<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 15, 1999
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
VERIO INC.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 7375 84-1339720
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) Number)
</TABLE>
---------------------
VERIO INC.
8005 SOUTH CHESTER STREET, SUITE 200
ENGLEWOOD, COLORADO 80112
(303) 645-1900
(Address, including zip code, and telephone number, including area code
of Registrant's principal executive offices)
---------------------
JUSTIN L. JASCHKE
CHIEF EXECUTIVE OFFICER
VERIO INC.
8005 SOUTH CHESTER STREET, SUITE 200
ENGLEWOOD, COLORADO 80112
(303) 645-1900
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
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<S> <C>
GAVIN B. GROVER, ESQ. CARLA HAMRE DONELSON
MORRISON & FOERSTER LLP GENERAL COUNSEL
425 MARKET STREET VERIO INC.
SAN FRANCISCO, CALIFORNIA 94105 8005 SOUTH CHESTER STREET, SUITE 200
(415) 268-7000 ENGLEWOOD, COLORADO 80112
(303) 645-1900
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
general Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933 (the "Securities Act"),
check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same offering. [
] ______________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______________
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE OFFERING PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
11 1/4% Senior Notes Due 2008......... $400,000,000 100% $400,000,000 $118,000
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION, DATED JANUARY 15, 1999
PROSPECTUS
, 1999
VERIO INC.
EXCHANGE OFFER FOR ALL OUTSTANDING 11 1/4% SENIOR NOTES DUE 2008
Verio will receive no proceeds from the Exchange Offer.
TERMS OF EXCHANGE OFFER
- --------------------------------------------------------------------------------
S EXCHANGE OFFER
Verio will exchange Old Notes for New Notes.
S EXCHANGE OFFER EXPIRATION
, 1999 at 5:00 p.m., New York City time.
S OLD NOTES
Verio issued and sold $400,000,000 11 1/4% Senior Notes due 2008 on
November 25, 1998.
If you tender your Old Notes in the Exchange Offer, interest will cease
to accrue before your New Notes are issued. If you do not tender in the
Exchange Offer, your Old Notes will continue to be subject to the same terms
and restrictions except that Verio will not be required to register your Old
Notes under the Securities Act.
S THE COMPANY
8005 South Chester Street, Suite 200, Englewood, Colorado 80112. (303)
645-1900.
S NEW NOTES
Identical to the Old Notes except that the New Notes will be registered
under the Securities Act.
- Maturity: December 1, 2008.
- Interest: Paid every six months on June 1 and December 1, starting
June 1, 1999.
- Redemption: Anytime on or after December 1, 2003.
- Ranking: The New Notes will be general unsecured obligations, ranking:
(1) equally with all Verio's unsecured unsubordinated liabilities;
(2) senior to all Verio's unsecured subordinated liabilities;
(3) junior to all Verio's secured liabilities and liabilities of
Verio's subsidiaries.
THIS EXCHANGE OFFER INVOLVES RISKS. SEE THE RISK FACTORS SECTION BEGINNING
ON PAGE 11.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE NOTES OR PASSED UPON THE ADEQUACY
OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE AMENDED.
THESE SECURITIES MAY NOT BE SOLD UNTIL THE RELATED REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION OR ANY APPLICABLE STATE SECURITIES
COMMISSION BECOMES EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT
SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS
NOT PERMITTED.
<PAGE> 3
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 3
Risk Factors................................................ 11
The Exchange Offer.......................................... 24
Use of Proceeds............................................. 31
Dividend Policy............................................. 31
Capitalization.............................................. 32
Selected Consolidated Financial Data........................ 33
Management's Discussion and Analysis of Financial
Information and Results of Operations..................... 35
Business.................................................... 46
Management.................................................. 63
Certain Transactions........................................ 80
Principal Stockholders...................................... 82
Description of the Notes.................................... 85
Book-Entry: Delivery and Form............................... 109
Certain Federal Income Tax Considerations................... 111
Plan of Distribution........................................ 114
Legal Matters............................................... 114
Experts..................................................... 115
Glossary.................................................... 116
Index to Financial Statements............................... F-1
</TABLE>
2
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PROSPECTUS SUMMARY
In this Prospectus the words "Company" and "Verio" refer to Verio Inc. and
its subsidiaries, and the word "Issuer" refers to Verio Inc. only. The following
summary contains basic information about the Exchange Offer. It likely does not
contain all the information that is important to you. For a more complete
understanding of the Exchange Offer, Verio encourages you to read this entire
Prospectus and the documents Verio has referred you to.
This Prospectus uses a number of technical terms related to Verio's
business which you may not understand. Certain technical terms in this
Prospectus are identified in the glossary which begins on page 116 of this
Prospectus.
THE COMPANY
GENERAL
Verio is a leading provider of comprehensive business Internet
services -- such as broadband connectivity, Web hosting, VPNs, e-commerce and
other enhanced Internet services -- with an emphasis on serving small and medium
sized businesses. Verio believes that small and medium sized businesses
represent an attractive target market for the provision of Internet services due
to this market's low current penetration levels and customer churn rates, and
the expanding Internet needs of these businesses. Because of their limited
internal technical resources and operating scale, small and medium sized
businesses are increasingly looking to outsource Internet and Information
Technology functions at a reasonable cost. These businesses also typically
require hands-on local support to help analyze their needs, configure solutions
and provide ongoing technical support. Verio believes that these businesses
currently are underserved by both the local and other national ISPs. While the
other national ISPs typically lack the local presence to provide customized
hands-on support, the local ISPs often lack the requisite scale and resources to
provide a full range of services at acceptable quality and pricing levels.
Verio further believes that it has a unique competitive advantage in
serving small and medium sized business customers through the combination of the
technical expertise and hands-on support provided through its local sales and
engineering personnel with the quality and economic efficiency of Verio's
national network, operational infrastructure and financial strength.
Since its inception in March 1996, Verio has rapidly established critical
mass and a global presence through the acquisition, integration and growth of
over 45 independent ISPs that provide a comprehensive range of Internet
connectivity, Web hosting, VPNs, e-commerce and other enhanced products and
services to businesses. Verio integrates the operations it acquires into
regional operating units with centralizing regional management, connecting their
regional networks to its high bandwidth "tier one" national backbone, and
providing them with Verio's national support services, in order to capture
economies of scale and operational efficiencies while improving reliability,
quality, and scalability. Verio currently provides locally based sales and
engineering support for its connectivity, Web hosting and other enhanced
services in 41 of the top 50 metropolitan statistical areas ("MSAs") in the
U.S., and provides Web hosting services to customers in over 150 countries.
In addition to basic Internet connectivity, businesses are increasingly
capitalizing on the power of the Internet by establishing domain-based Web sites
(such as www.yourcompany.com) and adopting additional enhanced Internet services
to expand their markets, increase productivity and reduce costs. Verio's recent
acquisitions of TABNet and Hiway, significantly accelerate and expand its
ability to provide Web hosting and other value-added services to its target
market. Together with its acquisition of iServer at the end of 1997, Verio has
become the largest Web hosting company in the world based on the number of
domain names hosted. The completion of these acquisitions also accomplishes
Verio's goal of deriving at least half of its total revenue from enhanced
services, and further establishes Verio's powerful sales engine, driven by
preferential marketing agreements with leading Internet portal companies,
private label relationships with major telecommunications companies, a
significant telemarketing operation, direct sales through over 200 sales
professionals, and a worldwide indirect distribution channel of over 4,000
resellers in the U.S. and over
3
<PAGE> 5
150 other countries. In addition, Verio now holds key proprietary technologies
that significantly differentiate its Web hosting platform from other providers.
RECENT DEVELOPMENTS
In December 1998, Verio acquired all of the stock of New York City-based
Tinkelman Enterprises Inc. (d/b/a new-york.net) and all of the stock of
Cleveland, Ohio-based Internet Access Group, Inc. and related companies
(together, "IAG") for total acquisition costs of approximately $22.1 million.
On January 5, 1999, Verio completed the acquisition of Best Internet
Communications, Inc., d/b/a/ Hiway Technologies, Inc. ("Hiway") pursuant to an
Amended and Restated Agreement and Plan of Merger, dated as of November 17, 1998
(the "Merger Agreement"). Upon completion of the acquisition of Hiway, Verio
issued approximately 3.14 million shares of Verio's common stock and paid
approximately $176 million, to the former shareholders of Hiway. In addition,
Verio reserved approximately 1.77 million additional shares of its common stock
for issuance upon the exercise of options and warrants issued to replace Hiway
options and warrants that were not exercised prior to the completion of the
acquisition of Hiway. As a result of the Hiway acquisition, the former
shareholders of Hiway own approximately 13% of Verio's common stock, on a fully
diluted basis. Approximately 59% of such shares are subject to a lockup that
expires six months following the closing of the merger. Pursuant to the terms of
the Merger Agreement, Hiway designated Arthur L. Cahoon to serve on Verio's
board of directors. The Hiway acquisition will be accounted for under the
purchase method of accounting, and was structured as a taxable transaction.
While financial information concerning Hiway is included in this
Prospectus, financial information concerning new-york.net and IAG is not
included.
4
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THE EXCHANGE OFFER
Securities Offered......... Up to $400.0 million principal amount of 11 1/4%
Senior Notes Due 2008, which will be registered
under the Securities Act. The form and terms of the
New Notes are substantially identical to the Old
Notes. The New Notes will be registered under the
Securities Act, and will not be subject to certain
transfer restrictions and registration rights
provisions applicable to the Old Notes.
The Exchange Offer......... $1,000 principal amount of New Notes in exchange
for each $1,000 principal amount of Old Notes. The
New Notes are being offered in exchange for up to
$400.0 million principal amount of Old Notes. The
issuance of the New Notes is intended to satisfy
Verio's obligations contained in the registration
rights agreement it entered into in connection with
the issuance of the Old Notes (the "Registration
Rights Agreement"). See "The Exchange
Offer -- Terms of the Exchange Offer."
Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New
York City time, on , 1999, or such
later date and time if it is extended. See "The
Exchange Offer -- Terms of the Exchange Offer."
Withdrawal................. Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m. New York City time, on the
Expiration Date. See "The Exchange
Offer -- Expiration Date; Extensions; Amendments."
Conditions of the Exchange
Offer...................... The Exchange Offer is not conditioned upon any
minimum principal amount of Old Notes being
tendered for exchange. The only condition to the
Exchange Offer is for the Securities and Exchange
Commission (the "Commission") to declare the
Registration Statement, of which this Prospectus is
a part, effective. See "The Exchange
Offer -- Conditions of the Exchange Offer."
Procedures for Tendering
Old Notes.................. If you want to tender your Old Notes in the
Exchange Offer, you must complete, sign and date
the Letter of Transmittal according to the
instructions contained in this Prospectus and the
Letter of Transmittal. You also must mail or
otherwise deliver the Letter of Transmittal,
together with your Old Notes and any other required
documents, to the Exchange Agent at the Exchange
Agent's address prior to 5:00 p.m., New York City
time, on the Expiration Date. If you own Old Notes
which are registered in the name of a broker,
dealer, commercial bank trust company or other
nominee and you wish to tender such Old Notes in
the Exchange Offer, you should give instructions
promptly to tender your Old Notes on your behalf.
Guaranteed Delivery
Procedures................. If you wish to tender your Old Notes and (i) your
Old Notes are not immediately available or (ii) you
cannot deliver your Old Notes together with the
Letter of Transmittal to the Exchange Agent prior
to the Expiration Date, you may tender your Old
Notes according to the guaranteed delivery
procedures contained in the Letter of Transmittal.
See "The Exchange Offer -- Guaranteed Delivery
Procedures."
5
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Acceptance of Old Notes and
Delivery of New Notes.... After the Registration Statement becomes effective
and the Exchange Offer is completed, Verio will
accept any and all Old Notes that are properly
tendered in the Exchange Offer prior to 5:00 p.m.,
New York City time, on the Expiration Date. The New
Notes will be delivered promptly after acceptance
of the Old Notes. See "The Exchange
Offer -- Acceptance of Old Notes for Exchange;
Delivery of New Notes."
The Exchange Agent......... U.S. Bank Trust National Association has agreed to
serve as the exchange agent (the "Exchange Agent")
in the Exchange Offer. See "The Exchange
Offer -- Acceptance of Old Notes for Exchange;
Delivery of New Notes."
Certain Federal Income Tax
Considerations........... See "Certain Federal Income Tax Considerations."
Use of Proceeds............ Verio will receive no proceeds from the Exchange
Offer. See "Use of Proceeds."
Fees and Expenses.......... Verio will bear all expenses for the completion of
the Exchange Offer and compliance with the
Registration Rights Agreement. Verio also will pay
certain transfer taxes applicable to the Exchange
Offer. See "The Exchange Offer -- Fees and
Expenses."
Accrued Interest........... Interest will accrue on the New Notes at a rate of
11 1/4% per annum. If your Old Notes are accepted
for exchange you will receive interest accrued on
your Old Notes from the date of original issuance
or date of the last interest payment, to, but not
including, the date of issuance of your New Notes.
Interest on your Old Notes will cease to accrue on
the day before your New Notes are issued. See
"Description of the Notes -- Maturity, Interest and
Principal."
Resales of New Notes....... Verio believes that, with certain exceptions, the
New Notes may be resold or transferred without
further compliance with the Securities Act. See
"The Exchange Offer -- Resales of the New Notes"
and "Plan of Distribution."
Effect of Not Tendering Old
Notes for Exchange....... If you do not tender your Old Notes or your Old
Notes are not properly tendered, the existing
transfer restrictions will continue to apply. Verio
will have no further obligations to provide for the
registration under the Securities Act of your Old
Notes. Your Old Notes will, following the
Expiration Date, bear interest at the same rate as
the New Notes.
6
<PAGE> 8
DESCRIPTION OF NEW NOTES
The form and terms of the New Notes and the Old Notes will be identical,
except that the New Notes will be registered under the Securities Act and
certain transfer restrictions and registration rights will not apply. The
Exchange Offer will be considered completed once Verio delivers to the Exchange
Agent New Notes in the same aggregate principal amount as the aggregate
principal amount of Old Notes that are validly tended by holders. See "The
Exchange Offer -- Procedures for Tendering Old Notes" and "Description of the
Notes."
Notes Offered.............. $400.0 million aggregate principal amount of
11 1/4% Senior Notes Due 2008.
Maturity................... December 1, 2008.
Interest Payment Dates..... June 1 and December 1, commencing June 1, 1999.
Ranking.................... The Old Notes and the New Notes will be senior
unsecured obligations ranking equally with all
Verio's unsecured and unsubordinated debt and
senior to all Verio's subordinated debt. Verio has
no existing senior unsecured debt or any existing
subordinated debt. The Old Notes and the New Notes
will be junior to all Verio's secured debt to the
extent of the value of the assets securing such
debt and to debt of its subsidiaries. If Verio's
September 30, 1998 balance sheet were restated to
give effect to the acquisitions completed through
October 31, 1998 and the acquisition of Hiway, it
would have had:
- approximately $18.4 million of secured long-term
debt; and
- approximately $14.4 million of subsidiary debt.
See "Description of the Notes -- General."
Sinking Fund............... None.
Optional Redemption........ On or after December 1, 2003, Verio may redeem some
or all of the Notes at specific redemption prices
described in this Prospectus, plus accrued
interest. See "Description of the
Notes -- Redemption -- Optional Redemption."
On or prior to December 1, 2001, Verio also may be
able to redeem up to 35% of the original aggregate
principal amount of the Notes at a redemption price
of 111.250% of the principal amount, plus accrued
and unpaid interest. See "Description of the
Notes -- Redemption -- Optional Redemption."
Change of Control.......... In the event of a change of control, Verio will be
required to make an offer to purchase the Notes at
a purchase price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest.
Furthermore, Verio would be required to repay any
funds drawn under a bank facility in the event of a
change of control. See "Description of the Notes --
Certain Covenants -- Change of Control."
Certain Covenants.......... The indenture governing the New Notes will, among
other things, restrict Verio's ability to:
- borrow money;
- make restricted payments;
- permit liens to exist;
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- change its business;
- issue guarantees;
- sell certain assets or merge with or into other
companies;
- pay dividends;
- restrict issuances and sales of preferred stock
by restricted subsidiaries;
- engage in transactions with affiliates;
- designate or create unrestricted subsidiaries;
and
- make investments.
These covenants are subject to important exceptions
and qualifications. See "Description of the
Notes -- Certain Covenants."
Exchange Rights............ Holders of the New Notes will not be entitled to
any exchange or registration rights. This Exchange
Offer is intended to satisfy Verio's obligation
under the Registration Rights Agreement. Verio will
have no further obligations to register any of the
Old Notes not tendered once the Exchange Offer is
completed. See "Risk Factors -- Consequences of
Failure to Exchange."
8
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL DATA
(Amounts in Thousands, Except Share Data)
The summary historical consolidated financial data as of December 31, 1997,
and for the period from inception (March 1, 1996) to December 31, 1996, the year
ended December 31, 1997 have been derived from the audited Consolidated
Financial Statements of the Company included elsewhere in this Prospectus. The
summary historical consolidated financial data as of September 30, 1998 and for
the nine-month periods ended September 30, 1997 and 1998 have been derived from
unaudited Consolidated Financial Statements of the Company, also included
herein.
The information set forth below should be read in conjunction with the
Unaudited Pro Forma Condensed Combined Financial Statements and the historical
Consolidated Financial Statements of the Company and the notes thereto included
elsewhere in this Prospectus. Results of operations for the period from
inception to December 31, 1996, the year ended December 31, 1997 and the
nine-month periods ended September 30, 1997 and 1998 are not necessarily
indicative of results of operations for future periods. The Company's
development and expansion activities, including acquisitions, during the periods
shown below may significantly affect the comparability of this data from one
period to another. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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<CAPTION>
YEAR ENDED
PERIOD FROM
NINE MONTHS ENDED SEPTEMBER 30,
DECEMBER 31, 1997 --------------------------------------
INCEPTION ----------------------- HISTORICAL
(MARCH 1, 1996) TO PRO ------------------------ PRO FORMA
DECEMBER 31, 1996 HISTORICAL FORMA(1) 1997 1998 1998(1)
------------------ ---------- ---------- ---------- ----------- -----------
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STATEMENT OF OPERATIONS DATA:
Total revenue............................. $ 2,365 $ 35,692 $ 125,283 $ 22,287 $ 83,543 $ 130,200
Total costs and expenses.................. 8,645 75,981 207,154 47,474 148,727 218,916
-------- ---------- ---------- ---------- ----------- -----------
Loss from operations...................... (6,280) (40,289) (81,871) (25,187) (65,184) (88,716)
======== ========== ========== ========== =========== ===========
Interest expense(2)....................... $ (115) $ (11,826) $ (12,585) $ (5,899) $ (22,860) $ (22,981)
======== ========== ========== ========== =========== ===========
Loss before extraordinary item............ $ (5,122) $ (46,069) $ (88,233) $ (27,022) $ (78,118) $ (102,093)
======== ========== ========== ========== =========== ===========
Net loss attributable to common
stockholders............................ $ (5,145) $ (46,329) $ (27,201) $ (88,306)
======== ========== ========== ===========
Loss per common share -- basic and
diluted:
Loss per common share before
extraordinary item.................. $ (5.29) $ (40.47) $ (14.55) $ (24.11) $ (4.49) $ (4.56)
======== ========== ========== ========== =========== ===========
Loss per common share................. $ (5.29) $ (40.47) (14.55) $ (24.11) $ (5.06)
======== ========== ========== ========== ===========
Weighted average common shares
outstanding -- basic and diluted........ 971,748 1,144,685 6,064,685 1,128,004 17,462,447 22,382,447
OTHER DATA:
EBITDA(3)................................. $ (5,611) $ (29,665) $ (24,537) $ (18,450) $ (38,366) $ (36,974)
Capital expenditures(4)................... 3,430 14,547 11,002 15,327
Ratio of earnings to fixed charges(5)..... -- -- -- -- -- --
CASH FLOWS INFORMATION:
Net cash used by operating activities... (2,326) (35,323) (20,462) (36,257)
Net cash used by investing activities... (9,123) (120,330) (89,375) (119,312)
Net cash provided by financing
activities............................ 77,916 161,772 163,002 328,895
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1997 1997 1997 1997 1998 1998 1998
--------- -------- ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
QUARTERLY STATEMENT OF
OPERATIONS DATA:
Total revenue................... $ 4,414 $ 8,249 $ 9,624 $ 13,405 $ 21,198 $ 28,541 $ 33,804
Total costs and expenses........ 10,006 17,103 20,365 28,507 35,916 49,868 62,944
------- ------- -------- ---------- -------- -------- --------
Loss from operations............ $(5,592) $(8,854) $(10,741) $ (15,102) $(14,718) $(21,327) $(29,140)
======= ======= ======== ========== ======== ======== ========
Net loss attributable to common
stockholders.................. $(4,677) $(9,274) $(13,250) $ (19,128) $(28,383) $(26,316) $(33,606)
======= ======= ======== ========== ======== ======== ========
</TABLE>
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<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
AS OF ----------------------------------------
DECEMBER 31, PRO FORMA
1997 ACTUAL PRO FORMA(1) AS ADJUSTED(6)
------------ -------- ------------ --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 72,586 $245,912 $ 61,925 $ 450,925
Restricted cash and securities.............. 40,554 21,397 21,397 21,397
Goodwill, net............................... 83,216 210,047 459,664 459,664
Total assets................................ 246,471 562,329 652,128 1,052,128
Long-term debt and capital lease
obligations, net of current portions...... 142,321 274,452 280,506 680,506
Redeemable preferred stock.................. 97,249 -- -- --
Stockholders' equity (deficit).............. (27,001) 234,607 309,327 309,327
</TABLE>
- ---------------
(1) Pro forma for the September 30, 1998 Completed Acquisitions (as defined in
the Unaudited Pro Forma Condensed Combined Financial Statements), the
acquisition of WWW-Service Online-Dienstleistungen AG ("WWW") and the Hiway
acquisition as if they had occurred on September 30, 1998 for balance sheet
purposes and on January 1, 1997 for statement of operations data purposes.
See "Unaudited Pro Forma Condensed Combined Financial Statements" and the
notes thereto.
(2) Pro forma interest expense, including amortization of debt issuance costs,
assuming that the Notes had been issued on January 1, 1997, would increase
by $46.1 million and $34.6 million for the year ended December 31, 1997 and
the nine months ended September 30, 1998, respectively.
(3) EBITDA represents earnings (loss) from operations before interest, taxes,
depreciation, amortization and provision for loss on write-offs of
investments in ISPs and fixed assets and includes non-cash stock option
compensation and severance costs of $3.0 million and $6.7 million on a
historical and pro forma basis, respectively, for the nine months ended
September 30, 1998. The primary measure of operating performance is net
earnings (loss). Although EBITDA is a measure commonly used in the Company's
industry, it should not be construed as an alternative to net earnings
(loss), determined in accordance with generally accepted accounting
principles ("GAAP"), as an indicator of operating performance or as an
alternative to cash flows from operating activities, determined in
accordance with GAAP. In addition, the measure of EBITDA presented herein by
the Company may not be comparable to other similarly titled measures of
other companies.
(4) Excludes equipment and leasehold improvements acquired in business
acquisitions.
(5) For the period ended December 31, 1996, the year ended December 31, 1997 and
the nine-month periods ended September 30, 1997 and September 30, 1998,
earnings were insufficient to cover combined fixed charges by $5.8 million,
$48.0 million, $28.7 million and $78.7 million, respectively. On a pro forma
basis, giving effect to the September 30, 1998 Completed Acquisitions, the
WWW Acquisition and the Hiway Acquisition, earnings would have been
insufficient to cover combined fixed charges by $88.2 million for the year
ended December 31, 1997 and $102.3 million for the nine months ended
September 30, 1998. Combined fixed charges consist of interest expense and
that portion of rent expense the Company believes to be representative of
interest (i.e., one third of rent expense), adjusted for minority interests.
See "Unaudited Pro Forma Condensed Combined Financial Statements" and the
notes thereto.
(6) As adjusted to give effect to the Old Notes after deducting discounts and
estimated expenses of the Initial Purchasers (as defined).
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RISK FACTORS
Holders of the Old Notes should carefully consider the following risk
factors, as well as the other information contained in this Prospectus in
evaluating the Exchange Offer. This Prospectus contains statements which
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). These statements
appear in a number of places in this Prospectus and include statements regarding
the intent, belief or current expectations of Verio, its directors or officers
primarily with respect to the future operating performance of Verio. Holders of
the Old Notes are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those in the forward-looking
statements as a result of various factors. The accompanying information
contained in this Prospectus, including the information set forth below,
identifies important factors that could cause such differences. See "-- Forward-
Looking Statements" below.
HISTORY OF LOSSES; NO ASSURANCE OF PROFITABILITY
Verio was formed in March 1996 and has incurred net losses since its
inception. There is little operating and financial data about Verio. Verio
expects to incur significant additional losses and to generate negative
operating cash flow as it continues its investment and acquisition program and
continues to build out its national network operations. The extent to which
Verio experiences negative cash flow will depend upon a number of factors,
including the following:
- the number and size of any additional acquisitions and investments;
- the expense and time it takes to integrate Verio's prior and future
acquired operations;
- the time and effort required to capture operating efficiencies;
- Verio's ability to generate increased revenues and cash flow;
- the amount of Verio's expenditures at the corporate and national level;
and
- potential regulatory developments that may apply to Verio's operations.
Verio depends on a number of different financing sources to fund its growth
and continued losses from operations. Verio cannot assure that it will achieve
or sustain positive operating cash flow or generate net income in the future.
Verio must develop and market products and services which gain broad commercial
acceptance. Given Verio's limited operating history, Verio cannot assure that it
will ever achieve broad commercial acceptance or profitability.
SUBSTANTIAL DEBT; EFFECT OF FINANCIAL LEVERAGE
Verio is highly leveraged and has significant debt service requirements.
Given certain assumptions, Verio's long-term debt is set forth below:
<TABLE>
<CAPTION>
PRO FORMA FOR
PRO FORMA FOR WWW $400 MILLION NOTES
AND HIWAY (INCLUDING
AS OF SEPTEMBER 30, 1998 ACQUISITION HIWAY ACQUISITION)
------------------------ ----------------- ------------------
<S> <C> <C> <C>
Debt (in thousands)........... $274.5 $280.5 $680.5
Percentage of Total
Capitalization.............. 54 48 69
</TABLE>
In addition, Verio has entered into a credit agreement providing for a
$70.0 million revolving credit facility (the "Bank Facility"). Verio has drawn
no funds from the Bank Facility.
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High levels of debt could have several important effects on Verio's future
operations. Some of these consequences include the following:
- a substantial portion of Verio's cash flow from operations must be used
to pay interest on its debt and will not be available for other business
purposes; and
- covenants imposed under certain of the financing agreements limit Verio's
ability to borrow additional funds and dispose of assets and affect its
flexibility with respect to changes in its business, including possible
acquisitions and capital expenditures.
Verio's ability to meet its debt obligations and to reduce its total debt
depends on its future operating performance and on economic, financial,
competitive, regulatory and other factors. Many of these factors are beyond
Verio's control. Verio believes that working capital from operations, existing
credit facilities, capital lease financings and proceeds of future equity or
debt financings will be adequate to meet its financial obligations. Verio cannot
assure, however, that its business will generate sufficient cash flow or that
its current or future financings will provide sufficient proceeds to meet such
obligations or to service its debt (including the Notes). In particular, Verio's
cash flow may not be sufficient to pay:
- $13.5 million in annual interest on the 13 1/2% Senior Notes due 2004
(the "1997 Notes") beginning in June 2000 following the termination of
the interest escrow arrangement for the 1997 Notes, $100.0 million
principal amount of which remains outstanding after Verio repurchased
$50.0 million of the 1997 Notes held by Brooks Fiber Properties, Inc. in
March 1998;
- $18.2 million in annual interest on the $175.0 million principal amount
of 10 3/8% Senior Notes due 2005 (the "March 1998 Notes");
- $45.0 million in annual interest on the Notes; or
- any debt obligations Verio may incur under the Bank Facility, if drawn
upon.
EFFECTIVE SUBORDINATION; HOLDING COMPANY STRUCTURE AND NEED TO ACCESS SUBSIDIARY
CASH FLOWS
The Notes are senior unsecured obligations, ranking equally with all
unsecured and unsubordinated debt, including the 1997 Notes and the March 1998
Notes. The Notes are senior to all subordinated debt. The Notes are junior to
all secured debt to the extent of the value of the assets securing such debt,
and to all debt of Verio's subsidiaries.
Verio conducts a significant portion of its business through its
subsidiaries. Therefore, Verio's ability to service its debt (including the
Notes) is partially dependent upon its subsidiaries' earnings and their
distributions, loans, advances or other payments to Verio. The creditors of
Verio's subsidiaries will have priority with respect to the assets of Verio's
subsidiaries over the claims of Verio and the holders of its debt, unless such
subsidiaries guaranteed Verio's debt and if loans made by Verio to its
subsidiaries are recognized as debt. In any event, the Notes will be junior to
all debt and other liabilities of Verio's subsidiaries, including trade
payables. The Bank Facility is secured by a pledge of certain of Verio's assets,
and therefore the Notes are junior to the Bank Facility.
RISKS ASSOCIATED WITH FINANCING ARRANGEMENTS
The Bank Facility is secured by a pledge of certain of Verio's assets,
including the capital stock of Verio's subsidiaries. The Bank Facility requires
Verio to meet certain financial tests and prohibits Verio from paying dividends
or repurchasing its capital stock without the lenders' consent. The secured
lenders would be entitled to foreclose on the capital stock of Verio's
subsidiaries if Verio defaults under the Bank Facility. The secured lenders
would be repaid from the proceeds of the liquidation of those assets before the
assets would be available for distribution to the holders of Verio's capital
stock. In addition, the terms of the Bank Facility, as well as the Notes, the
1997 Notes and the March 1998 Notes, impose limitations on Verio's ability to
incur additional debt, and therefore may make it difficult for Verio to borrow
in the future.
REQUIREMENTS FOR ADDITIONAL CAPITAL
Verio expects to make significant capital expenditures in order to maintain
its competitive position and continue to meet the increasing demands for service
quality, availability and competitive pricing. In addition
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to its continuing acquisition efforts, Verio currently expects that its
significant capital expenditures will include the following:
- network equipment;
- network operating centers;
- network monitoring equipment;
- information technology systems; and
- customer support systems.
Verio believes that it will have a reasonable degree of flexibility to
adjust the amount and timing of these capital expenditures. However, Verio may
need to raise additional funds in order to take advantage of unanticipated
opportunities, such as acquisition opportunities that may arise in the U.S. and
internationally. In addition, Verio may need to raise additional funds to
develop new products or otherwise respond to changing business conditions or
unanticipated competitive pressures. Verio cannot assure that it will be able to
raise such funds on favorable terms. In the event that Verio is unable to obtain
such additional funds on acceptable terms, it may be unable or determine not to
take advantage of new opportunities or take other actions that otherwise might
be important to its operations.
CHALLENGES OF GROWTH BY ACQUISITIONS
Verio is dependent on its ability to identify and acquire ISPs that meet
its acquisition criteria. Verio seeks to deepen and broaden its market presence
in the U.S. and internationally, to expand its strength in Internet connectivity
and Web hosting core service platforms, and to add additional enhanced service
capabilities through these acquisitions. Although Verio's initial acquisitions
were primarily of smaller local and regional independent ISPs, more recently it
has also targeted larger businesses such as TABNet and Hiway. Verio expects that
competition for appropriate acquisition candidates may be significant. Verio may
compete with other communications companies with similar acquisition strategies,
many of which may be larger and have greater financial and other resources.
Competition for independent ISPs is based on a number of factors, including
price, terms and conditions, size and access to capital, ability to offer cash,
stock, or other forms of consideration and other matters. Verio cannot assure
that it will be able to identify suitable ISPs or be able to complete any
acquisitions of or investments in those targeted ISPs on acceptable terms and
conditions. Once consummated, these acquisitions continue to present certain
risks, including:
- the difficulty of integrating the acquired operations, technology and
personnel;
- the possible inability of management to maximize Verio's financial and
strategic position by the successful incorporation of acquired technology
and products into Verio's service offerings and to maintain uniform
standards, controls, procedures and policies;
- the possible acquisition of substantial contingent or undisclosed
liabilities;
- the risks of entering markets in which Verio has little or no direct
prior experience; and
- the potential impairment of relationships with employees and subscribers
as a result of changes in management.
Verio may not be successful in overcoming these risks or any other problems
encountered in connection with future acquisitions. In addition, future
acquisitions could materially adversely affect Verio's operating results as a
result of dilutive issuances of equity securities, the incurrence of additional
debt or the amortization of expenses related to goodwill and other intangible
assets. Further, Verio's ability to complete transactions with ISPs may require
significant additional financial resources. Verio may be required to delay or
abandon some of its planned future expansion or expenditures if it fails to
raise sufficient funds.
CHALLENGES OF INTEGRATION
Verio's success depends in large part on its ability to integrate the
operations and management of the independent ISPs it has acquired and its
ability to integrate additional ISPs it may acquire in the future. Verio will
have to expend substantial managerial, operating, financial and other resources
to integrate these businesses and implement its business model. In particular,
to integrate Verio's newly acquired ISPs successfully, Verio must install and
standardize adequate operational and control systems, deploy certain
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<PAGE> 15
equipment and telecommunications facilities, implement new marketing efforts in
new as well as existing locations, employ qualified personnel to provide
technical and marketing support for Verio's various operating sites and continue
the expansion of its managerial, operational, technical and financial resources.
Failure to integrate its ISPs successfully may result in significant operating
inefficiencies, which may hurt Verio's operating results.
The process of consolidating its ISPs and integrating its regional
operations may take a significant period of time, will place a significant
strain on its resources, and could prove to be more expensive than predicted.
Verio may increase expenditures in order to accelerate the integration and
consolidation of its ISPs with the goal of achieving longer-term cost savings
and improved profitability. These expenses may include the following, among
others: the elimination of redundant staffing positions; personnel relocation;
the cancellation of overlapping unnecessary Internet access contracts; the
closure of redundant POP facilities; system upgrades; and the integration of
these ISPs' operations onto Verio's network, customer care, billing, financial
and other national support systems. However, Verio cannot assure that these
projected long-term cost savings and improvements in profitability can or will
be realized. Verio also cannot assure that customer support resources will be
sufficient to manage the growth in its business or that it will be successful in
implementing our expansion program in whole or in part.
CHALLENGES OF RAPID GROWTH
Verio expects to continue to grow rapidly. This rapid growth has placed,
and is likely to continue to place, a significant strain on Verio's managerial,
operating, financial and other resources. Verio's future performance will
depend, in part, upon its ability to manage this growth effectively. To that
end, Verio will have to undertake the following improvements, among others:
- implement additional management information systems capabilities;
- further develop its operating, administrative and financial and
accounting systems and controls;
- improve coordination between its engineering, accounting, finance,
marketing and operations; and
- hire and train additional personnel.
FINANCIAL INFORMATION CONCERNING ACQUISITIONS
The ISPs Verio targets for acquisition typically do not have audited
financial statements. These ISPs also have varying degrees of internal controls
and detailed financial information. Therefore, the pro forma and other financial
information Verio is able to provide in this Prospectus includes financial
information concerning certain recently completed acquisitions for which audited
financial statements may not be available. In particular, this is the case with
respect to the acquisition of WWW. Verio cannot assure that its audits will not
reveal significant issues with respect to revenues, expenses and liabilities,
contingent or otherwise, of any of these ISPs.
