Dividends, if any, and including any
Additional Payment to the Redemption Date) shall cease (excluding any right to
receive the dividend payment on shares called for redemption where the
Redemption Date falls between the Dividend Payment Record Date and the Dividend
Payment Date) either (A) from and after the Redemption Date (unless the Company
shall default in the payment of the Redemption Price, in which case such rights
shall not terminate at such time and date) or (B) if the Company shall so elect
and state in the Redemption Notice, from and after the time and date (which date
shall be the Redemption Date or an earlier date not less than 20 days after the
date of mailing of the Redemption Notice) on which the Company shall irrevocably
deposit in trust for the Holders of the shares to be redeemed with a designated
Redemption Agent as paying agent sufficient to pay at the office of such paying
agent, on the Redemption Date, the Redemption Price (including an amount equal
to any accumulated and unpaid dividends and Additional Dividends, if any, and
including any Additional Payment to the Redemption Date). Any money or shares of
Common Stock so deposited with such Redemption Agent which shall not be required
for such redemption shall be returned to the Company forthwith. Subject to
applicable escheat laws, any moneys or shares of Common Stock so set aside by
the Company and unclaimed at the end of one year from the Redemption Date shall
revert to the general funds of the Company, after which reversion the Holders of
such shares so called for redemption shall look only to the general funds of the
Company for the payment of the Redemption Price (including an amount equal to
any accumulated and unpaid dividends and Additional Dividends, if any, and
including any Additional Payment to the Redemption Date) without interest. Any
interest accrued on funds held by the Redemption Agent shall be paid to the
Company from time to time.
(3) If any Holder whose shares of Convertible
Preferred Stock are called for redemption pursuant to this Section 7 fails to
surrender the certificate representing such shares (or fails to arrange for the
appropriate book-entry transfer if a global certificate has been issued), such
Holder shall not be entitled to receive payment of the applicable Redemption
Price (including an amount equal to any accumulated and unpaid dividends and
Additional Dividends, if any, and including any Additional Payment) until the
certificate has been surrendered for cancellation or the appropriate book-entry
transfer has been made. Such Holder will not be entitled to receive any interest
on the Redemption Price.
8. VOTING RIGHTS
(i) General. The Holders of Convertible Preferred Stock shall have
no voting rights, except as required by applicable law or as hereinafter
provided in this Section 8. In exercising any such voting rights, each
outstanding share of Convertible Preferred Stock shall be entitled to one vote,
excluding shares held by the Company or any affiliate of the Company (as defined
in the Securities Act), which shares will have no voting rights.
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<PAGE> 18
(ii) Additional Directors. (a) Upon the accumulation of accrued
and unpaid dividends on the Convertible Preferred Stock in an amount equal to
six or more quarterly payments, whether or not consecutive (together with any
event with a similar effect pursuant to the terms of any other series of
Preferred Stock of the Company upon which like rights have been conferred, a
"Voting Rights Triggering Event"), then the number of directors constituting the
Board of Directors will be immediately and automatically increased by two
directors and the Holders of majority of the then outstanding shares of
Convertible Preferred Stock (together with the holders of Parity Stock upon
which like rights have been conferred and are exercisable), voting separately
and as a class (pro rata based on liquidation preference), shall have the right
and power to elect to serve on the Board of Directors the two additional
directors of the Company at any meeting of the stockholders of the Company at
which directors are to be elected. The rights of the Holders arising as a result
of a Voting Rights Triggering Event will continue until such time as all
dividends in arrears on the Convertible Preferred Stock are paid in full or sums
set aside for payment thereof. At such time the term of any directors elected
pursuant to the provisions of this paragraph (ii)(a) shall terminate immediately
and automatically, and the number of directors constituting the Board of
Directors shall be immediately and automatically decreased by such number (until
the occurrence of any subsequent Voting Rights Triggering Event).
(b) The foregoing right of the Holders of the Convertible
Preferred Stock with respect to the election of two directors may be exercised
at any meeting of stockholders at which directors are to be elected. The Board
of Directors shall, within 20 days after the delivery to the Company at its
principal office of a written request for a special meeting signed by the
Holders of at least 25% of the Convertible Preferred Stock then outstanding,
call a special meeting of the Holders of the Convertible Preferred Stock to be
held within 60 days after the delivery of such request for the purpose of
electing such additional directors.
(c) The Holders of a majority of the then outstanding shares
of Convertible Preferred Stock together with the holders of Parity Stock upon
which like rights have been conferred shall have the right to remove without
cause at any time and replace any directors such holders have elected pursuant
to paragraph (ii)(a), and such directors shall not be removed without cause
except by such Holders.
(iii) Certain Amendments. So long as the Convertible Preferred
Stock is outstanding, the Company shall not, without the affirmative vote of the
Holders of at least a majority of the shares of Convertible Preferred Stock then
outstanding (unless the vote of a greater percentage is required by applicable
law), voting separately as a class, amend, alter or repeal any provision of the
Restated Certificate of Incorporation or the Bylaws of the Company, as amended,
so as to affect materially and adversely the relative rights, preferences,
qualifications, limitations or restrictions of the Convertible Preferred Stock.
Except as otherwise set forth herein or in the Restated Certificate of
Incorporation or as otherwise required by law, (a) the creation, authorization
or issuance of any shares or series of Preferred Stock or (b) the increase or
decrease in the amount of authorized Capital Stock of any class or series,
including any Preferred Stock, shall not require the consent of the Holders of
Convertible Preferred Stock and shall not be deemed to affect
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adversely the rights, preferences, privileges or voting rights of the
Convertible Preferred Stock.
The voting provisions of this Section 8(iii) 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
sufficient shares of Common Stock, if needed, shall have been reserved, or cash
set aside for payment, by the Company to effect such redemption.
(iv) Amendment of Certificate of Designation. The Company may not
amend this Certificate of Designation without the affirmative vote or consent of
the Holders of a majority of the shares of Convertible Preferred Stock then
outstanding, (including votes or consents obtained in connection with a tender
offer or exchange offer for the Convertible Preferred Stock) and, except as
otherwise provided by applicable law, any past default or failure to comply with
any provision of this Certificate of Designation may not be waived without the
consent of such Holders. Notwithstanding the foregoing, however, without the
consent of each Holder affected, an amendment or waiver may not (with respect to
any shares of the Convertible Preferred Stock held by a non-consenting Holder):
(a) alter the voting rights with respect to the Convertible Preferred Stock or
reduce the number of shares of the Convertible Preferred Stock whose Holders
must consent to an amendment, supplement or waiver, (b) reduce the Liquidation
Preference of any share of the Convertible Preferred Stock or adversely alter
the provisions with respect to the redemption of the Convertible Preferred
Stock, (c) reduce the rate of or change the time for payment of dividends on any
share of the Convertible Preferred Stock, (d) waive a default in the payment of
dividends or Additional Dividends (if any) on the Convertible Preferred Stock,
(e) make any share of the Convertible Preferred Stock payable in money other
than United States dollars, (f) make any change in the provisions of this
Certificate of Designation relating to waivers of the rights of Holders to
receive the Liquidation Preference, dividends or Additional Dividends (if any)
on the Convertible Preferred Stock, or (g) make any change in the foregoing
amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder, the
Company may (to the extent permitted by, and subject to the requirements of,
Delaware law) amend or supplement this Certificate of Designation to cure any
ambiguity, defect or inconsistency, to provide for uncertificated shares of the
Convertible Preferred Stock in addition to or in place of certificated shares of
the Convertible Preferred Stock, to make any change that would provide any
additional rights or benefits to the Holders or to make any change that the
Board of Directors determines, in good faith, is not materially adverse to
Holders of the Convertible Preferred Stock.
9. REISSUANCE OF CONVERTIBLE PREFERRED STOCK
Shares of Convertible Preferred Stock that have been issued and
reacquired in any manner, including shares purchased, redeemed, converted or
exchanged, shall not be reissued as shares of Convertible Preferred Stock and
shall (upon compliance with any
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applicable provisions of the laws of Delaware) have the status of authorized and
unissued shares of Preferred Stock undesignated as to series and may be
redesignated and reissued as part of any series of Preferred Stock; provided,
however, that so long as any shares of Convertible Preferred Stock are
outstanding, any issuance of such shares must be in compliance with the terms
hereof. Upon any such reacquisitions, the number of shares of Convertible
Preferred Stock authorized pursuant to this Certificate of Designation shall be
reduced by the number of shares so reacquired.
10. BUSINESS DAY
If any payment, redemption or exchange shall be required by the terms
hereof to be made on a day that is not a Business Day, such payment, redemption
or exchange shall be made on the immediately succeeding Business Day.
11. CERTIFICATES
(i) Form and Dating.
(a) Form. The Convertible Preferred Stock and the Transfer
Agent's certificate of authentication shall be substantially in the form of
Exhibit A, which is hereby incorporated in and expressly made a part of this
Certificate of Designation. The Convertible Preferred Stock certificate may have
notations, legends or endorsements required by law, stock exchange rule,
agreements to which the Company is subject, if any, or usage (provided that any
such notation, legend or endorsement is in a form acceptable to the Company).
Each Convertible Preferred Stock certificate shall be dated the date of its
authentication. The terms of the Convertible Preferred Stock certificate set
forth in Exhibit A are part of the terms of this Certificate of Designation.
(b) Global Convertible Preferred Stock. The Convertible
Preferred Stock shall be issued initially in the form of one or more fully
registered global certificates with the global securities legend and restricted
securities legend set forth in Exhibit A hereto (the "Global Convertible
Preferred Stock"), which shall be deposited on behalf of the purchasers
represented thereby with the Transfer Agent, at its New York office, as
custodian for the Depositary (or with such other custodian as the Depositary may
direct), and registered in the name of the Depositary or a nominee of the
Depositary, duly executed by the Company and authenticated by the Transfer Agent
as hereinafter provided. The number of shares of Convertible Preferred Stock
represented by Global Convertible Preferred Stock may from time to time be
increased or decreased by adjustments made on the records of the Transfer Agent
and the Depositary or its nominee as hereinafter provided. With respect to
shares of Convertible Preferred Stock that are not "restricted securities" as
defined in Rule 144 under the Securities Act ("Rule 144") on a Dividend Payment
Record Date or on a conversion date, all shares of Dividend Common Stock
distributed on the related Dividend Payment Date in payment of dividends or on
such conversion date will be freely transferable without restriction under the
Securities Act (other than by affiliates), and such shares will be eligible for
receipt in global form through the facilities of the Depositary.
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(c) Book-Entry Provisions. In the event Global Convertible
Preferred Stock is deposited with or on behalf of the Depositary, the Company
shall execute and the Transfer Agent shall authenticate and deliver initially
one or more Global Convertible Preferred Stock certificates that (1) shall be
registered in the name of the Depositary for such Global Convertible Preferred
Stock or the nominee of the Depositary and (2) shall be delivered by the
Transfer Agent to the Depositary or pursuant to the Depositary's instructions or
held by the Transfer Agent as custodian for the Depositary. Members of, or
participants in, the Depositary ("Agent Members") shall have no rights under
this Certificate of Designation with respect to any Global Convertible Preferred
Stock held on their behalf by the Depositary or by the Transfer Agent as the
custodian of the Depositary or under such Global Convertible Preferred Stock,
and the Depositary may be treated by the Company, the Transfer Agent and any
agent of the Company or the Transfer Agent as the absolute owner of such Global
Convertible Preferred Stock for all purposes whatsoever. Notwithstanding the
foregoing, nothing herein shall prevent the Company, the Transfer Agent or any
agent of the Company or the Transfer Agent from giving effect to any written
certification, proxy or other authorization furnished by the Depositary or
impair, as between the Depositary and its Agent Members, the operation of
customary practices of the Depositary governing the exercise of the rights of a
holder of a beneficial interest in any Global Convertible Preferred Stock.
(d) Certificated Convertible Preferred Stock; Certificated
Dividend Common Stock; Certificated Conversion Common Stock. Except as provided
in this paragraph (i) or paragraph (iii) below, owners of beneficial interests
in Global Convertible Preferred Stock will not be entitled to receive physical
delivery of Convertible Preferred Stock in fully registered certificated form
("Certificated Convertible Preferred Stock"). With respect to shares of
Convertible Preferred Stock that are "restricted securities" as defined in Rule
144 on a Dividend Payment Record Date or on a conversion date, all such shares
of Dividend Common Stock distributed on the related Dividend Payment Date in
payment of dividends on the Convertible Preferred Stock or all such shares of
Conversion Common Stock issuable on such conversion date will be issued in fully
registered certificated form ("Certificated Dividend Common Stock" or
"Certificated Conversion Common Stock," and collectively, "Certificated Common
Stock"). Certificates of Certificated Common Stock will be mailed or made
available at the office of the Transfer Agent for the Convertible Preferred
Stock on or as soon as reasonably practicable after the relevant Dividend
Payment Date or the conversion date, as the case may be, to those Persons who
are Holders of Convertible Preferred Stock shown on the records of the
Depositary at the close of business on the relevant record date (in the case of
Certificated Dividend Common Stock) or to the converting holder (in the case of
Certificated Conversion Common Stock).