Verio expects to continue its acquisition and expansion strategy.
Additional acquisitions could have a material impact on the financial
information Verio has provided. Up to now, Verio has recorded all business
acquisitions under the purchase method. If Verio restates its financials to give
effect to the acquisitions of WWW and Hiway, it would record gross goodwill
totaling approximately $475.3 million, which will be amortized over a ten-year
period from the respective acquisition dates. Verio cannot assure the number,
timing or size of future acquisitions, or the effect that any such acquisitions
might have on its operating or financial results.
Verio is completing valuations of certain of its acquisitions (including
TABNet and Hiway). This process includes its evaluation of in-process research
and development programs. Verio will use these valuations to determine the final
purchase accounting adjustments for these acquisitions. Accordingly, the pro
forma financial statements included in this Prospectus may be revised. Verio
expects to record a charge to operations for in-process research and development
relating to certain of its acquisitions (including TABNet and Hiway). Verio does
not know the amounts of these charges, though some or all of them could be
material. The Commission is reviewing the assumptions and methodologies commonly
used by companies in calculating such charges, and Verio intends to follow the
Commission's guidelines in the valuation of in-process research and development.
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UNCERTAINTIES ASSOCIATED WITH INTEGRATION OF HIWAY
The Hiway acquisition was a substantial transaction for Verio. The
Unaudited Pro Forma Condensed Combined Financial Statements included in this
Prospectus reflect the impact that the Hiway acquisition would have had on
Verio's financial results as if it had been completed on January 1, 1997. The
acquisition of Hiway will have a continuing, significant impact on Verio's
operating and financial performance.
Verio also may encounter difficulties in integrating the operations of
Hiway including the following:
- Hiway's operations, facilities, equipment, service offerings, networks,
technologies, brand names, and sales, marketing and service development
efforts may not be effectively integrated with Verio's existing
operations;
- anticipated cost savings may not be realized;
- integration efforts may divert Verio's resources from its existing
business;
- standards, controls, procedures and policies may not be maintained; and
- key Hiway employees may choose to leave.
Any of these difficulties could interrupt Verio's business and operations.
Verio cannot assure that it will effectively realize any of the anticipated
benefits from the Hiway acquisition. Verio expects to incur significant expenses
in connection with the Hiway acquisition. Factors that could increase these
costs include: unexpected employee turnover; unforeseen delays in addressing
duplicate facilities and the associated costs of hiring temporary employees; and
additional fees and charges to obtain consents, regulatory approvals or permits.
Hiway was formed in May 1998 through a merger of Best Internet and Hiway
(the "Best/Hiway Merger"). Because the Best/Hiway Merger was accomplished only
recently, the integration of the operations of those two companies was not
completed prior to Verio's acquisition of Hiway. It is likely that this
integration effort will continue. In the course of that integration effort, it
is possible that facts or circumstances may be discovered that Verio did not
know at the time it executed the Merger Agreement. Verio cannot assume that
difficulties will not be encountered in integrating Hiway, or that the specific
benefits expected from the Best/Hiway Merger will be achieved or that it will
realize any of those anticipated cost savings.
DEPENDENCE UPON CHANNEL PARTNERS
Verio is dependent on third parties to stimulate demand for its products
and services where Verio does not have a direct sales force. These channel
partners include computer and telecommunications resellers, VARs, OEMs, systems
integrators, Web designers and advertising agencies (collectively, the "Channel
Partners"). If Verio fails to gain commercial acceptance in certain markets
Channel Partners may discontinue their relationships with Verio. Conflicts may
develop between Verio's direct sales force efforts and those of its Channel
Partners as well as among different Channel Partners. Such conflicts could
affect Verio's relationship with various Channel Partners. The loss of Channel
Partners, the failure of such parties to perform under agreements with Verio, or
the inability to attract other Channel Partners with the expertise and industry
experience required to market Verio's products and services could have a
material adverse effect on Verio. Furthermore, sales through Channel Partners
are usually at discounted rates. Therefore, the resulting revenues and gross
margins will be less than if Verio had sold the same services directly.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND EXPANSION
With Verio's recent Web hosting acquisitions, it now provides Web hosting
services to customers in over 150 countries. Verio cannot assure that acceptance
of the Internet or demand for Internet connectivity, Web hosting and other
enhanced Internet services will increase significantly in any international
markets. However Verio believes that it will be necessary to move quickly into
international markets in order to establish critical market presence and
credibility, though Verio cannot assure that it will be able to do so.
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Verio may need to enter into joint ventures or other strategic
relationships with one or more third parties in order to conduct its foreign
operations successfully. However, Verio cannot assure that it will be able to
obtain the permits and operating licenses required to operate, to hire and train
employees or to market, sell and deliver high quality services in these markets.
In addition to the uncertainty as to Verio's ability to expand its international
presence, there are certain risks inherent in doing business on an international
level. Such risks include:
- unexpected changes in or delays resulting from regulatory requirements,
tariffs, customs, duties and other trade barriers:
- difficulties in staffing and managing foreign operations;
- longer payment cycles and problems in collecting accounts receivable;
- political instability, expropriation, nationalization, war, insurrection
and other political risks;
- fluctuations in currency exchange rates and foreign exchange controls
which restrict or prohibit repatriation of funds;
- technology export and import restrictions or prohibitions;
- delays from customs brokers or government agencies;
- seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world; and
- potentially adverse tax consequences.
Verio cannot assure that such factors will not have an adverse effect on
its future international operations. In addition, Verio cannot assure that laws
or administrative practice relating to taxation, foreign exchange or other
matters of countries within which it operates will not change. Any such change
could have a material adverse effect on its business, financial condition and
results of operations.
In addition, effective January 1, 1999, 11 of the 15 member countries of
the European Union established fixed conversion rates between their existing
sovereign currencies and the euro, and adopted the euro as their common legal
currency (the "Euro Conversion"). Verio has not commenced any assessment of the
effects of the Euro Conversion, and it is unsure of the potential impact of the
Euro Conversion. Furthermore, certain foreign governments, such as Germany, have
enforced laws and regulations related to content distributed over the Internet
that are more strict than those currently in place in the U.S. One or more of
such factors could have a material adverse effect on Verio's international
operations and, consequently, on its business, results of operations and
financial condition.
COMPETITION; PRICING FLUCTUATION
The market for Internet connectivity and related services is extremely
competitive. Verio anticipates that competition will continue to intensify as
the use of the Internet grows. The tremendous growth and potential market size
of the Internet access market has attracted and likely will continue to attract
many new start-ups as well as existing businesses from different industries.
Verio believes that the primary competitive factors in its targeted market
are a reliable network, knowledgeable salespeople and high quality technical
support, and that price is usually secondary to these factors.
Verio's current and prospective competitors include:
- other national, regional and local ISPs;
- long distance and local exchange telecommunications companies;
- cable television providers;
- direct broadcast satellite providers;
- wireless communications providers; and
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- on-line service providers.
Many of these competitors have a significantly greater market presence,
brand recognition, and financial, technical and personnel resources than Verio
does.
Verio competes with all of the major long distance companies (also known as
interexchange carriers or IXCs), including AT&T, MCI/WorldCom, Cable &
Wireless/InternetMCI, and Sprint, which also offer Internet access services. The
recent sweeping reforms in the federal regulation of the telecommunications
industry have created greater opportunities for local exchange carriers
("LECs"), including the Regional Bell Operating Companies ("RBOCs"), to enter
the Internet connectivity market. Verio believes that there is a move toward
horizontal integration through acquisitions of, joint ventures with, and the
wholesale purchase of connectivity from, ISPs. Accordingly, Verio expects to
experience increased competition from the traditional telecommunications
carriers both for subscribers and potential acquisitions. Many of these
telecommunications carriers, in addition to their substantially greater network
coverage, market presence, and financial, technical and personnel resources,
also have large existing commercial customer bases. Furthermore,
telecommunications providers may have the ability to bundle Internet access with
basic local and long distance telecommunications services. This bundling of
services may make it difficult for Verio to compete effectively with the
telecommunications providers and may result in pricing pressure on Verio that
would have an adverse effect on its business, financial condition and results of
operations.
In addition, Tele-Communications, Inc. and Time Warner, among other cable
companies, offer high speed Internet access via cable modem in a growing number
of markets, either directly or through alliances with Internet access providers
such as @Home Corporation. Certain other alternative service companies are
approaching the Internet connectivity market with various newer wireless
terrestrial- and satellite-based service technologies.
As Verio continues to expand internationally, it will encounter new
competitors. In some cases, Verio will be forced to compete with and buy
services from government-owned or subsidized telecommunications providers. Some
of these providers may enjoy a monopoly on telecommunications services essential
to Verio's business. Verio cannot assure that it will be able to purchase such
services at a reasonable price or at all. In addition to the risks associated
with Verio's previously described competitors, foreign competitors may pose an
even greater risk, as they may possess a better understanding of their local
markets and better working relationships with local infrastructure providers and
others. Verio cannot assure that it can obtain similar levels of local
knowledge. Failure to obtain that knowledge could place Verio at a significant
competitive disadvantage.
In connection with the OSP Agreement (as defined in "Business -- NTT
Strategic Relationship") between Verio and NTT, further details of which have
been agreed to by Verio and NTT in a subsequent Strategic Partner Services
Agreement, NTT is entitled to "most favored customer" status and pricing
concessions in connection with the service Verio provided under those
agreements. See "Business -- NTT Strategic Relationship" and "Certain
Transactions -- Other Transactions."
DEPENDENCE UPON IMPLEMENTATION OF NETWORK INFRASTRUCTURE; ESTABLISHMENT AND
MAINTENANCE OF PEERING RELATIONSHIPS
Verio's success depends upon its ability to implement and expand its
national network infrastructure and support services at an acceptable cost. This
may require Verio to enter into additional agreements with providers of
infrastructure capacity and equipment and support services. Verio cannot assure
that any of these agreements can be obtained on satisfactory terms and
conditions.
The establishment and maintenance of peering relationships with other ISPs
is necessary in order to exchange traffic with other ISPs without having to pay
transit costs. The basis on which the large national ISPs make peering available
or impose settlement charges is evolving. Recently, companies that have
previously offered peering have cut back or eliminated peering relationships and
are establishing new, more restrictive criteria for peering. If increasing
requirements associated with maintaining peering with the major national ISPs
develop, Verio may have to comply in order to maintain its peering
relationships. Verio also anticipates that future expansions and adaptations of
its network infrastructure may be necessary in order to respond to growth in the
number of customers served, increased demands to transmit larger amounts of data
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and changes to its customers' product and service requirements. This will
require substantial financial, operational and managerial resources. Verio
cannot assure that it will be able to expand or adapt its network infrastructure
to meet the industry's evolving standards or its customers' growing demands and
changing requirements on a timely or cost-effective basis, or at all. Also,
Verio may not be able to deploy successfully any expanded and adapted network
infrastructure. Failure to maintain peering relationships or establish new ones,
if necessary, would cause additional operating expenditures which would
adversely affect Verio.
FLUCTUATIONS IN OPERATING RESULTS
Verio's operating results have fluctuated in the past and may in the future
fluctuate significantly depending upon a variety of factors, including the
incurrence of capital costs and the introduction of value-added enhanced
services and new services. Additional factors that may contribute to variability
of operating results include:
- the pricing and mix of services it offers;
- its customer retention rate;
- changes in pricing policies and product offerings by its competitors;
- growth in demand for network and Internet access services;
- one-time costs associated with acquisitions and regional consolidation;
and
- general telecommunications services' performance and availability.
Verio also has experienced seasonal variation in Internet use and,
therefore, revenue streams may fluctuate accordingly. In response to competitive
pressures, Verio may take certain pricing or marketing actions that could have a
material adverse effect on its business, financial condition and results of
operations. As a result, variations in the timing and amounts of revenues could
have a material adverse effect on Verio's quarterly operating results.
Therefore, Verio believes that period-to-period comparisons of its operating
results are not necessarily meaningful and cannot be relied upon as indicators
of future performance.
DEPENDENCE ON KEY PERSONNEL
Competition for qualified employees and personnel in the Internet services
industry is intense and there are a limited number of people with knowledge of
and experience in the Internet service industry. The process of locating
personnel with the combination of skills and attributes required to carry out
Verio's strategies is often lengthy. Verio's success depends to a significant
degree upon its ability to attract and retain qualified management, technical,
marketing and sales personnel and upon the continued contributions of such
people. Verio's employees may voluntarily terminate their employment with Verio
at any time. Verio cannot assure that it will be successful in attracting and
retaining qualified executives and personnel. The loss of the services of key
personnel, or the inability to attract additional qualified personnel, could
have a material adverse effect on its business, financial condition or results
of operations.
RISK OF SYSTEM FAILURE OR SHUTDOWN
Verio's success depends upon its ability to deliver reliable, high-speed
access to the Internet and upon the ability and willingness of its
telecommunications providers to deliver reliable, high-speed telecommunications
service through their networks. Verio's network, and other networks providing
services to it, are vulnerable to damage or cessation of operations from fire,
earthquakes, severe storms, power loss, telecommunications failures and similar
events, particularly if such events occur within a high traffic location of the
network. Verio has designed its network to minimize the risk of such system
failure, for instance, with redundant circuits among POPs to allow traffic
rerouting. In addition, Verio performs lab and field testing before integrating
new and emerging technology into the network, and Verio engages in capacity
planning. Nonetheless, Verio cannot assure that it will not experience failures
or shutdowns relating to individual POPs or even catastrophic failure of the
entire network.
Verio carries business personal property insurance at both scheduled
locations and unscheduled locations, with a blanket property limit of $10.0
million per location and business interruption insurance with a blanket
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limit of $2.0 million per location. This insurance may not be adequate or
available to compensate Verio. In addition, Verio generally attempts to limit
its liability to customers by contractually disclaiming liability or limiting
liability to a usage credit based upon the amount of time that the system was
down. Verio cannot assure, however, that such limitations of liability will be
enforceable. In any event, significant or prolonged system failures or shutdowns
could damage Verio's reputation and result in the loss of customers.
NETWORK SECURITY RISKS; RISKS ASSOCIATED WITH PROVIDING SECURITY SERVICES
Verio has implemented certain network security measures, such as limiting
physical and network access to its routers. Nonetheless, the network's
infrastructure is potentially vulnerable to computer viruses, break-ins and
similar disruptive problems caused by its customers or other Internet users.
Computer viruses, break-ins or other problems caused by third parties could lead
to interruptions, delays or cessation in service to Verio's customers.
Furthermore, such inappropriate use of the Internet by third parties could also
potentially jeopardize the security of confidential information stored in the
computer systems of Verio's customers. This could, in turn, deter potential
customers and adversely affect existing customer relationships.
Security problems represent an ongoing threat to public and private data
networks. Attacks upon the security of Internet sites and infrastructure
continue to be reported to organizations such as the CERT Coordination Center at
Carnegie Mellon University, which facilitates responses of the Internet
community to computer security events. Addressing problems caused by computer
viruses, break-ins or other problems caused by third parties could have a
material adverse effect on Verio.
The security services that Verio offers in connection with its customers'
networks cannot assure complete protection from computer viruses, break-ins and
other disruptive problems. Although Verio attempts to limit contractually its
liability in such instances, the occurrence of such problems may result in
claims against or liability on the part of Verio. Such claims, regardless of
their ultimate outcome, could result in costly litigation and could have a
material adverse effect on Verio's business or reputation or on Verio's ability
to attract and retain customers for its products. Moreover, until more consumer
reliance is placed on security technologies available, the security and privacy
concerns of existing and potential customers may inhibit the growth of the
Internet service industry and Verio's customer base and revenues.
DEPENDENCE ON THE INTERNET; RISK OF TECHNOLOGY TRENDS AND EVOLVING INDUSTRY
STANDARDS
Verio's products and services are targeted toward users of the Internet,
which has experienced rapid growth. The market for Internet access and related
services is relatively new and characterized by rapidly changing technology,
evolving industry standards, changes in customer needs and frequent new product
and service introductions. Verio's future success will depend, in part, on its
ability to effectively use leading technologies, to continue to develop its
technical expertise, to enhance its current services, to develop new products
and services that meet changing customer needs, and to influence and respond to
emerging industry standards and other technological changes on a timely and
cost-effective basis. Verio cannot assure that it will be successful in
accomplishing these tasks or that such new technologies or enhancements will
achieve market acceptance. Verio believes that its ability to compete
successfully is also dependent upon the continued compatibility and
interoperability of its services with products and architectures offered by
various vendors. Verio cannot assure that it will be able to effectively address
the compatibility and interoperability issues raised by technological changes or
new industry standards. In addition, Verio cannot assure that services or
technologies developed by others will not render its services or technology
uncompetitive or obsolete. For example, Verio's services rely on the continued
widespread commercial use of Transmission Control Protocol/Internet Protocol
("TCP/IP"). Alternative open and proprietary protocol standards that compete
with TCP/IP, including proprietary protocols developed by IBM and Novell, Inc.,
have been or are being developed. If the market for Internet access services
fails to develop, develops more slowly than expected, or becomes saturated with
competitors, or if the Internet access and services offered by Verio and its
ISPs are not broadly accepted, Verio's business, operating results and financial
condition will be materially adversely affected.
In addition, critical issues concerning the commercial use of the Internet
remain unresolved and may impact the growth of Internet use, especially in
Verio's target business market. Despite growing interest in the
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many commercial uses of the Internet, many businesses have been deterred from
purchasing Internet access services for a number of reasons, including:
- inconsistent quality of service;
- lack of availability of cost-effective, high-speed options;
- a limited number of local access points for corporate users;
- inability to integrate business applications on the Internet;
- the need to deal with multiple and frequently incompatible vendors;
- inadequate protection of the confidentiality of stored data and
information moving across the Internet; and
- a lack of tools to simplify Internet access and use.
In particular, numerous published reports have indicated that a perceived
lack of security of commercial data, such as credit card numbers, has
significantly impeded commercial use of the Internet to date. There can be no
assurance that encryption or other technologies will be developed that
satisfactorily address these security concerns. Published reports have also
indicated that capacity constraints caused by growth in the use of the Internet
may, unless resolved, impede further development of the Internet to the extent
that users experience delays, transmission errors and other difficulties. The
adoption of the Internet for commerce and communications, particularly by those
individuals and enterprises which have historically relied upon alternative
means of commerce and communication, generally requires the understanding and
acceptance of a new way of conducting business and exchanging information. In
particular, enterprises that have already invested substantial resources in
other means of conducting commerce and exchanging information may be
particularly reluctant or slow to adopt a new strategy that may make their
existing personnel and infrastructure obsolete. The failure of the market for
business-related Internet solutions to continue to develop would adversely
impact Verio's business financial condition and result of operations.
POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH NETWORK
The law relating to liability of ISPs for information carried on or
disseminated through their networks is not completely settled. A number of
lawsuits have sought to impose such liability for defamatory speech and
infringement of copyrighted materials. The U.S. Supreme Court has let stand a
lower court ruling which held that an ISP was protected from liability for
material posted on its system by a provision of the Communications Decency Act.
However, the findings in that case may not be applicable in other circumstances.
Other courts have held that online service providers and ISPs may, under certain
circumstances, be subject to damages for copying or distributing copyrighted
materials. Certain provisions of the Communications Decency Act, which imposed
criminal penalties for using an interactive computer service for transmitting
obscene or indecent communications, have been found unconstitutional by the U.S.
Supreme Court. However, on October 21, 1998, new federal legislation was enacted
that requires limitations on access to pornography and other material deemed
"harmful to minors." This legislation has been attacked in court as a violation
of the First Amendment. Verio is unable to predict the outcome of this case. The
imposition upon ISPs or web server hosts of potential liability for materials
carried on or disseminated through their systems could require Verio to
implement measures to reduce its exposure to such liability. These measures may
require that Verio spends substantial resources or discontinues certain product
or service offerings. Any of these actions could have a material adverse effect
on Verio's business, operating results and financial condition.
Verio carries errors and omissions insurance with a policy limit of $5.0
million, subject to deductibles and exclusions. This insurance may not be
adequate or available to compensate Verio for all liability that may be imposed.
The law relating to the regulation and liability of Internet access
providers in relation to information carried or disseminated also is undergoing
a process of development in other countries. Decisions, laws, regulations and
other activities regarding regulation and content liability may significantly
affect the development and profitability of companies offering on-line and
Internet access services.
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REGULATORY MATTERS
Although Verio is not currently subject to direct regulation by the Federal
Communications Commission (the "FCC") or any other federal or state agency
(other than regulations applicable to businesses generally), changes in the
regulatory environment relating to the Internet connectivity market, including
regulatory changes which directly or indirectly affect telecommunications costs
or increase the likelihood or scope of competition from the RBOCs or other
telecommunications companies, could affect Verio's pricing. For example,
proposed regulations at the FCC would require discounted Internet connectivity
rates for schools and libraries. Due to the increasingly widespread use of the
Internet, it is possible that additional laws and regulations may be adopted.
Such additional laws could cover issues such as content, user pricing, privacy,
libel, intellectual property protection and infringement, and technology export
and other controls. Verio may be subject to similar or other laws and
regulations in non-U.S. jurisdictions.
Moreover, the FCC continues to review its regulatory position on the usage
of the basic network and communications facilities by ISPs. Although in an April
1998 Report the FCC determined that ISPs should not be treated as
telecommunications carriers and therefore not regulated, it is expected that
future ISP regulatory status will continue to be uncertain. Indeed, in that
report, the FCC concluded that certain services offered over the Internet such
as phone-to-phone IP telephony, may be functionally indistinguishable from
traditional telecommunications service offerings and their non-regulated status
may have to be re-examined.
Changes in the regulatory structure and environment affecting the Internet
access market, including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood of competition from Regional
Bell Operating Companies ("RBOCs") or other telecommunications companies, could
have an adverse effect on Verio's business. Although the FCC has decided not to
allow local telephone companies to impose per-minute access charges on ISPs, and
that decision has been upheld by the reviewing court, further regulatory and
legislative consideration of this issue is likely. In addition, some telephone
companies are seeking relief through state regulatory agencies. Such rules, if
adopted, are likely to have a greater impact on consumer-oriented Internet
access providers than on business-oriented ISPs such as Verio. Nonetheless, the
imposition of access charges would affect Verio's costs of serving dial-up
customers and could have a material adverse effect on its business, financial
condition and results of operations.
DEPENDENCE UPON SUPPLIERS; LIMITED SOURCES OF SUPPLY
Verio relies on other companies to supply certain key components of its
network infrastructure, including telecommunications services and networking
equipment. The quantity and quality of components Verio demands is available
only from limited sources. For example, Verio currently relies on Cisco Systems
to supply routers critical to its network. Verio could be adversely affected if
routers from Cisco were to become unavailable on commercially reasonable terms.
Qwest, Sprint, MCI and MFS, which are Verio's competitors, are its primary
providers of data communications facilities and network capacity. Verio also is
dependent upon LECs, which often are Verio's competitors. LECs provide
telecommunications services and lease physical space to Verio for routers,
modems and other equipment. Verio has from time to time experienced delays in
its telecommunications services, which can lead to the loss of existing or
potential customers. Verio cannot assure that, on an ongoing basis, it will be
able to obtain such services cost-effectively and on the scale and within the
time frames it requires, or at all. Failure to obtain or to continue to make use
of such services would have a material adverse effect on its business, operating
results and financial condition.
LACK OF PUBLIC MARKET
The New Notes constitute a new issue of securities, have no established
trading market and may not be widely distributed. The Initial Purchasers have
informed Verio that they intend to make a market in the New Notes, however, the
Initial Purchasers are not obligated to do so. In addition, such market-making
will be subject to the limits imposed by the Securities Act and the Exchange
Act. Verio cannot assure that any market will develop for the New Notes. If a
market does develop, the New Notes may trade at prices lower than the initial
offering price of the Old Notes and liquidity may be limited. If a market for
the New Notes does not develop, you may be unable to resell your Notes for an
extended period of time, if at all. Also, the market for the New Notes may also
be materially and adversely affected by declines in the market for high-
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yield securities generally. Verio does not intend to apply for listing of the
New Notes on any securities exchange or for quotation through the Nasdaq
National Market.
RESTRICTIONS ON EXCHANGE OFFER
New Notes will be issued in exchange for Old Notes only after timely
receipt by the Exchange Agent of a properly completed and duly executed Letter
of Transmittal, including all other documents required by such Letter of
Transmittal. Therefore, if you desire to tender your Old Notes for New Notes you
should allow sufficient time to ensure timely delivery. Neither the Exchange
Agent nor Verio is under any duty to give notification of any defects or
irregularities with respect to the tenders of Old Notes. Each broker-dealer that
receives New Notes for its own account in the Exchange Offer must deliver a
prospectus in connection with any resale of such New Notes. See "The Exchange
Offer -- Resales of the New Notes" and "Plan of Distribution."
CONSEQUENCES OF FAILURE TO EXCHANGE
If you do not exchange your Old Notes for New Notes, the restrictions on
transfer of your Old Notes contained in the legend on the Old Notes will
continue to apply. In general, the Old Notes may not be offered or sold, unless
registered or exempt from registration under the Securities Act and applicable
state securities laws. Verio does not anticipate that it will register the Old
Notes under the Securities Act. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Notes could be adversely affected. Generally, if you do not
exchange your Old Notes, any rights you might have under the Registration Rights
Agreement will terminate.
YEAR 2000 COMPLIANCE
Verio is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "Year 2000" problem
is concerned with whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate wrong data or fail. The Year
2000 problem is pervasive and complex, as virtually every company's computer
operations will potentially be affected in some way.
Verio is currently engaged in a phased process to evaluate its internal
status with respect to the Year 2000 issue. In the first phase, completed in the
fourth quarter of 1998, Verio conducted an assessment of its national systems in
Denver, Colorado, Dallas, Texas and regional networks and systems in its east
operating region, including both IT systems and non-IT systems such as hardware
containing embedded technology, for Year 2000 compliance. The network systems of
Verio's operating regions are substantially similar in technology. If issues are
uncovered and resolved during the assessment of the east operating region, such
resolutions will be directly applied to other operating regions.
Verio hired outside consultants and utilized certain employees in its
evaluation of possible Year 2000 problems. The costs and expenses of such
outside consultants and employees have not been material. To date, Verio has not
discovered Year 2000 issues in the course of its assessment that would have a
material adverse effect on its business, results of operations or financial
condition; however, Verio cannot assure that all Year 2000 issues were
discovered during the assessment or that it will not discover additional Year
2000 issues that could have such an effect.
Phase two of the Verio phased process, which is expected to be completed
during the second quarter of 1999, will involve taking any needed corrective
action to bring systems into compliance and to develop a contingency plan in the
event any non-compliant critical systems remain by January 1, 2000. The
continued consolidation of Verio's operations, provisioning of national
operation systems, and standard maintenance updates is critical to the
successful completion of Verio's Year 2000 plan. As part of phase two, Verio
will attempt to quantify the impact, if any, of the failure to complete any
necessary corrective action. Although Verio cannot currently estimate the
magnitude of such impact, if systems material to its operations have not been
made Year 2000 compliant upon completion of this phase, the Year 2000 issue
could adversely affect Verio.
To date, the costs incurred with respect to phase two have not been
material. Future costs are difficult to estimate; however, Verio does not
currently anticipate that such costs will be material.
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Concurrently with the analysis of Verio's internal systems, Verio has begun
to survey third-party entities with which it transacts business, including
critical vendors and financial institutions, for Year 2000 compliance. With
respect to the most critical vendors, Verio is in the process of evaluating the
Year 2000 preparedness of its telecommunications providers, on which Verio is
reliant for the network services crucial to Web hosting and Internet
connectivity services. Verio is actively working to mitigate any potential
impact by maintaining diverse providers for such network services. However,
failure of any one provider may have a material impact on Verio's operations.
Verio expects to complete this survey in the first quarter of 1999. At this time
Verio cannot estimate the effect, if any, that non-compliant systems at these
entities could have on Verio, and Verio cannot assure that the impact, if any,
will not be material.
Prior to completing the Hiway acquisition, Hiway separately worked with an
independent consultant to evaluate its applications, services, operating
systems, software, servers, networking equipment and other hardware for Year
2000 compliance. This evaluation focused on whether Hiway's operations or
assets, including the provision of Web hosting and Internet connectivity,
accounting and customer billing, and other infrastructure would encounter any
Year 2000 problems. Hiway's Year 2000 project was divided into three
phases -- Assessment, Remediation Planning and Remediation and Testing with
progress tracked by phase and function. The costs associated with Hiway's Year
2000 project have not, and are not anticipated to be material. As part of
Verio's Year 2000 readiness plan, Verio will consolidate Hiway's Year 2000
project with Verio's Year 2000 plan.
FORWARD-LOOKING STATEMENTS
The statements contained in this Prospectus that are not historical fact
are "forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act")). The safe harbor provisions
provided in Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") apply to forward-looking
statements Verio makes. 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. Verio wishes to caution you that these forward-looking statements
addressing the timing, costs and scope of its acquisition of, or investments in,
existing ISPs, the revenue and profitability levels of the ISPs in which it
invests, the anticipated reduction in operating costs resulting from the
integration and optimization of those ISPs, and other matters contained above
and in this Prospectus regarding matters that are not historical facts, are only
predictions. Verio cannot assure that the future results indicated, whether
expressed or implied, will be achieved. While sometimes presented with numerical
specificity, these projections and other forward-looking statements are based
upon a variety of assumptions relating to Verio's business, which, although
Verio considered reasonable, may not be realized. Because of the number and
uncertainties of the assumptions underlying Verio's projections and
forward-looking statements, some of the assumptions may not materialize and
unanticipated events and circumstances may occur subsequent to the date of this
Prospectus. These forward-looking statements are based on current expectations,
and Verio assumes no obligation to update this information. Verio's actual
experience and results achieved during the period covered 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 person that these estimates and projections will be realized,
and actual results may vary materially.
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THE EXCHANGE OFFER
The summary herein of certain provisions of the Registration Rights
Agreement, does not purport to be complete and reference is made to the
provisions of the Registration Rights Agreement, which has been filed as an
exhibit to the Registration Statement of which this Prospectus constitutes a
part, and copies of which are available upon request to the Company.
PURPOSE AND EFFECT
The Old Notes were sold by the Issuer to Salomon Smith Barney Inc., Credit
Suisse First Boston Corporation, Donaldson, Lufkin & Jenrette Securities
Corporation and First Union Capital Markets (together, the "Initial Purchasers")
on November 20, 1998. The Initial Purchasers subsequently resold the Old Notes
in reliance on Rule 144A under the Securities Act. The Issuer and the Initial
Purchasers entered into the Registration Rights Agreement, pursuant to which the
Issuer agreed, with respect to the Old Notes and subject to the Issuer's
determination that the Exchange Offer is permitted under applicable law, to (i)
cause to be filed, on or prior to February 18, 1999, a registration statement
with the Commission under the Securities Act concerning the Exchange Offer with
respect to the Notes, and (ii) use its best efforts (a) to cause such
registration statement to be declared effective by the Commission on or prior to
May 17, 1999, and (b) to consummate the Exchange Offer with respect to the Notes
on or prior to June 16, 1999. The Issuer will keep the Exchange Offer with
respect to the Notes open for a period of not less than 30 days (or longer if
required by applicable law) after the date the notice of the Exchange Offer is
mailed to the holders of the Old Notes. The Exchange Offer is intended to
satisfy the Issuer's exchange offer obligations under the Registration Rights
Agreement.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Following the expiration of the Exchange Offer, holders of Old Notes not
tendered, or not properly tendered, will not have any further registration
rights and such Old Notes will continue to be subject to the existing
restrictions on transfer thereof. Accordingly, the liquidity of the market for a
holder's Old Notes could be adversely affected upon expiration of the Exchange
Offer if such holder elects not to participate in such Exchange Offer.
TERMS OF THE EXCHANGE OFFER
The Issuer hereby offers, upon the terms and subject to the conditions set
forth herein and in the accompanying Letter of Transmittal, to exchange up to
$400.0 million aggregate principal amount of New Notes for up to $400.0 million
aggregate principal amount of the outstanding Old Notes. The Issuer will accept
for exchange any and all Old Notes that are validly tendered on or prior to 5:00
p.m., New York City time, on the Expiration Date. The Issuer will issue $1,000
principal amount of New Notes in exchange of each $1,000 principal amount of
outstanding Old Notes accepted in the Exchange Offer. Holders may tender some or
all of their Old Notes pursuant to the Exchange Offer. However, Old Notes may be
tendered only in integral multiples of $1,000. Tenders of the Old Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date. The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange. However, the Exchange Offer is subject to
the terms and provisions of the Registration Rights Agreement. See
"-- Conditions of the Exchange Offer."
As of the date of this Prospectus, $400.0 million in aggregate principal
amount of the Old Notes is outstanding. As of January 13, 1999, there was one
registered holder of Old Notes with 43 DTC participants. Only a holder of the
Old Notes (or such holder's legal representative or attorney-in-fact) may
participate in the Exchange Offer. There will be no fixed record date for
determining holders of the Old Notes entitled to participate in the Exchange
Offer. The Issuer believes that, as of the date of this Prospectus, no holder of
Old Notes is an affiliate (as defined in Rule 405 under the Securities Act) of
the Issuer.
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The Issuer shall be deemed to have accepted validly tendered Old Notes
when, as and if the Issuer has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Old Notes and for the purposes of receiving the New Notes from the Issuer.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Expiration Date shall be , 1999 at 5:00 p.m., New York City
time, unless the Issuer, in its sole discretion, extends the Exchange Offer, in
which case the Expiration Date shall be the latest date and time to which the
Exchange Offer is extended.
In order to extend the Exchange Offer, the Issuer will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
The Issuer reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, (ii) to extend the Exchange Offer, in which event the
term "Expiration Date" shall mean the latest time and date to which the Exchange
Offer is extended, and (iii) to amend the terms of the Exchange Offer in any
manner. If the Exchange Offer is amended in a manner determined by the Issuer to
constitute a material change, the Issuer will promptly disclose such amendments
by means of a Prospectus supplement that will be distributed to the registered
holders of the Old Notes subject to the Exchange Offer. Modifications of the
Exchange Offer, including but not limited to extension of the period during
which the Exchange Offer is open, may require that at least five business days
remain in the Exchange Offer. In order to extend the Exchange Offer, the Issuer
will notify the Exchange Agent of any extension by oral or written notice and
will make a public announcement thereof, each prior to 9:00 a.m., New York City
time, on the next business day after the previously scheduled Expiration Date.
CONDITIONS OF THE EXCHANGE OFFER
The Exchange Offer is not conditioned upon any minimum principal amount of
the Old Notes being tendered for exchange. However, the Exchange Offer is
conditioned upon the declaration by the Commission of the effectiveness of the
Registration Statement of which this Prospectus constitutes a part.
ACCRUED INTEREST
The New Notes will bear interest at a rate equal to 11 1/4% per annum from
and including their date of issuance. Holders whose Old Notes are accepted for
exchange will have the right to receive interest accrued thereon from the last
date on which interest was paid on the Old Notes, or if no interest had been
paid on such Old Notes, from the date of their original issue, to, but not
including, the date of issuance of the New Notes accepted for exchange, which
interest accrued at the rate of 11 1/4% per annum, and will cease to accrue on
the day prior to the issuance of the New Notes. See "Description of the
Notes -- Maturity, Interest and Principal."