After a transfer of any Convertible Preferred Stock or Certificated
Common Stock during the period of the effectiveness of a Shelf Registration
Statement with respect to such Convertible Preferred Stock or such Certificated
Common Stock, all requirements pertaining to legends on such Convertible
Preferred Stock (including Global Convertible Preferred Stock) or Certificated
Common Stock will cease to apply, the requirement that any such Convertible
Preferred Stock or Certificated Common Stock issued to Holders be
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issued in global form or that any such Certificated Common Stock issued to
Holders be issued in certificated form, as the case may, will cease to apply,
and Convertible Preferred Stock or Common Stock, as the case may be, in global
or fully registered certificated form, in either case without legends, will be
available to the transferee of the Holder of such Convertible Preferred Stock or
Certificated Common Stock upon exchange of such transferring Holder's
Convertible Preferred Stock or Common Stock or directions to transfer such
Holder's interest in the Global Convertible Preferred Stock, as applicable.
(ii) Execution and Authentication.
(a) Two Officers shall sign the Convertible Preferred Stock
certificate for the Company by manual or facsimile signature. The Company's seal
shall be impressed, affixed, imprinted or reproduced on the Convertible
Preferred Stock certificate and may be in facsimile form.
(b) If an Officer whose signature is on Convertible Preferred
Stock certificate no longer holds that office at the time the Transfer Agent
authenticates the Convertible Preferred Stock certificate, the Convertible
Preferred Stock certificate shall be valid nevertheless.
(c) A Convertible Preferred Stock certificate shall not be
valid until an authorized signatory of the Transfer Agent manually signs the
certificate of authentication on the Convertible Preferred Stock certificate.
The signature shall be conclusive evidence that the Convertible Preferred Stock
certificate has been authenticated under this Certificate of Designation.
(d) The Transfer Agent shall authenticate and deliver
certificates for 7,200,000 shares of Convertible Preferred Stock for original
issue upon a written order of the Company signed by two Officers or by an
Officer and either an Assistant Treasurer or an Assistant Secretary of the
Company. Such order shall specify the number of shares of Convertible Preferred
Stock to be authenticated and the date on which the original issue of
Convertible Preferred Stock is to be authenticated.
(e) The Transfer Agent may appoint an authenticating agent
reasonably acceptable to the Company to authenticate the certificates for
Convertible Preferred Stock. Unless limited by the terms of such appointment, an
authenticating agent may authenticate certificates for Convertible Preferred
Stock whenever the Transfer Agent may do so. Each reference in this Certificate
of Designation to authentication by the Transfer Agent includes authentication
by such agent. An authenticating agent has the same rights as the Transfer Agent
or agent for service of notices and demands.
(iii) Transfer and Exchange.
(a) Transfer and Exchange of Certificated Convertible
Preferred Stock. When Certificated Convertible Preferred Stock is presented to
the Transfer Agent with a request to register the transfer of such Certificated
Convertible Preferred Stock or to exchange such Certificated Convertible
Preferred Stock for an equal number of shares of Certificated Convertible
Preferred Stock of other authorized
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denominations, the Transfer Agent shall register the transfer or make the
exchange as requested if its reasonable requirements for such transaction are
met; provided, however, that the Certificated Convertible Preferred Stock
surrendered for transfer or exchange:
(1) shall be duly endorsed or accompanied by a
written instrument of transfer in form reasonably satisfactory to the Company
and the Transfer Agent, duly executed by the Holder thereof or its attorney duly
authorized in writing; and
(2) is being transferred or exchanged pursuant to an
effective registration statement under the Securities Act or pursuant to
sub-clause (A) or (B) below, and is accompanied by the following additional
information and documents, as applicable:
(A) if such Certificated Convertible Preferred
Stock is being delivered to the Transfer Agent by a Holder for registration in
the name of such Holder, without transfer, a certification from such Holder to
that effect in substantially the form of Exhibit C hereto; or
(B) if such Certificated Convertible Preferred
Stock is being transferred to the Company or to a "qualified institutional
buyer" ("QIB") in accordance with Rule 144A under the Securities Act or pursuant
to an exemption from registration in accordance with Rule 144, (I) a
certification to that effect (in substantially the form of Exhibit C hereto) and
(II) if the Company so requests, an Opinion of Counsel or other evidence
reasonably satisfactory to it as to the compliance with the restrictions set
forth in the legend set forth in sub-paragraph (g) below.
(b) Restrictions on Transfer of Certificated Convertible
Preferred Stock for a Beneficial Interest in Global Convertible Preferred Stock.
Certificated Convertible Preferred Stock may not be exchanged for a beneficial
interest in Global Convertible Preferred Stock except upon satisfaction of the
requirements set forth below. Upon receipt by the Transfer Agent of Certificated
Convertible Preferred Stock, duly endorsed or accompanied by appropriate
instruments of transfer, in form reasonably satisfactory to the Company and the
Transfer Agent, together with written instructions directing the Transfer Agent
to make, or to direct the Depositary to make, an adjustment on its books and
records with respect to such Global Convertible Preferred Stock to reflect an
increase in the number of shares of Convertible Preferred Stock represented by
the Global Convertible Preferred Stock, then the Transfer Agent shall cancel
such Certificated Convertible Preferred Stock and cause, or direct the
Depositary to cause, in accordance with the standing instructions and procedures
existing between the Depositary and the Transfer Agent, the number of shares of
Convertible Preferred Stock represented by the Global Convertible Preferred
Stock to be increased accordingly. If no Global Convertible Preferred Stock is
then outstanding, the Company shall issue and the Transfer Agent shall
authenticate, upon written order of the Company in the form of an Officers'
Certificate, a new Global Convertible Preferred Stock representing the
appropriate number of shares.
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(c) Transfer and Exchange of Global Convertible Preferred
Stock. The transfer and exchange of Global Convertible Preferred Stock or
beneficial interests therein shall be effected through the Depositary, in
accordance with this Certificate of Designation (including applicable
restrictions on transfer set forth herein, if any) and the procedures of the
Depositary therefor.
(d) Transfer of a Beneficial Interest in Global Convertible
Preferred Stock for a Certificated Convertible Preferred Stock.
(1) Any person having a beneficial interest in
Convertible Preferred Stock that is being transferred or exchanged pursuant to
an effective registration statement under the Securities Act or pursuant to an
exemption from registration in accordance with Rule 144 may upon request, and if
accompanied by a certification from such person to that effect (in substantially
the form of Exhibit C hereto), exchange such beneficial interest for
Certificated Convertible Preferred Stock representing the same number of shares
of Convertible Preferred Stock. Upon receipt by the Transfer Agent of written
instructions or such other form of instructions as is customary for the
Depositary from the Depositary or its nominee on behalf of any person having a
beneficial interest in Global Convertible Preferred Stock and upon receipt by
the Transfer Agent of a written order or such other form of instructions as is
customary for the Depositary or the person designated by the Depositary as
having such a beneficial interest in a Transfer Restricted Security only, then,
the Transfer Agent or the Depositary, at the direction of the Transfer Agent,
will cause, in accordance with the standing instructions and procedures existing
between the Depositary and the Transfer Agent, the number of shares of
Convertible Preferred Stock represented by Global Convertible Preferred Stock to
be reduced on its books and records and, following such reduction, the Company
will execute and the Transfer Agent will authenticate and deliver to the
transferee Certificated Convertible Preferred Stock.
(2) Certificated Convertible Preferred Stock issued
in exchange for a beneficial interest in a Global Convertible Preferred Stock
pursuant to this sub-paragraph (d) shall be registered in such names and in such
authorized denominations as the Depositary, pursuant to instructions from its
direct or indirect participants or otherwise, shall instruct the Transfer Agent.
The Transfer Agent shall deliver such Certificated Convertible Preferred Stock
to the persons in whose names such Convertible Preferred Stock are so registered
in accordance with the instructions of the Depositary.
(e) Restrictions on Transfer and Exchange of Global
Convertible Preferred Stock.
(1) Notwithstanding any other provisions of this
Certificate of Designation (other than the provisions set forth in sub-paragraph
(f) below), Global Convertible Preferred Stock may not be transferred as a whole
except by the Depositary to a nominee of the Depositary or by a nominee of the
Depositary to the Depositary or another nominee of the Depositary or by the
Depositary or any such nominee to a successor depositary or a nominee of such
successor depositary.
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(2) In the event that the Global Convertible
Preferred Stock is exchanged for Convertible Preferred Stock in definitive
registered form pursuant to sub-paragraph (f) below prior to the effectiveness
of a Shelf Registration Statement with respect to such securities, such
Convertible Preferred Stock may be exchanged only in accordance with such
procedures as are substantially consistent with the provisions of this Section
11(iii) (including the certification requirements set forth in the Exhibits to
this Certificate of Designation intended to ensure that such transfers comply
with Rule 144A or such other applicable exemption from registration under the
Securities Act, as the case may be) and such other procedures as may from time
to time be adopted by the Company.
(f) Authentication of Certificated Convertible Preferred
Stock. If at any time:
(1) the Depositary notifies the Company that the
Depositary is unwilling or unable to continue as depository for the Global
Convertible Preferred Stock and a successor depository for the Global
Convertible Preferred Stock is not appointed by the Company within 90 days after
delivery of such notice;
(2) the Depositary ceases to be a clearing agency
registered under the Exchange Act; or
(3) the Company, in its sole discretion, notifies the
Transfer Agent in writing that it elects to cause the issuance of Certificated
Convertible Preferred Stock under this Certificate of Designation,
then the Company will execute, and the Transfer Agent, upon receipt of a written
order of the Company signed by two Officers or by an Officer and an Assistant
Treasurer or Assistant Secretary of the Company requesting the authentication
and delivery of Certificated Convertible Preferred Stock to the persons
designated by the Company, will authenticate and deliver Certificated
Convertible Preferred Stock equal to the number of shares of Convertible
Preferred Stock represented by Global Convertible Preferred Stock, in exchange
for Global Convertible Preferred Stock.
(g) Legends.
(1) Except as permitted by the following clause (2)
and in sub-paragraph (d) above, each certificate evidencing the Global
Convertible Preferred Stock, Certificated Convertible Preferred Stock and
Certificated Common Stock shall bear a legend in substantially the following
form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS
SECURITY, AGREES FOR THE BENEFIT OF VERIO INC. ("VERIO") THAT THIS SECURITY MAY
NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED (X) PRIOR TO THE SECOND
ANNIVERSARY OF THE ISSUANCE HEREOF (OR ANY
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PREDECESSOR SECURITY HERETO) OR (Y) BY ANY HOLDER THAT WAS AN AFFILIATE OF VERIO
AT ANY TIME DURING THE THREE MONTHS PRECEDING THE DATE OF SUCH TRANSFER, IN
EITHER CASE, OTHER THAN (1) TO VERIO, (2) IF AND TO THE EXTENT THAT THIS
SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT
("RULE 144A") TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A, PURCHASING FOR ITS OWN
ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS
GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON
RULE 144A, (3) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES
ACT PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT OR (4)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN
EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE
UNITED STATES. THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, REPRESENTS AND
AGREES FOR THE BENEFIT OF VERIO THAT IT IS A QUALIFIED INSTITUTIONAL BUYER. IN
ANY CASE THE HOLDER HEREOF WILL NOT, DIRECTLY OR INDIRECTLY, ENGAGE IN ANY
HEDGING TRANSACTION WITH REGARD TO THIS SECURITY OR ANY COMMON STOCK ISSUABLE
UPON CONVERSION OR REDEMPTION OF THIS SECURITY EXCEPT AS PERMITTED BY THE
SECURITIES ACT.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (THE "DEPOSITARY"), NEW
YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OF PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF
CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITARY (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY
AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY) ANY TRANSFER,
PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS
WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO. HAS AN INTEREST
HEREIN."
(2) Upon any sale or transfer of a Transfer
Restricted Security (including any Transfer Restricted Security represented by a
Global Convertible Preferred Stock) pursuant to Rule 144 under the Securities
Act or an effective registration statement under the Securities Act:
(A) in the case of any Transfer Restricted
Security that is a Certificated Convertible Preferred Stock, the Transfer Agent
shall permit the Holder thereof to exchange such Transfer Restricted Security
for Certificated Convertible Preferred Stock that does not bear the legend set
forth above and rescind any restriction on the transfer of such Transfer
Restricted Security; and
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(B) in the case of any Transfer Restricted
Security that is represented by a Global Convertible Preferred Stock, the
Transfer Agent shall permit the Holder thereof to exchange such Transfer
Restricted Security for Certificated Convertible Preferred Stock that does not
bear the second legend set forth above and rescind any restriction on the
transfer of such Transfer Restricted Security, if the Holder's request for such
exchange was made in reliance on Rule 144 and the Holder certifies to that
effect in writing to the Transfer Agent (such certification to be in
substantially the form set forth in Exhibit C hereto).
(h) Cancellation or Adjustment of Global Convertible Preferred
Stock. At such time as all beneficial interests in Global Convertible Preferred
Stock have either been exchanged for Certificated Convertible Preferred Stock,
redeemed, repurchased or canceled, such Global Convertible Preferred Stock shall
be returned to the Depositary for cancellation or retained and canceled by the
Transfer Agent. At any time prior to such cancellation, if any beneficial
interest in Global Convertible Preferred Stock is exchanged for Certificated
Convertible Preferred Stock, redeemed, repurchased or canceled, the number of
shares of Convertible Preferred Stock represented by such Global Convertible
Preferred Stock shall be reduced and an adjustment shall be made on the books
and records of the Transfer Agent with respect to such Global Convertible
Preferred Stock, by the Transfer Agent or the Depositary, to reflect such
reduction.
(i) Obligations with Respect to Transfers and Exchanges of
Convertible Preferred Stock.
(1) To permit registrations of transfers and
exchanges, the Company shall execute and the Transfer Agent shall authenticate
Certificated Convertible Preferred Stock and Global Convertible Preferred Stock
as required pursuant to the provisions of this paragraph (iii).
(2) All Certificated Convertible Preferred Stock and
Global Convertible Preferred Stock issued upon any registration of transfer or
exchange of Certificated Convertible Preferred Stock or Global Convertible
Preferred Stock shall be the valid obligations of the Company, entitled to the
same benefits under this Certificate of Designation as the Certificated
Convertible Preferred Stock or Global Convertible Preferred Stock surrendered
upon such registration of transfer or exchange.
(3) Prior to due presentment for registration of
transfer of any shares of Convertible Preferred Stock, the Transfer Agent and
the Company may deem and treat the person in whose name such shares of
Convertible Preferred Stock are registered as the absolute owner of such
Convertible Preferred Stock and neither the Transfer Agent nor the Company shall
be affected by notice to the contrary.
(4) No service charge shall be made to a Holder for
any registration of transfer or exchange upon surrender of any Convertible
Preferred Stock Certificate or Common Stock Certificate at the office of the
Transfer Agent maintained for that purpose. However, the Company may require
payment of a sum sufficient to
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cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer or exchange of Convertible Preferred Stock
certificates or Common Stock certificate.
(5) Upon any sale or transfer of shares of
Convertible Preferred Stock (including any Convertible Preferred Stock
represented by a Global Convertible Preferred Stock Certificate) or of
Certificated Common Stock pursuant to an effective registration statement under
the Securities Act, pursuant to Rule 144 under the Securities Act or pursuant to
an opinion of counsel reasonably satisfactory to the Company that no legend is
required:
(A) in the case of any Certificated Convertible
Preferred Stock or Certificated Common Stock, the Company and the Transfer Agent
shall permit the holder thereof to exchange such Convertible Preferred Stock or
Certificated Common Stock for Certificated Convertible Preferred Stock or
Certificated Common Stock, as the case may be, that does not bear the legend set
forth in sub-paragraph (g) (1) above and rescind any restriction on the transfer
of such Convertible Preferred Stock or Dividend Common Stock or Conversion
Common Stock issuable in respect thereof; and
(B) in the case of any Global Convertible
Preferred Stock, such Convertible Preferred Stock shall not be required to bear
the legend set forth in sub-paragraph (g) (1) above but shall continue to be
subject to the provisions of sub-paragraph (d) hereof; provided, however, that
with respect to any request for an exchange of Convertible Preferred Stock that
is represented by Global Convertible Preferred Stock for Certificated
Convertible Preferred Stock that does not bear the legend set forth in
sub-paragraph (g) (1) above in connection with a sale or transfer thereof
pursuant to Rule 144 (and based upon an opinion of counsel if the Company so
requests), the Holder thereof shall certify in writing to the Transfer Agent
that such request is being made pursuant to Rule 144 (such certification to be
substantially in the form of Exhibit C hereto).
(j) No Obligation of the Transfer Agent.
(1) The Transfer Agent shall have no responsibility
or obligation to any beneficial owner of Global Convertible Preferred Stock, a
member of, or a participant in the Depositary or any other Person with respect
to the accuracy of the records of the Depositary or its nominee or of any
participant or member thereof, with respect to any ownership interest in the
Convertible Preferred Stock or with respect to the delivery to any participant,
member, beneficial owner or other Person (other than the Depositary) of any
notice (including any notice of redemption or repurchase) or the payment of any
amount, under or with respect to such Global Convertible Preferred Stock. All
notices and communications to be given to the Holders and all payments to be
made to Holders under the Convertible Preferred Stock shall be given or made
only to the registered Holders (which shall be the Depositary or its nominee in
the case of the Global Convertible Preferred Stock). The rights of beneficial
owners in any Global Convertible Preferred Stock shall be exercised only through
the Depositary subject to the applicable rules and procedures of the Depositary.
The Transfer Agent may rely and shall be fully
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protected in relying upon information furnished by the Depositary with respect
to its members, participants and any beneficial owners.
(2) The Transfer Agent shall have no obligation or
duty to monitor, determine or inquire as to compliance with any restrictions on
transfer imposed under this Certificate of Designation or under applicable law
with respect to any transfer of any interest in any Convertible Preferred Stock
(including any transfers between or among the Depositary participants, members
or beneficial owners in any Global Convertible Preferred Stock) other than to
require delivery of such certificates and other documentation or evidence as are
expressly required by, and to do so if and when expressly required by, the terms
of this Certificate of Designation, and to examine the same to determine
substantial compliance as to form with the express requirements hereof.
(iv) Replacement Certificates. If a mutilated Convertible
Preferred Stock certificate is surrendered to the Transfer Agent or if the
Holder of a Convertible Preferred Stock certificate claims that the Convertible
Preferred Stock certificate has been lost, destroyed or wrongfully taken, the
Company shall issue and the Transfer Agent shall countersign a replacement
Convertible Preferred Stock certificate if the reasonable requirements of the
Transfer Agent and of Section 8-405 of the Uniform Commercial Code as in effect
in the State of New York are met. If required by the Transfer Agent or the
Company, such Holder shall furnish an indemnity bond sufficient in the judgment
of the Company and the Transfer Agent to protect the Company and the Transfer
Agent from any loss which either of them may suffer if a Convertible Preferred
Stock certificate is replaced. The Company and the Transfer Agent may charge the
Holder for their expenses in replacing a Convertible Preferred Stock
certificate.
(v) Temporary Certificates. Until definitive Convertible Preferred
Stock certificates are ready for delivery, the Company may prepare and the
Transfer Agent shall countersign temporary Convertible Preferred Stock
certificates. Temporary Convertible Preferred Stock certificates shall be
substantially in the form of definitive Convertible Preferred Stock certificates
but may have variations that the Company considers appropriate for temporary
Convertible Preferred Stock certificates. Without unreasonable delay, the
Company shall prepare and the Transfer Agent shall countersign definitive
Convertible Preferred Stock certificates and deliver them in exchange for
temporary Convertible Preferred Stock certificates.
(vi) Cancellation.
(a) In the event the Company shall purchase or otherwise
acquire Certificated Convertible Preferred Stock, the same shall thereupon be
delivered to the Transfer Agent for cancellation.
(b) At such time as all beneficial interests in Global
Convertible Preferred Stock have either been exchanged for Certificated
Convertible Preferred Stock, redeemed, repurchased or canceled, such Global
Convertible Preferred Stock shall thereupon be delivered to the Transfer Agent
for cancellation.
29
<PAGE> 30
(c) The Transfer Agent and no one else shall cancel and
destroy all Convertible Preferred Stock certificates surrendered for transfer,
exchange, replacement or cancellation and deliver a certificate of such
destruction to the Company unless the Company directs the Transfer Agent to
deliver canceled Convertible Preferred Stock certificates to the Company. The
Company may not issue new Convertible Preferred Stock certificates to replace
Convertible Preferred Stock certificates to the extent they evidence Convertible
Preferred Stock which the Company has purchased or otherwise acquired.
12. ADDITIONAL RIGHTS OF HOLDERS
In addition to the rights provided to Holders under this Certificate of
Designation, Holders shall have the rights set forth in the Registration Rights
Agreement and the Deposit Agreement.
13. CERTAIN DEFINITIONS
As used in this Certificate of Designation, the following terms shall
have the following meanings (and (i) terms defined in the singular have
comparable meanings when used in the plural and vice versa, (ii) "including"
means including without limitation, (iii) "or" is not exclusive and (iv) an
accounting term not otherwise defined has the meaning assigned to it in
accordance with United States generally accepted accounting principles as in
effect on the date of issuance of the Convertible Preferred Stock and all
accounting calculations will be determined in accordance with such principles),
unless the context otherwise requires:
"Additional Dividends" means with respect to any share of Convertible
Preferred Stock constituting a Transfer Restricted Security, the additional
amounts payable pursuant to Section 3(ii) above.
"Additional Payment" is as defined in Section 7(i) above.
"Additional Period" is as defined in Section 7(i) above.
"Agent Members" is as defined in Section 11(i)(c) above.
"Business Day" means each day which is not a Legal Holiday.
"Capital Stock" means any and all shares, interests, participations or
other equivalents (however designated, whether voting or non-voting) in equity
of the Company, including all Common Stock and Preferred Stock.
"Cash Change of Control" means any of the following events: (i) the
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 its assets to any Person, or any corporation consolidates with or merges into
or with the Company in any such event pursuant to a transaction in which the
Company's outstanding voting stock is changed into or exchanged for
consideration in which 50% or less of the value received by holders
30
<PAGE> 31
of such outstanding voting stock consists of common stock that has been admitted
for listing on a national securities exchange or quoted on the NNM; or (ii) the
Company is liquidated or dissolved or adopts a plan of liquidation or
dissolution.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's common stock, par value $0.001 per
share.
"Company" means Verio Inc., a Delaware corporation, and any successor
thereof.
"Conversion Price" means $96.5625.
"Conversion Price Triggering Event" is as defined in Section 4(iv)
above.
"Conversion Shares" is as defined in Section 4(ix) above.
"Deposit Account" means that certain deposit account established
pursuant to the Deposit Agreement.
"Deposit Agreement" means the Deposit Agreement, with respect to the
Convertible Preferred Stock, dated July 20, 1999, between the Company and
Norwest Bank Minnesota, N.A., as deposit agent.
"Deposit Expiration Date" means August 1, 2000.
"Depositary" means The Depository Trust Company.
"Distribution Date" is as defined in Section 4(ix)(a) above.
"Dividend Common Stock" is as defined in Section 3(iii) above.
"Dividend Payment Date" is as defined in Section 3(i) above.
"Dividend Payment Record Date" is as defined in Section 3(i) above.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Global Convertible Preferred Stock" is as defined in Section 11(i)(b)
above.
"Holders" means the registered holders from time to time of the
Convertible Preferred Stock.
"Junior Stock" is as defined in Section 2 above.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions are not required to be open in the State of New York.
"Liquidation Preference" is as defined in Section 1 above.
31
<PAGE> 32
"Market Value" means, as of any date, 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 shall 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 the 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 NNM, or other
similar organization if the NNM is no longer reporting such information, or if
not so available, the fair market price as determined in good faith by the Board
of Directors of the Company.
"Market Value Amount" means, (i) if (a) the applicable shares of Common
Stock are issued pursuant to a registration statement, (b) a Shelf Registration
Statement registering the resale of such shares is effective or (c) such shares
are eligible for immediate resale pursuant to Rule 144(k) under the Securities
Act, 97% of the Market Value of the Common Stock, or (ii) in all other cases,
93% of the Market Value of the Common Stock.
"NNM" means the Nasdaq National Market.
"Officer" means the Chairman of the Board of Directors, the Chief
Executive Officer, the President, the Chief Financial Officer, the Chief
Technical Officer, the Secretary or any Vice President of the Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Transfer Agent. The counsel may be an employee of or counsel
to the Company or the Transfer Agent.
"Optional Redemption" is as defined in Section 7(ii) above.
"Parity Stock" is as defined in Section 2 above.
"person" or "Person" means any individual, corporation, partnership,
joint venture, limited liability company, association, joint-stock company,
trust, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
"Preferred Stock," as applied to the Capital Stock of the Company,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation, winding up or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"Provisional Redemption" is as defined in Section 7(i) above.
"Provisional Redemption Date" is as defined in Section 7(i) above.
32
<PAGE> 33
"Redemption Agent" means that Person, if any, appointed by the Company
to hold funds deposited by the Company in trust to pay to the Holders of shares
of Convertible Preferred Stock to be redeemed.
"Redemption Date" means that certain date set forth in the Redemption
Notice on which date the redemption of the Convertible Preferred Stock is
completed.
"Redemption Notice" means that notice to be given by the Company to the
Holders notifying the Holders as to the redemption, in whole or in part, of the
Convertible Preferred Stock pursuant to Section 7 hereof. The Redemption Notice
shall include the following information: (i) the Redemption Date; (ii) the total
number of shares of Convertible Preferred Stock to be redeemed and, if fewer
than all the shares held by such Holders are to be redeemed, the number of such
shares to be redeemed from such Holders; (iii) the Redemption Price, and any
dividends, Additional Dividends (if any) and Additional Payments (whether to be
paid in cash or shares of Common Stock); (iv) the place or place where
certificates for such shares are to be surrendered for payment of the Redemption
Price and where delivery of certificates representing shares of Common Stock (if
the Company so chooses) payable upon redemption shall be made; (v) that
dividends on the shares to be redeemed will cease to accrue on such Redemption
Date unless the Company defaults in the payment of the Redemption Price; and
(vi) the name of any bank or trust corporation, if any, performing the duties of
Redemption Agent.
"Redemption Notice Date" means the date the Redemption Notice is first
mailed or delivered to any Holder.
"Redemption Price" means that price established for redemption of the
Convertible Preferred Stock established in Section 7 hereof.