PROCEDURE FOR TENDERING OLD NOTES
The tender of a holder's Old Notes as set forth below and the acceptance
thereof by the Issuer will constitute a binding agreement between the tendering
holder and the Issuer upon the terms and subject to the conditions set forth in
this Prospectus and in the accompanying Letter of Transmittal. Except as set
forth below, a holder who wishes to tender Old Notes for exchange pursuant to
the Exchange Offer must transmit such Old Notes, together with a properly
completed and duly executed Letter of Transmittal, including all other documents
required by such Letter of Transmittal, to the Exchange Agent at the address set
forth on the back cover page of this Prospectus prior to 5:00 p.m., New York
City time, on the Expiration Date. THE
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METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SUCH DELIVERY IS BY
MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT
THE HOLDER USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
Any financial institution that is a participant in DTC's Book-Entry
Transfer Facility system may make book-entry delivery of the Old Notes by
causing DTC to transfer such Old Notes into the Exchange Agent's account in
accordance with DTC's procedures for such transfer. In connection with a
book-entry transfer, a Letter of Transmittal need not be transmitted to the
Exchange Agent, provided that the book-entry transfer procedure is made in
accordance with DTC's ATOP (as defined below) procedures for transfer and such
procedures are complied with prior to 5:00 p.m., New York City time, on the
Expiration Date.
DTC's Automated Tender Offer Program ("ATOP") is the only method of
processing exchange offers through DTC. To accept the Exchange Offer through
ATOP, participants in DTC must send electronic instructions to DTC through DTC's
communication system, prior to 5:00 p.m., New York City time, on the Expiration
Date, in place of sending a signed, hard copy Letter of Transmittal. DTC is
obligated to communicate those electronic instructions to the Exchange Agent by
an "Agent's Message." To tender Old Notes through ATOP, the electronic
instructions sent to DTC and transmitted by DTC to the Exchange Agent must
contain the participant's acknowledgement of its receipt of and agreement to be
bound by the Letter of Transmittal for such Old Notes.
Each signature on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant hereto are tendered (i) by a registered holder of the Old Notes who has
not completed either the box entitled "Special Exchange Instructions" or the box
entitled "Special Delivery Instructions" in the Letter of Transmittal, or (ii)
by an Eligible Institution (as defined below). In the event that a signature on
a Letter of Transmittal or a notice of withdrawal, as the case may be, is
required to be guaranteed, such guarantee must be by a firm which is a member of
a registered national securities exchange or the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or otherwise be an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange Act
(collectively, "Eligible Institutions"). If the Letter of Transmittal is signed
by a person other than the registered holder of the Old Notes, the Old Notes
surrendered for exchange must either (i) be endorsed by the registered holder,
with the signature thereon guaranteed by an Eligible Institution or (ii) be
accompanied by a bond power, in satisfactory form as determined by the Issuer in
its sole discretion, duly executed by the registered holder, with the signature
thereon guaranteed by an Eligible Institution. The term "registered holder" as
used herein with respect to the Old Notes means any person in whose name the Old
Notes are registered on the books of the Registrar.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Old Notes tendered for exchange will be
determined by the Issuer in its sole discretion, which determination shall be
final and binding. The Issuer reserves the absolute right to reject any and all
Old Notes not properly tendered and to reject any Old Notes the Issuer's
acceptance of which might, in the judgment of the Issuer or its counsel, be
unlawful. The Issuer also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offer as to particular Old Notes
either before or after the Expiration Date (including the right to waive the
ineligibility of any holder who seeks to tender Old Notes in the Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offer
(including the Letter of Transmittal and the instructions thereto) by the Issuer
shall be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes for exchange must be
cured within such period of time as the Issuer shall determine. The Issuer will
use reasonable efforts to give notification of defects or irregularities with
respect to tenders of Old Notes for exchange but shall not incur any liability
for failure to give such notification. Tenders of the Old Notes will not be
deemed to have been made until such irregularities have been cured or waived.
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If any Letter of Transmittal, endorsement, bond power, power of attorney or
any other document required by the Letter of Transmittal is signed by a trustee,
executor, corporation or other person acting in a fiduciary or representative
capacity, such person should so indicate when signing, and, unless waived by the
Issuer, proper evidence satisfactory to the Issuer, in its sole discretion, of
such person's authority to so act must be submitted.
Any beneficial owner of the Old Notes (a "Beneficial Owner") whose Old
Notes are registered in the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender Old Notes in the Exchange
Offer should contact such registered holder promptly and instruct such
registered holder to tender on such Beneficial Owner's behalf. If such
Beneficial Owner wishes to tender directly, such Beneficial Owner must, prior to
completing and executing the Letter of Transmittal and tendering Old Notes, make
appropriate arrangements to register ownership of the Old Notes in such
Beneficial Owner's name. Beneficial Owners should be aware that the transfer of
registered ownership may take considerable time.
By tendering, each registered holder will represent to the Issuer that,
among other things, (i) the New Notes to be acquired in connection with the
Exchange Offer by the holder and each Beneficial Owner of the Old Notes are
being acquired by the holder and each Beneficial Owner in the ordinary course of
business of the holder and each Beneficial Owner, (ii) the holder and each
Beneficial Owner are not participating, do not intend to participate, and have
no arrangement or understanding with any person to participate, in the
distribution of the New Notes, (iii) the holder and each Beneficial Owner
acknowledge and agree that any person participating in such Exchange Offer for
the purpose of distributing the New Notes must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction of the New Notes acquired by such person and cannot
rely on the position of the staff of the Commission set forth in no-action
letters that are discussed herein under "Resales of New Notes," (iv) that if the
holder is a broker-dealer that acquired Old Notes as a result of market making
or other trading activities, it will deliver a prospectus in connection with any
resale of New Notes acquired in such Exchange Offer, (v) the holder and each
Beneficial Owner understand that a secondary resale transaction described in
clause (iii) above should be covered by an effective registration statement
containing the selling security holder information required by item 507 of
Regulation S-K of the Commission, and (vi) neither the holder nor any Beneficial
Owner is an "affiliate," as defined under Rule 405 of the Securities Act, of the
Issuer except as otherwise disclosed to the Issuer in writing. In connection
with a book-entry transfer, each participant will confirm that it makes the
representations and warranties contained in the Letter of Transmittal.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes or any other
documents required by the Letter of Transmittal to the Exchange Agent prior to
the Expiration Date (or complete the procedure for book-entry transfer on a
timely basis), may tender their Old Notes according to the guaranteed delivery
procedures set forth in the Letter of Transmittal. Pursuant to such procedures:
(i) such tender must be made by or through an Eligible Institution and a Notice
of Guaranteed Delivery (as defined in the Letter of Transmittal) must be signed
by such Holder; (ii) on or prior to the Expiration Date, the Exchange Agent must
have received from the Holder and the Eligible Institution a properly completed
and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail
or hand delivery) setting forth the name and address of the Holder, the
certificate number or numbers of the tendered Old Notes, and the principal
amount of tendered Old Notes, stating that the tender is being made thereby and
guaranteeing that, within five New York Stock Exchange trading days after the
date of delivery of the Notice of Guaranteed Delivery, the tendered Old Notes, a
duly executed Letter of Transmittal and any other required documents will be
deposited by the Eligible Institution with the Exchange Agent; and (iii) such
properly completed and executed documents required by the Letter of Transmittal
and the tendered Old Notes in proper form for transfer (or confirmation of a
book-entry transfer of such Old Notes into the Exchange Agent's account at DTC)
must be received by the Exchange Agent within five New York Stock Exchange
trading days after the Expiration Date. Any Holder who wishes to tender Old
Notes pursuant to the guaranteed delivery procedures described above must ensure
that the Exchange Agent receives the Notice of Guaranteed Delivery and Letter of
Transmittal relating to such Old
27
<PAGE> 29
Notes prior to 5:00 p.m., New York City time, on the Expiration Date. DTC
participants may also submit the Notice of Guaranteed Delivery through ATOP.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all the conditions to the Exchange Offer,
the Issuer will accept any and all Old Notes that are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date.
The New Notes issued pursuant to the Exchange Offer will be delivered promptly
after acceptance of the Old Notes. For purposes of the Exchange Offer, the
Issuer shall be deemed to have accepted validly tendered Old Notes, when, as,
and if the Issuer has given oral or written notice thereof to the Exchange
Agent.
In all cases, issuances of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Notes, a properly completed and duly executed
Letter of Transmittal and all other required documents (or of confirmation of a
book-entry transfer of such Old Notes into the Exchange Agent's account at DTC);
provided, however, that the Issuer reserves the absolute right to waive any
defects or irregularities in the tender or conditions of the Exchange Offer. If
any tendered Old Notes are not accepted for any reason, such unaccepted Old
Notes will be returned without expense to the tendering Holder thereof as
promptly as practicable after the expiration or termination of the Exchange
Offer.
WITHDRAWAL RIGHTS
Tenders of the Old Notes may be withdrawn by delivery of a written notice
(or for DTC participants, transmission of notice through ATOP) to the Exchange
Agent, at its address set forth on the back cover page of this Prospectus, at
any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any
such notice of withdrawal must (i) specify the name of the person having
deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old
Notes to be withdrawn (including the certificate number or numbers and principal
amount of such Old Notes, as applicable), (iii) be signed by the Holder in the
same manner as the original signature on the Letter of Transmittal by which such
Old Notes were tendered (including any required signature guarantees) or be
accompanied by a bond power in the name of the person withdrawing the tender, in
satisfactory form as determined by the Issuer in its sole discretion, duly
executed by the registered holder, with the signature thereon guaranteed by an
Eligible Institution together with the other documents required upon transfer by
the Indenture, and (iv) specify the name in which such Old Notes are to be
re-registered, if different from the Depositor, pursuant to such documents of
transfer. Any questions as to the validity, form and eligibility (including time
of receipt) of such notices will be determined by the Issuer, in its sole
discretion. The Old Notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the Exchange Offer. Any Old Notes which
have been tendered for exchange but which are withdrawn will be returned to the
Holder thereof without cost to such Holder as soon as practicable after
withdrawal. Properly withdrawn Old Notes may be retendered by following one of
the procedures described under "The Exchange Offer -- Procedure for Tendering
Old Notes" at any time on or prior to the Expiration Date.
28
<PAGE> 30
THE EXCHANGE AGENT; ASSISTANCE
U.S. Bank Trust National Association is the Exchange Agent. All tendered
Old Notes, executed Letters of Transmittal and other related documents should be
directed to the Exchange Agent. Questions and requests for assistance and
requests for additional copies of this Prospectus, the Letter of Transmittal and
other related documents should be addressed to the Exchange Agent as follows:
By Hand, or Overnight Courier:
U.S. BANK TRUST NATIONAL ASSOCIATION
180 East Fifth Street
St. Paul, MN 55101
Attn: Specialized Finance Department
Facsimile Transmissions (Eligible Institutions Only):
(612) 244-1537
To confirm by telephone or for information call:
(612) 244-1197
By Mail:
U.S. BANK TRUST NATIONAL ASSOCIATION
180 East Fifth Street
St. Paul, MN 55101
Attn: Specialized Finance Department
FEES AND EXPENSES
All expenses incident to the Issuer's consummation of the Exchange Offer
and compliance with the Registration Rights Agreement, will be borne by the
Issuer, including, without limitation: (i) all applicable Commission, stock
exchange or National Association of Securities Dealers, Inc. ("NASD")
registration and filing fees; (ii) all fees and expenses incurred in connection
with compliance with state securities or blue sky laws (including reasonable
fees and disbursements of one counsel for holders that are Initial Purchasers in
connection with blue sky qualifications of any of the New Notes) and compliance
with the rules of the NASD; (iii) all applicable expenses incurred by the Issuer
in preparing or assisting in preparing, word processing, printing and
distributing any registration statement, any prospectus and any amendments or
supplements thereto, and in preparing or assisting in preparing any other
documents relating to the performance of and compliance with the Registration
Rights Agreement; (iv) all rating agency fees, if any; and (v) the fees and
disbursements of counsel for the Issuer.
The Issuer has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers of others
soliciting acceptance of the Exchange Offer. The Issuer, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
29
<PAGE> 31
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
as reflected in the Issuer's accounting records on the date of the exchange.
Accordingly, no gain or loss will be recognized by the Issuer for accounting
purposes. The expenses of the Exchange Offer will be amortized over the term of
the New Notes.
RESALES OF THE NEW NOTES
Based on the position of the staff of the Commission as set forth in
certain interpretive letters issued to third parties in other transactions, the
Issuer believes that the New Notes issued pursuant to the Exchange Offer to any
holder of Old Notes in exchange for Old Notes may be offered for resale, resold
and otherwise transferred by such holder (other than (i) a broker-dealer who
purchased Old Notes directly from the Issuer for resale pursuant to Rule 144A
under the Securities Act or any other available exemption under the Securities
Act, or (ii) a person that is an affiliate of the Issuer within the meaning of
Rule 405 under the Securities Act) without further compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such holder is acquiring the New Notes in the ordinary course of business
and is not participating, and has no arrangement or understanding with any
person to participate, in the distribution of the New Notes. However, the Issuer
has not sought its own interpretive letter and there can be no assurance that
the Commission would make a similar determination with respect to the Exchange
Offer. The Issuer and holders of Old Notes are not entitled to rely on
interpretive advice provided by the staff or other persons, which advice was
based on the facts and conditions represented in such letters. However, the
Exchange Offer is being conducted in a manner intended to be consistent with the
facts and conditions represented in such letters. If any holder acquires New
Notes in the Exchange Offer for the purpose of distributing or participating in
a distribution of the New Notes, such holder cannot rely on the position of the
staff of the Commission enunciated in Morgan Stanley & Co. Incorporated
(available June 5, 1991) and Exxon Capital Holdings Corporation (available May
13, 1989), or interpreted in the Commission's letter to Shearman and Sterling
(available July 2, 1993), or similar no-action or interpretive letters and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction, unless an
exemption from registration is otherwise available. Each broker-dealer that
receives New Notes for its own account in exchange for Old Notes, where such Old
Notes were acquired by such broker-dealer as a result of market making or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "Plan of Distribution."
It is expected that the New Notes will be freely transferable by the
holders thereof, subject to the limitations described in the immediately
preceding paragraph. Sales of New Notes acquired in the Exchange Offer by
holders who are "affiliates" of the Issuer within the meaning of the Securities
Act will be subject to certain limitations on resale under Rule 144 of the
Securities Act (if applicable). Such persons will only be entitled to sell New
Notes in compliance with the volume limitations set forth in Rule 144, and sales
of New Notes by affiliates will be subject to certain Rule 144 requirements as
to the manner of sale, notice and the availability of current public information
regarding the Issuer. The foregoing is a summary only of Rule 144 as it may
apply to affiliates of the Issuer. Any such persons must consult their own legal
counsel for advice as to any restrictions that might apply to the resale of
their New Notes.
30
<PAGE> 32
USE OF PROCEEDS
There will be no cash proceeds payable to the Company from the issuance of
the New Notes pursuant to the Exchange Offer.
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. In consideration for
issuing the New Notes as contemplated in this Prospectus, the Issuer will
receive in exchange Old Notes in like principal amount, the form and terms of
which are the same in all material respects as the form and terms of the New
Notes except that the New Notes will be registered under the Securities Act and
hence do not include certain rights to registration thereunder. The Old Notes
surrendered in exchange for New Notes will be retired and canceled and cannot be
reissued. Accordingly, issuance of the New Notes will not result in any increase
in the indebtedness of the Company.
Net proceeds from the offering of the Old Notes (after deducting the
Initial Purchasers' discounts and expenses payable by the Issuer) were
approximately $389.0 million. The net proceeds from the offering of the Old
Notes have been and continue to be used to further the Company's ISP acquisition
and investment strategy, to continue the development and implementation of the
national backbone, customer care center, network operations center and billing
and accounting services, and to support the Company's general working capital
purposes. Pending application of the proceeds as described above, the Company
has invested the net proceeds of the issuance of the Old Notes in short-term,
interest-bearing, investment-grade securities.
DIVIDEND POLICY
The Company has never declared or paid any dividends on its common stock
(the "Common Stock") and does not expect to pay dividends in the foreseeable
future. The Company's current policy is to retain all of its earnings to finance
future growth and acquisitions. Furthermore, the terms of the indentures
relating to each of the Notes, the 1997 Notes and the March 1998 Notes, as well
as the Bank Facility, place limitations on the Company's ability to pay
dividends. Future dividends, if any, will be at the discretion of the Company's
Board of Directors and will depend upon, among other things, the Company's
operations, capital requirements and surplus, general financial condition,
contractual restrictions and such other factors as the Board of Directors may
deem relevant. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
31
<PAGE> 33
CAPITALIZATION
(Amounts in Thousands)
The following table sets forth at September 30, 1998 (i) the actual
capitalization of Verio, and (ii) the pro forma capitalization adjusted for the
September 30, 1998 Completed Acquisitions, the WWW acquisition and the Hiway
acquisition, and (iii) the pro forma capitalization adjusted to give effect to
the Old Notes. This table should be read in conjunction with the Selected
Consolidated Financial Data, the Unaudited Pro Forma Condensed Combined
Financial Statements and the Historical Consolidated Financial Statements and
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
------------------------------------------
PRO FORMA
HISTORICAL PRO FORMA(1) AS ADJUSTED(2)
---------- ------------ --------------
<S> <C> <C> <C>
Cash and cash equivalents.............................. $ 245,912 $ 65,925 $ 450,925
Restricted cash and securities......................... 21,397 21,397 21,397
========= ========= =========
Long-term debt and capital lease obligations, net of
current portions..................................... 274,452 280,506 680,506
--------- --------- ---------
Stockholders equity:
Common stock, par value $0.001 per share; 125,000,000
shares authorized; 32,789,776 shares outstanding
historical and pro forma; 37,709,776 shares pro
forma as adjusted; and additional paid in
capital(3)........................................ 374,387 449,107 449,107
Accumulated deficit.................................. (139,780) (139,780) (139,780)
--------- --------- ---------
Total stockholders' equity................... 234,607 309,327 309,327
--------- --------- ---------
Total capitalization......................... $ 509,059 $ 589,833 $ 989,833
========= ========= =========
</TABLE>
- ---------------
(1) Pro forma for the September 30, 1998 Completed Acquisitions, the WWW
acquisition and the Hiway acquisition, as if they had occurred on September
30, 1998. See "Unaudited Pro Forma Condensed Combined Financial Statements"
and the notes thereto.
(2) As adjusted to give effect to the Old Notes after deducting Initial
Purchasers' discounts and estimated expenses.
(3) Does not include 4,633,084 shares of Verio's Common Stock reserved for
issuance pursuant to outstanding stock options or 1,697,019 shares issuable
upon exercise of outstanding warrants, each as of September 30, 1998.
32
<PAGE> 34
SELECTED CONSOLIDATED FINANCIAL DATA
(Amounts in Thousands, Except Share Data)
The selected historical consolidated financial data as of December 31,
1997, and for the period from inception (March 1, 1996) to December 31, 1996,
and the year ended December 31, 1997 have been derived from the audited
Consolidated Financial Statements of the Company included elsewhere in this
Prospectus. The selected historical consolidated financial data as of September
30, 1998 and for the nine-month periods ended September 30, 1997 and 1998 have
been derived from the Company's unaudited Consolidated Financial Statements,
also included herein.
The information set forth below should be read in conjunction with the
Unaudited Pro Forma Condensed Combined Financial Statements and the historical
Consolidated Financial Statements of the Company and the notes thereto included
elsewhere in this Prospectus. Results of operations for the period from
inception to December 31, 1996, the year ended December 31, 1997 and the
nine-month periods ended September 30, 1997 and 1998 are not necessarily
indicative of results of operations for future periods. The Company's
development and expansion activities, including acquisitions, during the periods
shown below significantly affect the comparability of this data from one period
to another. All significant adjustments, consisting of only normal recurring
adjustments, which, in the opinion of management, are necessary for a fair
presentation of the Company's financial position and results of operations as of
September 30, 1998 and for the nine-month periods ended September 30, 1997 and
1998 have been included. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
NINE MONTHS ENDED SEPTEMBER 30,
YEAR ENDED -----------------------------------------
(MARCH 1, 1996) DECEMBER 31, 1997 HISTORICAL PRO FORMA(1)
TO DECEMBER 31, -------------------------- -------------------------- ------------
1996 HISTORICAL PRO FORMA(1) 1997 1998 1998
--------------- ---------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Dedicated connectivity.............. $ 1,100 $ 16,383 $ 54,996 $ 10,120 $ 36,924 $ 45,689
Dial-up connectivity................ 1,139 7,093 17,173 4,314 16,272 18,781
Enhanced services and other......... 126 12,216 53,114 7,853 30,347 65,730
-------- ---------- ---------- ---------- ----------- -----------
Total revenue................. 2,365 35,692 125,283 22,287 83,543 130,200
Costs and expenses:
Internet services operating costs... 974 15,974 47,022 9,504 37,928 49,194
Selling, general and administrative
and other......................... 7,002 49,383 102,798 31,233 80,941 111,300
Stock option related compensation
and severance costs............... -- -- -- -- 3,040 6,680
Depreciation and amortization....... 669 10,624 57,334 6,737 26,818 51,742
-------- ---------- ---------- ---------- ----------- -----------
Total costs and expenses...... 8,645 75,981 207,154 47,474 148,727 218,916
-------- ---------- ---------- ---------- ----------- -----------
Loss from operations.................. (6,280) (40,289) (81,871) (25,187) (65,184) (88,716)
Other income (expense):
Interest income..................... 593 6,080 6,223 4,068 9,381 9,420
Interest expense(2)................. (115) (11,826) (12,585) (5,899) (22,860) (22,981)
Equity in losses of affiliates...... -- (1,958) -- (1,642) -- --
Minority interests.................. 680 1,924 -- 1,638 545 184
-------- ---------- ---------- ---------- ----------- -----------
Loss before extraordinary item...... (5,122) (46,069) $ (88,233) (27,022) (78,118) $ (102,093)
========== ===========
Extraordinary item -- loss related
to debt repurchase................ -- -- -- (10,101)
-------- ---------- ---------- -----------
Net loss...................... (5,122) (46,069) (27,022) (88,219)
Accretion of preferred stock to
liquidation value................... (23) (260) (179) (87)
-------- ---------- ---------- -----------
Net loss attributable to common
stockholders........................ $ (5,145) $ (46,329) $ (27,201) $ (88,306)
======== ========== ========== ===========
Loss per common share -- basic and
diluted(3):
Loss per common share before
extraordinary item................ $ (5.29) $ (40.47) $ (14.55) $ (24.11) $ (4.49) $ (4.56)
======== ========== ========== ========== =========== ===========
Loss per common share............... $ (5.29) $ (40.47) $ (14.55) $ (24.11) $ (5.06)
======== ========== ========== ========== ===========
Weighted average common shares
outstanding -- basic and diluted.... 971,748 1,144,685 6,064,685 1,128,004 17,462,447 22,382,447
======== ========== ========== ========= ========== ===========
</TABLE>
33
<PAGE> 35
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
NINE MONTHS ENDED SEPTEMBER 30,
YEAR ENDED --------------------------------------
(MARCH 1, 1996) DECEMBER 31, 1997 HISTORICAL PRO FORMA(1)
TO DECEMBER 31, ------------------------- ----------------------- ------------
1996 HISTORICAL PRO FORMA(1) 1997 1998 1998
--------------- ---------- ------------ --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(4)............................. $(5,611) $ (29,665) $ (24,537) $ (18,450) $ (38,366) $ (36,974)
Capital expenditures(5)............... 3,430 14,547 11,002 15,327
Ratio of earnings to fixed
charges(6).......................... -- -- -- -- -- --
Cash flows information:
Net cash used by operating
activities........................ (2,326) (35,323) (20,462) (36,257)
Net cash used by investing
activities........................ (9,123) (120,330) (89,375) (119,312)
Net cash provided by financing
activities........................ 77,916 161,772 163,002 328,895
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
AS OF DECEMBER 31, ------------------------------------------
--------------------- PRO FORMA
1996 1997 HISTORICAL PRO FORMA(1) AS ADJUSTED(7)
------- -------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................... $66,467 $ 72,586 $245,912 $ 61,925 $ 450,925
Restricted cash and securities................. -- 40,554 21,397 21,397 21,397
Goodwill, net.................................. 8,736 83,216 210,047 459,664 459,664
Total assets................................... 82,628 246,471 562,329 652,128 1,052,128
Long-term debt and capital lease obligations,
net of discount.............................. 106 142,321 274,452 280,506 680,506
Redeemable preferred stock..................... 76,877 97,249 -- -- --
Stockholders' equity (deficit)................. (4,055) (27,001) 234,607 309,327 309,327
</TABLE>
- ---------------
(1) Pro forma for the September 30, 1998 Completed Acquisitions, the WWW
acquisition and the Hiway acquisition as if they had occurred on September
30, 1998 for balance sheet purposes and on January 1, 1997 for statement of
operations data purposes. See "Unaudited Pro Forma Condensed Combined
Financial Statements" and the notes thereto.
(2) Pro forma interest expense, including amortization of debt issuance costs,
assuming that the Old Notes had been issued on January 1, 1997, would
increase by $46.1 million and $34.6 million for the year ended December 31,
1997 and the nine months ended September 30, 1998, respectively.
(3) The Company paid no cash dividends on its Common Stock during the period
from inception (March 1, 1996) to December 31, 1996, the year ended December
31, 1997, and the nine-month periods ended September 30, 1997 and 1998.
(4) EBITDA represents earnings (loss) from operations before interest, taxes,
depreciation, amortization and provision for loss on write-offs of
investments in ISPs and fixed assets and includes non-cash stock option
compensation and severance costs of $3.0 million and $6.7 million on a
historical and pro forma basis, respectively, for the nine months ended
September 30, 1998. The primary measure of operating performance is net
earnings (loss). Although EBITDA is a measure commonly used in the Company's
industry, it should not be construed as an alternative to net earnings
(loss), determined in accordance with GAAP, as an indicator of operating
performance or as an alternative to cash flows from operating activities,
determined in accordance with GAAP. In addition, the measure of EBITDA
presented herein by the Company may not be comparable to other similarly
titled measures of other companies.
(5) Excludes equipment and leasehold improvements acquired in business
acquisitions.
(6) For the period ended December 31, 1996, the year ended December 31, 1997 and
the nine-month periods ended September 30, 1997 and 1998, earnings were
insufficient to cover combined fixed charges by $5.8 million, $48.0 million,
$28.7 million and $78.7 million, respectively. On a pro forma basis, giving
effect to the September 30, 1998 Completed Acquisitions, the WWW acquisition
and the Hiway acquisition, earnings would have been insufficient to cover
combined fixed charges by $88.2 million for the year ended December 31, 1997
and $102.3 million for the nine months ended September 30, 1998. Combined
fixed charges consist of interest expense and that portion of rent expense
the Company believes to be representative of interest (i.e., one third of
rent expense), adjusted for minority interests. See "Unaudited Pro Forma
Condensed Combined Financial Statements" and the notes thereto.
(7) As adjusted to give effect to the Old Notes after deducting Initial
Purchasers' discounts and estimated expenses.
34
<PAGE> 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is based on the historical and pro
forma results of Verio and includes a number of ISPs acquired at various times.
See "Unaudited Pro Forma Condensed Combined Financial Statements" for the basis
of presentation and those business acquisitions included therein. Investments in
ISP affiliates in which Verio acquires a minority interest are accounted for at
cost. Investments in ISP affiliates in which Verio acquires a majority interest
through the acquisition of net assets, common stock or convertible preferred
stock, and exercises significant control over the operations, are accounted for
using the purchase method of accounting and, accordingly, the financial results
of these ISPs have been consolidated with those of Verio. Certain statements set
forth below constitute "forward-looking statements" within the meaning of the
Reform Act. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of Verio, or industry results, to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Given these uncertainties, prospective investors are
cautioned not to place undue reliance on such forward-looking statements. See
"Risk Factors -- Forward-Looking Statements."
OVERVIEW
Verio is a leading provider of comprehensive business Internet
services -- such as broadband connectivity, Web hosting, virtual private
networks ("VPNs"), e-commerce and other enhanced Internet services -- with an
emphasis on serving small and medium sized businesses. Since its inception in
March 1996, Verio has rapidly established a global presence through the
acquisition, integration, and growth of local Internet service providers
("ISPs") with a business customer focus. Verio believes that small and medium
sized businesses represent an attractive target market for the provision of
Internet services due to this market's low current penetration levels and
customer churn, and the expanding Internet needs of these businesses. Verio
believes it has a unique competitive advantage in serving small and medium sized
business customers through the combination of the technical competency and
hands-on support provided through its local sales and engineering personnel with
the quality and economic efficiency of Verio's national network, operational
infrastructure and financial strength. Verio has quickly built critical mass by
acquiring the stock or assets of, or making significant investments in, over 45
ISPs that provide a comprehensive range of Internet connectivity, Web hosting
and other enhanced products and services to over 160,000 customer accounts
providing locally based sales and engineering support in 41 of the top 50 MSAs
in the U.S. under the Verio brand name and providing Web hosting services to
customers in over 150 countries. Verio and its consolidated subsidiaries had
total revenue of approximately $33.8 million for the three-month period ended
September 30, 1998. Taking into account the combined revenue of all ISP
operations acquired as of October 31, 1998, the pro forma combined revenue for
the three-month period ended September 30, 1998 would have been approximately
$35.7 million. Combined revenue includes the revenue of all of the ISPs that
were owned 51% or more on or before October 31, 1998. The acquisition of Hiway
(the "Hiway Acquisition") would have increased Verio's pro forma combined
revenue for the three months ended September 30, 1998 to approximately $46.2
million.
Initially, Verio's strategy was to acquire 51% to 100% of a large regional
ISP, and a minority interest in smaller ISPs within designated geographic
regions. Verio now generally seeks to acquire 100% of new ISPs and, during the
second quarter of 1998, Verio completed the buyout of the remaining equity
interests (each, a "Buyout") in all but one of the ISPs in which Verio initially
acquired less than a 100% interest. Since that time, Verio has undertaken to
consolidate the ownership and management of the acquired ISPs into five
geographic operating regions, and to integrate the network operations, customer
support, marketing efforts, financial and accounting systems, and other
back-office functions onto Verio's national systems, in order to capture scale
and operating efficiencies. Verio has incurred significant one-time costs in
these consolidation efforts, but expects to recognize substantial long-term cost
savings as a result of these expenditures. Verio has the contractual right to
effect the Buyout of the one remaining ISP in which it does not currently hold
100% ownership (not including V-I-A Internet, Inc. ("VIANet") in which Verio
holds an approximately 16% equity position). From January 1, 1998 through
September 30, 1998, Verio incurred costs of approximately
35
<PAGE> 37
$52.2 million, in the aggregate, in connection with a total of 11 Buyouts, and
approximately $84.8 million for acquisitions, which amounts were paid with a
combination of cash, shares of Verio stock and options to acquire stock. As a
result of its acquisitions, and the limited amount of fixed assets required to
operate an ISP, Verio has recorded significant amounts of goodwill, and expects
goodwill to increase significantly during 1998.
During July 1998, Verio announced its acquisition of NTX, Inc. d/b/a TABNet
("TABNet"), which was consummated on July 7, 1998 (the "TABNet Acquisition). In
the TABNet Acquisition, Verio paid an initial purchase price of $45.5 million in
cash to TABNet's shareholders. While the TABNet Acquisition Agreement provided
for additional contingent payments to be paid based on TABNet's performance
through the end of 1998, Verio does not currently anticipate that any material
amount of additional consideration will be required to be paid. In connection
with the Hiway acquisition, Verio paid total consideration of approximately
$176.0 million in cash and 4.92 million fully diluted shares of Common Stock to
Hiway's shareholders, option holders and warrant holders.
To fund its acquisitions and operations, through September 30, 1998, Verio
had raised approximately $320.5 million of equity capital, including
approximately $115.7 million (after deduction of underwriting discounts,
commissions and expenses) in connection with its initial public offering of
Common Stock ("the IPO") and approximately $100.0 million in connection with its
sale of Common Stock to an affiliate of Nippon Telegraph and Telephone
Corporation ("NTT"), both of which occurred in May 1998. On June 15, 1998,
pursuant to the partial exercise, at the request of the managing underwriters,
of the over-allotment option granted to the underwriters in the IPO, Verio
raised an additional $5.1 million after deduction of underwriting discounts and
commissions (the "Over-Allotment Offering"). Verio also issued $150.0 million
principal amount of 13 1/2% Senior Notes due 2004 ("the 1997 Notes") to a group
of institutional investors and Brooks Fiber Properties, Inc. ("Brooks"), $100.0
million of which remain outstanding following the repurchase of $50.0 million
principal amount of the 1997 Notes previously held by Brooks (the
"Refinancing"). On March 25, 1998, Verio consummated the sale of $175.0 million
principal amount of 10 3/8% Senior Notes due 2005 (the "March 1998 Notes"), a
portion of the proceeds of which was used to effect the Refinancing. Subsequent
to September 30, 1998, on November 25, 1998, Verio issued the Old Notes with an
aggregate principal amount of $400 million, and resulting in net proceeds to the
Company of approximately $389 million after deducting the initial purchasers'
discount and expenses. See "-- Liquidity and Capital Resources."
Verio has incurred net losses since its inception, and management expects
to incur significant additional losses as Verio continues its acquisition
program, the development of its national network, the implementation of its
national services and systems, and the integration of the operations it
acquires. For the period from inception to December 31, 1996, the year ended
December 31, 1997, and the nine-month period ended September 30, 1998, Verio
reported net losses of $5.1 million, $46.3 million, and $88.3 million,
respectively. The extent to which Verio continues to experience negative cash
flow will depend upon a number of factors, including the number and size of its
further acquisitions, the expenses and time required to integrate acquired
operations and capture operating efficiencies, and the ability to generate
increasing revenue and cash flow. While Verio anticipates that it will recognize
various economies and efficiencies of scale as a result of the integration of
the operations of the ISPs it has acquired and continues to acquire, the process
of consolidating the businesses and implementing the strategic integration of
Verio and its acquired operations may take a significant period of time, will
place a significant strain on Verio's resources, and could subject Verio to
additional expenses during the integration process. The timing and amount of
expenditures related to Verio's cost-saving initiatives and integration efforts
may be difficult to predict. Verio may increase near-term expenditures in order
to accelerate the integration and consolidation of acquired operations with the
goal of achieving longer-term cost savings and improved profitability.
36
<PAGE> 38
RESULTS OF OPERATIONS
REVENUE
Verio derives the majority of its revenue from business customers who
purchase dedicated Internet connections and enhanced services such as Web
hosting. Verio's subsidiaries offer a broad range of connectivity options to
their customers including dedicated, dial-up, Integrated Services Digital
Network ("ISDN"), frame relay and point-to-point connections. Dedicated
connection customers typically sign a contract for one to three years of service
that provides for fixed, recurring monthly service charges, and pay a one-time
setup fee. These charges vary depending on the type of service, the length of
the contract, and local market conditions. Dial-up customers also typically pay
a one-time setup fee and recurring monthly service charges. Fees and service
charges for enhanced services vary from product to product. For example, Web
hosting customers typically pay a one-time setup fee and fixed monthly service
charges that vary depending on the amount of disk space and bandwidth required.