"Registration Default" is as defined in Section 3(ii) above.
"Registration Rights Agreement" means the Registration Rights Agreement
dated July 20, 1999 among the Company, Salomon Smith Barney Inc., Donaldson,
Lufkin & Jenrette Securities Corporation, Credit Suisse First Boston
Corporation, Deutsche Bank Securities Inc. and First Union Capital Markets Corp.
with respect to the Convertible Preferred Stock.
"Regular Dividend Commencement Date" is as defined in Section 2 above.
"Rights" is as defined in Section 4(iv)(b) above.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Stock" is as defined in Section 2 above.
"Shelf Registration Statement" means a shelf registration statement
filed with the Commission to cover resales of Transfer Restricted Securities by
holders thereof, as required by the Registration Rights Agreement.
33
<PAGE> 34
"Suspension Period" is as defined in Section 3(ii) (c) above.
"Trading Day" means any day on which the NNM or other applicable stock
exchange or market is open for business.
"Trading Price" means, on any specified Trading Day, the last sales
price of the Common Stock 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 the 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 NNM, or
other similar organization if the NNM is no longer reporting such information,
or if not so available, the fair market price as determined in good faith by the
Board of Directors of the Company.
"Transaction" is as defined in Section 6(x) above.
"Transfer Agent" means the transfer agent for the Convertible Preferred
Stock appointed by the Company, which initially shall be Norwest Bank Minnesota,
N.A. (also known as Norwest Shareowner Services).
"Transfer Restricted Securities" means each share of Convertible
Preferred Stock and any share of Dividend Common Stock until (i) the date on
which such security or its predecessor has been transferred pursuant to the
Shelf Registration Statement or another registration statement covering such
security which has been filed with the Commission pursuant to the Securities
Act, in either case after such registration statement has become effective under
the Securities Act, (ii) has been transferred pursuant to Rule 144 under the
Securities Act, or any similar provision then in force, (iii) may be sold or
transferred pursuant to Rule 144(k) under the Securities Act, or any similar
provision then in force, or (iv) in the Opinion of Counsel may be freely sold
without restriction under the Securities Act by the Holder thereof.
"Voting Rights Triggering Event" is as defined in Section 8(ii) above.
34
<PAGE> 35
IN WITNESS WHEREOF, Verio Inc., has caused this Certificate of
Designation to be signed by Carla Hamre Donelson, its Vice President, General
Counsel and Secretary, this 20th day of July, 1999.
By: /s/ Carla Hamre Donelson
-------------------------------------
Name: Carla Hamre Donelson
Title: Vice President, General Counsel
and Secretary
35
<PAGE> 36
EXHIBIT A
FORM OF CONVERTIBLE PREFERRED STOCK
FACE OF SECURITY
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS
SECURITY, AGREES FOR THE BENEFIT OF VERIO INC. ("VERIO") THAT THIS SECURITY MAY
NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED (X) PRIOR TO THE SECOND
ANNIVERSARY OF THE ISSUANCE HEREOF (OR ANY PREDECESSOR SECURITY HERETO) OR (Y)
BY ANY HOLDER THAT WAS AN AFFILIATE OF VERIO AT ANY TIME DURING THE THREE MONTHS
PRECEDING THE DATE OF SUCH TRANSFER, IN EITHER CASE, OTHER THAN (1) TO VERIO,
(2) IF AND TO THE EXTENT THAT THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO
RULE 144A UNDER THE SECURITIES ACT ("RULE 144A") TO A PERSON WHOM THE SELLER
REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF
RULE 144A, PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER
TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (3) PURSUANT TO AN EXEMPTION
FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE)
UNDER THE SECURITIES ACT OR (4) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. THE HOLDER HEREOF, BY
PURCHASING THIS SECURITY, REPRESENTS AND AGREES FOR THE BENEFIT OF VERIO THAT IT
IS A QUALIFIED INSTITUTIONAL BUYER. IN ANY CASE, THE HOLDER HEREOF WILL NOT,
DIRECTLY OR INDIRECTLY, ENGAGE IN ANY HEDGING TRANSACTION WITH REGARD TO THIS
SECURITY OR ANY COMMON STOCK ISSUABLE UPON CONVERSION OR REDEMPTION OF THIS
SECURITY EXCEPT AS PERMITTED BY THE SECURITIES ACT.*
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (THE "DEPOSITARY"), NEW
YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OF PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF
CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITARY (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY
AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY) ANY TRANSFER,
PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS
WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO. HAS AN INTEREST
HEREIN.**
36
<PAGE> 37
----------------
* Subject to removal upon registration under the Securities Act of 1933 or
otherwise when the security shall no longer be a restricted security.
** Subject to removal if not a global security.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF THE DEPOSITARY OR TO A SUCCESSOR THEREOF
OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY
SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH
IN THE CERTIFICATE OF DESIGNATION REFERRED TO BELOW.**
IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE
REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH
REGISTRAR AND TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER
COMPLIES WITH THE FOREGOING RESTRICTIONS.
Certificate Number 001
Number of Shares of Convertible
Preferred 7,200,000
CUSIP NO.: 923433 30 4
Series A 6.75% Convertible Preferred Stock (par value $0.001)
(liquidation preference $50.00 per share of Convertible Preferred
Stock) of Verio Inc.
Verio Inc., a Delaware corporation (the "Company"), hereby certifies
that Cede & Co. or registered assigns (the "Holder") is the registered owner of
fully paid and non-assessable preferred securities of the Company designated the
Series A 6.75% Convertible Preferred Stock (par value $0.001) (liquidation
preference $50.00 per share) (the "Convertible Preferred Stock"). The shares of
Convertible Preferred Stock are transferable on the books and records of the
Registrar, in person or by a duly authorized attorney, upon surrender of this
certificate duly endorsed and in proper form for transfer. The designations,
rights, privileges, restrictions, preferences and other terms and provisions of
the Convertible Preferred Stock represented hereby are issued and shall in all
respects be subject to the provisions of the Certificate of Designations of the
Powers, Preferences and Relative, Participating, Optional and other Special
Rights, and Qualifications, Limitations and Restrictions of the Convertible
Preferred Stock, dated July 19, 1999, as the same may be amended from time to
time (the "Certificate of Designation"). Capitalized terms used herein but not
defined shall have the meaning given them in the Certificate of Designation. The
Company will provide a copy of the
37
<PAGE> 38
Certificate of Designation to a Holder without charge upon written request to
the Company at its principal place of business.
Reference is hereby made to select provisions of the Convertible
Preferred Stock set forth on the reverse hereof, and to the Certificate of
Designation, which select provisions and the Certificate of Designation shall
for all purposes have the same effect as if set forth at this place.
Upon receipt of this certificate, the Holder is bound by the
Certificate of Designation and is entitled to the benefits thereunder.
Unless the Transfer Agent's Certificate of Authentication hereon has
been properly executed, these shares of Convertible Preferred Stock shall not be
entitled to any benefit under the Certificate of Designation or be valid or
obligatory for any purpose.
IN WITNESS WHEREOF, Verio Inc. has executed this certificate this
____ day of July, 1999.
VERIO INC.,
By:
---------------------------
Name:
----------------------
Title:
---------------------
By:
---------------------------
Name:
----------------------
Title:
---------------------
TRANSFER AGENT'S CERTIFICATE OF AUTHENTICATION
This is one of the certificates representing shares of Convertible
Preferred Stock referred to in the within mentioned Certificate of Designation.
Dated: , 1999
Norwest Bank Minnesota, N.A.
By:
---------------------------
Authorized Signatory
38
<PAGE> 39
REVERSE OF SECURITY
Dividends on each share of Convertible Preferred Stock shall be payable
at a rate per annum set forth in the face hereof or as provided in the
Certificate of Designation (including Additional Dividends). Dividends may be
paid in cash or in shares of Common Stock of the Company, or any combination of
the two, at the option of the Company.
The shares of Convertible Preferred Stock shall be redeemable as
provided in the Certificate of Designation. The shares of Convertible Preferred
Stock shall be convertible into the Company's Common Stock in the manner and
according to the terms set forth in the Certificate of Designation.
As required under Delaware law, the Company shall furnish to any Holder
upon request and without charge, a full summary statement of the designations,
voting rights preferences, limitations and special rights of the shares of each
class or series authorized to be issued by the Company so far as they have been
fixed and determined.
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned assigns and transfers the shares of
Convertible Preferred Stock evidenced hereby to:
--------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Insert assignee's social security or tax identification number)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Insert address and zip code of assignee)
and irrevocably appoints: __________________________________, agent to transfer
the shares of Convertible Preferred Stock evidenced hereby on the books of the
Transfer Agent and Registrar. The agent may substitute another to act for him or
her.
Date:
Signature:
------------------------------
(Sign exactly as your name appears on the
side of this Convertible Preferred
Stock Certificate)
Signature Guarantee:(1)
-------------------------
- ------------------
(1) Signature must be guaranteed by an "eligible guarantor institution" that is,
a bank, stockbroker, savings and loan association or credit union meeting the
requirements of the Registrar, which requirements include membership in the
Securities Transfer Agents Medallion Program ("STAMP") or such other "signature
guarantee program" as may be determined by the Registrar in addition to, or in
substitution for, STAMP, all in accordance with the Securities Exchange Act of
1934, as amended.
39
<PAGE> 40
EXHIBIT B
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in
order to Convert the Convertible Preferred Stock)
The undersigned hereby irrevocably elects to convert (the "Conversion")
shares of Series A 6.75% Convertible Preferred Stock (the "Convertible Preferred
Stock"), represented by stock certificate No(s). ____ (the "Convertible
Preferred Stock Certificates") into shares of common stock ("Common Stock") of
Verio Inc. (the "Company") according to the conditions of the Certificate of
Designations of the Powers, Preferences and Relative, Participating, Optional
and other Special Rights, and Qualifications, Limitations and Restrictions of
the Convertible Preferred Stock (the "Certificate of Designation"), as of the
date written below. If shares are to be issued in the name of a person other
than the undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates. No fee will be
charged to the holder for any conversion, except for transfer taxes, if any. A
copy of each Convertible Preferred Stock Certificate is attached hereto (or
evidence of loss, theft or destruction thereof).
The undersigned represents and warrants that all offers and sales by
the undersigned of the shares of Common Stock issuable to the undersigned upon
conversion of the Convertible Preferred Stock shall be made pursuant to
registration of the Common Stock under the Securities Act of 1933, as amended
(the "Securities Act"), or pursuant to any exemption from registration under the
Securities Act.
Any holder, upon the exercise of its conversion rights in accordance
with the terms of the Certificate of Designation, agrees to be bound by the
terms of the Registration Rights Agreement and the Deposit Agreement.
The Company is not required to issue shares of Common Stock until the
original Convertible Preferred Stock Certificate(s) (or evidence of loss, theft
or destruction thereof) to be converted are received by the Company or its
Transfer Agent. The Company shall issue and deliver shares of Common Stock to an
overnight courier not later than three business days following receipt of the
original Convertible Preferred Stock Certificate(s) to be converted.
Capitalized terms used but not defined herein shall have the meanings
ascribed thereto in or pursuant to the Certificate of Designation.
Date of Conversion:
------------------------
Applicable Conversion Price:
---------------
Number of shares of Convertible
Preferred Stock to be Converted:
-----------
40
<PAGE> 41
Number of shares of Common
Stock to be Issued:
-----------------------
Signature:
--------------------------------
Name:
-------------------------------------
Address:*
---------------------------------
------------------------------------------
Fax No.:
----------------------------------
* Address where shares of Common Stock and any other payments or certificates
shall be sent by the Company.
41
<PAGE> 42
EXHIBIT C
CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR
REGISTRATION OF TRANSFER OF CONVERTIBLE PREFERRED STOCK
Re: Series A 6.75% Convertible Preferred Stock (the "Convertible
Preferred Stock") of Verio Inc. (the "Company")
This Certificate relates to _______ shares of Convertible
Preferred Stock held in
_____*/ book-entry or
_____*/ definitive form by __________________ (the "Transferor").
The Transferor*:
[ ] has requested the Transfer Agent by written order to deliver in
exchange for its beneficial interest in the Convertible Preferred Stock held by
the depository shares of Convertible Preferred Stock in definitive, registered
form equal to its beneficial interest in such Convertible Preferred Stock (or
the portion thereof indicated above); or
[ ] has requested the Transfer Agent by written order to exchange or
register the transfer of Convertible Preferred Stock.
In connection with such request and in respect of such
Convertible Preferred Stock, the Transferor does hereby certify that the
Transferor is familiar with the Certificate of Designation relating to the
above-captioned Convertible Preferred Stock and that the transfer of this
Convertible Preferred Stock does not require registration under the Securities
Act of 1933, as amended (the "Securities Act") because:
[ ] Such Convertible Preferred Stock is being acquired for the
Transferor's own account without transfer.
[ ] Such Convertible Preferred Stock is being transferred to the
Company.
[ ] Such Convertible Preferred Stock is being transferred to a
qualified institutional buyer (as defined in Rule 144A under the Securities
Act), in reliance on Rule 144A.
[ ] Such Convertible Preferred Stock is being transferred in reliance
on and in compliance with another exemption from the registration requirements
of the Securities Act (and based on an opinion of counsel if the Company so
requests).