In contrast, domain name registration customers pay a one-time fee. Additional
sources of enhanced services and other revenue include e-commerce, virtual
private networks, security services, co-location services, consulting and the
sales of equipment and customer circuits. Revenue related to Internet
connectivity and enhanced services is recognized as the services are provided.
Amounts billed relating to future periods are recorded as deferred revenue and
amortized monthly as services are rendered.
Currently, connectivity services provide a majority of total revenue.
However, revenue from enhanced services, especially Web hosting, is expected to
represent an increasing percentage of total revenue in future periods. With the
TABNet Acquisition and the Hiway Acquisition, Verio expects that revenue from
enhanced services and other revenue, including Web hosting, will exceed 50% of
its total revenue. Revenue from business customers currently represents
approximately 90% of total revenue. In addition to the growth that Verio has
achieved through acquisitions, revenue is also expected to increase due to
internal growth. In the past, Verio has experienced some seasonality in its
internal revenue growth, with the period of higher growth being the fall and
winter.
Nine months ended September 30, 1997 compared to the nine months ended
September 30, 1998
Total consolidated revenue increased 275% from $22.3 million for the nine
months ended September 30, 1997, to $83.5 million for the nine months ended
September 30, 1998. Internet connectivity represented 65% and 64% of total
revenue for the nine months ended September 30, 1997 and the nine months ended
September 30, 1998, respectively, with the balance derived from enhanced
services and other. The increase in enhanced services and other revenue as a
percentage of total revenue is due to acquisitions and increased sales of
enhanced services. The increase in revenue from the nine months ended September
30, 1997 to the nine months ended September 30, 1998 was primarily due to the
acquisitions of ISPs subsequent to September 30, 1997. Revenue attributable to
acquisitions completed subsequent to September 30, 1997 accounted for $42.2
million or 50% of total revenue for the nine months ended September 30, 1998.
The larger acquisitions completed subsequent to September 30, 1997 contributed
the following revenue amounts for the nine months ended September 30, 1998: $7.9
million from Clark Internet Services, Inc. and Monumental Network System, Inc.
(whose operations have been consolidated); $4.7 million from Internet Servers,
Inc.; and $3.4 million from TABNet.
Period from Inception to December 31, 1996 compared to the Year Ended December
31, 1997
Total consolidated revenues increased from $2.4 million for the period from
inception (March 1, 1996) to December 31, 1996 (the "1996 Period"), to $35.7
million for the year ended December 31, 1997. Internet connectivity decreased
from 95% of total revenue for the 1996 Period to 66% for the year ended December
31, 1997, with the balance derived from enhanced services and other, which
include Web hosting, consulting, sales of equipment and customer circuits. The
increase in enhanced services and other revenues as a percentage of total
revenues is because of a change in the revenue mix resulting from acquisitions
and increased sales of enhanced services. The increase in dedicated and dial-up
revenues and enhanced services and other revenues for the 1996 Period compared
to the year ended December 31, 1997 was primarily due to
37
<PAGE> 39
the acquisitions of ISPs subsequent to December 31, 1996 and the longer period
covered. Revenues attributable to acquisitions completed in 1996 accounted for
$2.4 million or 100% of total revenues for the 1996 Period. Of these
acquisitions, revenues from material acquisitions were $1.8 million from On-Ramp
Technologies, Inc. and $.5 million from RAINet, Inc. Revenues attributable to
material acquisitions completed in 1997 accounted for $23.8 million or 67% of
total revenues for the year ended December 31, 1997. Of these acquisitions,
revenues from material acquisitions were $7.7 million from NorthWestNet, Inc.
($4.4 million in connectivity revenue and $3.3 million in enhanced services and
other revenue), and $3.6 million from Global Enterprise Services ($2.3 million
in connectivity revenue and $1.3 million in enhanced services and other
revenue). Revenues attributable to ISPs consolidated for the entire year were
31% of total revenues for the year ended December 31, 1997.
COSTS OF SERVICE AND OPERATING EXPENSES
Internet services operating costs consist primarily of local
telecommunication expense, Internet access expense and the cost of equipment and
customer circuits sold. Local telecommunications expense represents the cost of
transporting data between Verio's Points of Presence ("POPs") and a transit
provider, or circuits from the customer's location to one of the POPs. As of
September 30, 1998, 35 of the ISPs acquired prior thereto were utilizing the
Verio national network for their Internet access. In March 1998, Verio signed a
long-term long haul capacity agreement with Qwest Communications Corporation
("Qwest") (the "Capacity Agreement") in order to reduce the per unit costs of
such services. There will not be a significant effect on the results for 1998
from this agreement due to the time required to convert from existing circuits;
however, Verio expects that the pricing advantages provided by this agreement
will substantially reduce the cost of these services in future years.
Additionally, Verio has the right to prepay its minimum commitment, which would
allow the capitalization of costs (to the extent prepaid) under this contract.
Such capitalized costs would be amortized to operations over the term of the
agreement. The amount of the prepayment at September 30, 1998 would have been
approximately $60.0 million. Verio has incurred certain one-time expenses in
connection with the cancellation of Internet access contracts of acquired ISPs
and the consolidation of duplicate POPs that resulted from overlapping
acquisitions, closing a total of 31 POPs during the first nine months of 1998.
Selling, general and administrative and other expenses consist primarily of
salaries and related employment expenses, consulting, travel and entertainment,
rent, and utilities. During the three months ended September 30, 1998, Verio
incurred approximately $3.5 million in higher sales and marketing expenses
compared to the immediately prior three-month period, reflecting Verio's
increase in quota-carrying salespeople, a national advertising and marketing
campaign, and other sales-related efforts. In addition, Verio recorded a
one-time charge relating to integration activities of approximately $1.9 million
in connection with the elimination of approximately 250 positions, which are no
longer necessary due to the integration of these functions onto Verio's national
services.
Depreciation is provided over the estimated useful lives of the assets
ranging from 3 to 5 years using the straight-line method. The excess of cost
over the fair value of net assets acquired, or goodwill, is amortized using the
straight-line method over a ten-year period.
Nine months ended September 30, 1997 compared to the nine months ended
September 30, 1998
Internet services operating costs were 43% and 45% of total revenue for the
nine months ended September 30, 1997 and the nine months ended September 30,
1998, respectively. Total consolidated Internet services operating costs
increased $28.4 million from the nine months ended September 30, 1997 to the
nine months ended September 30, 1998 primarily due to the acquisitions of ISPs
subsequent to September 30, 1997. Internet services operating costs attributable
to corporate operations were 14% of total Internet services operating costs for
the nine months ended September 30, 1997, compared to 21% of total Internet
services operating costs for the nine months ended September 30, 1998. This
increase is primarily due to the conversion of acquired ISPs onto Verio's
national network. Verio expects Internet services operating costs to increase in
absolute dollars but to decrease as a percentage of total revenue over time as
additional acquired
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<PAGE> 40
ISPs are integrated onto Verio's national network, as enhanced services become a
larger percentage of total revenue, and as the Capacity Agreement with Qwest is
implemented.
Selling, general and administrative and other expenses decreased from 140%
to 97% of total revenue from the nine months ended September 30, 1997 to the
nine months ended September 30, 1998. Total selling, general and administrative
and other expenses increased $49.7 million or 159% from the nine months ended
September 30, 1997 to the nine months ended September 30, 1998 primarily due to
acquisitions completed subsequent to September 30, 1997. In addition, Verio
incurred $3.4 million in one-time charges in connection with Verio's network and
operational consolidation and the associated integration of a number of its
previously acquired ISP operations. These expenses include 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
integration of these functions on to Verio's national services. These
terminations have begun and will continue for approximately nine months. The
remaining liability for unpaid severance costs totaled approximately $1.7
million at September 30, 1998. The balance of the one-time integration expenses
were primarily related to personnel relocation costs and costs associated with
the cancellation of Internet access contracts and the closure of redundant POP
facilities of acquired ISPs. Corporate selling, general and administrative
expenses including the one-time expenses decreased from 59% of total revenue for
the nine months ended September 30, 1997 to 29% for the nine months ended
September 30, 1998. Consolidated sales and marketing expenses decreased from 32%
of total revenue for the nine months ended September 30, 1997 to 27% for the
nine months ended September 30, 1998, due in part to efficiencies gained from
the regionalization and nationalization of certain sales and marketing
functions.
Verio expects selling, general and administrative expenses to continue to
increase in absolute dollars but to decrease as a percentage of total revenue as
Verio acquires additional Internet businesses, allowing it to spread its
corporate overhead over a larger revenue base, as its scaleable systems reduce
the incremental costs of supporting additional revenue, as sales force
productivity increases with experience, and as indirect selling channels are
expanded. Verio anticipates that increases in absolute dollar terms will be
primarily due to increased personnel resulting from acquisitions and additional
expenditures in sales and marketing. Depreciation and goodwill amortization are
expected to continue to increase significantly as a result of Verio's
acquisition and investment strategies. Also, Verio expects that it will continue
to incur significant one-time integration expenses related to its strategy of
acquiring and regionalizing ISP operations, and integrating those operations
onto Verio's national systems.
Period from Inception to December 31, 1996 compared to the Year Ended December
31, 1997
Internet services operating costs increased from 41% to 45% of total
revenues from the 1996 Period to the year ended December 31, 1997. Internet
services operating costs attributable to acquisitions completed in 1996
accounted for $0.7 million, or 69%, of total Internet services operating costs
for the 1996 Period. Total consolidated Internet services operating costs
increased $15.0 million from the 1996 Period to the year ended December 31,
1997, primarily due to the acquisitions of ISPs subsequent to December 31, 1996.
Of these acquisitions, the costs from material acquisitions were $0.4 million
from On-Ramp Technologies, Inc. and $.2 million from RAINet, Inc. Internet
services operating costs attributable to acquisitions completed in 1997
accounted for $8.3 million, or 52%, of total Internet services operating costs
for the year ended December 31, 1997. Of these acquisitions, the costs from
material acquisitions were $2.5 million from Global Enterprise Services, $1.2
million from NorthWestNet, Inc. and $1.1 million from Compute Intensive Inc.
Internet services operating costs attributable to ISPs consolidated for the
entire year were 26% of total Internet services operating costs for the year
ended December 31, 1997. Internet services operating costs attributable to
corporate operations were 33% of total Internet services operating costs for the
1996 Period, compared to 22% of total Internet services operating costs for the
year ended December 31, 1997. This decrease is primarily the result of
acquisitions in late 1997 that had not yet converted to Verio's national
network.
Selling, general and administrative and other expenses declined from 296%
to 138% of total revenues from the 1996 Period to the year ended December 31,
1997. Total selling, general and administrative and other expenses increased
$42.4 million from the 1996 Period to the year ended December 31, 1997,
primarily
39
<PAGE> 41
due to the acquisitions of ISPs subsequent to December 31, 1996. Selling,
general and administrative and other expenses attributable to acquisitions
completed in 1996 accounted for $3.1 million or 44% of total selling, general
and administrative and other expenses for the 1996 Period. Corporate, selling,
general and administrative expenses accounted for 167% of total revenue for the
1996 Period compared to 54% for the year ended December 31, 1997. Selling,
general and administrative and other expenses attributable to acquisitions
completed in 1997 accounted for $19.7 million or 40% of total selling, general
and administrative and other expenses for the year ended December 31, 1997. Of
these acquisitions, the expenses from material acquisitions were $4.9 million
from NorthWestNet, Inc., $4.3 million from Compute Intensive Inc., and $3.2
million from Global Enterprise Services. Selling, general and administrative and
other expenses attributable to ISPs consolidated for the entire year, and to
corporate expenses, were 22% and 38% of total selling, general and
administrative and other expenses for the year ended December 31, 1997,
respectively. For the 1996 Period, selling, general and administrative and other
expenses relating to operations, engineering and customer care were 63% of total
selling, general and administrative and other expenses compared to 66% for the
year ended December 31, 1997, as a result of Verio's decision to emphasize the
quality of its engineering and technical support for its customers. Sales and
marketing expenses decreased from 49% of total revenue for the 1996 Period to
30% for the year ended December 31, 1997, due in part to efficiencies gained
from the regionalization and nationalization of certain sales and marketing
functions. Executive and finance expenses were 59% of total revenue for the 1996
Period compared to 17% for the year ended December 31, 1997.
OTHER EXPENSES
Nine months ended September 30, 1997 compared to the nine months ended
September 30, 1998
Interest expense increased from $5.9 million for the nine months ended
September 30, 1997 to $22.9 million for the nine months ended September 30,
1998, primarily as a result of the issuance of the 1997 Notes in June 1997 and
the issuance of the March 1998 Notes in March 1998. Interest income increased
from $4.1 million for the nine months ended September 30, 1997 to $9.4 million
for the nine months ended September 30, 1998 due to the increased cash balance
related to the debt and equity offerings. See "-- Liquidity and Capital
Resources."
Verio incurred an extraordinary expense of $10.1 million related to the
Refinancing. See "-- Liquidity and Capital Resources."
Period from inception to December 31, 1996 compared to the Year Ended December
31, 1997
During the year ended December 31, 1997, Verio recognized equity in losses
of affiliates in the amount of $1,958,000, representing losses of those
affiliates in excess of the equity of the common shareholders of the affiliates.
See Note 1 to the Consolidated Financial Statements.
Interest expense increased from $115,000 in the 1996 Period to $11.8
million for the year ended December 31, 1997 primarily as a result of the
completion of the $150.0 million placement of the 1997 Notes on June 24, 1997.
Interest expense is expected to increase in 1998, reflecting a full year's
interest on the 1997 Notes that remain outstanding and interest on the March
1998 Notes.
INCOME TAXES
As of December 31, 1997, Verio had a net operating loss carryforward for
federal income tax purposes of approximately $49.9 million which is available to
offset future federal taxable income, if any, through 2012. The utilization of a
portion of the net operating loss carryforwards may be limited under Section 382
of the Internal Revenue Code. No tax benefit for such losses has been recorded
by Verio in fiscal 1997 or 1998 due to uncertainties regarding the utilization
of the loss carryforward.
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<PAGE> 42
STOCK-BASED COMPENSATION
Verio accounts for its stock-based compensation plans in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and Related Interpretations. Since inception, Verio has granted stock
options with exercise prices equal to the fair value of the underlying Common
Stock, as determined by Verio's Board of Directors and based on Verio's other
equity transactions. Accordingly, Verio has not recorded compensation expense
related to the granting of stock options in 1996, 1997 and through February 28,
1998. Subsequent to February 28, 1998, and prior to the IPO, Verio granted
options to employees with exercise prices which were less than $22 per share
which was the low end of the IPO filing range immediately prior to the IPO.
Verio will record compensation expense totaling approximately $10.6 million,
representing the difference between the strike prices of the options granted and
$22 per share, pro rata over the forty-eight month vesting period of the
options. This compensation expense will total approximately $2.0 million for the
year ended December 31, 1998 and was $1.3 million for the nine months ended
September 30, 1998. Additionally, Verio incurred $1.4 million in compensation
expense during the quarter ended June 30, 1998 primarily related to the
accelerated vesting of options issued to Mark Johnson, Verio's former president
who passed away in March 1998, and approximately $0.4 million in compensation
expense during the quarter ended September 30, 1998, related to options issued
to Verio's new president.
QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1997 1997 1997 1997 1998 1998 1998
--------- -------- ------------- ------------ --------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Dedicated connectivity........ $ 1,954 $ 3,852 $ 4,314 $ 6,263 $ 9,900 $ 12,644 $ 14,380
Dial-up connectivity.......... 1,106 1,564 1,644 2,779 4,147 5,739 6,386
Enhanced services and other... 1,354 2,833 3,666 4,363 7,151 10,158 13,038
------- ------- -------- -------- -------- -------- --------
Total revenue............... 4,414 8,249 9,624 13,405 21,198 28,541 33,804
Costs and expenses:
Internet services operating
costs....................... 2,042 3,433 4,029 6,470 9,536 13,318 15,074
Selling, general and
administrative and other.... 6,718 11,122 13,393 18,150 19,999 25,851 35,091
Stock option related
compensation and severance
costs....................... -- -- -- -- -- 2,001 1,039
Depreciation and
amortization................ 1,246 2,548 2,943 3,887 6,381 8,698 11,740
------- ------- -------- -------- -------- -------- --------
Total costs and expenses.... 10,006 17,103 20,365 28,507 35,916 49,868 62,944
------- ------- -------- -------- -------- -------- --------
Loss from operations........ $(5,592) $(8,854) $(10,741) $(15,102) $(14,718) $(21,327) $(29,140)
======= ======= ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1997 1997 1997 1997 1998 1998 1998
--------- -------- ------------- ------------ --------- -------- -------------
(AS A PERCENTAGE OF TOTAL REVENUE)
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenue....................... 100% 100% 100% 100% 100% 100% 100%
Costs and expenses:
Internet services operating
costs........................... 46% 42% 42% 48% 45% 47% 45%
Selling, general and
administrative and other........ 152% 135% 139% 135% 94% 91% 104%
Stock option related compensation
and severance costs............. -- -- -- -- -- 7% 3%
Depreciation and amortization..... 28% 31% 31% 29% 30% 30% 35%
Total costs and expenses........ 227% 207% 212% 213% 169% 175% 186%
Loss from operations................ (127%) (107%) (112%) (113%) (69%) (75%) (86%)
</TABLE>
Verio's operating results have fluctuated in the past and may in the future
fluctuate significantly depending upon a variety of factors, including the
incurrence of capital costs, costs associated with the integration of acquired
operations, and the introduction of value-added enhanced services and new
services by Verio. Additional factors that may contribute to variability of
operating results include: the pricing and mix of services offered by Verio;
customer retention rate; changes in pricing policies and product offerings by
41
<PAGE> 43
Verio's competitors; growth in demand for network and Internet access services;
one-time costs associated with regional consolidation; and general
telecommunications services' performance and availability. Verio also has
experienced seasonal variation in Internet use and, therefore, revenue streams
may fluctuate accordingly. As a result, variations in the timing and amounts of
revenues could have a material adverse effect on Verio's quarterly operating
results. Due to the foregoing factors, Verio believes that period-to-period
comparisons of its operating results are not necessarily meaningful and that
such comparisons cannot be relied upon as indicators of future performance.
LIQUIDITY AND CAPITAL RESOURCES
Verio's business and acquisition strategy has required and will continue to
require substantial capital for investments in Internet businesses, capital
expenditures for expansion of services, operating losses and working capital.
Net cash used by operating activities was $36.3 million during the nine months
ended September 30, 1998, which includes an increase in cash of $12.5 million
related to working capital items.
Net cash used by investing activities was $119.3 million during the nine
months ended September 30, 1998, primarily related to purchases of fixed assets
of $15.3 million and approximately $121.4 million for acquisitions, which was
partially offset by $19.7 million provided from the release of the restricted
cash related to the Refinancing, which includes $6.5 million of net interest
payments on the 1997 Notes. Net cash provided by financing activities was $328.9
million during the nine months ended September 30, 1998, primarily from the IPO,
the March 1998 Notes, and the NTT investment.
Until the completion of the IPO in May 1998, Verio financed its operations
primarily through the private sale of Preferred Stock, debt, and to a lesser
extent Common Stock. In 1996, Verio raised approximately $78.1 million from the
sale of Series A and B Preferred Stock and approximately $1.1 million from the
sale of Common Stock. In 1997, Verio sold Series C Preferred Stock for gross
proceeds of approximately $20.0 million. Upon the effectiveness of Verio's IPO
on May 12, 1998, all outstanding shares of Series A, B, C and D-1 Preferred
Stock automatically converted to an equivalent number of shares of Common Stock.
On June 24, 1997, Verio completed the placement of $150.0 million principal
amount of the 1997 Notes and attached warrants (the "Warrants"). One hundred
fifty thousand units were issued, each consisting of $1,000 principal amount of
the 1997 Notes and eight Warrants, with each Warrant entitling the holder
thereof to purchase 1.76 shares of Verio's Common Stock at a price of $.01 per
share, for a total of 2,112,480 shares of Verio Common Stock. The Warrants and
the 1997 Notes were separated on December 15, 1997. The 1997 Notes mature on
June 15, 2004. Interest on the 1997 Notes, at the annual rate of 13 1/2%, is
payable semi-annually in arrears on June 15 and December 15 of each year.
Concurrent with the completion of the sale of the 1997 Notes, Verio was required
to deposit funds into an escrow account in an amount that together with interest
would be sufficient to fund the first five interest payments on the 1997 Notes.
Upon consummation of the sale of the March 1998 Notes and the Refinancing, that
portion of the escrowed amount attributable to the principal amount of the 1997
Notes refinanced was released to Verio. The 1997 Notes are redeemable at the
option of Verio commencing June 15, 2002. The 1997 Notes are senior unsecured
obligations of Verio ranking pari passu in right of payment with all existing
and future unsecured and senior indebtedness. The 1997 Notes impose significant
limitations on Verio's ability to incur additional indebtedness unless Verio's
Consolidated Pro Forma Interest Coverage Ratio (as defined) is greater than or
equal to 1.8 to 1.0 prior to June 30, 1999, or 2.5 to 1.0 on or after that date.
Verio is also limited in its ability to pay dividends or make Restricted
Payments (as defined in the Indenture, dated as of June 24, 1997, relating to
the 1997 Notes (the "1997 Indenture")), to engage in businesses other than the
Internet service business, and to place liens on its assets for the benefit of
persons other than the noteholders, among other restrictions. If a Change of
Control (as defined in the 1997 Indenture) occurs, Verio is required to make an
offer to purchase all of the 1997 Notes then outstanding at a price equal to
101% of the principal amount, plus accrued and unpaid interest.
On March 25, 1998, Verio completed the placement of $175.0 million
principal amount of the March 1998 Notes. The March 1998 Notes are senior
unsecured obligations of Verio ranking pari passu in right of payment with all
existing and future unsecured and senior indebtedness and mature on April 1,
2005. Interest
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<PAGE> 44
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 the option of Verio commencing April 1,
2002. 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 effect the repurchase of $50.0 million principal amount of 1997
Notes from Brooks Fiber Properties, Inc. ("Brooks") (the "Refinancing"). As a
result of the Refinancing, 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 on the $50.0 million principal amount of
1997 Notes repurchased from Brooks.
On April 6, 1998, Verio entered into a credit facility ("the Bank
Facility") with a group of commercial lending institutions that committed to
provide a $57.5 million revolving credit facility secured by the stock of the
ISPs that Verio owns currently or may own in the future and the Capacity
Agreement with Qwest. During the three months ended September 30, 1998, the Bank
Facility was increased to $70.0 million. The Chase Manhattan Bank serves as
agent for the Bank Facility. The Bank Facility requires no payments of principal
until its maturity on December 31, 1999. The terms of the Bank Facility provide
for borrowings at LIBOR + 2%. There is a commitment fee of 1/2% per annum on
the undrawn amount of the Bank Facility and a one-time fee of 1/2% on any
amounts drawn. The last $3.0 million of the Bank Facility can only be drawn for
the payment of interest. As of October 31, 1998, Verio had made no borrowings
under the Bank Facility.
The Bank Facility sets forth covenants restricting, among other things,
Verio's ability to borrow, to guarantee the debt of others, and to make
borrowings at the subsidiary level. Verio is also limited in its ability to
enter into transactions with affiliates, create liens on its assets, and make
certain investments. In particular, Indebtedness (less cash), as defined in the
Bank Facility, may not exceed 2.35 times annualized pro forma revenue for the
most recent fiscal quarter. Verio's current indebtedness incurrence capacity is
approximately 2.35 times its annualized pro forma revenue. Dividends and certain
types of investments are prohibited, as are liens incurred for borrowed money.
Borrowings under the Bank Facility are required to be paid down with the
proceeds of new Indebtedness, certain asset sales, Excess Cash Flow (as defined
in the Bank Facility), or the net proceeds from insurance claims. As of October
31, 1998, Verio is in compliance with the provisions of each of the material
agreements under which it has incurred indebtedness.
On May 12, 1998, Verio effected its IPO, selling 5,500,000 shares of Common
Stock for net proceeds of approximately $115.7 million after deducting
underwriting discounts, commissions and expenses. Concurrently with the IPO,
Verio completed the sale of 4,493,877 shares of Common Stock to an affiliate of
NTT for net proceeds of approximately $100.0 million. On June 15, 1998, pursuant
to the partial exercise, at the request of the managing underwriters, of the
over-allotment option granted to the underwriters in the IPO, Verio sold an
additional 235,000 shares in the Over-Allotment Offering. The net proceeds from
the Over-Allotment Offering were approximately $5.1 million after deducting
underwriting discounts and commissions.
As of September 30, 1998, Verio had approximately $245.9 million in cash
and cash equivalents (excluding restricted cash). Subsequent to September 30,
1998, on November 25, 1998, Verio issued the Old Notes, for net proceeds of
approximately $389 million after deducting the initial purchasers' discount and
expenses. Verio's business plan currently anticipates investments of
approximately $325.0 million over the next 12 months for capital expenditures,
currently anticipated acquisitions, operating losses and working capital. EBITDA
losses increased from $(18.5) million for the nine months ended September 30,
1997 to $(38.4) million for the nine months ended September 30, 1998 despite an
increase in revenue from $22.3 million for the nine months ended September 30,
1997 to $83.5 million for the nine months ended September 30, 1998. EBITDA as a
percentage of revenue improved from (83%) to (46%) for the nine months ended
September 30, 1997 and the nine months ended September 30, 1998, respectively.
Cash flows from operations declined from $(20.5) million for the nine months
ended September 30, 1997 to $(36.3) million for the nine months ended September
30, 1998. Cash flows from operations as a percentage of revenue improved from
(92%) to (43%) from the nine months ended September 30, 1997 and 1998,
respectively. Verio incurred $80.9 million in selling, general and
administrative expenses during the nine months ended September 30, 1998 as it
invested in scaleable systems, hiring and sales training, and network
improvements, that it expects will result in incremental revenue at reduced
incremental costs. Although Verio is seeking to
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reduce EBITDA losses as a percentage of revenue over time, there can be no
assurance that Verio will be able to do so, or that the rate of any reduction in
EBITDA losses will be as rapid as is being sought by Verio.
Since the completion of substantially all of the Buyouts during the first
six months of 1998, Verio has focused considerable effort on, and incurred
significant expense in connection with, the consolidation of the ownership and
management and integration of the operations of the ISPs it has acquired to
date. During the three months ended September 30, 1998, Verio recorded one-time
expenses totaling approximately $3.4 million primarily in connection with
Verio's network and operational consolidation and integration strategy,
including approximately $1.9 million primarily related to the elimination of
approximately 250 positions which are no longer necessary due to the integration
of these functions into Verio's national services, and other costs associated
with personnel relocation and the cancellation of Internet access contracts and
the closure of redundant POP facilities of acquired ISPs. Verio continues to
incur costs for system upgrades and integration of TABNet's operations onto
Verio's network, customer care, billing and financial systems, and expects to
incur similar expenses associated with the integration of additional ISP and Web
hosting operations it acquires (including Hiway). While Verio anticipates that
these expenses could be significant, it also expects to derive significant
long-term savings as a result of synergies resulting from telco and transit cost
reductions, shared data centers, joint product development, shared
infrastructure and increased economies of scale made possible by the
consolidation and integration of its operations.
Verio's 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 Verio's business, and Verio's
ability to raise additional funds. Accordingly, Verio may need significant
amounts of cash in excess of its plan, and no assurance can be given as to the
actual amounts of Verio's expenditures and additional capital requirements.
Verio is constantly evaluating potential acquisition and other strategic
transaction opportunities, which could significantly affect Verio's business
plan and cash needs. Verio intends to use a significant portion of its cash for
acquisitions, and will have to increase revenue without a commensurate increase
in costs to generate sufficient cash to enable it to meet its debt service
obligations as described above. There can be no assurance that Verio will have
sufficient resources to fund its continued acquisition efforts, particularly if
operating losses continue to increase or additional acquisition or other
strategic opportunities become available, or that Verio will be able to
successfully raise additional capital.
Verio expects to meet its capital needs with cash on hand, proceeds from
the sale, or issuance of capital stock, credit facilities (including the Bank
Facility), lease financing, and additional debt. In the near term, Verio intends
to use its excess cash and the Bank Facility, which provides for up to $70.0
million in credit until it matures on December 31, 1999. Over the longer term,
Verio will be dependent on increased operating cash flows, and, to the extent
cash flow is not sufficient, the availability of additional financing, to meet
its debt service obligations. As an ongoing matter, Verio evaluates the
potential sources of capital that may be available to it, including public and
private sales of equity, the issuance of debt securities, bank financing, and
other sources, taking into account market conditions, available terms, the
current trading price of its stock, and other factors. There can be no assurance
that Verio will be able to service its indebtedness. Insufficient funding may
require Verio to delay or abandon some of its planned future expansion or
expenditures, which could have a material adverse effect on Verio's growth and
its ability to realize economies of scale. In addition, Verio's operating
flexibility with respect to certain business activities is limited by covenants
associated with its indebtedness. There can be no assurance that such covenants
will not adversely affect Verio's ability to finance its future operations or
capital needs or to engage in business activities that may be in the interest of
Verio.
NEW ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130), No. 131, Disclosures About Segments of an Enterprise and Related
Information (SFAS 131), and No. 132, Employers' Disclosures about Pensions and
Other Postretirement Benefits. During 1998, the American Institute of Certified
Public Accountants issued Statement of Position No. 98-5, Reporting on the Costs
of Start-up Activities (SOP 98-5) and Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
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Activities. The adoption of these pronouncements did not and are not expected to
have a significant effect on Verio's financial position or results of
operations.
FORWARD-LOOKING STATEMENTS
The statements included in the discussion and analysis above that are not
historical fact are "forward-looking statements" (as such term is defined in the
Reform Act). The safe harbor provisions provided in Section 27A of the
Securities Act and Section 21E of the Exchange Act 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 its acquisition of, or
investments in, existing ISPs, the revenue and profitability levels of the ISPs
in which it invests, the anticipated reduction in operating costs resulting from
the integration and optimization of those ISPs, and other statements regarding
matters that are not historical facts, are only predictions. No assurance can be
given that future results indicated, whether expressed or implied, will be
achieved. While sometimes presented with numerical specificity, these
projections and other forward-looking statements are based upon a variety of
assumptions relating to the business of 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 herein will prove to be accurate.
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BUSINESS
OVERVIEW
Verio is a leading provider of comprehensive business Internet
services -- such as broadband connectivity, Web hosting solutions, VPNs,
e-commerce and other enhanced Internet services -- with an emphasis on serving
the small and medium sized business market. Verio believes that small and medium
sized businesses represent an attractive target market for the provision of
Internet services due to this market's low current penetration levels and
customer churn rates, and the expanding Internet needs of these businesses.
Because of their limited internal technical resources and operating scale, small
and medium sized businesses are increasingly looking to outsource Internet and
IT functions at a reasonable cost. These businesses also typically require
hands-on local support to help analyze their needs, configure solutions and
provide ongoing technical support. Verio believes that these businesses
currently are underserved by both the local and other national ISPs. While the
national ISPs typically lack the local presence to provide customized hands-on
support, the local ISPs often lack the requisite scale and resources to provide
a full range of services at acceptable quality and pricing levels. Verio further
believes it has a unique competitive advantage in serving small and medium sized
business customers through the combination of the technical expertise and
hands-on support provided through its local sales and engineering personnel with
the quality and economic efficiency of Verio's national network, operational
infrastructure and financial strength.
Since its inception in March 1996, Verio has rapidly established critical
mass and a national presence through the acquisition, integration and growth of
over 45 ISPs that provide a comprehensive range of business Internet services.
Verio integrates the operations it acquires into regional operating units with
centralized regional management, connecting their regional networks to Verio's
high bandwidth, "tier one" national backbone, and providing them with Verio's
national support services, in order to capture economies of scale and
operational efficiencies while improving reliability, quality, and scalability.
Verio currently provides locally based sales and engineering support for its
connectivity, Web hosting and other enhanced services in 41 of the top 50 MSAs
in the U.S., and provides Web hosting services to customers in over 150
countries.
In addition to basic Internet connectivity, businesses are increasingly
capitalizing on the power of the Internet by establishing domain-based Web sites
(such as www.yourcompany.com) and adopting additional enhanced Internet services
to expand their markets, increase productivity and reduce costs. With its recent
acquisitions of TABNet and Hiway, Verio significantly accelerated and expanded
its ability to provide Web hosting and other value-added services to its target
market. Together with its acquisition of iServer at the end of 1997, these
acquisitions establish Verio as the largest Web hosting company in the world
based on the number of domain names hosted, and significantly increase Verio's
customer base. As of November 30, 1998, including all acquisitions completed as
of that date, Verio served over 160,000 customer accounts, including over 80,000
hosted Web sites, with combined pro forma revenues of approximately $35.7
million for the three months ended September 30, 1998. The acquisition of Hiway
brought Verio's total customer accounts to over 250,000, the number of Web sites
hosted to over 180,000, and its pro forma combined revenues for the three months
ended September 30, 1998 to approximately $46.2 million. The completed
acquisitions of iServer, TABNet and Hiway, accomplish Verio's goal of deriving
at least half of its total revenue from enhanced services. These acquisitions
also create in Verio a powerful sales engine, driven by preferential marketing
agreements with leading Internet portal companies, private label relationships
with major telecommunications companies, an established telemarketing
operations, direct sales through over 200 sales professionals, and a worldwide
indirect distribution channel of over 4,000 resellers in the U.S. and over 150
other countries. In addition, Verio has acquired key proprietary technologies
that significantly differentiate Verio's Web hosting platform from other
providers.
INDUSTRY BACKGROUND
Internet connectivity and enhanced Internet services (including Web
hosting) represent two of the fastest growing segments of the telecommunications
services market. Total ISP revenues in the United States are projected to grow
from $4.6 billion in 1997 to $18.3 billion in 2000, according to IDC, an
independent company that prepares market studies relating to the Internet. The
availability of Internet connectivity,
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advancements in technologies required to navigate the Internet, and the
proliferation of content and applications available over the Internet have
attracted a rapidly growing number of users. Businesses are increasingly
recognizing that the Internet can significantly enhance communications among
geographically distributed offices and employees as well as with customers and
suppliers. In addition, the Internet presents a compelling profit opportunity
for businesses as it enables them to reduce operating costs, access valuable
information and reach new markets. As a result, businesses increasingly are
utilizing the Internet for mission critical applications such as sales, customer
service and project coordination.
In order to capitalize on the power of the Internet, businesses must adopt
one or both of the fundamental Internet service platforms: Internet connectivity
and an Internet Web site presence. Internet connectivity provides a company with
its basic gateway to the Internet, allowing it to transfer e-mail, access
information, and connect with employees, customers and suppliers, and provides
the foundation for VPNs. A Web site provides a company with a tangible identity
and interactive presence on the Internet, allowing it to post company
information and automate business processes such as sales, order entry and
customer service. Businesses are increasingly seeking a variety of enhanced
services and applications that can be enabled from the basic connectivity and
Web site platforms. For example, by connecting each of the company's office
locations and providing front-end security for data encryption, businesses can
implement a secured VPN over the Internet far more economically than the
traditional dedicated private wide area network approach. Similarly, by adding
security, shopping cart and transactions support to its Web site, a company can
offer electronic commerce, expanding its market reach and reducing its cost of
sales. According to IDC, enhanced services (including Web hosting) is the
fastest growing segment of the Internet services market, growing from
approximately $352 million in 1997 to over $7 billion by the year 2000. As
business users of the Internet adopt enhanced services, they also require
additional bandwidth and Web site functionality to support their expanded use of
the Internet. Verio expects this trend to continue as high-bandwidth, high
functionality enhanced services continue to be developed, improve and
proliferate and as Internet usage continues to expand.
Industry analysts have reported that small and medium sized businesses
represent a potential market of over seven million customers in the U.S., and
use of the Internet by this market segment is expected to grow substantially
from its current low level of market penetration. IDC predicts that dedicated
connections to the Internet for small and medium sized businesses will grow from
approximately 122,000 in 1997 to just under 800,000 in 2000, representing an 87%
compounded annual growth rate. In addition, these businesses are moving rapidly
to establish a presence on the Internet through Web sites, enabling them to more
effectively communicate company information, expand distribution, and improve
productivity through back-office automation. IDC estimates Web hosting revenues
from small and medium sized businesses will grow from approximately $217 million
in 1997 to over $3.4 billion, representing 95% of the total Web hosting market,
by the year 2000. Often these companies find an outsourced solution more
cost-effective, because they typically lack the technology expertise, IT
resources, capital, personnel, or ability to bear the time-to-market and
operational risks required to install, maintain and monitor their own Web
servers and Internet connectivity. Small and medium sized businesses generally
seek an ISP with locally based personnel who are readily available to respond
in-person to technical issues, who can assist in developing and implementing the
customer's effective use of the Internet, and with whom they can establish a
stable and long-term relationship.
The rapid development and growth of the Internet has resulted in a highly
fragmented industry of over 4,000 national and local ISPs in the United States,
with no dominant ISP serving the needs of small and medium sized businesses. The
other large national ISPs have primarily focused on the large business or
consumer markets and lack the local presence to provide the customized, hands-on
service required by small and medium sized businesses. Verio believes that
independent local and regional ISPs generally have been more adept at serving
small and medium sized businesses, and that these ISPs often have been the
source of innovative Internet products and services. As a result, independent
regional and local ISPs have successfully captured approximately one-half of
this market, despite the substantially greater resources of the national
providers. However, rising costs and increasing demands from business customers
are increasing the importance of scale and making it more difficult for the
small ISP to meet its customer's demands on a cost-effective basis. Facing these
competitive pressures, Verio believes that independent ISPs will continue to be
attracted to and benefit from the consolidation opportunity provided by Verio.
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THE VERIO SOLUTION
Verio is a leading provider of Internet connectivity, Web hosting, VPNs,
e-commerce and other enhanced Internet services to small and medium sized
businesses. Verio's business strategy of combining national scale with local
presence was specifically developed to serve the needs of this market sector.
Verio has taken a leading role in consolidating the fragmented, independent ISP
industry, rapidly establishing its national presence through the acquisition,
integration, and growth of established, well-regarded national, regional and
local ISPs with a business customer focus. Verio believes it has a unique
competitive advantage in serving small and medium sized business customers.
Verio's combination of national scale with local presence provides distinct and
significant value to these customers, which Verio expects will result in
long-term customer loyalty and an expanding customer base. Verio's national
scale in both Internet connectivity and Web hosting allows it to provide robust,
scalable, high-quality service platforms for the full range of business Internet
solutions. Verio intends to further enhance the value of these platforms by
developing, both internally and through strategic vendor relationships, a
further array of enhanced, higher margin product and service offerings to
continue to address the evolving business needs of its customers. Verio plans to
leverage its local direct sales and technical support, as well as its increasing
number of distribution partners, to configure Internet connectivity, Web
hosting, VPNs, e-commerce and other enhanced service solutions for its
customers. Verio further believes that the small and medium sized business
market is more attractive than the consumer or large business market segments
for Internet services, in large part due to the stability of the customer
relationship resulting from the customer's reliance on its service provider's
hands-on technical support and ability to provide a turnkey Internet solution
tailored to the customer's particular business needs. Verio's market research
indicates that Verio's local presence, 7-day by 24-hour ("24X7") hands-on
technical support and tailored Internet service solutions combined with its high
speed, highly reliable national backbone, will be significant factors in the
purchase decision for the small and medium sized business customer, as well as
being a critical factor driving customer loyalty.
THE VERIO STRATEGY
Verio's goal is to be the premier, full-service provider of Internet
connectivity, Web hosting, VPNs, e-commerce and other enhanced Internet services
to small and medium sized businesses. Key elements of Verio's strategy in
accomplishing this goal are to: (i) continue to build scale and expand market
presence and service offerings through acquisitions; (ii) drive cost savings and
quality of service improvements by integrating the operations of its acquired
companies and leveraging its national network, infrastructure and support
services; (iii) generate internal growth and customer loyalty by building
national Verio brand name recognition, expanding distribution and leveraging its
local sales and technical support capability; and (iv) leverage its connectivity
and Web hosting core service platforms to develop and offer additional high-
margin enhanced services to increase revenues from existing and future
customers.
Build Scale, Market Presence and Service Offerings through
Acquisitions. Verio has rapidly established a national presence and critical
customer mass by acquiring the stock or assets of, or making significant
investments in, established, well-regarded independent ISPs throughout the U.S.
Verio intends to continue its consolidation strategy, acquiring additional
business-focused ISPs to deepen and broaden its market presence, to expand its
strength in its Internet connectivity and Web hosting core service platforms,
and to add additional enhanced service capabilities. Given the increasing
competitive pressures facing independent ISPs, Verio believes that these ISPs
will continue to be attracted to and benefit from the consolidation opportunity
provided by Verio. As part of its integration strategy, Verio now seeks to
acquire 100% of new ISP affiliates and has effected the Buyouts of all but one
of the ISPs in which it did not initially acquire 100% ownership. See
"-- Subsidiary Ownership Structure." Given Verio's large customer base, broad
distribution channels and core service strengths in connectivity and Web
hosting, Verio believes it is also an attractive acquiror and strategic partner
for other related enhanced product and service companies.
Drive Cost Savings and Quality Improvements by Integrating Operations and
Leveraging National Infrastructure. Verio believes it can capture significant
economies of scale and operational efficiencies while improving service
reliability, quality and scalability by integrating the operations of the
entities it acquires into core national service platforms for Internet
connectivity and Web hosting, focusing regional operations on sales,
distribution and customer support and leveraging a common set of leading edge
national systems and
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support services. Verio integrates the networks of the ISPs it acquires into
common regional networks connected to Verio's high-speed, highly reliable
national backbone with network management and monitoring services provided by
Verio's 24X7 Network Operations Center (NOC). Integration of the regional
networks allows Verio to consolidate POPs, aggregate traffic on higher capacity,
lower per unit cost telco links, consolidate engineering and network operations
staffs, increase network redundancy and ensure consistency of network
operations. Similarly, Verio is in the process of integrating its Web hosting
operations into a single national Web hosting operating unit with regional data
centers connected to Verio's national backbone and monitored 24X7 by Verio's
NOC. Verio has developed national support services backed by leading edge
systems for network management, billing, customer service and financial and
accounting information. Verio is in the process of integrating all of its
operations onto these common national services in order to capture further
economies of scale, drive operations efficiency, ensure operational control and
improve quality, consistency and scalability of its services. Finally, Verio has
leveraged its scale to negotiate advantageous national volume purchase
agreements with key vendors such as Cisco, Qwest and Raptor.
Drive Growth by Building Brand Recognition, Expanding Distribution Channels
and Leveraging Local Support. Verio believes that brand recognition will be an
increasingly important decision factor among small and medium sized businesses
in choosing an Internet solutions provider. In conjunction with the integration
of its acquired ISPs, Verio has branded its consolidated regional operations
under the Verio name. Verio is building national Verio brand recognition by
aggressively marketing its full range of services through a national advertising
campaign using traditional media, online campaigns and trade shows and by
leveraging a coordinated public relations program. Verio intends to leverage its
strong local sales, distribution and technical customer support capabilities to
provide superior hands-on support to customers, further enhancing its brand
image and driving customer loyalty and sales. Verio currently has over 200 local
direct sales executives, over 300 local engineers and customer support
technicians, and over 2,500 resellers and referral partners. Verio expects to
continue to expand this local sales and distribution force and to increase its
effectiveness through national training, sales support, advertising and
marketing programs. Verio also markets its services nationally through direct
mail, telemarketing and online marketing campaigns, as well as through national
reseller arrangements. In addition, Verio has expanded the marketing of its
services through OEM-like relationships with major telecommunications carriers,
such as NTT, who can offer Verio's services on a private-label or co-branded
basis to their customer base. NTT America has recently launched its branded
Arcstar Internet service in the U.S., and will resell the full range of Verio
services under this brand. Completion of the Hiway acquisition added another
1,500 resellers and a number of additional "OEM" relationships to Verio's
existing distribution channels.
Develop and Offer Enhanced Products and Services to Increase
Revenues. While basic Internet connectivity and Web hosting constitute the
predominant services offered by Verio today, small and medium sized businesses
are increasingly looking for enhanced products and services that allow them to
further leverage the power of the Internet to expand markets, increase
productivity and reduce costs. Verio believes that its large existing customer
base and strong, balanced position in both the Internet connectivity and Web
hosting service platforms give it a competitive advantage in offering related
high-margin enhanced Internet services and bundled packages to meet the more
complex needs of its current and future customers. As a result, Verio believes
that it will be able to derive incremental revenue from these customers and
increase profitability by selling an expanding array of enhanced services, as
well as higher functionality Web sites and additional bandwidth to support these
services. Web-based enhanced services would include electronic commerce,
Web-based faxing and email, unified messaging, office and business process
automation capabilities, audio and video applications, automated Web site
authoring tools and templates and redundant "hot" sites across multiple national
and international data centers. Verio also plans to offer alternative
connectivity options such as DSL, as well as intranets and extranets
incorporating both connectivity and Web-hosting capabilities with enhanced
security measures. Verio also offers enhanced Internet security capabilities and
professional consulting services to support all of its Internet solutions. Verio
expects to provide these further enhanced services through a combination of
internal development and packaging, acquisitions and relationships with selected
Internet hardware, software and service companies.
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THE VERIO ORGANIZATION
Verio conducts its operations with both a national and regional approach.
Initially, Verio pursued a regional acquisition strategy, acquiring independent,
locally based ISPs to establish critical mass and a pervasive market presence in
selected geographic regions. Having established its presence in each of its
initially targeted regions, Verio expanded its target markets to encompass all
of the top 50 MSAs and is continuing to add incrementally to its presence within
its existing regions. In order to provide enhanced services such as Web hosting
on a national basis, Verio more recently has sought to acquire national
operations that can add strength to Verio's core service capabilities. Both the
iServer and TABNet acquisitions brought Verio national Web hosting operations
which added significantly to Verio's technical, marketing and operational
strength, and the Hiway acquisition considerably expanded those capabilities.
As of December 31, 1998, Verio had acquired the stock or assets of, or
invested in, over 45 ISPs, including the funding of a start-up operation which
is in the early stages of establishing a presence in the Rocky Mountain region.
Verio is in the process of consolidating the ownership and management of these
ISPs into five geographic operating regions, and integrating their network
operations, customer support, marketing efforts, financial and accounting
systems, and other back-office functions onto Verio's national systems, in order
to maximize operating synergies and efficiencies. Through these regional
operations, Verio provides locally based sales and engineering support in 41 of
the top 50 MSAs in the country. Verio is now focusing its acquisition efforts on
deepening and broadening its market presence, expanding its strength in its
Internet connectivity and Web hosting core service platforms, and adding
additional enhanced service capabilities. Verio has executed non-binding letters
of intent to acquire a number of additional ISPs and continues to evaluate, and
is in various stages of negotiations with, a number of additional potential
acquisition candidates.
PRODUCTS AND SERVICES
Verio currently offers, through its regional ISP operations, a
comprehensive range of Internet connectivity, Web hosting, VPNs, e-commerce and
other enhanced products and services. Verio plans to offer a core suite of
products and services nationally, with additional specific products offered in
each market based on the needs of the market and local telco tariffs. Verio
intends to continue to develop a broad range of enhanced products and services
independently, through acquisition, and through strategic relationships with key
vendors.
Connectivity Services. Verio offers a variety of connectivity solutions,
including Internet access, third-party software and hardware implementations and
configuration services, which are offered in bundled and unbundled packages.
Internet access currently includes dial-up, ISDN, xDSL, frame relay and leased
line connectivity at speeds ranging from 28.8 kbps to 155 Mbps. Verio is
participating in trials for the deployment of new access technologies, such as
wireless access, and expects to deploy additional connectivity-related enhanced
services, such as Internet fax, Internet telephony and Internet video
conferencing, as and when they become commercially viable. Verio also offers a
full range of customer premise equipment ("CPE") hardware required to connect to
the Internet, including routers, servers and other products as needed. Verio's
national purchasing and leasing relationships with a variety of partners provide
improved hardware pricing, lower cost leasing arrangements and bundled service
offerings. Verio also offers a selection of software products including
browsers, electronic mail, news and other solutions that permit customers to
navigate and utilize the Internet. Additionally, Verio provides turnkey
configuration solutions encompassing such services as domain name server ("DNS")
support, telco line provisioning, IP address space assignment, router set-up,
e-mail configuration, router security configuration and other set-up services.
Web Hosting Services.
- Shared Server Web Hosting. Verio offers a series of shared server Web
hosting plans that allow individuals and businesses to establish a
sophisticated presence on the Internet at a reasonable cost, leveraging
the expertise and equipment of Verio to deploy an effective Web site.
The basic standardized Web hosting option offers 6,000 megabytes of data
transfer per month and 30 megabytes of disk storage. This service level
allows customers to store HTML, graphics, video and
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sound files on a Web site and generally satisfies customers' bandwidth and
disk storage requirements. A majority of Verio's current shared server Web
hosting customers use the entry-level service. In order to allow customers
to use their Web site as an effective interface for communication, Verio
provides additional services bundled into its various shared server
hosting plans. For example, customers are provided various Web-based
e-mail options, support for Microsoft FrontPage(TM) extensions and a
variety of unique Web site development tools as part of the basic Web
hosting account. The higher tier shared server Web hosting offerings,
including the proprietary Virtual Server technology developed by iServer,
provide customers enhanced services, functionality and resources. Each
successive tier allocates the customer more disk storage and increases the
monthly data transfer limit. In addition, the more advanced plans offer
Real Audio(TM), Real Video(TM) and mSQL(TM) database support and support
for electronic commerce-enabled Web sites.
Verio also has implemented a variety of tools to allow its customers to
manage and enhance their sites more effectively and update their Web sites
remotely. Typically, the Web hosting plans feature detailed Web statistics
and access to raw log files, giving customers the ability to track the
performance and evaluate the effectiveness of their Web sites. Higher tier
plans offer customers their own configuration files, POP server and SMTP
gateway. In addition, Verio provides a number of popular CGI scripts that
allow customers to deploy hit counters, guest books, mail forms and other
useful graphics easily, and also supports custom CGI scripts that enable
customers to build additional functionality into their Web sites. Verio
offers numerous tools which increase the control a customer has over Web
site management, allowing them to change passwords, set e-mail forwarding
options, view Web site statistics and check account and billing
information. Additionally, all shared servers have regular back-up
procedures to protect customer files.
- Dedicated Server Web Hosting. Verio also offers dedicated server Web
hosting solutions for larger customers that prefer not to host their Web
sites on a shared server, providing the customer substantially more
server and network resources than available under shared server Web
hosting plans. The dedicated server Web hosting solutions provide the
customer with an NT or UNIX-based Verio-owned dedicated server that is
maintained by Verio in one of its data centers and monitored on a 24X7
basis. This solution gives customers the ability to run complex
applications without the additional IT administration costs and
considerations that customers would experience if they managed their own
servers and Web sites internally. Verio maintains spare equipment and
backs up data regularly. Verio offers the dedicated server service at
various prices depending upon the specific hardware configuration, level
of service and data transfer rates required by the customer.
- Co-location. Verio offers co-location services for customers that require
the resources of a dedicated server, prefer to retain physical access to
and ownership of their server, and have the expertise to maintain the Web
site and the server. Verio's co-location facilities offer customers a
secure location, environmental control, monitoring and a high-speed
connection to the Internet. The co-location facilities typically are
designed to provide an uninterruptible power source, a back-up diesel
generator, climate control and 24X7 monitoring.
- Domain Name Reservation. Each business or individual that desires a
personalized Web address must first reserve a domain name (such as
www.yourcompany.com). As more individuals and businesses establish a Web
presence, desirable domain names, like trade or service marks, become
more difficult to secure. With its acquisition of TABNet, Verio became
the world leader in providing this important service, registering more
domain names on a daily basis than any other company. For a one-time fee,
Verio will register and maintain a domain name for two years or until the
customer decides to use the domain name to host an active Web site.
Domain name registration typically generates a one-time fee for Verio,
but more importantly provides Verio a marketing advantage when these
domain name registration customers select a Web hosting provider. Verio
has built its leading position in this service through online marketing
campaigns which leverage preferred banner ad positions on the leading
search engines and Internet portals. Verio then actively telemarkets to
new customers registering a domain name and has a high conversion rate of
these customers to recurring revenue Web hosting services.
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Virtual Private Networks ("VPNs"). Many companies today have private data
communication networks, which are often referred to as wide area networks
("WANs") and built on expensive leased lines, to transfer proprietary data
between office locations. The Internet offers companies a cost-effective
replacement alternative to WANs through VPNs, which are meant to provide secure
transmission of private Internet Protocol ("IP") traffic through the Internet.
Additionally, many companies require that their employees have remote access to
these private networks from home or while traveling. VPN products are available
in hardware, software, and firewall formats. VPN products, often in combination
with a Web site, are also the basis for offering intranet and extranet services.
Intranets are corporate/organizational networks that rely on Internet-based
technologies to provide secure links between corporate offices and secure access
to company data. Extranets expand the network to selected business partners
through secured links on the Internet. Increasingly, companies are finding that
intranets and extranets can enhance corporate productivity more easily and less
expensively than proprietary systems. Verio currently offers its customers a
number of VPN solutions, including Raptor's Firewall, IRE's SafeNet(TM), and
Watchguard's Firebox II(TM), and continues to evaluate additional products to
meet the needs of customers.
Electronic Commerce Solutions. Electronic commerce provides users the
ability to sell products and services on the Internet. Verio currently provides
e-commerce capability to its customers by providing one or more of the three
principle functions of electronic commerce: secure socket layer, shopping cart
support, and transaction processing capability. Secure socket layer ("SSL") is
provided through its Premier Business Partner relationship with Verisign for
digital certificates. Verio supports a large variety of shopping carts,
including Shop Site(TM) by Icentral, and provides support for third party
transaction processing through ICVerify(TM), Cybercash(TM) and AuthorizeNet(TM).
The e-commerce solutions are packaged according to the complexity of the
individual customer's needs. Verio also provides fully integrated, turnkey
e-commerce applications that simplify and facilitate online commerce for small
and medium sized businesses without the need for sophisticated IT support.
Other Enhanced Services. Verio believes that its small and medium sized
business customers will continue to increase their use of the Internet as a
business tool and, as a result, will require an expanding range of enhanced
services. Verio currently offers a variety of enhanced services. In addition,
Verio's national marketing group is focused on developing new enhanced services
through both internal development, acquisition and strategic relationships with
software, hardware and content providers. Verio's current and planned enhanced
services offerings include the following:
- Security. Security solutions are a vital component for most businesses
connected to the Internet. These solutions, which include firewalls,
packet filter and proxy servers, give the customer (i) an ability to
prevent intruders from accessing its corporate network, (ii)
authentication of users attempting to gain access to the customer's local
area network ("LAN") or Web site, and (iii) encryption services,
providing secured transmission of company data through the Internet.
Verio currently offers a comprehensive set of firewall products from
Raptor, including the sophisticated Eagle Firewall(TM) and the more
simplified product known as The Wall(TM). Additionally, Verio offers a
"managed" security solution that provides ongoing detection and
prevention of intrusions. Verio plans to expand its security product line
with new solutions that simplify, reduce cost, or offer greater
functionality as they become commercially available.
- National Roaming. Employees of small and medium businesses are
increasingly dependent on accessing their e-mail while on the road.
Currently, many users either cannot do so because of the limitations of
their local ISP, or they are required to pay expensive long distance
access charges. Verio is in the process of implementing a national
dial-up access roaming product to enable dial-up business customers to
access the Internet locally as they travel throughout the country and
abroad.
- Professional Services. Verio's target customers typically do not have the
internal resources or personnel to design and maintain Internet services.
As more businesses utilize the Internet for mission critical
applications, Verio expects its customers to rely on their ISP for
support of many of their IT applications. As a result, Verio believes it
will be increasingly important for ISPs to offer onsite, technical
consulting to customers. Verio currently offers a full complement of
professional services to
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its customers, including network and system design, Web content creation,
security system needs analysis and implementation, virtual private
network design and implementation, and other Internet-related consulting
projects. Verio plans to invest in additional professional services
capabilities as they are required to provide customers with turnkey
Internet solutions.
- Future Enhanced Connectivity Enabled Services. Customers are increasingly
seeking to utilize the Internet for an expanding array of
telecommunication services. Verio plans to serve these needs through the
packaging and configuration of third party applications, such as IP
telephony (which permits users to make voice calls on the Internet),
Internet faxing, Internet audio and video conferencing solutions, and
other applications that may be developed.
- Future Enhanced Web Enabled Services. Verio is exploring other Web-based
services through internal development and third-party licensing
arrangements to serve the evolving needs of small and medium size
businesses. Verio has focused its efforts on select areas, including
expanded electronic commerce capabilities, Web-based faxing and e-mail,
unified messaging and "virtual offices," audio and video appliances,
automated Web site authoring tools and templates, basic automated
marketing tools, and redundant "hot" sites across multiple national and
international data centers.
As businesses commit to using the Internet, Verio believes that the
advanced applications product category will continue to expand, offering
additional revenue opportunities. Verio strives to be market driven, assessing
potential opportunities to extend new offerings as they become available and
evaluating its ability to implement these solutions in a cost-effective way
while maintaining quality of service for its customers.
Verio has and intends to continue to enter into agreements with other
Internet companies to leverage their products, brand names, distribution
channels and other assets. Verio believes that its existing Internet product and
service partners have been attracted to Verio because of its broad geographic
coverage, ability to influence purchase decisions of its business customers, and
the ability of the Verio sales forces to sell complex Internet solutions. Verio
has established strategic relationships with software providers such as
Microsoft, Oracle and Raptor, and equipment providers such as Cisco and
Farallon, and intends to expand its strategic relationships with additional
providers of key products and services. These relationships provide Verio with
benefits including preferred pricing, access to the latest products,
co-marketing with the vendors, tailored product training and access to the
vendor's distribution channels to generate leads for new customers.
MARKETING
Verio's marketing organization is responsible for services management,
advertising, marketing communications and public relations, and focuses on
stimulating demand for Verio's services and extending Verio's brands. Verio
stimulates demand for its services and seeks to extend its brands through a
broad range of advertising, marketing communications and public relations
activities. Verio relies on a combination of traditional media and online
advertising, and recently has launched a national advertising campaign. Verio
focuses its traditional media efforts on advertisements in major business and
technical publications, radio spots and direct mail. Verio's online marketing
program consists of general rotation and keyword-specific Web banner
advertisements. Verio hosted more than 80,000 Web sites with the TABNet
acquisition and the recent Hiway acquisition increases the total Web sites
hosted to over 180,000. TABNet became one of the world's largest Internet domain
name registrars and Web hosting companies by pioneering domain name registration
services and establishing preferential Web-based marketing relationships with
leading Internet search engine and portal companies including Netscape, Yahoo,
Excite, Infoseek, and others. Verio intends to leverage TABNet's marketing
relationships and systems to build brand recognition and expand these marketing
opportunities to Verio's full suite of product offerings. Other marketing
vehicles include collateral materials, trade shows, direct response programs and
management of Verio's Web site. Public relations focuses on cultivating industry
analyst and media relationships with the goal of securing broad media coverage
and public recognition of Verio.
Verio has consolidated the operations and marketing efforts of its acquired
operations under the Verio brand name. Verio has undertaken national public
relations efforts to raise the awareness and visibility of Verio in its target
market, and its recently launched national advertising campaign is designed to
further build
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Verio brand awareness. In certain instances, where an acquired operation has
established particularly strong brand identity (such as Hiway and its
RapidSite(TM) product offering), Verio may continue to market particular
products and services under that name.
SALES AND DISTRIBUTION
Verio utilizes multiple distribution channels in order to extend its reach
and leverage the service capabilities and brand names of its channel partners.
Verio uses a combination of direct sales, telemarketing, VARs and private label
resellers.
Direct Sales. Verio has a direct sales force of more than 200
professionals. These local sales representatives have a strong Internet
technical background and understand the local telecommunications tariffs as well
as the needs of their local business community. Additionally, these
representatives are familiar with local companies to assist in implementing
tailored solutions such as Web page content development. Because they are
locally based, these sales representatives are able to meet face-to-face with
prospective customers to discuss their Internet needs and technical requirements
and develop tailored solutions. Verio has developed programs at the national
level to attract and train high quality, motivated sales representatives that
have the necessary technical skills, consultative sales experience and knowledge
of their local markets. These programs include technical sales training,
consultative selling techniques, sales compensation plan development, and sales
representative recruiting profile identification. Through the effective use of
these initiatives, Verio plans to continue to expand its direct sales force. At
the local level, direct marketing techniques are being employed to target
customer segments that would achieve substantial benefit from the business
applications afforded by the Internet. Some direct marketing tactics include
direct mail, telemarketing, seminars and trade show participation. Verio works
with key vendors to assist in these direct marketing efforts. Verio co-markets
with these vendors through direct mail programs, joint seminar development and
joint trade show involvement. Through the TABNet acquisition, Verio has gained a
centralized outbound and inbound telemarketing sales capability targeted at
offering Web hosting services.
Resellers and Indirect Sales. Verio has three primary partner programs that
permit the regional operations to adapt a formal indirect distribution strategy
to their markets. Verio believes indirect sales channels are a significant
contributor to its growth, and already has over 2,500 formal and informal
channel partner relationships. The recent Hiway acquisition increases Verio's
worldwide indirect distribution channel to over 4,000 resellers in the U.S. and
over 150 other countries. The Authorized Solutions Partner ("ASP") program
offers partners the ability to share in the ongoing revenue stream of customers
they bring to Verio. ASPs include computer resellers, VARs, systems integrators
and other organizations focused on providing IT hardware, software, and services
to the business community, who typically have an established relationship with
the prospective customer base, and a sales force capable of selling Internet
services as part of the partner's suite of services. Referral partners,
including organizations such as Web designers, advertising agencies, and telco
resellers, are another source of customer leads. Verio's Referral Partner
program targets organizations that are less capable of, or interested in,
selling Internet services, or where Internet services fall outside their core
business interests. The Private Label Partner program is a wholesale program
which allows qualifying organizations to resell Verio services under their own
brand. The benefits of these programs to Verio include greater market reach
without fixed overhead costs, and the ability to use partners to assist in the
delivery of complete solutions to meet customer needs. In addition to local
partnerships, Verio is working with several national companies to expand its
indirect sales capability. Verio also intends to pursue additional private label
OEM-like relationships with major telecommunications carriers such as NTT. NTT
America recently has launched its branded ArcStar Internet service in the U.S.,
and will resell the full range of Verio services under this brand. Hiway also is
party to this sort of agreement with three of the RBOCs and a large European
telecommunications company, and has a number of letters of intent with
additional potential OEM-type partners, all of which were brought to Verio upon
completion of the Hiway acquisition.
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TECHNOLOGY AND NETWORK OPERATIONS
Overview. Verio owns and operates a national network, providing a high
bandwidth, highly reliable data transmission path connecting Verio's customers
to the Internet, which Verio believes is adequate for the provision of current
and future planned access and enhanced services needs. Verio's national network
interconnects more than 29 national nodes and over 180 local POPs across the
United States. Verio believes that aggregating the bandwidth and capacity
requirements of its regional operations onto one national network provides
operational control and efficiency, reduces costs, provides redundancy, and
results in a higher quality service, thereby addressing some of the most
significant challenges that an ISP faces in supporting its customers. Verio's
national infrastructure also incorporates several other elements critical to
maintaining the highest quality Internet service, including a high capacity and
reliable national network, peering relationships with other regional, national
and international ISPs, sophisticated network management tools and engineering
support services. The reliability of the national network is the result of many
factors, including redundant routers and other critical hardware, carrier class
facilities at POP locations (such as back up power, fire suppression and climate
control), and redundant telecommunications lines.
National Network. As of November 30, 1998, the national network carried
traffic for 37 of the ISPs acquired to date. The remaining ISPs' traffic will be
added as growth drives the need for additional capacity, as private and public
peering is implemented and as their current transit contracts expire.
Following is a diagram of Verio's national network as of December 31, 1998:
[MAP]
Currently, the national network architecture includes a presence at
selected national exchange points and redundant network nodes to link Verio's
regional networks to the national network. As of December 31, 1998, Verio's
network included connectivity at MAE West, MAE East and the NY NAP, each of
which is a major public national exchange point for ISPs. Verio also has a
presence at the Palo Alto Internet Exchange
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(PAIX), NASA Ames and a number of other regional connecting points, including
Seattle, Washington; Portland, Oregon; Irvine, Sacramento and San Diego,
California; Denver, Colorado; Orem, Utah; New Orleans, Louisiana; Dallas and
Houston, Texas; St. Louis and Kansas City, Missouri; Chicago, Illinois; Ann
Arbor, Michigan; Atlanta, Georgia; Tampa, Florida; Harrisburg, Philadelphia and
Pittsburgh, Pennsylvania; Baltimore, Maryland; Rochester and New York City, New
York; and Boston, Massachusetts. Each of these Verio locations features leading
router technology. The equipment is located in facilities leased from a variety
of telecommunications providers, including MCI, Sprint, MFS and others. These
access points are linked, using a nationwide, high-speed ATM and DS-3 (45 Mbps),
OC-3 (155 Mbps) and OC-12 (622 Mbps) clear line network infrastructure,
utilizing capacity leased primarily from Qwest and a variety of national telco
providers, including Sprint, MCI and WorldCom. This combination of clear channel
circuits, ATM and router architecture provides reliability to the network
through path diversity and redundancy. Verio's regional operating units either
co-locate at these access nodes or lease connectivity from a local service
provider such as an RBOC or other LEC to connect to the Verio equipment.
Verio is continuing to add national access nodes to serve additional parts
of the Midwest, Southern California, the Southeast and the Northeast, all of
which Verio currently plans to put on-line during 1999. Multiple national access
nodes facilitate connection to Verio's national network by its regional
operations. Verio continues to add additional private peering points and access
nodes as it acquires more ISPs and expands operations, and to further increase
network capacity as the need for additional bandwidth arises.
The national network is planned to allow for rapid expansion of bandwidth
through scaleable design supported by multiple local access and interexchange
carriers to provide the required bandwidth. Verio has begun the migration of
selected links from ATM to clear line, 12,000 miles of which has been leased
from Qwest. Verio has implemented nationwide OC-3 capacity and selected OC-12
links to handle its projected traffic requirements.
On March 31, 1998, Verio entered into a 15-year Capacity and Services
Agreement (the "Capacity Agreement") with Qwest Communications Corporation
("Qwest"), under which Verio will have access to long haul capacity and
ancillary services on Qwest's planned 16,285 mile MacroCapacity(sm) Fiber
Network. Over the first seven years of the term of the Capacity Agreement (the
"Commitment Term"), Verio must purchase, and Qwest must provide, not less than
$100.0 million, in the aggregate, of such capacity and services (the
"Commitment"), at agreed upon prices. The amount of capacity represented by the
Commitment would satisfy less than 50% of Verio's currently projected long haul
capacity requirements over the Commitment Term. However, Verio has the right to
order capacity and services in excess of the Commitment, and after the
expiration of the Commitment Term, at the same agreed upon prices. Verio also
currently is party to a number of other long haul capacity agreements with
additional telecommunication providers. These agreements are for various terms
(of up to 5 years), and have varied pricing. Verio anticipates that it will
satisfy a substantial portion of its capacity and ancillary services needs under
the Capacity Agreement, because it believes that the agreed upon pricing levels
will significantly reduce the per unit costs that it otherwise would pay under
its other existing long haul capacity agreements.
Verio believes that the currently installed Cisco and Juniper Networks
routers will be sufficient to support its traffic routing needs up to and
including OC-3 and OC-12 speeds. Verio is investigating and testing various
options to support higher than OC-12 speeds and bandwidth requirements. Verio's
options include switching, higher capacity and faster routers, or hybrid routing
and switching solutions.
Peering Relationships. By implementing its own national network and
establishing peering relationships with other national ISPs, Verio believes it
can lower the cost of its Internet transit and increase the performance and
reliability of its network operations. Peering is the Internet practice under
which ISPs exchange each other's traffic without the payment of settlement
charges. The basis on which the large national ISPs make peering available or
impose settlement charges is evolving as the provision of Internet access and
related services has expanded and the dominance of a small group of national
ISPs has driven industry peering practice. Recently, companies that have
previously offered peering have cut back or eliminated peering relationships and
are establishing new, more restrictive criteria for peering. Verio believes that
substantial traffic volume and national scale will continue to be the focal
criteria necessary to establish and
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maintain peering relationships. As a result, it has become increasingly
important for companies seeking to take advantage of peering to have significant
traffic, a national network and monitoring capability.
Verio has established public or private peering relationships with all of
the major national ISPs, as well as with many smaller domestic and international
networks, and continues to evaluate additional private peering proposals. With
over 100 peering partners, including all of the largest ISPs, Verio's network is
considered a "tier one" national network. Some large network providers now
prefer to peer at private exchange points rather than at national exchange
points. This preference represents the desire to accomplish the exchange of high
bandwidth traffic in a more efficient manner rather than to risk congestion and
equipment failure at public exchange points. Verio currently anticipates that,
as Verio's traffic grows, more peering relationships can be obtained. However,
no assurance can be given that peering relationships will continue to be made
available to Verio. Even if these relationships are not maintained or
established, Verio believes that it will be more economical for Verio to
maintain an exchange point transit agreement than to pay other national ISPs for
transit. See "Risk Factors -- Dependence upon Implementation of Network
Infrastructure; Establishment and Maintenance of Peering Relationships."
Web Hosting Operations. Through the iServer, TABNet and Hiway acquisitions,
Verio has developed high-performance, reliable, secure and scalable Web hosting
solutions, which Verio believes provide it with a significant competitive
advantage. These solutions are comprised of multiple proprietary Web hosting
platforms that incorporate automated functionality and a highly reliable network
infrastructure that includes multiple data centers monitored on a 24X7 basis.
Verio's strategy in developing its Web hosting solutions focuses on utilizing
proprietary technological innovations that it integrates with third-party
software and hardware.