Date:
----------------------
--------------------------
[INSERT NAME OF TRANSFEROR]
By:
------------------------
42
<PAGE> 1
EXHIBIT 4.1
VERIO INC.
DEPOSIT AGREEMENT
DEPOSIT AGREEMENT (this "Agreement"), dated as of July 20, 1999,
by and between Verio Inc., a Delaware corporation (the "Company"), and Norwest
Bank Minnesota, N.A. (the "Deposit Agent"), as deposit agent for the benefit of
the registered holders (the "Holders") of the 6.75% Series A Convertible
Preferred Stock (the "Preferred Stock").
This Agreement is made to induce all present and future Holders
to purchase the Preferred Stock by providing a non-interest bearing trust
deposit account (the "Deposit Account") to pay in cash certain quarterly return
amounts that Holders shall be entitled to receive as hereinafter provided in an
amount equal to $0.8438 per share of Preferred Stock (the "Quarterly Return
Amount") of the Company or, in lieu thereof, to provide funds for the purchase
on behalf of the Holders from the Company of common stock, par value $0.001 per
share, of the Company (the "Common Stock"), on each Deposit Payment Date (as
defined below) as provided herein.
NOW, THEREFORE, the parties hereto agrees as follows:
1. Establishment of Deposit Account.
(a) The Deposit Account shall be established in connection with
the offering of 6,000,000 shares of Preferred Stock (the "Offering"), and
1,200,000 additional shares of Preferred Stock (the "Over-Allotment Shares")
subject to acquisition in connection therewith, and shall be held subject to the
terms and conditions of this Agreement.
(b) Simultaneously with each closing in respect of the Offering,
Salomon Smith Barney Inc., Donaldson, Lufkin & Jenrette Securities Corporation,
Credit Suisse First Boston Corporation, Deutsche Bank Securities Inc. and First
Union Capital Markets Corp. (together, the "Initial Purchasers") shall deliver
to the Deposit Agent against the Deposit Agent's written acknowledgment and
receipt thereof, in the form attached hereto as Exhibit A on behalf of the
purchasers of the Preferred Stock, an amount in cash equal to (i) approximately
6.731% of the purchase price of the Preferred Stock (equal to $24,275,155.89 of
the $360,000,000.00 total purchase price) payable by the underwriters pursuant
to the Purchase Agreement (the "Purchase Agreement") dated July 20, 1999,
between the Company and the Initial Purchasers in respect of the Offering (the
"Initial Deposit") plus (ii) a ratable amount (the "Additional Deposit") to be
deposited in respect of any Additional Shares (as defined in the Purchase
Agreement) purchased by the Initial Purchasers, sufficient to pay, together with
the earnings thereon, any Quarterly Return Amount from the Deposit Account
required to be
<PAGE> 2
made hereunder prior to the Deposit Expiration Date (as defined below). The
Initial Deposit (and the Additional Deposit, if any), together with any
earnings, interest and other proceeds of investments thereon is referred to as
the "Deposit Fund". The Deposit Agent will deposit the Initial Deposit (and the
Additional Deposit, if any) into the Deposit Account and hold it pursuant to the
terms of this Agreement. Subject to early termination of the Deposit Account or
prior conversion of shares of the Preferred Stock as hereinafter provided, the
Deposit Fund will be the property of the Holders, and not of the Company. The
Company shall have a security interest in the Deposit Account to secure payment
of the purchase price for its Common Stock in the event the Company makes the
election on each Deposit Payment Date as set forth in Section 2(b) below. The
Deposit Fund shall be invested as provided on Exhibit B to be attached at the
closing of the Offering (and which may be amended by delivery by the Company of
a revised Exhibit B in the event of the issuance of the Additional Shares),
which investment will provide sufficient funds, without any further investment,
to equal the aggregate Quarterly Return Amounts due on the outstanding Preferred
Stock, as such Quarterly Return Amounts become due, on each Deposit Payment
Date. The Deposit Agent shall have no responsibility for determining whether
funds held in the Deposit Account have been invested in such a manner so as to
comply with the requirements of this Section 1(b).
2. Distribution, Reduction and Termination of Deposit Account;
Duties of Deposit Agent.
(a) Unless on or prior to the Notice Date (as defined in Section
2(g)), the Company shall have delivered to the Deposit Agent a Direction Notice
(as defined in Section 2(g)) in respect of a Deposit Payment Date or the Deposit
Expiration Date, the Deposit Agent shall deliver from the Deposit Account to
each Holder of Record (as defined in Section 3), cash in an amount equal to the
Quarterly Return Amount on November 1, 1999, February 1, 2000, May 1, 2000 and
August 1, 2000 (each such date being a "Deposit Payment Date"), continuing until
the earlier of (i) August 1, 2000 (the "Deposit Expiration Date") and (ii) such
earlier time as the Deposit Account is terminated in accordance with Section
2(e) below. The amount payable to each Holder of Record shall be prorated
accordingly in the event of early termination of the Deposit Account, and the
Deposit Agent shall distribute the remaining balance of the Deposit Account to
the Company. The sole source of funds for each Quarterly Return Amount delivered
to Holders of Record by the Deposit Agent in accordance herewith shall be the
Deposit Account, and the Deposit Agent shall have no liability in respect of any
deficiency thereof (subject to Section 6(d)).
(b) If the Company shall have delivered a Direction Notice to the
Deposit Agent on or prior to the Notice Date relating to a Deposit Payment Date
or to the Deposit Expiration Date and upon compliance by the Company with
applicable law, the Deposit Agent shall, as instructed by the Company in such
Direction Notice, purchase from the Company, on behalf of the Holders of Record
and with funds from the Deposit Account, that number of
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<PAGE> 3
whole shares of Common Stock as is determined by the Company (as set forth in
the Direction Notice) by dividing all or such portion of the Quarterly Return
Amount as set forth in the Direction Notice (the "Share Consideration") by the
Market Value Amount (as defined in Section 2(g)) as of the Notice Date. The
Deposit Agent shall pay the Share Consideration from the Deposit Account to the
Company in consideration for such purchase of shares, and the Deposit Agent, or
the Company upon the written request of the Deposit Agent, shall transfer such
shares of Common Stock on such Deposit Payment Date or on the Deposit Expiration
Date to Holders of Record appearing on the list provided to the Deposit Agent in
accordance with Section 3, each such Holder of Record to receive the number of
such shares of Common Stock as is directed by the Company in writing. The
Deposit Agent shall transfer to Holders of Record on the next Deposit Payment
Date or on the Deposit Expiration Date any portion of such Quarterly Return
Amount as is not utilized to purchase Common Stock from the Company. The Deposit
Agent's obligation hereunder to cause shares of Common Stock to be purchased by
the Deposit Account from the Company shall be secured by, and limited to, the
funds in the Deposit Account, and the Deposit Agent shall have no liability to
the Company, the Holders or any other person to the extent that there are not
sufficient funds in the Deposit Account to make any purchase, payment or
transfer required under this Agreement.
(c) In the event of any conversion of the Preferred Stock into
shares of Common Stock prior to the Deposit Expiration Date, the Company will
promptly after such conversion be paid any funds remaining in the Deposit
Account allocable to those shares of Preferred Stock so converted. As a result,
Holders of Preferred Stock will not receive any partial payment from the Deposit
Account if they convert their shares of Preferred Stock prior to the record date
for such full Quarterly Return Amount.
(d) On the Deposit Expiration Date, any cash remaining in the
Deposit Account on such date shall be applied to pay the fees and expenses of
the Deposit Agent to the extent the Company has failed to meet its obligations
to pay amounts owed to the Deposit Agent hereunder. Nothing in this Section 2(d)
shall be construed to limit the obligations of the Company under Section 4.
(e) Notwithstanding any other provision herein to the contrary,
if (A) the Company obtains any required amendments to the covenants under its
various debt obligations that would permit the Company to pay cash dividends on
the Preferred Stock prior to the Deposit Expiration Date, and (B) at the time
the Company obtains such amendments or at any time thereafter (so long as the
amendments remain effective), the trading price, on any date, for the Preferred
Stock equals or exceeds the liquidation preference in respect thereof, then, in
such event, the Company may thereafter, upon notice to the Holders, elect to
exchange the Deposit Account for an obligation to accrue dividends on the
Preferred Stock from the Deposit Payment Date immediately preceding the date of
such election by instructing the Deposit Agent in writing to distribute the
remaining balance of the Deposit Account to the Company
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<PAGE> 4
in accordance with this clause (e). If the Company elects to so terminate the
Deposit Account, the Preferred Stock will begin to accrue dividends from the
last Deposit Payment Date preceding such election.
(f) 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 the Company, the Deposit Agent shall,
upon the written direction of the Company, return to the Holders any funds at
the time remaining in the Deposit Account.
(g) For purposes of this Agreement the following terms have the
meanings specified:
"Direction Notice" means a notice from the Company, in the form
attached as Exhibit C, delivered to the Deposit Agent directing the Deposit
Agent to use funds from the Deposit Account to purchase Common Stock from the
Company to distribute to holders of Preferred Stock.
"Market Value" means, as of any date, 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 shall 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 the shares of the 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 so available, the fair market
price as determined in good faith by the Board of Directors of the Company.
"Market Value Amount" means
(A) if (1) the relevant 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 of the Common Stock; or
(B) in all other cases, 93% of the Market Value of the Common
Stock.
"Notice Date" means the tenth business day prior to the
applicable Deposit Payment Date or the Deposit Expiration Date, as the case may
be.
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<PAGE> 5
(h) The Deposit Agent shall take all actions and make all filings
and reports in connection with the Deposit Account to the Holders and to the
Internal Revenue Service required by the Internal Revenue Code of 1986 and the
rules and regulations thereunder.
(i) This Agreement shall remain in full force and effect until
all amounts held hereunder by the Deposit Agent have been finally distributed in
accordance herewith.
3. Record Date.
The Quarterly Return Amount or, if a Direction Notice has been
delivered by the Company, Common Stock, shall be returned or delivered to the
Holders of Record of the Preferred Stock, as they appear on the stock register
of the Company or its transfer agent or registrar ten business days prior to
each Deposit Payment Date (such Holders, the "Holders of Record"). A list of the
Holders of Record, including the number of shares of Preferred Stock held by
each such Holder, shall be delivered to the Deposit Agent by the Company or its
transfer agent or registrar at least five business days prior to each Deposit
Payment Date.
4. Expenses.
The Deposit Agent shall be entitled to customary fees and
expenses for performing its duties hereunder, as may be agreed from time to time
by the Company and the Deposit Agent. The Deposit Agent shall be entitled to
prompt reimbursement of all reasonable expenses incurred by it in carrying out
its duties hereunder, including, without limitation, reasonable travel and other
out-of-pocket expenses and reasonable fees and expenses of its legal counsel
arising in connection with the entering into of this Agreement or the
negotiation, interpretation or enforcement of any provision hereof or any
arbitration or other proceeding hereunder. The fees and expenses of the Deposit
Agent in carrying out its duties hereunder shall be paid or reimbursed by the
Company. In the event the Deposit Agent renders any extraordinary services in
connection with the Deposit Account or otherwise under this Agreement at the
request of the Company or the Holders, the Deposit Agent shall be entitled to
reasonable additional compensation from the Company therefor. The terms of this
Section 4 shall survive termination of this Agreement.
5. Notices.
All communications hereunder will be in writing and effective
only on receipt, and will be mailed, delivered or telegraphed and confirmed:
(a) if to the Holders, to their address as set forth in the stock
transfer records of the Company;
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<PAGE> 6
(b) if to the Company, to Verio Inc., 8005 South Chester Street,
Suite 200, Englewood, Colorado 80112, Attention: Carla Hamre Donelson, Esq., or
to such other person or address as the Company shall designate in writing, with
a copy to Morrison & Foerster LLP, 428 Market Street, San Francisco, California
94105-2482, Attention: Gavin Grover, Esq.; and
(c) if to the Deposit Agent, to Norwest Shareowner Services, a
division of Norwest Bank Minnesota, N.A., Sixth and Marquette, Minneapolis,
Minnesota 55479-0069, Attention: Rogene Pendelton.
Any party may change the address (or the person to whose attention such notice
is directed) by notice given to the other parties hereto as aforesaid.
6. Concerning the Deposit Agent.
In order to induce the Deposit Agent to act as deposit agent
hereunder, the Company hereby covenants and agrees with the Deposit Agent as
follows:
(a) The Deposit Agent shall not in any way be bound or affected
by any amendment, modification or cancellation of this Agreement, unless the
same shall have been agreed to in writing by the Deposit Agent.
(b) The Deposit Agent shall be entitled conclusively to rely, and
shall be protected in acting in reliance upon, any Direction Notice or other
notice, letter, statement, list, instruction or direction or any signature
furnished to the Deposit Agent pursuant to this Agreement and shall be entitled
to treat as genuine, and as the document it purports to be, any letter, notice,
statement, list, instruction, direction or other document or instrument and any
signature delivered to the Deposit Agent hereunder and believed by the Deposit
Agent to be genuine and to have been presented by the proper party or parties,
without being required to determine (and the Deposit Agent shall be permitted to
so assume) the authenticity or correctness thereof and of any fact stated
therein, the propriety or validity thereof, or the authority or authorization of
the party or parties making and/or delivering the same.
(c) This Agreement sets forth exclusively the duties and
obligations of the Deposit Agent with respect to any and all matters pertinent
to its acting as deposit agent under this Agreement.
(d) The Deposit Agent undertakes to perform only such duties as
are expressly set forth in this Agreement, and no implied duties or implied
obligations shall be read into this Agreement against the Deposit Agent. Neither
the Deposit Agent nor any of its directors, officers, employees or agents shall
be in any manner liable or responsible to the
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<PAGE> 7
Company or any Holder or any other person or entity for or in respect of any
loss, claim, damage or liability (collectively, "Loss") resulting from, or
arising out of, any action or failure or omission to act hereunder or for any
mistake of fact or error of judgment, including, but not limited to, any Loss
that may occur by reason of the exercise of the Deposit Agent's discretion in
connection with this Agreement or the Deposit Account in any particular matter
or for any other reason, except for any Loss which is the result of gross
negligence or willful misconduct on the part of the Deposit Agent or such
director, officer, employee or agent.
(e) The Company covenants and agrees to indemnify and hold the
Deposit Agent and each of its directors, officers, employees and agents (the
Deposit Agent and any such person or entity seeking indemnification hereunder
being hereinafter referred to as an "Indemnified Party") harmless from and
against, and upon demand reimburse each Indemnified Party for, any and all
losses, claims, damages, liabilities, costs and expenses, actions, suits or
proceedings at law or in equity, and any other expenses, fees or charges of any
character or nature (including reasonable costs of investigation and fees and
disbursements of its legal counsel) (collectively, "Indemnified Losses"), which
may be paid, incurred or suffered by such Indemnified Party or to which such
Indemnified Party may become subject by reason of or in connection with its
acting as deposit agent hereunder or arising out of the Deposit Account
(including, but not limited to, any action taken or omitted by the Deposit Agent
in connection with this Agreement or any action allegedly so taken or omitted)
or by reason of, or as a result of, the Deposit Agent's compliance with the
instructions set forth herein or with any instructions delivered to the Deposit
Agent pursuant hereto, except with respect to Indemnified Losses which shall be
the result of gross negligence or willful misconduct on the part of such
Indemnified Party. The terms of this Section 6(e) shall survive the termination
of this Agreement.
(f) In the event of any controversy or dispute hereunder, or with
respect to any question as to the construction of this Agreement or any action
to be taken by it hereunder, the Deposit Agent may, in its discretion, obtain
the advice of counsel reasonably satisfactory to it and shall incur no liability
for, and shall be fully protected in, acting in accordance with the advice or
opinion of such counsel.
(g) If any part of the Deposit Fund is at any time attached,
garnished or levied upon or under any court order, or in case the payment,
assignment, transfer, conveyance or delivery of any of the Deposit Fund shall be
stayed or enjoined by any court order, or in case any order, writ, judgment or
decree shall be made or entered by any court affecting the Deposit Fund or any
part thereof, then and in any of such events, the Deposit Agent is authorized,
in its sole discretion, to rely upon and comply with any such order, writ,
judgment or decree. The Deposit Agent shall not be liable to any of the parties
hereto, to any Holder or to any other person, firm or corporation by reason of
such compliance even though such order, writ, judgment or decree may be
subsequently reversed, modified, annulled, set aside, vacated,
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<PAGE> 8
found to have been entered without jurisdiction, or found to be in violation of
or beyond the scope of a constitution or a law.
(h) Notwithstanding anything to the contrary contained herein, if
the Deposit Agent shall be uncertain as to its duties or rights hereunder, shall
receive any notice, advice, direction, or other document from the Company with
respect to the Deposit Fund which, in its opinion, is in conflict with any of
the provisions of this Agreement, should be advised that a dispute has arisen
with respect to the payment, ownership, or right of possession of the Deposit
Fund or any part thereof (or as to the delivery, non-delivery, or content of any
notice, advice, direction, or other document) or if any obligation of the
Deposit Agent under this Agreement shall, in the opinion of the Deposit Agent,
expose the Deposit Agent to liability due to actual or potential conflicting
claims to the Deposit Account, the Deposit Agent shall be entitled (but not
obligated), without liability to anyone, to refrain from taking any action other
than to hold the Deposit Fund in accordance with this Agreement until such
uncertainty, conflict, dispute or obligation is resolved to the reasonable
satisfaction of the Deposit Agent, including by (and, notwithstanding anything
to the contrary, it shall be reasonable for the Deposit Agent not to act until
it has received) an order, decree or judgment of a court of competent
jurisdiction which has been finally affirmed on appeal or which by lapse of time
or otherwise is no longer subject to appeal, but the Deposit Agent shall be
under no duty to institute or to defend any proceeding, although it may
institute or defend such proceedings.
(i) The Company shall have the right to cause the Deposit Agent
to be relieved of its duties hereunder and to select a substitute deposit agent,
upon the expiration of 30 days following delivery of written notice of
substitution to the Deposit Agent. Upon selection of such substitute deposit
agent, such substitute deposit agent and the Company shall enter into an
agreement substantially identical to this Agreement and, thereafter, the
replaced deposit agent shall be relieved of its duties and obligations to
perform hereunder, except that the replaced deposit agent shall transfer to the
substitute deposit agent upon request therefor the Deposit Funds and copies of
all books, records, plans and other documents in the replaced deposit agent's
possession relating to such funds or this Agreement.
(j) Upon not less than 30 days' written notice to the Company and
the Holders of its intention to resign under this Agreement, the Deposit Agent
may resign. The Company shall promptly select a successor deposit agent. Such
resignation shall take effect upon delivery by the resigning Deposit Agent of
the Deposit Fund to such successor deposit agent; the resigning Deposit Agent
shall thereupon be discharged of all its duties and obligations hereunder. If
the Company has not selected and appointed a successor deposit agent within 30
days of the notice from the Deposit Agent of its resignation, the Deposit Agent
may petition a court of competent jurisdiction to appoint a successor deposit
agent, notify the Company of such selection and deliver the Deposit Fund to such
successor agent as described in this paragraph (j). In addition, the Deposit
Agent shall be discharged of all of its duties and
-8-
<PAGE> 9
obligations hereunder upon its deposit of the Deposit Fund with a court of
competent jurisdiction. The Company and the Holders each hereby irrevocably
consents and submits to the jurisdiction of such court in any such action and
waives all rights to contest the jurisdiction of such court.
(k) The Company hereby authorizes the Deposit Agent, (i) to
institute a bill of interpleader in any court of competent jurisdiction to
determine the rights of any person (including the Initial Purchasers, the
Holders, the Company and any other person) to the Deposit Account and the
Company shall pay all reasonable costs, expenses and disbursements of the
Deposit Agent in connection therewith, including reasonable attorney's fees and
(ii) to deposit the Deposit Account with the clerk of that court.
(l) The Deposit Agent's duties, obligations and liabilities
hereunder, except as a result of the Deposit Agent's gross negligence or willful
misconduct, will terminate upon its delivery of all of the Deposit Fund pursuant
to the terms of this Agreement. The provisions of this Section 6(l) shall
survive any such termination.
7. Miscellaneous.
(a) Continuance of Agreement. This Agreement shall be binding
upon the parties hereto and their respective heirs, personal representatives,
successors and assigns.
(b) Counterparts. This Agreement may be executed in any number of
counterparts all of which, taken together shall constitute the same agreement.
(c) No Amendments. This Agreement may not be modified or amended,
nor may any provision hereof be waived, except by a writing duly executed by the
Deposit Agent, the Company and by a majority of the Holders. For the avoidance
of doubt, delivery of a revised Exhibit B as provided in Section 1(b) shall not
be considered an amendment to this Agreement.
(d) Governing Law. This Agreement shall be governed and construed
in accordance with the laws of the State of New York without reference to its
principles of conflicts of law.
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<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date and the year first above written.
VERIO INC.
By: /s/ Carla Hamre Donelson
-----------------------------
Name: Carla Hamre Donelson
Title: Vice President and General
Counsel
NORWEST BANK MINNESOTA, N.A.
By: /s/ Curtis D. Schweqman
-----------------------------
Name: Curtis D. Schweqman
Title: Assistant Vice President
* With the understanding that section 2(h) may require Norwest to employ tax
counsel to ensure compliance. Therefore, additional expense to the company for
reimbursement of associated fees may be necessary.
S-1
<PAGE> 11
EXHIBIT A
FORM OF DEPOSIT AGENT'S CROSS-RECEIPT
THE UNDERSIGNED hereby acknowledges receipt of Dollars ($)
of the [Initial] [Additional] Deposit.
The undersigned, as deposit agent (the "Deposit Agent") pursuant
to that certain Deposit Agreement, dated July 20, 1999 between the Company and
Norwest Bank Minnesota, N.A., as Deposit Agent (the "Deposit Agreement"), has
deposited the [Initial] [Additional] Deposit in the Deposit Account (as such
term is defined in the Deposit Agreement).
NORWEST BANK MINNESOTA, N.A.
By:
-----------------------------
Name:
Title:
Date:
<PAGE> 12
EXHIBIT B
INVESTMENTS
The funds that the Initial Purchasers of the 6.75% Series A
Convertible Preferred Stock deposit in the Deposit Account will be invested in
U.S. government obligations or U.S. government guaranteed obligations as
provided on the attachment hereto.
In the event that investments made pursuant to this Exhibit B
shall mature or otherwise require reinvestment, the Deposit Agent shall make
overnight (or, if requested in writing by the Company, other) investment of
available funds in U.S. government obligations or U.S. government guaranteed
obligations which shall mature as required to make payments required under the
Deposit Agreement.
<PAGE> 13
EXHIBIT C
FORM OF DIRECTION NOTICE
VERIO INC.
8005 South Chester Street
Suite 200
Englewood, Colorado 80012
[DATE]
NORWEST BANK MINNESOTA, N.A.
Sixth and Marquette
Minneapolis, MN 55479-0069
Re: Direction Notice No. [ ]
Ladies and Gentlemen:
We refer to the Deposit Agreement (the "Deposit Agreement") dated
as of the 20th day of July, 1999 between you, as Deposit Agent, and Verio Inc.,
a Delaware corporation (the "Company"). Unless otherwise specified, capitalized
terms used herein shall have the meaning given in the Deposit Agreement. This
letter constitutes a Direction Notice under the Deposit Agreement.
[The undersigned hereby notifies you that you are directed,
pursuant to Section 2(b) of the Deposit Agreement, to purchase from the Company
on behalf of the Holders, for delivery to each Holder of Record of Preferred
Stock in lieu of the Quarterly Return Amount ($[ ] on the Deposit Payment
Date ([Date]), shares of Common Stock for $ of Quarterly Return Amount. The
calculation of the number of shares of Common Stock to be purchased is attached
hereto as Annex A.]
[The undersigned hereby notifies you of the conversion of shares
of Preferred Stock by certain Holders, and that you are directed, pursuant to
Section 2(c) of the Deposit Agreement, to pay to the Company any funds remaining
in the Deposit Account allocable to the shares of Preferred Stock so converted.
The number of shares of Preferred Stock converted and a calculation of the
related amount to be paid to the Company is attached hereto as Annex A.]
<PAGE> 14
In connection with the requested disbursement, the undersigned
hereby notifies you that: (i) you may elect to have the Company deliver, for and
on your behalf, the shares of Common Stock acquired by you directly to the
holders of the Preferred Stock and (ii) your obligation to purchase shares of
Common Stock is secured by the funds in the Deposit Account. The Deposit Agent
is entitled to rely on the foregoing in disbursing funds relating to this
Deposit Notice.
VERIO INC.
By:
----------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 4.2
================================================================================
REGISTRATION RIGHTS AGREEMENT
Dated as of July 20, 1999
by and among
VERIO INC.
and
SALOMON SMITH BARNEY INC.,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION,
CREDIT SUISSE FIRST BOSTON CORPORATION,
DEUTSCHE BANK SECURITIES INC.
and
FIRST UNION CAPITAL MARKETS CORP.,
as Initial Purchasers
================================================================================
<PAGE> 2
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and
entered into as of July 20, 1999 (the "Closing Date") by and among VERIO INC., a
Delaware corporation (the "Company"), and SALOMON SMITH BARNEY INC., DONALDSON,
LUFKIN & JENRETTE SECURITIES CORPORATION (together with Salomon Smith Barney
Inc., the "Representatives"), CREDIT SUISSE FIRST BOSTON CORPORATION, DEUTSCHE
BANK SECURITIES INC. and FIRST UNION CAPITAL MARKETS CORP. (collectively with
the Representatives, the "Initial Purchasers").
This Agreement is made pursuant to the Purchase Agreement dated
as of July 14, 1999 by and among the Company and the Initial Purchasers (the
"Purchase Agreement"), that provides for, among other things, the sale by the
Company to the Initial Purchasers of up to 7,200,000 shares of its 6.75% Series
A Convertible Preferred Stock (liquidation preference $50.00 per share) (the
"Preferred Stock"). Holders of the Preferred Stock are also entitled to the
benefits of a deposit agreement (the "Deposit Agreement") of even date herewith
by and between the Company and Norwest Bank Minnesota, N.A., as Deposit Agent.