Web Hosting Platform. Also through its acquisitions, Verio has established
multiple proprietary Web hosting platforms that permit efficient hosting of up
to two thousand Web sites on a single server. Although industry-standard Web
servers can enable Web hosting, Verio believes that efficiently managing large
numbers of Web sites and users on a single shared server is technically
difficult and requires significant technological innovations. Accordingly, Verio
has focused its technology development efforts on creating various proprietary
operating system level tools to facilitate a high-density customer to server
ratio. Verio has also customized or developed Web server applications designed
to improve performance in a shared server environment and resource monitoring
tools designed to report and address scarcity of shared CPU and memory
resources. Verio's solution can scale easily, allowing server groups to be added
seamlessly and to be monitored centrally wherever they are located. To address
the diverse requirements of its customers, Verio offers Web hosting services on
a range of operating systems and computing platforms.
Verio also has developed proprietary software that allows Verio to provide
its services on an efficient and cost-effective basis by automating the
following back-end functions: (i) order-taking and processing; (ii) customer
billing via credit cards, check, bank transfer and accounts receivable; (iii)
account provisioning and activation; (iv) server management and monitoring; (v)
coordination of the e-mail subsystem to integrate e-mail forwarding, multiple
e-mail accounts on a single Web site and autoresponders; (vi) inherent
distributor-dealer-customer hierarchy of all data; and (vii) support for
third-party feature "plug-ins." In addition, Verio provides a front-end
interface that allows a customer to set up accounts, change account parameters,
check Web site statistics quickly and easily and verify billing information. "TQ
software" was engineered to maximize automation to achieve high levels of
scalability, and the modular design allows additional server groups to be
supported easily. Language and branding independence enables international VARs
and OEMs to localize for foreign languages and customize the interface quickly
and with minimal effort.
Data Centers. Verio currently has data centers located in Orem, Utah; San
Francisco, California; Seattle, Washington; Dallas, Texas; and Washington, D.C.
An upgraded data center in the San Francisco Bay Area is planned for 1999. All
of Verio's data centers are fitted with environmental controls, back-up
generators, Cisco routers and switches, and continuous monitoring capabilities
to ensure high-quality service with minimal interruptions. With the recent
completion of the Hiway acquisition, Verio has added additional telco class data
centers in Mountain View, California and Boca Raton, Florida.
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National Network Management. Verio considers world-class network management
an essential capability for network monitoring and expansion, maintaining high
customer satisfaction and improving network quality. Verio has established a
24X7 NOC to allow continuous monitoring of the network and to provide a single
point of contact for real-time network status information and customer technical
problem resolution. The NOC is designed to provide real-time alarming, event
correlation, traffic management and forecasting, and distributed notification of
the network events and network status. Verio utilizes many leading edge systems
to provide the NOC capabilities. As of December 31, 1998, Verio monitored the
national network and the local networks of approximately 27 of the ISPs it had
acquired as of such time.
Engineering Support Services. Verio has negotiated national level
telecommunications contracts with LECs, such as MFS/WorldCom, providing
favorable terms for local transport. Verio plans to expand national purchasing
and leasing benefits as well as technical planning and support to improve the
performance, reliability and economics of its regional networks. National level
purchasing benefits include both cost and vendor performance issues as well as
the provisioning of spare equipment and additional technical support from
suppliers. National level distribution agreements have been negotiated with a
number of additional national-scope suppliers. Co-location agreements have also
been established with companies such as Qwest, Sprint, MCI, MFS/WorldCom and
Digital Equipment Corporation. Verio is pursuing additional vendor and
telecommunication relationships in an effort to reduce the cost of equipment and
improve network quality.
Technical Planning and Support. The national engineering team provides
engineering support for routing configurations, telecommunications management
and pricing, development of local networks and purchasing and contract
negotiation. The national engineering team also works with the regional
engineering teams to nationalize certain network elements, improve performance
and reduce network costs. Support includes Internet protocol addressing support,
training and technology. This effort of sharing ideas and best practices among
the national team and the regions is intended to enhance the engineering talent
available locally and to share best practices nationally.
NATIONAL SUPPORT SERVICES
In addition to its national network and network monitoring capability,
Verio has developed and implemented three critical national support services
designed to increase operational efficiencies and enhance the quality,
consistency and scalability of Verio's services. These support services include
24X7 customer technical support and service, financial information management
through a central, standardized accounting system and a sophisticated billing
and collections system. The strategy of creating a partnership between local
support teams and Verio's established national support services enables Verio to
capture economies of scale, improve quality and responsiveness, and increase
productivity, while allowing local personnel to focus on relationships with
customers.
Customer Technical Support. Verio's customer care combines the
responsiveness and on-site capabilities of local ISP presence with the scale
economies of a national customer support center in order to deliver customer
care to businesses. While local, independent ISPs bring the benefits of
understanding customer needs and providing hands-on support demanded by their
customers, they lack the ability to cost-effectively scale internal resources to
independently support their growing customer base. Verio's national customer
support center (located in Dallas, Texas) enables Verio to provide 24X7
responsiveness while maintaining the ability to provide on-site installation
assistance, hands-on troubleshooting and access to local experts who understand
the customer's business. As of December 31, 1998, Verio was providing customer
care services to 33 of the ISPs it had acquired as of such time and will offer
services to all of the Verio regional operations as the national customer
support center continues to expand throughout 1998. The support center team is
utilizing a leading customer support trouble ticketing and workflow management
system offered by Vantive Corporation. The system offers Verio the ability to
track, route, and report on customer issues and provides significant benefit in
ensuring quality and timely care to customers. Based on information received
through the trouble ticketing system, as well as through the centralized billing
and collections system, Verio is able to monitor network reliability and outage
experiences. To date, this information, as well as the low churn rates among
Verio's dedicated connectivity customers, reflects that the outages experienced
by Verio's customers, for the most part, are minor and attributable to expected,
ordinary course of business service interruptions,
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telco capacity demands, and the customer's hardware and software functionality
issues. While Verio does not provide general service warranties and has not
instituted a uniform policy relating to the provision or extent of service
credits, Verio provides credits for outages resulting from network failures in
certain circumstances. To date, these credits have been immaterial. Verio will
continue to monitor outage experiences, and would expect to record appropriate
reserves if the level of outage credits becomes material.
Financial Information Management. Verio is in the process of converting all
of its acquired ISP operations to the PeopleSoft(TM) financial reporting system
and the ADP payroll/human resources system, in order to provide a central,
standardized accounting system. As of December 31, 1998, 38 of the ISPs acquired
were utilizing the financial reporting system and 41 were utilizing the payroll
human resources system. These systems enable Verio to cost effectively increase
the productivity and quality of administrative support by standardizing
operational systems such as payroll, payables, purchasing and financial
reporting. These enhancements are part of Verio's initiative to implement
continuous improvement methodology and to create a learning organization.
Billing and Collections. Verio has implemented the Kenan Systems' EC Arbor
billing solution which offers high quality, flexibility, cost-effectiveness and
scalability. Kenan is a leading billing solutions provider to the
telecommunications industry, providing accurate, timely, and easy-to-understand
invoicing. As of December 31, 1998, this system served 27 of Verio's acquired
ISPs. Verio is aggressively rolling out this billing platform to all of its
regional operations and will continue on the path toward centralized management
of billing operations.
NTT STRATEGIC RELATIONSHIP
On April 7, 1998, Verio entered into agreements establishing a strategic
relationship with NTT. Under these agreements, upon the consummation of the IPO,
NTT acquired 4,493,877 shares of Common Stock for approximately $100.0 million
in aggregate consideration and is entitled to designate one member to serve on
Verio's Board of Directors. See "Certain Transactions -- Other Transactions."
In addition, Verio and NTT's U.S. affiliate, NTT America, Inc. ("NTT
America"), entered into a three year Outside Service Provider Agreement (the
"OSP Agreement"), which took effect upon the closing of the NTT Investment.
Pursuant to the OSP Agreement, Verio was designated as the preferred provider of
Internet access and related services to customers of NTT America on a reseller
basis. Verio and NTT also will connect their backbones and establish a peering
and transit relationship. During the term of the OSP Agreement, NTT America will
pay Verio for the services provided by Verio at predetermined rates reflective
of the strategic relationship between the parties, under which NTT is entitled
to "most favored customer" status and pricing concessions. Under the OSP
Agreement, NTT and Verio agreed to continue to negotiate the specific terms of
these arrangements. Recently, NTT America and Verio have executed a further
Strategic Partner Services Agreement setting forth the details for
implementation of the specific technical and administrative aspects arising
under the OSP Agreement. NTT America has now launched its branded Arcstar
Internet service in the U.S., and will resell the full range of Verio services
under this brand. Verio will also provide NTT America with full back-office and
engineering support.
SUBSIDIARY OWNERSHIP STRUCTURE
While Verio now typically seeks to acquire 100% of new ISPs' operations,
Verio's early acquisition strategy was to rapidly build mass and scale by
acquiring less than 100% of its ISPs. In each case where Verio acquired less
than 100% of an ISP initially, it obtained the right to Buyout the remaining
equity in the future. As part of its integration strategy, Verio has effected
the Buyouts of all but one of the ISPs in which it did not initially acquire
100% ownership (other than VIANet, as discussed below). With the recent
completion of these Buyouts, Verio is now consolidating its ISP operations into
five integrated regional operating units and a national Web hosting division.
While Verio continues to own 100% of a number of operating subsidiaries, it is
continuing to consolidate the ownership of those subsidiaries in order to
minimize administrative costs.
Verio currently holds an approximately 16% equity position in VIANet, which
was formed in 1997 to pursue a strategy similar to that of Verio's outside of
the U.S. and Canada. See "Certain Transactions --
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Other Transactions." Verio has no contractual right to acquire the remaining
equity of VIANet, and has no present plan to integrate the operations of VIANet
with those of its own. Hiway owned minority and majority interests in certain
entities that provide Web hosting and other enhanced Internet services in
various foreign countries. With the recent Hiway acquisition, Verio acquired the
remaining majority and minority equity positions held by Hiway at that time, and
may seek to acquire the remaining equity in those entities in the future. Verio
has recently completed the acquisition of the remaining equity in one of these
entities, a German Web hosting company.
COMPETITION
The market for Internet connectivity and related services is extremely
competitive. Verio anticipates that competition will continue to intensify as
the use of the Internet grows. The tremendous growth and potential market size
of the Internet access market has attracted many new start-ups as well as
existing businesses from different industries. Current and prospective
competitors include, in addition to other national, regional and local ISPs,
long distance and local exchange telecommunications companies, cable television
companies, direct broadcast satellite and wireless communications providers, and
on-line service providers. Verio believes that a reliable national network,
knowledgeable salespeople and the quality of technical support currently are the
primary competitive factors in Verio's target market, and that price is usually
secondary to these factors. See "Risk Factors -- Competition; Pricing
Fluctuation."
ISPs. According to Boardwatch magazine's directory of Internet Service
Providers, there are currently over 4,000 ISPs in the United States, consisting
of national, regional and local providers. Verio's current primary competitors
include other ISPs with a significant national presence which focus on business
customers, such as UUNet, GTE Internetworking (formerly BBN), PSINet, Concentric
Network and Intermedia/DIGEX. While Verio believes that its level of local
service and support and target market focus distinguish it from these
competitors, some of these competitors have significantly greater market
presence, brand recognition, and financial, technical and personnel resources
than Verio, and have extensive coast-to-coast Internet backbones. Verio also
competes with unaffiliated regional and local ISPs in its targeted geographic
regions.
Telecommunications Carriers. All of the major long distance companies (also
known as interexchange carriers or IXCs), including AT&T, MCI/WorldCom, Cable &
Wireless/InternetMCI, and Sprint, offer Internet access services and compete
with Verio. The recent sweeping reforms in the federal regulation of the
telecommunications industry have created greater opportunities for LECs,
including the RBOCs, to enter the Internet connectivity market. In order to
address the Internet connectivity requirements of the current business customers
of long distance and local carriers, Verio believes that there is a move toward
horizontal integration through acquisitions of, joint ventures with, and the
wholesale purchase of connectivity from, ISPs. The MCI/WorldCom/MFS/UUNet
consolidation, Cable & Wireless' acquisition of InternetMCI, the
Intermedia/DIGEX merger and GTE's acquisition of BBN are indicative of this
trend. Accordingly, Verio expects that it will experience increased competition
from the traditional telecommunications carriers. Many of these
telecommunications carriers, in addition to their substantially greater network
coverage, market presence, and financial, technical and personnel resources,
also have large existing commercial customer bases. Furthermore,
telecommunications providers may have the ability to bundle Internet access with
basic local and long distance telecommunications services. Such bundling of
services may have an adverse effect on Verio's ability to compete effectively
with the telecommunications providers and may result in pricing pressure on
Verio that would have an adverse effect on Verio's business, financial condition
and results of operations. Verio believes that its local presence and its strong
technical and data-oriented sales force is an important feature distinguishing
it from the centralized voice-oriented sales approach typified by the current
Internet connectivity services offered by the IXCs and LECs.
Cable Companies, Direct Broadcast Satellite and Wireless Communications
Companies. Many of the major cable companies have announced that they are
exploring the possibility of offering Internet connectivity, relying on the
viability of cable modems and economical upgrades to their networks. MediaOne
Group and TCI have recently announced trials to provide Internet cable service
to their residential customers in select areas. However, the cable companies are
faced with large-scale upgrades of their existing plant equipment
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and infrastructure in order to support connections to the Internet backbone via
high-speed cable access devices. Additionally, their current subscriber base and
market focus is residential which requires that they partner with
business-focused providers or undergo massive sales and marketing and network
development efforts in order to target the business sector. Several
announcements also have recently been made by other alternative service
companies approaching the Internet connectivity market with various wireless
terrestrial and satellite-based service technologies. These include Hughes
Network System's DirecPC product that provides high-speed data through direct
broadcast satellite technology, CAI Wireless System's announcement of an MMDS
wireless cable operator launching data services via 2.5 to 2.7 GHz and
high-speed wireless modem technology, Cellularvision's announcement that it is
offering Internet access via high-speed wireless LMDS technology, and Winstar,
which currently offers high-speed Internet access to business customers over the
38 GHz spectrum.
On-line Service Providers. The predominant on-line service providers,
including America Online, CompuServe, Microsoft Network, and Prodigy, have all
entered the Internet access business by engineering their current proprietary
networks to include Internet access capabilities. Verio competes to a lesser
extent with these on-line service providers.
Recently, there have been several announcements regarding the deployment
and planned deployment of broadband services for high speed Internet access by
cable and telephone companies through new technologies such as cable modems and
various DSL technologies. While these providers initially targeted the
residential consumer, recently a number of DSL providers have also announced
their intent to offer DSL services to Verio's target market of small and medium
sized businesses, which may significantly affect the pricing of Verio's service
offerings. Further, a number of DSL providers have recently launched their
services in conjunction with ISPs (including Verio), allowing ISPs to offer
Internet connectivity over DSL circuits. These DSL circuits, which provide
higher speed and lower latency Internet connections than a standard dial-up
phone connection, may compete with Verio's dedicated connectivity offerings.
PROPERTIES
Verio's corporate headquarters is located in Englewood, Colorado where
Verio leases approximately 43,400 square feet of office space. Verio's lease
agreement, which commenced February 1, 1998, is for a term of five years. Verio
also has executed a lease covering 20,700 square feet of space in the InfoMart
in Dallas, Texas, where Verio maintains its network operations center and
customer support center. That lease expires on June 30, 2002. Verio also leases
space, typically less than 200 square feet, in various geographic locations to
house network infrastructure and telecommunications equipment. Operational
functions are principally located in the offices of its regional operations,
where Verio typically is party to lease agreements for administrative office
space sufficient for locally based personnel, as well as smaller site leases to
house network equipment.
EMPLOYEES
As of November 30, 1998, Verio employed approximately 1,100 people,
including full-time and part-time employees at its corporate headquarters in
Colorado, its network operations and customer support center in Texas and at its
controlled ISPs. Verio considers its employee relations to be good. None of the
employees of Verio is covered by a collective bargaining agreement.
TRADEMARKS AND TRADE NAMES
Verio filed for federal trademark protection of "Verio" on November 29,
1996. This application is pending and Verio has no assurance that it will be
granted. Trademark protections for the Verio mark also have been applied for in
the European Economic Community, as well as in Japan. Additionally, corporate
name reservations for the name "Verio Inc." have been filed in all fifty states.
In conjunction with the consolidation of its ISPs into regional operating
entities, the ISPs have migrated to the Verio brand name, with a regional or
local geographical identifier appended.
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LEGAL PROCEEDINGS
Verio is not currently party to any material legal proceedings.
ADDITIONAL INFORMATION
Verio has filed with the Commission a registration statement on Form S-4
(the "Registration Statement") with respect to the New Notes. As permitted by
the rules and regulation of the Commission, this Prospectus, which is part of
the Registration Statement, omits certain information, exhibits, schedules and
undertakings included elsewhere in the Registration Statement. For further
information pertaining to Verio and the securities offered hereby, reference is
made to such Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents or provisions of any
documents referred to herein are not necessarily complete, and in each instance,
reference is made to the copy of the document filed as an exhibit to the
Registration Statement. Verio is currently subject to the information
requirements of the Exchange Act. Verio will issue annual and quarterly reports.
Annual reports will include audited financial statements prepared in accordance
with accounting principles generally accepted in the United States and a report
of its independent auditors with respect to the examination of such financial
statements. In addition, Verio will issue to its securityholders such other
unaudited quarterly or other interim reports as it deems appropriate.
The Registration Statement may be inspected without charge at the public
reference facilities of the Commission located at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington D.C. 20549, and at the Commission's Regional
Offices at Seven World Trade Center, Suite 1300, New York, New York 10048, and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials also can be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. In addition, registration statements and certain other filings
made with the Commission through its Electronic Data Gathering, Analysis and
Retrieval ("EDGAR") system are publicly available through the Commission's web
site at http://www.sec.gov. Verio's Common Stock is quoted on the Nasdaq
National Market. Reports and other information concerning Verio may be inspected
at the offices of the Nasdaq Stock Market at 1735 K Street, N.W., Washington,
D.C. 20006.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and certain officers (including all executive officers) of
Verio are:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
Steven C. Halstedt(3)(4)........... 52 Chairman of the Board
Justin L. Jaschke(3)(4)............ 40 Chief Executive Officer, Director
Herbert R. Hribar(3)............... 47 President and Chief Operating Officer, Director
James C. Allen(2).................. 52 Director
Trygve E. Myhren(1)(2)(4).......... 62 Director
Paul J. Salem...................... 35 Director
Stephen W. Schovee(1)(2)........... 39 Director
George J. Still, Jr.(4)............ 40 Director
Yukimasa Ito....................... 43 Director
Arthur L. Cahoon................... 42 Director
Sean G. Brophy..................... 40 Vice President of Corporate Development
James E. Cunningham................ 41 Vice President of Sales and Marketing
Chris J. DeMarche.................. 42 Chief Technical Officer
Carla Hamre Donelson............... 43 Vice President, General Counsel and Secretary
Peter B. Fritzinger................ 40 Chief Financial Officer
Deb Mayfield Gahan................. 44 Vice President of Human Resources and
Organizational Development
James M. Kieffer................... 37 Vice President of Customer Operations
Eric S. Hood....................... 46 Vice President of Engineering and Operations
Edward R. Milstein................. 41 Vice President and Chief Information Officer
</TABLE>
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Executive Committee
(4) Member of Finance Committee
All of the officers identified above serve at the discretion of Verio's
Board of Directors ("Verio Board"). There are no family relationships between
any persons identified above. There is currently one vacancy on the Verio Board.
The following are brief biographies of these individuals.
Steven C. Halstedt has served as Chairman of the Verio Board since Verio's
inception in March 1996. Mr. Halstedt is a co-founder of The Centennial Funds.
Mr. Halstedt has 17 years of direct venture capital experience and serves as a
general partner of each of the Centennial Holdings' partnerships. Prior to co-
founding The Centennial Funds in 1981, he was Executive Vice President and
Director of Daniels & Associates, Inc., a private communications service company
involved in cable television system operations. Mr. Halstedt is a member of the
Board of Directors of Formus Communications, Inc., VIANet and WLL International,
Inc. Mr. Halstedt was recently a director of Pluto Technologies International,
Inc., Centennial Communications Corp., Masada Security Holdings, Inc. and Triax
Communications Corp. He is also former Chairman of the Board of OneComm
Corporation ("OneComm"), PageAmerica Group, Inc. and Orion Network Systems,
Inc., all publicly traded telecommunications companies. Mr. Halstedt received a
Bachelor of Science with distinction in management engineering from Worcester
Polytechnic Institute, and earned a Master of Business Administration from the
Amos Tuck School of Business Administration at Dartmouth College, where he was
named an Edward Tuck Scholar. He attended the University of Connecticut School
of Law. He was a Platoon Leader and Battalion Operations Officer in a U.S. Army
Combat Engineer Battalion in Vietnam.
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Justin L. Jaschke has served as Chief Executive Officer of Verio since
Verio's inception in March 1996. He is also a member of the Verio Board. Prior
to forming Verio, Mr. Jaschke served as Chief Operating Officer for Nextel
Communications ("Nextel") following its merger with OneComm in July of 1995. Mr.
Jaschke served as OneComm's President and a member of its Board of Directors
from the time that he joined that company in April 1993 until the merger with
Nextel. Mr. Jaschke currently serves as Chairman of the Board of Directors of
VIANet and also serves on the Board of Directors of Metricom, a leading wireless
data communications provider, and on the Board of Directors of Dobson
Communications, a rural cellular and local exchange provider. From May 1990 to
April 1993, Mr. Jaschke served as President and CEO of Bay Area Cellular
Telephone Company. From November 1987 to May 1990, Mr. Jaschke was Vice
President of Corporate Development of PacTel Cellular, and from 1985 to 1987 was
Director of Mergers and Acquisitions for PacTel Corporation. Prior to that, Mr.
Jaschke was a management consultant with Marakon Associates. Mr. Jaschke
received a Bachelor of Science degree summa cum laude in mathematics from the
University of Puget Sound and a Master of Science degree in management from the
Sloan School of Management at MIT.
Herbert R. Hribar has served as President and Chief Operating Officer of
Verio since July 1998. Mr. Hribar joined Verio from Ameritech Corporation, where
he served as President of Ameritech Corporation's cellular services business
unit and was responsible for all aspects of the business, including strategy,
marketing, sales, network, customer service, IT and business development. He was
promoted to that position in 1997 after working for Ameritech for two years,
first as Vice President of International Operations beginning in early 1995, and
later as Managing Director of Ameritech Europe. He also served as Chairman and
Chief Executive Officer of ADSB Telecommunications, a consortium of
international telecommunications companies headed by Ameritech. Before joining
Ameritech, Mr. Hribar served in various capacities with Sprint Corporation from
1988 to 1995, including as Vice President and General Manager at Sprint
International, where he was responsible for the off-shore network planning,
design, operations and information systems planning for Sprint's international
voice, data, messaging and fax services as well as private data network systems.
Mr. Hribar previously worked in senior management positions at GTE Telenet and
served in the U.S. Navy. Mr. Hribar holds a Bachelor of Science degree in Ocean
Engineering from the U.S. Naval Academy, a Master of Science degree in Civil
Engineering from the University of Illinois, a Master of Business Administration
from George Washington University and a Master of Science degree in Computer
Science from Johns Hopkins University.
James C. Allen has served as a director of Verio since May 1996. Mr. Allen
served as CEO of Brooks Fiber Properties, Inc. until its recent acquisition by
WorldCom. Mr. Allen has 25 years of experience as an entrepreneur, operator,
financier, expert witness and advisor in cable television and broadband
telecommunications. Prior to joining Brooks, he served as Chief Financial
Officer and Chief Operating Officer of David Lipscomb University from which he
holds a Bachelor of Science degree. Mr. Allen was a founder and former
President, CFO and COO of Cencom Cable Associates, which was purchased by a
subsidiary of Hallmark Cards, and a former Vice President of Operations of
Telecom Engineering, Inc., a telecommunications engineering and consulting firm
with clients in both the telephone and cable television industries. Mr. Allen
previously held positions as Vice President of Operations of United Cable
Television, Divisional Manager of Continental Telephone Corporation, and Vice
President of Finance for National Communications Service Corporation. Mr. Allen
also is a director of MetroNet Communications Corp. ("MetroNet"), an LEC.
Trygve E. Myhren has served as a director of Verio since April 1997. Mr.
Myhren is President of Myhren Media, Inc., a private investment firm
concentrating in media, telecommunications, software and Internet related and
consumer products companies. From 1990 to 1996, Mr. Myhren was President and a
director of The Providence Journal Company. From 1975 until 1988, Mr. Myhren was
an officer of American Television and Communications Corporation (ATC), the
cable television subsidiary of Time, Inc. (now Time/Warner Cable), serving as
Chairman and CEO from 1980 to 1988. Mr. Myhren also serves on the boards of The
Providence Journal Company, Advanced Marketing Services, Peapod, Inc.,
CableLabs, J.D. Edwards, Inc., WNP, Inc., Founders Funds and The University of
Denver. Previously, Mr. Myhren served as chairman of the National Cable
Television Association (NCTA), and also served on the boards of Turner
Broadcasting Systems, Continental Cablevision, Inc., Citizens Bank and several
internal Time, Inc. boards, including Home
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Box Office, Temple-Eastex and Time Magazine Group. He also served on the FCC's
Advisory Committee on High Definition TV. Mr. Myhren has an undergraduate degree
in political science and philosophy from Dartmouth and a Master of Business
Administration from the Amos Tuck Graduate School at Dartmouth. He served three
and one-half years as a naval officer with the U.S. Pacific Fleet.
Paul J. Salem has served as a director of Verio since December 1996. Mr.
Salem is a Managing Director of Providence Equity Partners, Inc., and is a
partner of the general partner of Providence's private equity funds. Providence
manages over $500 million in equity and specializes in communications and media
investments. Mr. Salem has been responsible for many of Providence's investment
activities, including its investments in competitive local exchange companies,
enhanced specialized mobile radio, wireless data networks, radio representation,
telecommunications infrastructure and other areas. He is currently a director of
Interep National Radio Sales, Inc., MetroNet, Wired Ventures, Inc. and UniSite,
Inc. Prior to joining Providence, Mr. Salem worked for Morgan Stanley & Co. in
corporate finance and mergers and acquisitions. Previously, Mr. Salem spent four
years with Prudential Investment Corporation, an affiliate of Prudential
Insurance, where his responsibilities included private placement financings,
leveraged buyout transactions and establishing Prudential's European investment
office. Mr. Salem received a Bachelor of Arts in business from Brown University
and a Master of Business Administration from Harvard Business School.
Stephen W. Schovee has been a director of Verio since Verio's inception in
March 1996. Mr. Schovee serves as Managing Member of Telecom Partners, L.P. and
Telecom Partners II, L.P. Mr. Schovee was previously co-founder, Chief Executive
Officer and a director of OneComm from its inception until its merger with
Nextel. Prior to that, Mr. Schovee was a Vice President of Centennial Holdings,
the manager of The Centennial Funds, a Denver based venture capital fund with
over $400 million of subscribed capital. Mr. Schovee was a partner in two of The
Centennial Funds where he focused on telecommunications investments. Mr. Schovee
is a special limited partner of Centennial Fund IV, L.P. and Centennial Fund V,
L.P. He is a director of SMR Direct, WLL International, Inc., and Infobeat. Mr.
Schovee received a Bachelor of Science degree in mechanical engineering from
Bucknell University and a Master of Business Administration from The Wharton
School.
George J. Still, Jr. has been a director of Verio since Verio's inception
in March 1996. Mr. Still, based in Palo Alto, California, is a Managing Partner
of various Norwest Venture capital partnerships. From July 1984 until October
1989, he was a General Partner with The Centennial Funds based in Denver,
Colorado. Prior to Centennial, Mr. Still was with Ernst & Whinney (now Ernst &
Young) in San Francisco. Currently, he is a director of PeopleSoft, Inc. and
3Dfx Interactive, Inc., both public companies. In addition, he serves on the
board of several private companies, including Metapath Software Corporation,
Software Technologies Corp., ObjectStream, Inc., and Chordiant Software.
Further, Mr. Still serves as a director of the National Venture Capital
Association. He holds a Bachelor of Science degree in business administration
from Pennsylvania State University and a Master of Business Administration from
the Amos Tuck School at Dartmouth College.
Yukimasa Ito has been a director of Verio since September 11, 1998. Mr. Ito
is Vice President, Service Planning of NTT Worldwide Telecommunications Inc., a
corporation specializing in providing various international telecommunications
services to end-users. NTT Worldwide Telecommunications Inc. is a subsidiary of
NTT which, in turn, is an affiliate of Verio. Mr. Ito has held his current
position at NTT Worldwide Telecommunications Inc. since 1997, prior to which he
was Vice President, Service Planning of NTTPC Communications, Inc. from 1994 to
1997 and Director, Corporate Planning of NTT America, Inc. from 1991 until 1994.
Mr. Ito has worked for NTT or its subsidiaries since 1980. Mr. Ito holds a
Bachelor of Engineering degree from Waseda University and a Master of Business
Administration from the University of Washington. In 1990, Mr. Ito was a M.Sc.
Sloan Fellow at Stanford University.
Arthur L. Cahoon was appointed to the Verio Board upon completion of the
Hiway acquisition on January 5, 1999. Mr. Cahoon served as Chairman of Hiway's
Board of Directors, CEO and a director of Hiway since May 1998. From October
1997 to May 1998, he was Chairman of Hiway Florida. Since March 1993, he has
served as general partner of Rock Creek Partners, Ltd., an investment company,
and executive vice president of James Dahl & Co., an investment banking company.
Since January 1995, Mr. Cahoon also
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has served as Executive Vice President of Timberland Investment Services, LLP,
an investment management company, which he co-founded. In addition, from June
1995 to June 1996, he served as President of QuinStone Industries, inc., a
manufacturing company. Prior to March 1993, Mr. Cahoon served as Executive Vice
President and CFO of Cain & Bultman, Inc., a wholesale distributor. Mr. Cahoon
holds a B.B.A. in accounting and finance from Stetson University.
Sean G. Brophy has served as Vice President of Corporate Development since
November 1997, and prior to that served as Vice President of Marketing and
Business Development for Verio since joining Verio in May 1996. Mr. Brophy
served as Vice President of Marketing for OneComm and then Nextel from 1994 to
1996. He worked at Northern Telecom from 1990 through 1994 in a variety of
capacities, including strategic planning and product management, where he had
global responsibilities for new products for Personal Communications Services.
Prior to that he worked at Bell Northern Research, the research and development
arm of Northern Telecom, designing telephone equipment and services ranging from
the DMS-100 to key systems. While there he was awarded patent and design
excellence awards. Mr. Brophy holds a Bachelor of Science degree in computer
engineering from McMaster University, a Master of Science degree in electrical
engineering from Carleton University and a Master of Science degree in
management from the Sloan School of Management at MIT.
James E. Cunningham was appointed as Verio's Vice President of Sales and
Marketing in June 1998, after serving as the President of Verio's Northeast
regional operations since December 1997. He assumed that role after acting as
the President of Global Enterprise Services, Inc. (one of Verio's acquired ISPs)
beginning in May 1997. Mr. Cunningham has 17 years of sales, marketing and
general management experience with both established and early stage
telecommunications companies. Mr. Cunningham most recently served as Senior Vice
President of Sales and Marketing at U.S. One Communications, Inc. overseeing its
eastern United States sales and service organization. Prior to joining U.S. One
Communications in 1996, Mr. Cunningham spent 10 years with MCI. From 1995 to
1996, he served as Vice President, Sales & Marketing for network MCI Digital
Imaging where he directed its Campus MCI program which provided Internet access
and enhanced services for universities and local governments around the country.
Mr. Cunningham holds a Bachelor of Science degree in Business Administration
from Livingston University in Alabama.
Chris J. DeMarche has been Chief Technical Officer of Verio since joining
Verio in May 1996. From 1995 to 1996, Mr. DeMarche was CTO and Senior Vice
President of Nextel, where he was credited with addressing many critical
technology issues. From 1993 to 1995, he was Senior Vice President of
Engineering and Technology at OneComm, where he was responsible for building a
national engineering team and designing and implementing wireless communication
networks. Mr. DeMarche also worked in advanced technology areas at PacTel
Corporation and Hughes Aircraft Corporation and served in the U.S. Naval
Submarine Force. Mr. DeMarche received his Master of Business Administration
from UCLA in 1990, his Master of System Management from University of Southern
California in 1986, and his Bachelor of Science from the United States Naval
Academy in 1978.
Carla Hamre Donelson has served as Vice President, General Counsel and
Secretary of Verio since joining Verio in October 1996 from the law firm of
Morrison & Foerster LLP, where she had practiced law since March 1987. She
served as a partner in that firm's business department from 1990 and as head of
the Denver business practice from 1993. While in private practice, Ms. Donelson
was engaged in a general corporate and transactional practice, focused primarily
on the communications and related technology industries, representing domestic
and foreign entities in numerous financing, merger, acquisition, investment, and
licensing transactions. She served as regular outside corporate counsel to
OneComm and represented OneComm in connection with a variety of its SMR
acquisitions as well as its merger with Nextel. Ms. Donelson received her
Bachelor of Arts degree in molecular biology from the University of Colorado,
her Juris Doctor degree from the University of Denver College of Law, and is a
member of the Colorado Bar Association.
Peter B. Fritzinger has served as Chief Financial Officer of Verio since
June 1997. From September 1993 until June 1997, Mr. Fritzinger served as Chief
Financial Officer of Louis Dreyfus Natural Gas Corp., an
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independent, publicly held oil and gas company headquartered in Oklahoma City.
From 1991 to 1993, he was Vice President-Finance and Treasurer of Louis Dreyfus
Energy Corp., a diversified, global enterprise with investments in oil and gas
reserves and other petroleum-related industries. Mr. Fritzinger joined Louis
Dreyfus Energy Corp. from J.P. Morgan, where he was a Vice President in its
corporate finance group, having held various positions with Morgan Guaranty
Trust Company of New York since 1980. Mr. Fritzinger received his Bachelor of
Arts degree in math and psychology from Amherst College.
Deb Mayfield Gahan has served as Vice President of Human Resources and
Organizational Development for Verio since September 3, 1998. Prior to that, Ms.
Gahan served as Vice President of Finance and Administration since joining Verio
in May 1996. She brings with her ten years of extensive start-up and
telecommunications experience. From 1994 to 1996, Ms. Gahan served as Vice
President of Business Services and Controller for OneComm and then for Nextel
following its acquisition of OneComm. From 1987 to 1994, she was Director of
Business Operations and Controller for American Cellular Communications and then
BellSouth Cellular Corp., a leading provider of cellular service in 15 states.
In these positions, she was responsible for implementing cost-effective
financial control systems, asset protection, revenue assurance, financial
reporting, treasury and business process development. Ms. Gahan is a Certified
Public Accountant and holds a Master of Business Administration from Mississippi
College, as well as a Bachelor of Science in accounting from Mississippi State
University.
James M. Kieffer has served as Vice President of Customer Operations for
Verio since joining Verio in July 1996. Previously, Mr. Kieffer served as
Nextel's Vice President of Customer Operations responsible for customer care,
billing, accounts receivable, and inventory management from August 1996. Prior
to OneComm's merger with Nextel, Mr. Kieffer led the development of OneComm's
customer care as Director of Customer Operations from January 1994 to August
1995. Prior to that, Mr. Kieffer served as National Customer Service Manager for
Motorola's Land Mobile Products Sector. During his six years with Motorola, he
held several key roles while developing a consolidated national customer care
organization from March 1990 until January 1994. Prior to joining Motorola, Mr.