The Preferred Stock will be convertible into shares of Common
Stock, par value $0.001 per share, of the Company (the "Common Stock") as set
forth in the Certificate of Designations of the Powers, Preferences and
Relative, Participating, Optional and other Special Rights of the Convertible
Preferred Stock to the Company's Certificate of Incorporation relating to the
Preferred Stock (the "Certificate"). The Preferred Stock and the Common Stock
issuable upon conversion of the Preferred Stock, or paid or payable as dividends
thereon or sold by us to the Deposit Agent pursuant to the Deposit Agreement,
are collectively herein referred to as the "Securities" and each of them as held
singularly is herein referred to as a "Security". In order to induce the Initial
Purchasers to enter into the Purchase Agreement, the Company has agreed to
provide to the Initial Purchasers and their direct and indirect transferees and
the holders of the Securities from time to time (each of the foregoing, a
"Holder" and together the "Holders"), the registration rights set forth in this
Agreement. The execution and delivery of this Agreement is a condition to the
closing under the Purchase Agreement.
In consideration of the foregoing, the parties hereto agree as
follows:
1. Shelf Registration. So long as any Transfer Restricted
Security (as defined in Section 5(e) hereof) exists, the Company shall take the
following actions:
(a) The Company shall, at its cost, prepare and, on or before the
date that is 120 days after the Closing Date, file with the Securities and
Exchange Commission (the "Commission") and thereafter shall use its
reasonable best efforts to cause to be
<PAGE> 3
declared effective on or prior to the date that is 210 days after the
Closing Date, a registration statement on the appropriate form (the "Shelf
Registration Statement") covering issuance by the Company and the offer and
sale from time to time by the Holders thereof of the maximum amount of
Transfer Restricted Securities issuable pursuant to the terms of the
Certificate and this Agreement, as described in Rule 415 under the
Securities Act of 1933, as amended (the "Securities Act") (hereinafter, the
"Shelf Registration").
(b) The Company shall keep the Shelf Registration Statement
continuously effective and usable under the Securities Act, in order to
permit the prospectus included therein to be lawfully delivered by the
Holders of the relevant Securities, until such time as all the Securities
covered by the Shelf Registration Statement may be freely sold by such
Holders without restriction pursuant to Rule 144(k) under the Securities
Act, or any successor provision promulgated by the Commission or otherwise,
assuming for this purpose that the Holders thereof are not affiliates of
the Company (such period being called the "Shelf Registration Period").
(c) Notwithstanding any other provisions of this Agreement to the
contrary, the Company shall cause (other than information required to be
supplied by the selling Holders pursuant to this Agreement) (i) the Shelf
Registration Statement and the related prospectus and any amendment or
supplement thereto to comply in all material respects with the applicable
requirements of the Securities Act and the rules and regulations of the
Commission thereunder, (ii) the Shelf Registration Statement and any
amendment thereto not to contain, when it becomes effective, any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading and (iii) any prospectus forming a part of the Shelf
Registration Statement, and any amendment or supplement to such prospectus,
not to contain, as of the date of such prospectus or amendment or
supplement, any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
(d) Notwithstanding any other provisions of this Agreement to the
contrary, if (i) the Company determines, in its good faith judgment, that
the disclosure of an event or development, or the filing of a required
filing with the Commission would have a material adverse impact on the
Company, or (ii) the disclosure of an event or development, or the filing
of a required filing with the Commission is otherwise related to a material
business transaction that has not yet been publicly disclosed, (each of the
foregoing is referred to herein as a "Suspension Period"), the Company
shall be entitled to suspend any registration referred to in this Section
1, provided, however, that a Suspension Period shall not prevent the
accrual of Additional Dividends as set
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<PAGE> 4
forth in the Certificate from occurring or continuing to the extent it
exceeds 60 days in any 90-day period or to the extent multiple Suspension
Periods exceed 90 days in the aggregate in any 12-month period.
(e) The Company shall declare and pay all Additional Dividends (as
defined in the Certificate) required in the Certificate upon failure to
meet its obligations pursuant to this Agreement. No Additional Dividends in
cash will be required to the extent a declaration of such Additional
Dividends would conflict with the debt instruments of the Company in place
at the time of such declaration.
2. Registration Procedures. In connection with the Shelf Registration
contemplated by Section 1 hereof, the following provisions shall apply so long
as any Transfer Restricted Security exists:
(a) The Company shall (i) furnish, without charge, to the Initial
Purchasers, prior to the filing thereof with the Commission, a copy of the
Shelf Registration Statement and each amendment thereto and each amendment
or supplement, if any, to the prospectus included therein and, in the event
that the Initial Purchasers (with respect to any portion of an unsold
allotment from the original offering) are participating in the Shelf
Registration Statement, shall use its best efforts to reflect in each such
document, when so filed with the Commission, such comments as such Initial
Purchasers reasonably may propose, (ii) include in each such document the
names of the Holders who propose to sell Transfer Restricted Securities
pursuant to the Shelf Registration Statement as selling security holders
and (iii) file pursuant to Rule 424(b) under the Securities Act an
amendment to the Shelf Registration Statement or amend the prospectus to
cover new Holders of Securities upon written notice by such new Holders to
the effect.
(b) The Company shall give written notice to the Initial Purchasers
and the Holders (which notice pursuant to clauses (ii)-(v) hereof shall be
accompanied by an instruction, if applicable, to suspend the use of the
prospectus until the requisite changes have been made):
(i) when the Shelf Registration Statement or any amendment
thereto has been filed with the Commission and when the Shelf
Registration Statement or any post-effective amendment thereto has
become effective;
(ii) of any request by the Commission for amendments or
supplements to the Shelf Registration Statement or the prospectus
included therein or for additional information;
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<PAGE> 5
(iii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Shelf Registration Statement or
the initiation of any proceedings for that purpose;
(iv) of the receipt by the Company or its legal counsel of any
notification with respect to the suspension of the qualification of
the Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; and
(v) of the happening of any event that requires the Company to
make changes in the Shelf Registration Statement or the prospectus in
order that the Shelf Registration Statement and the prospectus do not
contain an untrue statement of a material fact and do not omit to
state a material fact required to be stated therein or necessary to
make the statements therein (in the case of the prospectus, in light
of the circumstances under which they were made) not misleading, which
written notice need not provide any detail as to the nature of such
event.
(c) The Company shall use its best efforts to obtain the withdrawal as
soon as practicable, of any order suspending the effectiveness of the Shelf
Registration Statement.
(d) The Company shall furnish to each Holder of Transfer Restricted
Securities included within the coverage of the Shelf Registration, if the
Holder so requests in writing, without charge, one copy of the Shelf
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules, and, if the Holder so requests in
writing, all exhibits thereto (other than exhibits to documents
incorporated by reference). The Company shall furnish exhibits to documents
incorporated by reference for a reasonable fee to Holders who request in
writing.
(e) The Company shall, during the Shelf Registration Period, deliver
to each Holder of Transfer Restricted Securities included within the
coverage of the Shelf Registration Statement, without charge, as many
copies of the prospectus (including each preliminary prospectus) included
in the Shelf Registration Statement and any amendment or supplement thereto
as such person may reasonably request. The Company consents, subject to the
provisions of this Agreement, to the use of the then current prospectus or
any amendment thereto, together with any supplement thereto, by each of the
selling Holders in connection with the offering and sale of the Transfer
Restricted Securities covered by the prospectus, or any amendment or
supplement thereto, included in the Shelf Registration Statement.
-4-
<PAGE> 6
(f) Prior to any public offering of the Securities pursuant to the
Shelf Registration Statement, the Company shall register or qualify or
cooperate with the Holders of the Transfer Restricted Securities included
therein and their respective counsel in connection with the registration or
qualification of such Securities for offer and sale under the securities or
"blue sky" laws of such states of the United States as any such Holder
reasonably requests in writing and do any and all other acts or things
necessary or advisable to enable the offer and sale in such jurisdictions
of the Securities covered by the Shelf Registration Statement; provided,
however, that the Company shall not be required to (i) qualify generally to
do business in any jurisdiction where it is not then otherwise required to
be so qualified or (ii) take any action which would subject it to general
service of process or to taxation in any jurisdiction where it is not then
so subject.
(g) The Company shall cooperate with the Holders of the Transfer
Restricted Securities to facilitate the timely preparation and delivery of
certificates representing the Securities to be sold pursuant to the Shelf
Registration Statement free of any restrictive legends and in such
denominations and registered in such names as the Holders may reasonably
request in writing at least two Business Days prior to the closing of any
sale of Registrable Securities. For purposes of this Section 2(g),
"Business Day" means any day, other than a Saturday or Sunday, on which
banks in New York are open for business.
(h) Upon the occurrence of any event contemplated by paragraphs (ii)
through (v) of Section 2(b) above during the period for which the Company
is required to maintain an effective Shelf Registration Statement, the
Company shall use its best efforts to prepare and file as promptly as
practicable a post-effective amendment to the Shelf Registration Statement
or an amendment or supplement to the related prospectus and any other
required document so that, as thereafter delivered to Holders or purchasers
of Securities, the prospectus will not contain an untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. If an Initial
Purchaser or a Holder receives actual notice from the Company, in
accordance with paragraphs (ii) through (v) of Section 2(b) above, to
suspend the use of the prospectus until the requisite changes to the
prospectus have been made, then such person shall suspend use of such
prospectus.
(i) The Company will comply with all rules and regulations of the
Commission to the extent and so long as they are applicable to the Shelf
Registration and will make generally available to its security holders (or
otherwise provide in accordance with Section 11(a) of the Securities Act)
an earnings statement satisfying the provisions of Section 11(a) of the
Securities Act, no later than 45 days after the end of
-5-
<PAGE> 7
a 12-month period (or 90 days, if such period is a fiscal year) beginning
with the first month of the Company's first fiscal quarter commencing after
the effective date of the Shelf Registration Statement, which statement
shall cover such 12-month period.
(j) The Company may require each Holder of Securities to be sold
pursuant to the Shelf Registration Statement to furnish to the Company such
information regarding the Holder and the distribution of the Securities by
such Holder as the Company may from time to time reasonably require for
inclusion in the Shelf Registration Statement and to provide comments on
the Shelf Registration Statement, and the Company may exclude from such
registration the Securities of any Holder that fails to furnish such
information.
(k) The Company shall (i) make reasonably available for inspection by
the Holders of the Transfer Restricted Securities and any attorney,
accountant or other agent retained by the Holders of the Securities all
relevant financial and other records, pertinent corporate documents and
properties of the Company and (ii) cause the Company's officers, directors,
employees, accountants and auditors to supply all relevant information
reasonably requested by the Holders of the Securities or any such attorney,
accountant or agent in connection with the Shelf Registration Statement, in
each case, as shall be reasonably necessary to enable such persons to
conduct a reasonable investigation within the meaning of Section 11 of the
Securities Act; provided, however, that the foregoing inspection and
information gathering (i) shall be coordinated by the Representatives and,
on behalf of the other parties, by one counsel (the "Designated Counsel")
designated by the Holders of a majority in principal amount of the Transfer
Restricted Securities covered by the Shelf Registration Statement (provided
that Holders of Common Stock issued upon the conversion of the Preferred
Stock shall be deemed to be Holders of the aggregate number of shares of
Preferred Stock from which such Common Stock was converted) and (ii) shall
not be available for any such Holder that is a competitor of the Company.
Such Holders shall keep the information so received confidential.
(l) The Company shall use its commercially reasonable best efforts to
cause the Common Stock relating to such Shelf Registration Statement to be
listed on the Nasdaq National Market.
(m) The Company shall use its commercially reasonable best efforts to
take all other steps necessary to effect the registration of the Transfer
Restricted Securities covered by the Shelf Registration Statement
contemplated hereby.
-6-
<PAGE> 8
3. Registration Expenses. The Company shall bear all fees and
expenses incurred in connection with the performance of its obligations under
Sections 1 through 2 hereof, whether or not the Shelf Registration Statement is
filed or becomes effective.