Kieffer managed customer relations and accounts receivable for IBM. He received
his Master of Business Administration from DePaul University and holds a
Bachelor of Science in management from Illinois State University.
Eric S. Hood has served as Vice President of Engineering and Operations
since September 3, 1998, having previously served as President and CEO of
NorthWestNet, Inc. Dr. Hood sits on the advisory board for several Internet
industry organizations, including Trustworthy Systems/Computer Emergency
Response Team (CERT), the top-level, international Internet security
organization; the U.S. Department of Justice Working Group on Internet Security;
and eCOMM Northwest, a regional consortium of businesses including Intel,
Sequent, BC Tel and Nike, promoting Internet commerce in the Northwest. From
1992 through 1994, Dr. Hood served as President of FARNET, the national
association of Internet service providers, telecommunications companies and
network equipment manufacturers, and from 1993 through 1995, he served on the
Steering Board for the U.S. Department of Energy's ESNet. Dr. Hood's research
and development programs in science, computing and network communications have
received funding support from the National Science Foundation, the U.S.
Department of Energy, the U.S. Department of Education, US West and Digital
Equipment Corporation, among others. Dr. Hood received his doctoral degree in
Theoretical Chemistry from the University of California at Santa Barbara in
1983. He also held the research positions of Bantrell Fellow at the California
Institute of Technology and Visiting Scientist at IBM's Thomas J. Watson
Research Center.
Edward R. Milstein has served as Vice President and Chief Information
Officer since September 3, 1998. Mr. Milstein previously served as President and
CEO of Compute Intensive d/b/a Network Intensive. Founded in 1991, Mr. Milstein
oversaw the growth of Network Intensive into a leading, full service, business
Internet access provider with customers throughout Southern California. Prior to
1991, Mr. Milstein served as area systems engineer for Sun Microsystems Computer
Corporation, a leading provider of high performance UNIX hardware and software.
From 1985 to 1987, Mr. Milstein was a software engineer for Hughes Aircraft,
where he developed a training business focused on the UNIX and Networking
industry. While earning his Bachelor of Science degree from the New Jersey
Institute of Technology in 1984, Mr. Milstein began his first business venture
as an independent consultant.
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COMMITTEES OF THE VERIO BOARD
The Verio Board has established an Executive Committee, a Finance
Committee, a Compensation Committee and an Audit Committee. The Executive
Committee is responsible for reviewing and, where appropriate, authorizing
corporate action with respect to the conduct of the business of Verio between
Board meetings. Actions taken by the Executive Committee must be submitted to
the Verio Board for review and ratification at the next meeting, except in those
cases when the Verio Board has specifically delegated final decision-making
authority to the Executive Committee. The Executive Committee is composed of
Messrs. Halstedt, Jaschke and Hribar. The Finance Committee is responsible for
reviewing and, where appropriate, authorizing certain corporate actions with
respect to the finances of Verio and certain acquisitions of ISPs not involving
the issuance of stock. The Finance Committee is composed of Messrs. Halstedt,
Jaschke, Still and Myhren. The Compensation Committee is responsible for
reviewing and establishing the compensation structure for Verio's officers and
directors, including salary rates, participation in incentive compensation and
benefit plans, 401(k) plans, stock option and purchase plans and other forms of
compensation. The Compensation Committee is composed of Messrs. Allen, Myhren
and Schovee.
The Verio Board also has established an Audit Committee consisting of
Messrs. Myhren and Schovee. The Audit Committee will be comprised solely of
independent directors and will be responsible for recommending the firm to be
appointed as independent accountants to audit Verio's financial statements,
discussing the scope and results of the audit with the independent accountants,
reviewing the functions of Verio's management and independent accountants with
respect to Verio's financial statements and performing such other related duties
and functions as are deemed appropriate by the Audit Committee and the Verio
Board.
DIRECTORS COMPENSATION
Each non-employee director of Verio receives an annual retainer fee of
$5,000 and a fee of $1,000 for each meeting of the Verio Board attended in
person or $500 for each meeting attended by telephone. The fee for Verio Board
committee meetings is $500 per meeting. A director may elect to receive these
payments in the form of Common Stock. Upon consummation of the Verio IPO, each
non-employee director was automatically granted an option to acquire 30,000
shares of Common Stock at an exercise price per share equal to the fair market
value of the Common Stock at the date of grant. Such options will vest and
become exercisable in three equal installments on each yearly anniversary of the
grant date. Non-employee directors elected or appointed to the Verio Board will
be granted automatically at the time of election or appointment an option to
acquire 30,000 shares of Common Stock with the same terms and conditions at an
exercise price equal to the then fair market value of the Common Stock. After
the initial three year vesting period for such options, non-employee directors
will receive automatic annual grants of options to acquire an additional 3,000
shares of Common Stock at an exercise price equal to the fair market value of
the Common Stock at the date of grant. Such options will vest and become
exercisable on the first anniversary of the grant date. In April 1998, Verio
adopted a separate stock incentive plan under which options may be granted and
shares of Common Stock may be issued to non-employee directors in accordance
with these compensation arrangements. See "-- Stock Option and Incentive
Plans -- 1998 Non-Employee Director Stock Incentive Plan."
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<PAGE> 70
EXECUTIVE COMPENSATION
The following table sets forth certain summary information for the years
ended December 31, 1998, 1997 and 1996, respectively, concerning the
compensation paid and awarded to: (a) Verio's Chief Executive Officer and (b)
Verio's four most highly compensated executive officers whose salaries and
bonuses exceeded $100,000 who were serving as executive officers as of December
31, 1998 (collectively, with the Chief Executive Officer, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -----------------------
-------------------------------- RESTRICTED SECURITIES
FISCAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR(1) SALARY($) BONUS($) AWARDS($) OPTIONS(#) COMPENSATIONS($)
--------------------------- ------- --------- -------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Justin L. Jaschke............... 1998 221,041 -- -- -- --
Chief Executive Officer 1997 175,003 66,500 85,000 -- --
1996 124,631(2) 44,867 -- 240,000 --
Herbert R. Hribar............... 1998 125,004 235,998 -- -- 125,000(3)
President and Chief 1997 -- -- -- 200,000 --
Operating Officer 1996 -- -- -- -- --
Chris J. DeMarche............... 1998 173,541 -- -- -- --
Chief Technical Officer 1997 160,004 57,780 25,000 20,000 --
1996 106,666(4) 38,215 -- 70,000 --
Carla Hamre Donelson............ 1998 173,541 -- -- -- --
Vice President, General 1997 160,004 60,800 -- 20,000 --
Counsel and Secretary 1996 26,320(5) 13,680 50,000 60,000 42,678(6)
Peter B. Fritzinger............. 1998 173,541 -- -- -- --
Chief Financial Officer 1997 89,443(7) 31,287 -- 75,000 70,267(8)
1996 -- -- -- -- --
</TABLE>
- ---------------
(1) Fiscal year 1996 covers the period from inception (March 1, 1996) to
December 31, 1996.
(2) Reflects compensation paid to Mr. Jaschke commencing with his appointment as
Chief Executive Officer in April 1996.
(3) Represents the cost to the Company of providing relocation benefits.
(4) Reflects compensation paid to Mr. DeMarche commencing with his appointment
as Chief Technical Officer in May 1996.
(5) Reflects compensation paid to Ms. Donelson commencing with her appointment
as Vice President, General Counsel and Secretary in October 1996.
(6) Represents the cost to the Company of tax reimbursements.
(7) Reflects compensation paid to Mr. Fritzinger commencing with his appointment
as Chief Financial Officer in June 1997.
(8) Represents the cost to the Company of providing relocation benefits.
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<PAGE> 71
STOCK OPTIONS GRANTED IN 1998
The following table contains information concerning the grant of stock
options by Verio under Verio's stock option plans to the Named Executive
Officers during the year ended December 31, 1998.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM($)(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------------
NAME GRANTED(#) FISCAL YEAR ($/SHARE)(1) DATE 5% 10%
---- ---------- ------------- ------------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Justin L. Jaschke......... 200,000 3.6% $13.50 Mar. 19, 2006 1,698,015 4,303,105
100,000 1.8% $22.00 Dec. 16, 2006 1,383,568 3,506,234
Herbert R. Hribar......... 250,000 4.5% $17.75 Jun. 23, 2006 2,790,720 7,072,232
100,000 1.8% $22.00 Dec. 16, 2006 1,383,568 3,506,234
Chris J. DeMarche......... 40,000 0.7% $13.50 Mar. 19, 2006 339,603 860,621
60,000 1.0% $22.00 Dec. 16, 2006 830,140 2,103,740
Carla Hamre Donelson...... 40,000 0.7% $13.60 Mar. 19, 2006 339,603 860,621
100,000 1.8% $22.00 Dec. 16, 2006 1,383,568 3,506,234
Peter B. Fritzinger....... 40,000 0.7% $13.50 Mar. 19, 2006 339,603 860,621
70,000 1.2% $22.00 Dec. 16, 2006 968,498 2,454,364
</TABLE>
- ---------------
(1) Prior to the consummation of the Verio IPO, all options were granted at an
exercise price per share equal to at least the fair market value of the
Verio Common Stock on the date of grant, as determined by the Verio Board.
Subsequent to the Verio IPO, all options were granted at the market price of
the Common Stock on the last trading day before the date of grant.
(2) The potential realizable value is calculated based on the fair market value
on the date of grant, which is equal to the exercise price of the options,
assuming that the stock appreciates in value from the date of grant
compounded annually until the end of the option term at the rate specified
(5% or 10%) and that the option is exercised and sold on the last day of the
option term for the appreciated stock price. Potential realizable value is
net of the option exercise price. The assumed rates of appreciation are
specified in the rules and regulations of the Commission and do not
represent Verio's estimate or projection of future stock price. Actual
gains, if any, resulting from stock option exercises and Common Stock
holdings are dependent on the future performance of the Common Stock and
overall stock market conditions. There can be no assurance that the amounts
reflected in this table will be achieved.
FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information with respect to the
Named Executive Officers regarding the stock options exercised during the last
fiscal year, the aggregate number of unexercised options to purchase Common
Stock granted in all years and held by them as of December 31, 1998, and the
value of unexercised in-the-money options (i.e., options that had a positive
spread between the exercise price and the fair market value of the Common Stock)
as of December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS AT IN-THE-MONEY OPTIONS
SHARES FISCAL YEAR-END(#) AT FISCAL YEAR-END($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Justin L. Jaschke.......... -- $ -- 70,000 470,000 $1,566,250 $10,516,250
Herbert R. Hribar.......... -- $ -- -- 350,000 $ -- $ 7,831,250
Chris J. DeMarche.......... -- $ -- 41,334 148,666 $ 924,848 $ 3,326,402
Carla Hamre Donelson....... -- $ -- 37,333 182,667 $ 835,326 $ 4,087,174
Peter B. Fritzinger........ -- $ -- 15,000 170,000 $ 335,625 $ 3,803,750
</TABLE>
- ---------------
(1) The value of options at year-end is based on the December 31, 1998 closing
price of $22.375 per share of Common Stock.
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EMPLOYMENT AGREEMENTS
As a general matter, Verio does not enter into employment agreements, and
has not entered into employment agreements with any of its officers. Rather, the
employment relationships with each officer are "at will." However, in connection
with the initial employment of each officer, Verio and the officer executed an
offer letter, in which the general compensation and benefits provided to the
officer are outlined, including base salary, targeted annual bonus, option
grants, employee benefits and severance. The amounts outlined in such offer
letters are subject to change from time to time.
COMPENSATION PROTECTION AGREEMENTS
Verio has entered into compensation protection agreements (the
"Compensation Protection Agreements") with each of the Named Executive Officers
and certain additional officers (collectively, the "Protected Officers") of
Verio. Each of the Compensation Protection Agreements contain substantially
similar terms. The form of Compensation Protection Agreement has been filed as
an exhibit to Verio's Registration Statement of which this Prospectus is a part.
The Compensation Protection Agreements are for a term of three years, subject to
automatic yearly extensions. In no event will the Compensation Protection
Agreements terminate within 12 months of a Change in Control of Verio. "Change
in Control" includes the following:
(a) An acquisition (other than directly from Verio) of any voting
securities of Verio (the "Voting Securities") by any Person (as defined in
the Exchange Act) immediately after which such Person has Beneficial
Ownership (as defined in the Exchange Act) of 40% or more of the combined
voting power of Verio's then outstanding Voting Securities. In determining
whether a Change in Control has occurred, Voting Securities which are
acquired in a "Non-Control Acquisition," as defined in the Compensation
Protection Agreements, do not constitute an acquisition which would cause a
Change in Control;
(b) The individuals who, as of the date the Compensation Protection
Agreements were approved by the Verio Board, are members of the Verio Board
(the "Incumbent Verio Board"), cease for any reason to constitute at least
a majority of the Verio Board (subject to certain provisos);
(c) Approval by stockholders of Verio of a merger, consolidation or
reorganization involving Verio, unless such merger, consolidation or
reorganization (each, an "event") satisfies certain specified conditions;
(d) Any other event that at least two-thirds of the Incumbent Verio
Board determines constitutes a Change in Control; and
(e) If a Protected Officer's employment is terminated prior to a Change
in Control and the Verio Board determines that such termination was at the
request of a third party who has indicated an intention or taken steps to
effect a Change in Control and who subsequently effectuates a Change in
Control, or occurred in connection with, or in anticipation of, a Change in
Control which actually occurs, then a Change in Control is considered to
have occurred with respect to that Protected Officer.
Upon termination within 12 months following a Change in Control, each
Protected Officer will receive the following compensation and benefits:
(i) If a Protected Officer's employment with Verio is terminated within
12 months following a Change in Control by Verio for Cause (as defined in
the Compensation Protection Agreements) or by reason of the Protected
Officer's Disability (as defined in the Compensation Protection
Agreements), death or retirement, or by the Protected Officer other than
for Good Reason (as defined in the Compensation Protection Agreements),
then Verio must pay to the Protected Officer the Accrued Compensation (as
defined below) due through the date of termination (the "Termination
Date"). "Accrued Compensation" includes base salary, reimbursement for
reasonable and necessary expenses incurred by the Protected Officer on
behalf of Verio during the period ending on the Termination Date, and
vacation pay.
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<PAGE> 73
(ii) If a Protected Officer's employment is terminated within 12 months
of a Change in Control for any other reason than specified above, the
Protected Officer will receive:
(A) his or her Accrued Compensation;
(B) an amount equal to the product of a fraction, the numerator of
which is the number of days in Verio's fiscal year through the
Termination Date and the denominator of which is 365, and the bonus
amount, which will be the greater of 100% of the last annual incentive
payment paid or payable to the Protected Officer prior to the
Termination Date, and the Protected Officer's incentive target for the
fiscal year in which the Change in Control occurs (the "Bonus Amount");
(C) an amount equal to two times the sum of the Protected Officer's
annual base salary in effect immediately prior to the Change in Control,
plus the Bonus Amount. However, the amount paid to Mr. Jaschke will be
three times that sum;
(D) until the third anniversary of the Termination Date, the same
rights with respect to benefits provided by Verio, as were provided to
the Protected Officer as of the Effective Date, or, if greater, at any
time within 90 days preceding the date of the Change in Control; and
(E) the immediate vesting and removal of all restrictions on any
outstanding incentive awards granted to the Protected Officer under
Verio's stock option and other stock incentive plans or arrangement.
The Compensation Protection Agreements further provide that the Protected
Officers are not required to mitigate the amount of any payment by seeking
employment or otherwise. Protected Officers may be entitled to additional
compensation or benefits in accordance with Verio's employee benefit plans and
other applicable programs, policies and practices then in effect. The
Compensation Protection Agreements contain a "gross-up" provision pursuant to
which any Severance Payment, which would be subject to certain excise taxes
occurring as a result of Change in Control, would include an additional gross-up
payment resulting in the Protected Officer retaining an additional amount equal
to excise tax.
STOCK OPTION AND INCENTIVE PLANS
1996 Stock Option Plan
The 1996 Stock Option Plan was adopted and approved by the Verio Board in
May 1996 and by the stockholders of Verio in June 1996. In February 1998, the
1996 Stock Option Plan was amended, with the approval of the Verio Board, to
reserve a total of 2,205,300 shares of Common Stock for issuance under this
plan. As of October 31, 1998, options to purchase 157,547 shares of Common Stock
granted under the 1996 Stock Option Plan had been exercised, options to purchase
1,743,158 shares of Common Stock were outstanding and no additional options to
purchase shares of Common Stock remained available for grant. All options
forfeited after the amendment to the 1996 Stock Option Plan was implemented in
February 1998 result in availability under the 1998 Stock Incentive Plan and are
no longer available for grant under the 1996 Stock Option Plan. The outstanding
options were exercisable at a weighted average exercise price of $6.31 per
share. Outstanding options to purchase an aggregate of 1,051,334 shares were
held by employees who are not officers or directors of Verio. Of the 157,547
shares issued upon exercise of options, a total of 48,250 were issued upon
exercise prior to their respective exercise vesting dates, as permitted by the
terms of the 1996 Stock Option Plan. As a result, these shares are subject to
repurchase by Verio at their respective exercise prices, until the date on which
they would have become exercisable. The 1996 Stock Option Plan will terminate in
2006, unless sooner terminated by the Verio Board.
The Verio Board has delegated administration of the 1996 Stock Option Plan
to its Compensation Committee. The Compensation Committee is constituted to
comply with the rules under Rule 16b-3 of the Exchange Act. Awards under the
1996 Stock Option Plan may consist of (i) options to purchase Common Stock that
are designed to qualify, under Section 422 of the Code, as "incentive stock
options" ("Incentive Stock Options"), or (ii) options to purchase Common Stock
that are not described in Sections 422 or 423 of the Code ("Non-Qualified Stock
Options" and, collectively with Incentive Stock Options, "Options").
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<PAGE> 74
The Compensation Committee has discretion to grant Incentive Stock Options
to employees and officers (including directors who are employees) of Verio or
any Affiliate (as defined in the 1996 Stock Option Plan) of Verio and
Non-Qualified Stock Options to employees, officers, directors or consultants of
Verio and its Affiliates. The Compensation Committee may set the terms of such
grants, subject to applicable restrictions in the 1996 Stock Option Plan.
Incentive Stock Option grants are subject to the following limitations: (i) the
term of any Incentive Stock Option may not be longer than ten years, provided
that the term of any Incentive Stock Option granted to an individual possessing
more than 10% of the combined voting power of Verio or an Affiliate (a "10%
Holder") may not be longer than five years; (ii) the aggregate fair market value
of all shares underlying Incentive Stock Options granted to an individual that
first become exercisable in any calendar year may not exceed $100,000; and (iii)
the exercise price of Incentive Stock Options may not be less than the fair
market value of the underlying shares on the grant date, provided that the
exercise price of any Incentive Stock Option granted to a 10% Holder may not be
less than 110% of the fair market value of the underlying shares on the grant
date. With respect to Non-Qualified Stock Options, the exercise price may not be
less than 85% of the fair market value of the underlying shares on the grant
date. As of October 31, 1998, no such below-market grant has been made.
During an optionee's lifetime, an Incentive Stock Option is exercisable
only by the optionee and no Incentive Stock Option may be transferred by the
optionee other than by will or the laws of descent and distribution. During an
optionee's lifetime (or a transferee pursuant to a qualified domestic relation
order), a Non-Qualified Stock Option is exercisable only by the optionee and no
Non-Qualified Stock Option may be transferred by the optionee other than by will
or the laws of descent and distribution or pursuant to a qualified domestic
relation order satisfying the requirements of the prior version of Rule 16b-3
under the Exchange Act. An optionee whose continuous status as an employee,
director or consultant of Verio terminates for any reason (other than
termination because of death or disability) may exercise, in the three-month
period following such cessation (unless such Options terminate or expire sooner
by their terms), or such longer or shorter period as specified in the Option,
that portion of the optionee's Options that is exercisable at the time of such
cessation. In the event the optionee becomes disabled, the Options vested as of
the date of disability may be exercised prior to the earlier of such Option's
specified expiration date or 12 months from the date of the optionee's
disability, or such longer or shorter period as specified in the Option. In the
event the optionee dies, the Options vested as of the date of death may be
exercised prior to the earlier of such Option's specified expiration date or 18
months from the date of the optionee's death, or such longer or shorter period
as specified in the Option.
In the event of (i) a dissolution or liquidation of Verio, (ii) a merger or
consolidation in which Verio is not the surviving corporation, (iii) a reverse
merger in which Verio is the surviving corporation but the shares of Verio's
outstanding Common Stock immediately prior to such merger are converted into
other property, whether in the form of securities, cash or otherwise, or (iv)
any other capital reorganization in which Verio's stockholders receive less than
50% of the outstanding voting shares of the surviving corporation: (a) any
surviving corporation shall assume any Options outstanding under the 1996 Stock
Option Plan; (b) such Options shall continue in full force and effect; or (c)
the Options shall terminate if not exercised prior to such event.
1997 California Stock Option Plan
Verio's 1997 California Stock Option Plan (the "1997 California Plan") was
adopted by the Verio Board in February 1997, and approved by Verio's
stockholders in April 1997. In February 1998, the 1997 California Plan was
amended, with the approval of the Verio Board, to reserve a total of 795,400
shares of Common Stock for issuance under this plan. This amendment has been
approved by Verio's stockholders. As of October 31, 1998, options to purchase
320 shares of Common Stock had been exercised under the 1997 California Plan,
options to purchase 542,751 shares of Common Stock were outstanding and there
were no options available for grant as the remaining options were transferred to
the 1998 Stock Incentive Plan (as defined below). The outstanding options were
exercisable at a weighted average exercise price of $12.10 per share.
Outstanding options to purchase an aggregate of 515,251 shares were held by
employees who are not
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officers or directors of Verio, and the remaining outstanding options to
purchase 70,000 shares are held by Mr. Johnson's estate.
The 1997 California Plan may be administered by the Verio Board or the
Compensation Committee (either, the "1997 Plan Administrator"). The 1997
California Plan provides for the granting to employees of Verio and of its
subsidiaries or parent corporations of Incentive Stock Options, and for the
granting to employees and independent contractors of Non-Qualified Stock
Options. The 1997 Plan Administrator has the power to determine the terms of the
Options granted, including the exercise price, number of shares subject to the
Option and the exercisability thereof, and the form of consideration payable
upon exercise. Options granted under the 1997 California Plan are not
transferable by the optionee other than by will or by the laws of descent or
distribution, and each Option is exercisable during the lifetime of the optionee
only by such optionee. The exercise price of all Incentive Stock Options granted
under the 1997 California Plan must be at least equal to the fair market value,
as determined by the Verio Board, of the Common Stock on the grant date. The
exercise price of all Non-Qualified Stock Options granted under the 1997
California Plan must be at least 85% of the fair market value, as determined by
the 1997 Plan Administrator, of the Common Stock on the grant date. With respect
to any participant who owns stock possessing more than 10% of the voting power
or value of all classes of Verio's outstanding capital stock, the exercise price
of any Incentive Stock Option or Non-Qualified Stock Option granted must equal
at least 110% of the fair market value of the Common Stock on the grant date and
the term of the Option must not exceed five years. The term of all other Options
granted under the 1997 California Plan may not exceed ten years. The
consideration for exercising any Option may consist of cash, check, shares of
Common Stock, a promissory note, the assignment of part of the proceeds from the
sale of shares acquired upon exercise of the Options or any combination thereof
as specified in the agreement evidencing the Option.
The 1997 California Plan provides that in the event of a merger of Verio
with or into another corporation or a consolidation, sale of substantially all
of Verio's assets or like transaction involving Verio in which Verio's
stockholders before the transaction do not retain a majority interest in Verio,
each Option may be assumed or an equivalent Option may be substituted by a
successor corporation. If the successor corporation chooses not to assume the
Options under the 1997 California Plan, the Options not otherwise exercisable
will terminate immediately prior to the consummation of the transaction.
Unless terminated sooner, the 1997 California Plan will terminate
automatically in 2007. The Verio Board has the authority to amend, suspend or
terminate the 1997 California Plan, subject to stockholder approval of certain
amendments, and provided no such action may affect any share of Common Stock
previously issued and sold or any Option previously granted under the 1997
California Plan without the optionee's consent.
1998 Stock Incentive Plan
Verio's 1998 Stock Incentive Plan (the "1998 Stock Incentive Plan"), which
was adopted by the Verio Board in February 1998, was amended and restated as of
March 19, 1998 and has been approved by Verio's stockholders to reserve
6,199,300 shares of Common Stock for issuance under the 1998 Stock Incentive
Plan, together with (i) any shares of Common Stock available for future awards
under the 1997 California Plan as of the Verio IPO, and (ii) any shares of
Common Stock represented by Awards under the 1996 Stock Option Plan and the 1997
California Plan (the "Prior Plans"), that are forfeited, expire or are cancelled
following the Verio IPO. In connection with the adoption of the 1998 Stock
Incentive Plan, the Verio Board determined that Verio will limit the issuance of
1998 Awards (as defined below) under the 1998 Stock Incentive Plan such that the
aggregate number of shares subject to 1998 Awards granted under the 1998 Stock
Incentive Plan and the Prior Plans will not at any time exceed 15% of the
Verio's outstanding fully-diluted equity. From and after Verio's IPO, all
further option grants, including Hiway's options assumed by Verio in the Hiway
acquisition, will be made solely under the 1998 Stock Incentive Plan.
As of October 31, 1998, options to purchase 34,968 shares of Common Stock
had been exercised under the 1998 Stock Incentive Plan, options to purchase
2,280,807 shares of Common Stock were outstanding, and options to purchase an
additional 3,883,525 shares of Common Stock remained available for grant. The
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<PAGE> 76
outstanding options were exercisable at a weighted average exercise price of
$16.75 per share. Outstanding options to purchase an aggregate of 1,372,103
shares were held by employees who are not officers or directors of Verio.
The purpose of the 1998 Stock Incentive Plan is to attract and retain the
best available personnel, to provide additional incentive to employees,
directors and consultants of Verio and its related entities and to promote the
success of Verio's business. The 1998 Stock Incentive Plan provides for the
granting to employees of Incentive Stock Options and the granting of
nonstatutory stock options, stock appreciation rights, dividend equivalent
rights, restricted stock, performance units, performance shares, and other
equity-based rights ("1998 Awards") to employees, directors and consultants of
Verio and its related entities.
With respect to 1998 Awards granted to directors or officers, the 1998
Stock Incentive Plan is administered by the Verio Board or a committee
designated by the Verio Board constituted to permit such 1998 Awards to be
exempt from Section 16(b) of the Exchange Act in accordance with Rule 16b-3
thereunder. With respect to 1998 Awards granted to other participants, the 1998
Stock Incentive Plan is administered by the Verio Board or a committee
designated by the Verio Board. In each case, the respective plan administrator
shall determine the provisions, terms and conditions of each 1998 Award,
including, but not limited to, the 1998 Award vesting schedule, repurchase
provisions, rights of first refusal, forfeiture provisions, form of payment
(cash, shares of Common Stock or other consideration) upon settlement of the
1998 Award, payment contingencies and satisfaction of any performance criteria.
Incentive Stock Options are not transferable by the optionee other than by
will or the laws of descent or distribution, and each Incentive Stock Option is
exercisable during the lifetime of the optionee only by such optionee. Other
1998 Awards shall be transferable to the extent provided in the agreement
evidencing the 1998 Award.
The exercise price of Incentive Stock Options must be at least equal to the
fair market value of the Common Stock on the date of grant, and the term of the
option must not exceed ten years. The term of other 1998 Awards will be
determined by the respective plan administrator. With respect to an employee who
owns stock possessing more than 10% of the voting power of all classes of
Verio's outstanding capital stock, the exercise price of any Incentive Stock
Option must equal at least 110% of the fair market value of the Common Stock on
the grant date and the term of the option must not exceed five years. The
exercise price or purchase price, if any, of other 1998 Awards will be such
price as determined by the respective plan administrator, but not less than 85%
of the fair market value of the stock. The consideration to be paid for the
shares of Common Stock upon exercise or purchase of a 1998 Award will be
determined by the respective plan administrator and may include cash, check,
shares of Common Stock or the assignment of part of the proceeds from the sale
of shares acquired upon exercise or purchase of the 1998 Award.
Where the 1998 Award agreement permits the exercise or purchase of a 1998
Award for a certain period of time following the recipient's termination of
service with Verio, disability or death, such 1998 Award will terminate to the
extent not exercised or purchased on the last day of the specified period or the
last day of the original term of such 1998 Award, whichever occurs first.
Unless terminated sooner, the 1998 Stock Incentive Plan will terminate
automatically in 2008. The Verio Board has the authority to amend, suspend or
terminate the 1998 Stock Incentive Plan, subject to stockholder approval of
certain amendments, and provided no such action may affect 1998 Awards
previously granted under the 1998 Stock Incentive Plan unless agreed to by the
affected grantees.
1998 Employee Stock Purchase Plan
Verio's 1998 Employee Stock Purchase Plan (the "Stock Purchase Plan") was
approved by the Verio Board in February 1998 and has been approved by Verio's
stockholders. The Stock Purchase Plan was subsequently amended and restated as
of April 13, 1998. The Stock Purchase Plan is intended to qualify as an
"employee stock purchase plan" under Section 423 of the Code in order to provide
employees of Verio with an opportunity to purchase Common Stock through payroll
deductions. An aggregate of 3,000,000 shares of Common Stock has been reserved
for issuance under the Stock Purchase Plan and available for purchase
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thereunder, subject to adjustment in the event of a stock split, stock dividend
or other similar change in the Common Stock or the capital structure of Verio.
All employees of Verio (and employees of "subsidiary corporations" and "parent
corporations" of Verio (as defined by the Code) designated by the administrator
of the Stock Purchase Plan) whose customary employment is for more than five
months in any calendar year and more than 20 hours per week are eligible to
participate in the Stock Purchase Plan. Employees of Verio are eligible to
participate in the Stock Purchase Plan, subject to a six-month waiting period
after hiring. Non-employee directors, consultants and employees subject to the
rules or laws of a foreign jurisdiction that prohibit or make impractical the
participation of such employees in the Stock Purchase Plan are not eligible to
participate in the Stock Purchase Plan.
The Stock Purchase Plan designates Purchase Periods, Accrual Periods and
Exercise Dates. Purchase Periods are generally overlapping periods of 12 months.
The initial Purchase Period began on the effective date of the Stock Purchase
Plan, which was the effective date of Verio's Registration Statement relating to
the Verio IPO, and ends on May 14, 1999. Additional Purchase Periods will
commence each May 15 and November 15. Accrual Periods are generally six month
periods, with the initial Accrual Period commencing on the effective date of the
Stock Purchase Plan and ending on November 14, 1998. Thereafter, Accrual Periods
will commence each May 15 and November 15. Exercise Dates are the last day of
each Accrual Period. In the event of a merger of Verio with or into another
corporation, the sale of all or substantially all of the assets of Verio, or
certain other transactions in which the stockholders of Verio before the
transaction own less than 50% of the total combined voting power of Verio's
outstanding securities following the transaction, the administrator of the Stock
Purchase Plan may elect to shorten the Purchase Period then in progress.
On the first day of each Purchase Period, a participating employee is
granted a purchase right, which is a form of option to be automatically
exercised on the forthcoming Exercise Dates within the Purchase Period, during
which deductions are to be made from the pay of participants (in accordance with
their authorizations) and credited to their accounts under the Stock Purchase
Plan. When the purchase right is exercised, the participant's withheld salary is
used to purchase shares of Common Stock. The price per share at which shares of
Common Stock are to be purchased under the Stock Purchase Plan during any
Accrual Period is the lesser of (i) 85% of the fair market value of the Common
Stock on the date of the grant of the option (the commencement of the Purchase
Period), or (ii) 85% of the fair market value of the Common Stock on the
Exercise Date (the last day of an Accrual Period). The participant's purchase
right is exercised in this manner on both Exercise Dates arising in the Purchase
Period unless, on the first day of any Accrual Period, the fair market value of
the Common Stock is lower than the fair market value of the Common Stock on the
first day of the Purchase Period. If so, the participant's participation in the
original Purchase Period is terminated, and the participant is automatically
enrolled in the new Purchase Period effective the same date.
Payroll deductions may range from 1% to 10% (in whole percentage
increments) of a participant's regular base pay and bonuses, exclusive of
overtime, shift-premiums or commissions. Participants may not make direct cash
payments to their accounts. The maximum number of shares of Common Stock which
any employee may purchase under the Stock Purchase Plan during an Accrual Period
is 1,250 shares. Certain additional limitations on the amount of Common Stock
which may be purchased during any calendar year are imposed by the Code.
The Stock Purchase Plan will be administered by the Verio Board or a
committee designated by the Verio Board, which will have the authority to
terminate or amend the Stock Purchase Plan (subject to specified restrictions)
and otherwise to administer the Stock Purchase Plan and to resolve all questions
relating to the administration of the Stock Purchase Plan.
1998 Non-Employee Director Stock Incentive Plan
In April 1998, the Verio Board adopted the 1998 Non-Employee Director Stock
Incentive Plan (the "1998 Non-Employee Director Plan"), under which the total
number of shares available for grant is equal to 550,000 shares of Common Stock,
in order to provide for option grants and stock issuances to members of the
Verio Board who are not employees of Verio in accordance with the compensation
guidelines described in "-- Compensation of Verio Directors." The 1998
Non-Employee Director Plan has been approved by Verio's
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stockholders. Options to purchase 210,000 shares of Common Stock were granted to
non-employee directors. As of October 31, 1998, options to purchase an
additional 340,000 shares of Common Stock remained available for grant.
The purposes of the 1998 Non-Employee Director Plan are to attract and
retain the best available non-employee directors, to provide them additional
incentives, and to promote the success of Verio's business. The 1998
Non-Employee Director Plan establishes two programs for the grant of awards to
non-employee directors: the Automatic Option Grant Program and the Stock Fee
Program (the "Non-Employee Director Awards").
Under the Automatic Option Grant Program, each of the six non-employee
directors serving on the Verio Board automatically at the time of the Verio IPO
were granted an option to acquire 30,000 shares of Common Stock at an exercise
price per share equal to the fair market value of the Common Stock at the date
of grant. These options will vest and become exercisable in three equal
installments on each yearly anniversary of the grant date. Non-employee
directors appointed to the Verio Board also will be granted automatically at the
time of election or appointment an option to acquire 30,000 shares of Common
Stock with the same terms and conditions at an exercise price equal to the then
fair market value of the Common Stock. After the initial three year vesting
period for such options, each non-employee director will receive automatic
annual grants of options to acquire an additional 3,000 shares of Common Stock
at an exercise price equal to the fair market value of the Common Stock at the
date of grant. Such options will vest and become fully exercisable on the first
anniversary of the grant date.