4. Indemnification and Contribution. (a) The Company shall
indemnify and hold harmless each Initial Purchaser, each Holder, each
broker-dealer (a "Participating Broker-Dealer") that holds Transfer Restricted
Securities acquired for its own account as a result of market-making activities
or other trading activities and that will be the beneficial owner (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) of Securities, each underwriter who participates in an offering of
Transfer Restricted Securities, their respective affiliates, and each person, if
any, who controls any of such parties within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, joint or several, as incurred, arising out of any
untrue statement or alleged untrue statement of a material fact
contained in the Shelf Registration Statement (or any amendment or
supplement thereto), covering the Securities, including all documents
incorporated therein by reference, or the omission or alleged omission
therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out
of any untrue statement or alleged untrue statement of a material fact
contained in any prospectus (or any amendment or supplement thereto)
or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, joint or several, as incurred, to the extent of
the aggregate amount paid in settlement of any litigation, or any
investigation or proceeding by any court or governmental agency or
body, commenced or threatened, or of any claim whatsoever based upon
any such untrue statement or omission, or any such alleged untrue
statement or omission; provided that (subject to Sections 4(c) and
4(d) below) any such settlement is effected with the prior written
consent of the Company; and
(iii) against any and all expenses whatsoever, as incurred
(including reasonable fees and disbursements of one counsel (in
addition to any local counsel) chosen by the Representatives, such
Holder, such Participating Broker-Dealer or any underwriter (except to
the extent otherwise expressly provided in Section 4(c) hereof)),
reasonably incurred in investigating, preparing or defending against
any litigation, or any investigation or proceeding by any court or
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or
-7-
<PAGE> 9
omission, or any such alleged untrue statement or omission, to the
extent that any such expense is not paid under subparagraph (i) or
(ii) of this Section 4(a);
provided, however, that this indemnity does not apply to any loss, liability,
claim, damage or expense to the extent arising out of an untrue statement or
omission or alleged untrue statement or omission (i) made in reliance upon and
in conformity with written information furnished to the Company by or on behalf
of such Initial Purchaser, such Holder, such Participating Broker-Dealer or any
underwriter with respect to such Initial Purchaser, Holder, Participating
Broker-Dealer or underwriter, as the case may be, expressly for use in the Shelf
Registration Statement (or any amendment or supplement thereto) or any
prospectus (or any amendment or supplement thereto) or (ii) contained in any
preliminary prospectus if such Initial Purchaser, such Holder, such
Participating Broker-Dealer or such underwriter failed to send or deliver a copy
of the prospectus (in the form it was first provided to such parties for
confirmation of sales) to the person asserting such losses, claims, damages or
liabilities on or prior to the delivery of written confirmation of any sale of
securities covered thereby to such person in any case where the Company shall
have previously furnished copies hereof to such Initial Purchaser, such Holder,
such Participating Broker-Dealer or such underwriter, as the case may be, in
accordance with this Agreement, at or prior to the written confirmation of the
sale of such Securities to such person and the untrue statement or omission of a
material fact contained in or omitted from the preliminary prospectus that was
corrected in the final prospectus (or any amendment or supplement thereto). Any
amounts advanced by the Company to an indemnified party pursuant to this Section
4 as a result of such losses shall be returned to the Company if it shall be
finally determined by a court of competent jurisdiction in a judgment not
subject to appeal or final review that such indemnified party was not entitled
to indemnification by the Company.
(b) Each Holder agrees, severally and not jointly, to indemnify and
hold harmless the Company, each Initial Purchaser, each underwriter who
participates in an offering of Transfer Restricted Securities and the other
selling Holders and each of their respective directors and each person, if any,
who controls any of the Company, any Initial Purchaser, any underwriter or any
other selling Holder within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act, against any and all loss, liability, claim,
damage and expense whatsoever described in the indemnity contained in Section
4(a) hereof, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Shelf
Registration Statement (or any amendment or supplement thereto) or any
prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
such selling Holder with respect to such Holder expressly for use in the Shelf
Registration Statement (or any supplement thereto), or any such prospectus (or
any amendment thereto); provided, however, that no such Holder shall be liable
for any claims hereunder in excess of the amount of net proceeds
-8-
<PAGE> 10
received by such Holder from the sale of Transfer Restricted Securities pursuant
to the Shelf Registration Statement; provided, further, however, that for
purposes of Section 4(a)(iii), such counsel shall (subject to Section 4(c)
hereof) be chosen by the Company.
(c) Each indemnified party shall give notice as promptly as
reasonably practicable to each indemnifying party of any action commenced
against it in respect of which indemnity may be sought hereunder, but failure to
so notify an indemnifying party shall not relieve such indemnifying party from
any liability hereunder to the extent it is not materially prejudiced as a
result thereof and in any event shall not relieve it from any liability that it
may have otherwise than on account of this indemnity agreement. In the case of
parties indemnified pursuant to Section 4(a) above, one counsel to all the
indemnified parties shall be selected by the Representatives, and, in the case
of parties indemnified pursuant to Section 4(b) above, counsel to all the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party.
Notwithstanding the foregoing, if it so elects within a reasonable time after
receipt of such notice, an indemnifying party, jointly with any other
indemnifying parties receiving such notice, may assume the defense of such
action with counsel chosen by it and approved by the indemnified parties
defendant in such action (which approval shall not be unreasonably withheld),
unless such indemnified parties reasonably object to such assumption on the
ground that there may be legal defenses available to them which are different
from or in addition to those available to such indemnifying party. If an
indemnifying party assumes the defense of such action, the indemnifying parties
shall not be liable for any fees and expenses of counsel for the indemnified
parties incurred thereafter in connection with such action. In no event shall
the indemnifying parties be liable for fees and expenses of more than one
counsel (in addition to any local counsel) separate from their own counsel for
all indemnified parties in connection with any one action or separate but
similar or related actions arising out of the same general allegations or
circumstances. No indemnifying party shall, without the prior written consent of
the indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification or contribution could be sought
under this Section 4 (whether or not the indemnified parties are actual or
potential parties thereto), unless such settlement, compromise or consent (i)
includes a full and unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
the offer and sale of any Securities and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for reasonable fees and
expenses of counsel
-9-
<PAGE> 11
pursuant to Section 4(a)(iii) above, then such indemnifying party agrees that it
shall be liable for any settlement of the nature contemplated by Section
4(a)(ii) effected without its written consent if (i) such settlement is entered
into more than 45 days after receipt by such indemnifying party of the aforesaid
request, (ii) such indemnifying party shall have received notice of the terms of
such settlement at least 30 days prior to such settlement being entered into and
(iii) such indemnifying party shall not have reimbursed such indemnified party
in accordance with such request prior to the date of such settlement.
(e) In order to provide for just and equitable contribution in
circumstances under which any of the indemnity provisions set forth in this
Section 4 is for any reason held to be unavailable to the indemnified parties
although applicable in accordance with its terms, the Company, the Initial
Purchasers and the Holders, as applicable, shall contribute to the aggregate
losses, liabilities, claims, damages and expenses of the nature contemplated by
such indemnity agreement incurred by the Company, the Initial Purchasers and the
Holders; provided, however, that no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person that was not guilty of such
fraudulent misrepresentation. As between the Company and the Initial Purchasers
and the Holders, such parties shall contribute to such aggregate losses,
liabilities, claims, damages and expenses of the nature contemplated by such
indemnity agreement in such proportion as shall be appropriate to reflect the
relative fault of the Company on the one hand and of the Holder of Transfer
Restricted Securities, the Participating Broker-Dealer or Initial Purchaser, as
the case may be, on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative fault of the Company on the one hand and the Holder
of Transfer Restricted Securities, the Participating Broker-Dealer or the
Initial Purchasers, as the case may be, on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, or by the Holder of Transfer
Restricted Securities, the Participating Broker-Dealer or the Initial
Purchasers, as the case may be, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The Company and the Holders of the Transfer Restricted Securities
and the Initial Purchasers agree that it would not be just and equitable if
contribution pursuant to this Section 4 were determined by pro rata allocation
or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 4.
For purposes of this Section 4, each affiliate of any person, if
any, who controls a Holder of Transfer Restricted Securities, an Initial
Purchaser or a Participating
-10-
<PAGE> 12
Broker-Dealer within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act shall have the same rights to contribution as such other
person, and each director of the Company, each affiliate of the Company, each
executive officer of the Company who signed the Shelf Registration Statement,
and each person, if any, who controls the Company within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act shall have the same
rights to contribution as the Company.
(f) The agreements contained in this Section 4 shall survive the
sale of the Securities pursuant to the Shelf Registration Statement and shall
remain in full force and effect, regardless of any termination or cancellation
of this Agreement or any investigation made by or on behalf of any indemnified
party.
(g) "Transfer Restricted Securities" means each Security until
the date on which such Security (i) has been transferred pursuant to the Shelf
Registration Statement or another registration statement covering such Security
which has been filed with the Commission pursuant to the Securities Act, in
either case after such registration statement has become effective under the
Securities Act, (ii) has been transferred pursuant to Rule 144 under the
Securities Act, or any similar provision then in force, (iii) may be freely sold
or transferred pursuant to Rule 144(k) under the Securities Act, or any similar
provision then in force or (iv) in the opinion of counsel to the Company may be
freely sold without restriction under the Securities Act by the Holder thereof.
5. Miscellaneous.
(a) Rule 144 and Rule 144A. So long as any Transfer Restricted
Security exists, the Company shall use its commercially reasonable best efforts
to file the reports required to be filed by it under the Securities Act and the
Exchange Act in a timely manner and, if at any time the Company is not required
to file such reports, it will, upon the request of any Holder of Transfer
Restricted Securities, make publicly available other information so long as
necessary to permit sales of its securities pursuant to Rules 144 and 144A. The
Company covenants that, if in the event the Company is no longer subject to
Sections 13 or 15(d) of the Exchange Act, it will take such further action as
any Holder of Transfer Restricted Securities may reasonably request, all to the
extent required from time to time to enable such Holder to sell such Holder's
Transfer Restricted Securities without registration under the Securities Act
within the limitation of the exemptions provided by Rules 144 and 144A
(including the requirements of Rule 144A(d)(4)) or any similar rules or
regulations adopted by the Commission. The Company will provide a copy of this
Agreement to prospective purchasers of Securities identified to the Company by
the Initial Purchasers upon request.
(b) No Inconsistent Agreements. The rights granted to the Holders
hereunder do not, and will not for the term of this Agreement in any way
conflict with and are
-11-
<PAGE> 13
not, and will not during the term of this Agreement be inconsistent with the
rights granted to the holders of the Company's other issued and outstanding
securities under any other agreements entered into by the Company.
(c) Amendments and Waivers. The provisions of this Agreement,
including provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, otherwise than with the prior written consent of the Company
and the Holders of a majority of the Transfer Restricted Securities affected by
such amendment, modification, supplement, waiver or consents; provided, however,
that Holders of Common Stock issued upon conversion of Convertible Preferred
Stock shall be deemed to be Holders of the aggregate number of Convertible
Preferred Stock from which such Common Stock was converted. No amendment,
modification or supplement or waiver or consent to the departure with respect to
the provisions of Section 4 hereof shall be effective against any Holder of
Transfer Restricted Securities or the Company unless consented to in writing by
such Holder of Transfer Restricted Securities or the Company, as the case may
be.
(d) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, telex, telecopier, or any courier guaranteeing overnight
delivery (i) if to a Holder, at the most current address given by such Holder to
the Company by means of a notice given in accordance with the provisions of this
Section 5(d), which address initially is, with respect to the Initial
Purchasers, the address set forth in the Purchase Agreement; and (ii) if to the
Company, initially at the Company's address set forth in the Purchase Agreement
and thereafter at such other address, notice of which is given in accordance
with the provisions of this Section 5(d).
All such notices and communications shall be deemed to have been
duly given: at the time delivered by hand, if personally delivered; five
business days after being deposited in the mail, postage prepaid, if mailed;
when answered back, if telexed; when receipt is acknowledged, if telecopied; and
on the next business day, if timely delivered to an air courier guaranteeing
overnight delivery.
(e) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors, assigns and transferees of the
Initial Purchasers, including, without limitation and without the need for an
express assignment, subsequent Holders; provided, however, that nothing herein
shall be deemed to permit any assignment, transfer or other disposition of
Transfer Restricted Securities in violation of the terms of the Purchase
Agreement. If any transferee of any Holder shall acquire Transfer Restricted
Securities, in any manner, whether by operation of law or otherwise, such
Transfer Restricted Securities shall be held subject to all of the terms of this
Agreement, and by taking and holding such Transfer Restricted Securities, such
person shall be conclusively deemed to have agreed to be
-12-
<PAGE> 14
bound by and to perform all of the terms and provisions of this Agreement and
such person shall be entitled to receive the benefits hereof.
(f) Third Party Beneficiary. Each of the Initial Purchasers and
each Holder shall be a third party beneficiary of the agreements made hereunder
between the Company, on the one hand, and the Initial Purchasers, on the other
hand, and shall have the right to enforce such agreements directly to the extent
it deems such enforcement necessary or advisable to protect its rights or the
rights of Holders hereunder.
(g) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise affect the meaning hereof.
(i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING
EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS. Specified times of day
refer to New York City time.
(j) Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
(k) Securities Held by the Company or Any of Its Affiliates.
Whenever the consent or approval of Holders of a specified percentage of
Transfer Restricted Securities is required hereunder, Securities held by the
Company or any of its affiliates (as such term is defined in Rule 405 under the
Securities Act) shall not be counted in determining whether such consent or
approval was given by the Holders of such required percentage.
[Signature Page Follows]
-13-
<PAGE> 15
IN WITNESS WHEREOF, the parties have executed this Registration
Rights Agreement as of the date first written above.
VERIO INC.
By: /s/ Carla Hamre Donelson
------------------------------
Name: Carla Hamre Donelson
Title: Vice President General
Counsel and Secretary
CONFIRMED AND ACCEPTED,
as of the date first above written:
SALOMON SMITH BARNEY INC.,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
CREDIT SUISSE FIRST BOSTON CORPORATION
DEUTSCHE BANK SECURITIES INC.
FIRST UNION CAPITAL MARKETS CORP.
By: Salomon Smith Barney Inc.
as Representative of the
Initial Purchasers
By: /s/ Mark W. Barber
--------------------------------
Name: Mark W. Barber
Title: Vice President
By: Donaldson, Lufkin & Jenrette Securities Corporation,
as Representative of the
Initial Purchasers
By: /s/ Colin Knudsen
---------------------------------
Name: Colin Knudsen
Title: Managing Director
S-1
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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449,875
0
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