Each automatic option grant will have a term of eight years and will be
transferable to the extent provided in the agreement evidencing the option. The
consideration for exercising an option may consist of cash, check, shares of
Common Stock, the assignment of part of the proceeds from the sale of shares
acquired upon exercise of the option or any combination thereof. In the event of
a merger of Verio with or into another corporation, a sale of substantially all
of Verio's assets, a person becoming more than a 50% owner of Verio or a like
transaction involving Verio in which Verio's stockholders before the transaction
do not retain a majority interest in Verio, immediately prior to the
transaction, one-third of the shares subject to the options to purchase 30,000
shares of Common Stock will vest and become exercisable and all of the shares
subject to the options to purchase 3,000 shares of Common Stock will vest and
become exercisable. Upon consummation of such transaction all such options will
terminate, unless they are assumed by the successor company. In the event of a
hostile takeover of Verio or change in the majority of the Verio Board through
contested elections, the vesting of all such options will likewise accelerate as
described above, but the options will remain exercisable according to their
terms.
Under the Stock Fee Program, each non-employee director will be eligible to
apply all or any portion of the annual retainer and meeting fees otherwise
payable in cash to the non-employee director to the acquisition of shares of
Common Stock. The non-employee director must make the stock purchase election
prior to the start of the calendar year for which the election is to be in
effect. The first year for which such elections may be made is 1999. On the
first trading day following the due date for payment of a portion of the annual
retainer fee or the date of any meeting in a calendar year for which the
election is effective, the portion of the annual retainer or meeting fee subject
to such election automatically will be applied to the acquisition of shares of
Common Stock by dividing the selected dollar amount by the then fair market
value per share of the Common Stock. The number of issuable shares will be
rounded down to the next whole share.
The 1998 Non-Employee Director Plan is administered by the Verio Board or a
committee designated by the Verio Board (either, the "1998 Plan Administrator")
constituted to permit Non-Employee Director Awards to be exempt from Section
16(b) of the Exchange Act in accordance with Rule 16b-3 thereunder. The 1998
Plan Administrator shall approve forms of the Non-Employee Director Award
agreement for use under the Plan, determine the terms and conditions of
Non-Employee Director Awards, and construe and interpret the terms of the 1998
Non-Employee Director Plan and Non-Employee Director Awards granted pursuant
thereto.
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Unless terminated sooner, the 1998 Non-Employee Director Plan will
terminate automatically in 2008. The Verio Board has the authority to amend,
suspend or terminate the 1998 Non-Employee Director Plan, subject to stockholder
approval of certain amendments, and provided no such action may affect Non-
Employee Director Awards previously granted under the 1998 Non-Employee Director
Plan unless agreed to by the affected non-employee directors.
401(k) PLAN
In January 1997, Verio implemented an employee savings and retirement plan
(the "401(k) Plan") covering certain of Verio's employees who have at least one
month of service with Verio and have attained the age of 21. Pursuant to the
401(k) Plan, eligible employees may elect to reduce their current compensation
by up to the lesser of 20% of such compensation or the statutorily prescribed
annual limit ($10,000 in 1998) and have the amount of such reduction contributed
to the 401(k) Plan. Verio may make contributions to the 401(k) Plan on behalf of
eligible employees. Employees become 20% vested in these Verio contributions
after one year of service, and increase their vested percentages by an
additional 20% for each year of service thereafter. The 401(k) Plan is intended
to qualify under Section 401 of the Code so that contributions by employees or
by Verio to the 401(k) Plan, and income earned on the 401(k) Plan contributions,
are not taxable to employees until withdrawn from the 401(k) Plan, and so that
contributions by Verio, if any, will be deductible by Verio when made. The
trustee under the 401(k) Plan, at the direction of each participant, invests the
401(k) Plan employee salary deferrals in selected investment options. Verio made
no contributions to the 401(k) Plan in 1996 or in 1997. Verio does not presently
expect to make any contributions to the 401(k) Plan during fiscal 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Chairman of the Compensation Committee is Mr. Schovee. No member of the
Compensation Committee was at any time during the fiscal year ended December 31,
1998, or at any other time, an officer or employee of Verio. No member of the
Compensation Committee serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of the Verio Board or the Compensation Committee.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Certificate of Incorporation and Bylaws of Verio provide that Verio
shall indemnify to the fullest extent permitted by Section 145 of the DGCL, as
it now exists or as amended, all directors and officers pursuant thereto. The
Certificate of Incorporation and Bylaws also authorize Verio to indemnify its
employees and other agents, at its option, to the fullest extent permitted by
Section 145, as it now exists or as amended. Verio entered into agreements to
indemnify its directors and officers, in addition to indemnification provided
for in Verio's charter documents. These agreements, among other things, provide
for the indemnification of Verio's directors and officers for certain expenses
(including attorneys' fees), judgments, fines and settlement amounts incurred by
any such person in any action or proceeding, including any action by or in the
right of Verio, arising out of such person's services as a director or officer
of Verio, any subsidiary of Verio or any other company or enterprise to which
such person provides services at the request of Verio to the fullest extent
permitted by applicable law. Verio believes that these provisions and agreements
will assist Verio in attracting and retaining qualified persons to serve as
directors and officers.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL or
(iv) for any transaction from which the director derived an improper personal
benefit. Verio's Certificate of Incorporation provides for the elimination of
personal liability of a director for breach of fiduciary duty, as permitted by
Section 102(b)(7) of the DGCL.
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Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Verio
pursuant to the provisions contained in its Certificate of Incorporation and
Bylaws, the DGCL or otherwise, Verio has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Verio of
expenses incurred or paid by a director, officer or controlling person of Verio
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer or controlling person in connection with the Common Stock
being registered hereunder, Verio will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
Verio has purchased and maintains insurance on behalf of the officers and
directors insuring them against liabilities that they may incur in such
capacities or arising out of such status.
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CERTAIN TRANSACTIONS
TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
On June 16, 1997, Verio made a loan in the amount of $100,000 to Peter
Fritzinger, which Mr. Fritzinger repaid on July 21, 1997 with interest at the
then current market rate.
As a condition to the closing of the acquisition of Hiway, all related
party indebtedness was to be repaid to Hiway on or prior to closing. However,
Verio agreed to waive the condition that Arthur L. Cahoon repay his indebtedness
to Hiway in the principal amount of $280,409 with interest at the then prime
rate.
OTHER TRANSACTIONS
Brooks. On March 18, 1998, in response to an offer by Brooks, Verio and
Brooks reached an agreement pursuant to which Verio agreed to repurchase the
$50.0 million principal amount of Verio's 1997 Notes held by Brooks for an
aggregate net purchase price of approximately $54.5 million, plus accrued
interest. A portion of the proceeds from the sale of the March 1998 Notes was
used to effect the Refinancing.
NTT. On May 15, 1998 (the date of the closing of the Verio IPO), pursuant
to a Stock Purchase and Master Strategic Relationship Agreement, dated as of
April 7, 1998, between Verio and NTT (the "NTT Stock Purchase Agreement"), NTT
purchased 4,493,877 shares of Common Stock from Verio for proceeds of
approximately $100.0 million (the "NTT Investment"). Verio granted NTT certain
registration rights with respect to the Common Stock it had acquired.
Verio and NTT also entered into an Investment Agreement, dated as of April
7, 1998 (the "NTT Investment Agreement"), providing for certain arrangements
effective from and after the consummation of the NTT Investment, some or all of
which could have the effect of delaying, deferring or preventing a change of
control of Verio. In particular, so long as NTT continues to hold at least 50%
of the aggregate number of shares of Common Stock acquired by it in connection
with the NTT Investment, Verio has agreed to appoint an individual designated by
NTT to the Verio Board. The initial NTT designee, Yukimasa Ito, will serve for
an initial term ending as of the third annual stockholder meeting following the
closing of the Verio IPO. Thereafter, for so long as NTT continues to meet the
share ownership requirement, Verio has agreed, subject to certain exceptions, to
nominate as a member of the Verio Board at each subsequent election of the
applicable class of directors a person designated by NTT who will be subject to
election by the stockholders of Verio. In addition, NTT has agreed on behalf of
itself and its affiliates to certain "standstill" restrictions pursuant to which
NTT and its affiliates may only make open market or privately negotiated
purchases of additional voting securities (including Verio's Common Stock) so
long as the total holdings of NTT and its affiliates do not exceed 17.5% of
Verio's fully diluted Common Stock after taking into account such acquisition.
The "standstill" obligations terminate five years after the consummation of the
NTT Investment. NTT has also agreed, among other things, that it will not (i)
solicit proxies or participate in a proxy solicitation or otherwise seek to
influence voting with respect to Verio, (ii) call a stockholders meeting, or
(iii) make any announcement or proposal for a tender offer that would result in
NTT owning more than 17.5% of Common Stock on a fully diluted basis. In
addition, NTT has agreed that in connection with any offer or agreement by a
third party to acquire over 30% of the voting power of Verio or over 50% of the
assets or earning power of Verio (an "Acquisition Proposal"), it will not
transfer any securities of Verio in connection with an Acquisition Proposal,
unless such Acquisition Proposal has been recommended by the Verio Board or the
Verio Board has not publicly recommended against such Acquisition Proposal
within three months of the public announcement or presentation to the Verio
Board of such Acquisition Proposal.
The NTT Investment Agreement also imposes certain limitations on NTT's
ability to dispose of the shares of Common Stock that it has acquired. NTT has
granted to Verio certain rights of first offer and rights of first refusal which
apply, under certain circumstances, in the event that NTT proposes to sell some
or all of the shares that it has acquired. The specific terms of these rights
vary depending upon the quantity of shares proposed to be sold and other terms
of the proposed sale. The NTT Investment Agreement also precludes NTT from
transferring Common Stock to certain parties specified by Verio (which list may
include no more than 15 specified parties at any one time) that are or are
likely to become competitors of Verio or, subject to
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certain conditions, to any person that as a result of such transfer would
beneficially own more than 10% of Common Stock.
In connection with the NTT Investment Agreement, Verio and NTT also entered
into the OSP Agreement, under which Verio was designated as the preferred
provider of Internet access and related services to customers of NTT America on
a reseller basis, and Verio and NTT agreed to connect their backbones and
establish a peering and transit relationship, and that Verio would provide NTT
America with full back-office and engineering support. NTT America has agreed to
pay Verio for the services provided by Verio at predetermined rates reflective
of the strategic relationship between the parties, under which NTT is entitled
to "most favored customer" status and pricing concessions. Under the OSP
Agreement, NTT and Verio agreed to continue to negotiate the specific terms of
these arrangements. See "Business -- NTT Strategic Relationship." Recently, NTT
America and Verio have executed a further Strategic Partner Services Agreement
setting forth the details for implementation of the specific technical and
administrative aspects arising under the OSP Agreement. NTT America recently has
launched its branded Arcstar Internet service in the U.S., and will resell the
full range of Verio services under this brand. Under the NTT Investment
Agreement, NTT has designated three individuals to be employed by Verio in
corporate development, technical and marketing positions to assist in
implementing and carrying out the commercial relationship between Verio and NTT.
VIANet. In May 1998, Verio consummated an additional equity investment in
VIANet in which it purchased shares of VIANet's Series B Preferred Stock for an
aggregate purchase price of $8.0 million, resulting in Verio's owning an
approximately 16% equity position in VIANet. Verio has no right to acquire the
remaining equity of VIANet. Although, with the iServer, TABNet and Hiway
acquisitions, Verio gained a substantial international Web hosting presence, the
Verio Board has determined that its investment in VIANet currently will be the
primary component of its international expansion strategy in the Internet
connectivity market in the near term. However, Verio also may pursue direct
investments in certain international markets where appropriate opportunities
exist. Verio believes that its indirect strategy through VIANet currently is the
most effective means to leverage Verio's resources in pursuing Internet
connectivity business internationally.
A number of Verio's significant stockholders (including certain of The
Centennial Funds and Norwest) are investors in VIANet. Mr. Jaschke serves as the
Chairman of the Board of Directors of VIANet and Mr. Halstedt is a member of
VIANet's Board of Directors.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of October 31, 1998
with respect to the beneficial ownership of Verio's Common Stock by (i) each
stockholder known by Verio to own beneficially more than five percent, in the
aggregate, of the outstanding shares of Common Stock, (ii) each director and
Named Executive Officer of Verio (as defined below), and (iii) all executive
officers and directors as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE
HOLDERS BENEFICIALLY OWNED(1) BENEFICIALLY OWNED(1)
- ------- --------------------- ---------------------
<S> <C> <C>
Brooks Fiber Properties, Inc.(2)............................ 5,369,131 14.59%
425 Woods Mill Road South
Suite 300
Town & Country, Missouri 63017
Nippon Telegraph and Telephone Corporation(3)............... 4,493,877 12.45%
Global Communications Headquarters
Tokyo Opera City Tower
20-2 Nishi-Shinjuku 3-chrome
Shinjuku-ku
Tokyo 163-14, Japan
Norwest Equity Partners V, L.P. ............................ 4,301,250 11.92%
245 Lytton Avenue
Palo Alto, California 94301
Providence Equity Partners, L.P. ........................... 3,055,693 8.47%
50 Kennedy Plaza
Providence, Rhode Island 02903
Centennial Fund V, L.P.(4).................................. 2,302,303 6.38%
1428 Fifteenth Street
Denver, Colorado 80202
Centennial Fund IV, L.P.(4)................................. 2,159,105 5.98%
1428 Fifteenth Street
Denver, Colorado 80202
Steven C. Halstedt(5)....................................... -- --
Herbert R. Hribar........................................... -- --
Justin L. Jaschke(6)........................................ 240,182 *
Estate of Mark D. Johnson(7)................................ 130,000 *
James C. Allen(8)........................................... 30,435 *
Trygve E. Myhren(9)......................................... 20,000 *
Paul J. Salem(10)........................................... 2,174 *
Stephen W. Schovee(11)...................................... -- --
George J. Still, Jr.(12).................................... -- --
Arthur L. Cahoon(13)........................................ 542,312 1.48%
Yukimasa Ito(14)............................................ -- --
Chris J. DeMarche(15)....................................... 102,819 *
Carla Hamre Donelson(16).................................... 55,250 *
Peter B. Fritzinger(17)..................................... 42,174 *
All executive officers and directors as a group (14
persons)(18).............................................. 1,101,433 3.00%
</TABLE>
- ---------------
* Less than 1%
(1) Percentage of beneficial ownership is based on 36,086,524 total shares of
Common Stock outstanding as of October 31, 1998 (assuming the issuance of
3,144,846 shares of Common Stock in the acquisition of Hiway as if such
acquisition was completed on October 31, 1998, but excluding 1,772,618
shares of Common Stock reserved for issuance relating to the assumption by
Verio of options or warrants to acquire former shares of Hiway's common
stock). In computing the number of shares beneficially owned by a person
and the percentage ownership of that person, shares of Common Stock subject
to options or warrants owned by such person that are currently exercisable
or exercisable within 60 days of October 31, 1998 are deemed outstanding;
provided, that such shares are not deemed outstanding for the purpose of
computing the percentage of ownership of any other person. Except as
indicated in the footnotes to this table and pursuant to applicable
community property laws, each of the persons named
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in this table has sole voting and investment power with respect to the
shares set forth opposite such stockholder's name.
(2) Includes warrants to acquire 704,160 shares of Common Stock exercisable
within 60 days. As a result of the acquisition of Brooks by WorldCom, which
resulted in Brooks becoming a wholly owned subsidiary of WorldCom, WorldCom
may be deemed to indirectly beneficially own the shares owned by Brooks.
(3) Because the percentage of beneficial ownership following the Verio IPO
reflected in this table is based on outstanding (not fully diluted) shares
(see footnote 1), the ownership percentage shown for NTT is higher than the
maximum percentage of fully diluted shares that NTT was permitted to
purchase in the NTT Investment.
(4) Does not include 71,205 shares of Common Stock held by Centennial
Entrepreneurs Fund V, L.P. ("Centennial Entrepreneurs"). Centennial
Holdings V, L.P. ("Holdings V") is the sole general partner of Centennial
Entrepreneurs and may be deemed to indirectly beneficially own such shares
by virtue of its authority to make decisions regarding the voting and
disposition of shares beneficially owned by Centennial Entrepreneurs.
Centennial Fund V, L.P. ("Centennial V") disclaims beneficial ownership of
the shares held by Centennial Entrepreneurs, and Centennial Entrepreneurs
disclaims beneficial ownership of the shares held by Centennial V. In
addition, Centennial V disclaims beneficial ownership of the shares held by
Centennial Fund IV, L.P. ("Centennial IV"), and Centennial IV disclaims
beneficial ownership of the shares held by Centennial V.
(5) The sole General Partner of Centennial IV is Centennial Holdings IV, L.P.
("Holdings IV") and the sole General Partner of Centennial V is Holdings V.
Holdings IV and Holdings V may be deemed to indirectly beneficially own the
shares owned by Centennial IV and Centennial V, respectively. Mr. Halstedt
is a general partner of Holdings IV and Holdings V and may be deemed to be
the indirect beneficial owner of the shares owned by Centennial IV and
Centennial V. Mr. Halstedt disclaims beneficial ownership of shares held by
Centennial IV and Centennial V. In addition, this amount does not include
141,265 shares of Common Stock held by Centennial Holdings I, L.L.C.
("Holdings LLC"), of which Mr. Halstedt is a unit holder. Centennial
Holdings, Inc. ("Holdings Inc."), of which Mr. Halstedt is an officer and
director, is the sole Managing Member of Holdings LLC and may be deemed to
beneficially own shares directly beneficially owned by Holdings LLC.
However, Mr. Halstedt, acting alone, does not have voting or investment
power with respect to any of the shares directly held by either Holdings
Inc. or Holdings LLC, and, as a result, Mr. Halstedt disclaims beneficial
ownership of the shares held by Holdings LLC.
(6) Includes options for 70,000 shares of Common Stock exercisable within 60
days.
(7) Includes options for 70,000 shares of Common Stock exercisable within 60
days.
(8) On April 6, 1998, Mr. Allen transferred 25,000 of his shares of Common
Stock to the James C. Allen Revocable Trust. In accordance with the rules
of the Exchange Act, Mr. Allen is deemed to be the beneficial owner of such
shares.
(9) Includes options for 10,000 shares of Common Stock exercisable within 60
days.
(10) Mr. Salem holds 2,174 shares of Common Stock personally. The sole general
partner of Providence Equity Partners L.P. ("Providence") is Providence
Equity Partners LLC ("PEPLLC"). Mr. Salem is a member of PEPLLC and may be
deemed to indirectly beneficially own the shares owned by Providence. Mr.
Salem disclaims beneficial ownership of these shares.
(11) Telecom Partners L.P. ("Telecom") holds 936,666 shares of Common Stock. Mr.
Schovee is a general partner of Telecom and may be deemed to be the
indirect beneficial owner of the shares owned by Telecom. Mr. Schovee
disclaims beneficial ownership of shares held by Telecom.
(12) The sole general partner of Norwest Equity Partners V, L.P. ("Norwest") is
Itasca Partners V ("Itasca"). Mr. Still is a general partner of Itasca and
may be deemed to indirectly beneficially own the shares owned by Norwest.
Mr. Still disclaims beneficial ownership of these shares.
(13) Includes the shares held of record by Pam Fitch as Trustee of the Arthur
Logan Cahoon Grantor Retained Annuity Trust dated May 29, 1998 and 456,947
shares of Common Stock issuable upon exercise of warrants assumed by Verio
upon completion of the Hiway acquisition.
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(14) On September 11, 1998, options to purchase 30,000 shares of Common Stock
were issued to Mr. Ito. Mr. Ito assigned these options to NTT Rocky, Inc.
on October 14, 1998. Mr. Ito disclaims beneficial ownership of these
options. NTT Rocky, Inc. is affiliated with NTT, and NTT may be deemed to
indirectly beneficially own these options.
(15) Includes options for 41,334 shares of Common Stock exercisable within 60
days.
(16) Includes options for 37,333 shares of Common Stock exercisable within 60
days.
(17) Includes options for 15,000 shares of Common Stock exercisable within 60
days.
(18) Includes options and warrants (in the case of Mr. Cahoon) exercisable for
653,281 shares of Common Stock (not including options held by Mr. Johnson's
estate).
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DESCRIPTION OF THE NOTES
Set forth below is a summary of certain provisions of the New Notes. The
New Notes will be issued under the Indenture between the Issuer and the Trustee.
A copy of the Indenture may be obtained upon request from the Issuer, 8005 South
Chester Street, Suite 200, Englewood, Colorado 80112; attention: General
Counsel; telephone: (303) 645-1900.
Except as otherwise indicated below, the following summary applies to both
the Old Notes and the New Notes. As used herein, the term "Notes" means the Old
Notes and the New Notes, unless otherwise indicated.
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that the New Notes will
be registered under the Securities Act, and therefore such New Notes will not be
subject to certain transfer restrictions and registration rights applicable to
the Old Notes. See "The Exchange Offer."
The Notes are issued under the Indenture, a copy of the form of which is
available upon request. The Indenture is subject to and governed by the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The following
summary of certain provisions of the Indenture does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, the Trust
Indenture Act, and to all of the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part of the
Indenture by reference to the Trust Indenture Act, as in effect on the date of
the Indenture. The definitions of certain capitalized terms used in the
following summary are set forth below under "Certain Definitions."
GENERAL
The Notes are general senior obligations of the Issuer. The Notes have been
issued only in fully registered form without coupons, in denominations of $1,000
principal amount and integral multiples thereof. Principal of, premium, if any,
and interest on the Notes are payable, and the Notes are exchangeable and
transferable, at the office or agency of the Issuer in the City of New York
maintained for such purposes (which initially will be the corporate trust office
of the Trustee). See "-- Book-Entry; Delivery and Form." No service charge will
be made for any registration of transfer, exchange or redemption of the Notes,
except in certain circumstances for any tax or other governmental charge that
may be imposed in connection therewith.
MATURITY, INTEREST AND PRINCIPAL
The Notes are limited to $400,000,000 aggregate principal amount and will
mature on December 1, 2008. The Issuer will not be required to make any
mandatory sinking fund payments in respect of the Notes. Interest on the Notes
will accrue at a rate of 11 1/4% per annum and be payable in cash semi-annually
in arrears on each June 1 and December 1 (each, an "Interest Payment Date"),
commencing June 1, 1999, to registered holders of Notes, on May 15 or November
15, as the case may be, immediately preceding such Interest Payment Date.
Interest on the Notes will accrue from the most recent Interest Payment Date to
which interest has been paid or duly provided for or, if no interest has been
paid or duly provided for, from the Issue Date. Cash interest will be computed
on the basis of a 360-day year of twelve 30-day months. If the Issuer defaults
on any payment of principal and/or premium (whether upon redemption or
otherwise), cash interest will accrue on the amount in default at the rate of
interest borne by the Notes. Interest on overdue principal and premium and, to
the extent permitted by law, on overdue installments of interest will accrue at
the rate of interest borne by the Notes.
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REDEMPTION
Optional Redemption. The Notes are redeemable, at the option of the
Issuer, in whole or in part, on or after December 1, 2003 upon not less than 30
nor more than 60 days' written notice at the redemption prices (expressed as
percentages of principal amount) set forth below, plus accrued and unpaid
interest thereon, if any, to the applicable redemption date, if redeemed during
the twelve-month period beginning on December 1 of each of the years indicated
below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<S> <C>
2003........................................................ 105.625%
2004........................................................ 103.750%
2005........................................................ 101.875%
2006........................................................ 100.000%
</TABLE>
Notwithstanding the foregoing, in the event that after the Issue Date and
prior to December 1, 2001 the Issuer issues, in one or more transactions,
Capital Stock (other than Disqualified Stock) of the Issuer to one or more
Strategic Equity Investors or in any Public Equity Offering for aggregate gross
cash proceeds of $50.0 million or more (an "Equity Sale"), the Issuer may
redeem, at its option, up to a maximum of 35% of the initially outstanding
aggregate principal amount of Notes from the net proceeds thereof at a
redemption price equal to 111.250% of the principal amount of the Notes,
together with accrued and unpaid interest to the date of redemption; provided
that not less than $260.0 million aggregate principal amount of Notes is
outstanding following such redemption. Any such redemption may only be effected
once and must be effected upon not less than 30 nor more than 60 days' notice
given within 180 days after such Equity Sale.
Selection; Effect of Redemption Notice. In the case of a partial
redemption, selection of the Notes for redemption will be made pro rata, by lot
or such other method as the Trustee in its sole discretion deems appropriate and
just; provided that any redemption pursuant to the provisions relating to an
Equity Sale shall be made on a pro rata basis or on as nearly a pro rata basis
as practicable (subject to DTC procedures). No Notes of a principal amount of
$1,000 or less shall be redeemed in part. Notice of redemption shall be mailed
by first-class mail at least 30 but not more than 60 days before the redemption
date to each holder of Notes to be redeemed at its registered address. If any
Note is to be redeemed in part only, the notice of redemption that relates to
such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in a principal amount equal to the unredeemed portion
thereof will be issued in the name of the holder thereof upon surrender for
cancellation of the original Note. Upon giving of a redemption notice, interest
on Notes called for redemption will cease to accrue from and after the date
fixed for redemption (unless the Issuer defaults in providing the funds for such
redemption) and such Notes will cease to be outstanding.
RANKING
The indebtedness of the Issuer evidenced by the Notes ranks senior in right
of payment to all subordinated indebtedness of the Issuer and pari passu in
right of payment with all other existing and future unsubordinated indebtedness
of the Issuer including the 1997 Notes and the March 1998 Notes. The Company has
no existing unsecured and unsubordinated indebtedness or any existing
subordinated indebtedness. Accordingly, there is no existing debt that is
subordinated to the Notes.
The Issuer is a holding company with limited assets and no significant
business operations of its own. The Issuer operates its business through its
subsidiaries. Any right of the Issuer and its creditors, including holders of
the Notes, to participate in the assets of any of the Issuer's subsidiaries upon
any liquidation or administration of any such subsidiary will be subject to the
prior claims of the subsidiary's creditors, including trade creditors. As of
September 30, 1998, on a pro forma basis (taking into account the acquisitions
completed through October 31, 1998 and the Hiway acquisition), there would have
been approximately $18.4 million of secured indebtedness outstanding to which
holders of Notes would have been effectively subordinated in right of payment
and approximately $14.4 million of subsidiary indebtedness to which holders of
Notes would have been structurally subordinated. In addition, the Bank Facility
is secured by certain assets, including the equity of the ISPs that Verio owns
currently or may own in the future, and thus the
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<PAGE> 88
Notes are effectively subordinated to the Bank Facility to the extent of the
value of such assets. For a discussion of certain adverse consequences of the
Issuer being a holding company and of the terms of potential future indebtedness
of the Issuer and its subsidiaries, see "Risk Factors -- Effective
Subordination; Holding Company Structure and Need to Access Subsidiary Cash
Flows."
CERTAIN COVENANTS
Set forth below are certain covenants that are contained in the Indenture.
Limitation on Additional Indebtedness. The Indenture provides that the
Issuer will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, incur any Indebtedness (including any Acquired Indebtedness), except
for Permitted Indebtedness (including Acquired Indebtedness to the extent it
would constitute Permitted Indebtedness); provided, however, that (i) the Issuer
will be permitted to incur Indebtedness (including Acquired Indebtedness) and
(ii) a Restricted Subsidiary will be permitted to incur Acquired Indebtedness,
if, in either case, after giving pro forma effect to such incurrence (including
the application of the net proceeds therefrom), the ratio of Total Consolidated
Indebtedness to Consolidated Annualized Pro Forma Operating Cash Flow would be
less than 6.0 to 1.0.
Limitation on Restricted Payments. The Indenture provides that the Issuer
will not, and will not permit any of the Restricted Subsidiaries to, make,
directly or indirectly, any Restricted Payment unless:
(i) no Default shall have occurred and be continuing at the time of or
upon giving effect to such Restricted Payment;
(ii) immediately after giving effect to such Restricted Payment, the
Issuer would be able to incur $1.00 of Indebtedness under (x) the proviso
of the covenant "Limitation on Additional Indebtedness" or (y) solely in
the case of a Restricted Payment constituting an Investment of cash or
Newly Acquired Assets, clause (g) of the definition of Permitted
Indebtedness; and
(iii) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments declared or made on or after
the Prior Issue Date (assuming that the Indenture had been in effect as of
the Prior Issue Date) and all Designation Amounts made on or after the
Prior Issue Date (assuming that the Indenture had been in effect as of the
Prior Issue Date) does not exceed an amount equal to the sum of, without
duplication, (a) 50% of the Consolidated Net Income of the Issuer accrued
on a cumulative basis during the period beginning on January 1, 1998 and
ending on the last day of the fiscal quarter of the Issuer immediately
preceding the date of such proposed Restricted Payment (or, if such
cumulative Consolidated Net Income of the Issuer for such period is a
deficit, minus 100% of such deficit), plus (b) the aggregate net cash
proceeds received by the Issuer either (x) as capital contributions to the
Issuer after the Prior Issue Date or (y) from the issue and sale (other
than to a Restricted Subsidiary of the Issuer) of its Capital Stock (other
than Disqualified Stock) on or after the Prior Issue Date (including upon
exercise of warrants, options or rights), plus (c) the aggregate net
proceeds received by the Issuer from the issuance (other than to a
Restricted Subsidiary of the Issuer) on or after the Prior Issue Date of
its Capital Stock (other than Disqualified Stock) upon the conversion of,
or in exchange for, Indebtedness of the Issuer, plus (d) in the case of the
disposition or repayment (in whole or in part) of any Investment
constituting a Restricted Payment made after the Prior Issue Date (assuming
that the Indenture had been in effect as of the Prior Issue Date) (except
for Investments made (1) pursuant to clause (vii) of the second following
paragraph that are not subject to clause (e) or (f) of this paragraph
below, and (2) pursuant to clauses (viii) or (ix) of the second following
paragraph), an amount equal to the lesser of the return of capital with
respect to the applicable portion of such Investment and the cost of the
applicable portion of such Investment, in either case, less the cost of the
disposition of such Investment, plus (e) in the case of any Revocation with
respect to a Subsidiary of the Issuer that was made subject to a
Designation after the Prior Issue Date (assuming that the Indenture had
been in effect as of the Prior Issue Date), an amount equal to the lesser
of the Designation Amount with respect to such Subsidiary or the Fair
Market Value of the Investment of the Issuer and the Restricted
Subsidiaries in such Subsidiary at the time of Revocation, plus (f) an
amount equal to the amount of any Investment constituting a Restricted
Payment made after the Prior Issue Date
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(assuming that the Indenture had been in effect as of the Prior Issue Date)
in an ISP which has been (or which is deemed to be because of the
assumption set forth in the previous parenthetical clause) included as a
Restricted Payment under this clause (iii) pursuant to the last paragraph
of this covenant to the extent such ISP thereafter (1) becomes or has
become a Wholly Owned Restricted Subsidiary or is merged with the Issuer or
(2) is a New ISP that becomes or has become a Restricted Subsidiary or is
merged with the Issuer, less, in either such case, any amounts credited
pursuant to the immediately preceding clause (d) in respect of any such
Investment. For purposes of the preceding clauses (b)(y) and (c), as
applicable, the value of the aggregate net proceeds received by the Issuer
upon the issuance of Capital Stock either upon the conversion of
convertible Indebtedness or in exchange for outstanding Indebtedness or
upon the exercise of options, warrants or rights will be the net cash
proceeds received upon the issuance of such Indebtedness, options, warrants
or rights plus the incremental amount received, if any, by the Issuer upon
the conversion, exchange or exercise thereof.
For purposes of determining the amount expended for Restricted Payments,
cash distributed shall be valued at the face amount thereof and property other
than cash shall be valued at its Fair Market Value.
The provisions of this covenant shall not prohibit the following (each of
which shall be given independent effect): (i) the payment of any dividend or
other distribution within 60 days after the date of declaration thereof if at
such date of declaration such payment would be permitted by the provisions of
the Indenture; (ii) the purchase, redemption, retirement or other acquisition of
any shares of Capital Stock of the Issuer in exchange for, or out of the net
cash proceeds of the substantially concurrent issue and sale (other than to a
Restricted Subsidiary of the Issuer) of, shares of Capital Stock of the Issuer
(other than Disqualified Stock); provided that any such net cash proceeds are
excluded from clause (iii)(b) of the second preceding paragraph; (iii) so long
as no Default shall have occurred and be continuing, the purchase, redemption,
retirement, defeasance or other acquisition of Subordinated Indebtedness made by
exchange for, or out of the net cash proceeds of, a substantially concurrent
issue and sale (other than to a Restricted Subsidiary of the Issuer) of (x)
Capital Stock (other than Disqualified Stock) of the Issuer or (y) other
Subordinated Indebtedness to the extent that its stated maturity for the payment
of principal thereof is not prior to the 180th day after the final stated
maturity of the Notes; provided that any such net cash proceeds are excluded
from clause (iii)(b) of the second preceding paragraph; (iv) (a) so long as no
Default shall have occurred and be continuing, Investments constituting
Restricted Payments by the Issuer or any Restricted Subsidiary in a New ISP or a
person that becomes or since the Prior Issue Date has become a New ISP as a
result of such Investment and (b) so long as no Default shall have occurred and
be continuing, Investments constituting Restricted Payments by the Issuer or any
Restricted Subsidiary in an Existing ISP (x) made out of the net cash proceeds
of a substantially concurrent sale of Capital Stock (other than Disqualified
Stock) of the Issuer (provided that any such proceeds are excluded from clause
(iii)(b) of the second preceding paragraph) or (y) such that the aggregate
amount of all Investments in Existing ISPs that are made after the Prior Issue
Date pursuant to this subclause (b)(y) would not exceed $25.0 million in
aggregate; (v) bonds, notes, debentures or other securities received as a result
of Asset Sales pursuant to and in compliance with the covenant "Disposition of
Proceeds of Asset Sales"; (vi) so long as no Default shall have occurred and be
continuing, purchases or redemptions of Capital Stock (including cash
settlements of stock options) held by employees, officers or directors upon or
following termination of their employment with the Issuer or one of its
Subsidiaries; provided that payments shall not exceed $2.0 million in any fiscal
year in the aggregate or $4.0 million in the aggregate during the term of the
Notes; (vii) so long as no Default shall have occurred and be continuing,
Investments in Unrestricted Subsidiaries to the extent reasonably promptly made
with the proceeds of a substantially concurrent (1) capital contribution to the
Issuer or (2) issue or sale of Capital Stock (other than Disqualified Stock) of
the Issuer (other than to a Restricted Subsidiary of the Issuer); provided that
any such proceeds are excluded from clause (iii)(b) of the second preceding
paragraph; (viii) loans or advances to employees of the Issuer or any Restricted
Subsidiary made in the ordinary course of business, including to fund the
purchase of Capital Stock of the Issuer (provided that any proceeds from such
purchase are excluded from clause (iii)(b) of the second preceding paragraph to
the extent such loan or advance is not reimbursed) in an amount not to exceed
$2.0 million at any time outstanding; (ix) so long as no Default shall have
occurred and be continuing, Investments constituting Restricted Payments in
joint
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ventures formed to provide services in furtherance of an Internet Service
Business of the Issuer and the ISPs or other persons engaged principally in an
Internet Service Business in an aggregate amount not to exceed $50.0 million
outstanding at any time; and (x) cash payments in lieu of fractional shares
pursuant to any warrant, option or other similar agreement.
In determining whether the receipt of net cash proceeds of a sale of
Capital Stock is "substantially concurrent" for purposes of clause (iv)(b)(x) of
the preceding paragraph, if such net cash proceeds are deposited in escrow with
a third party, free and clear of any Lien (other than the Lien of the escrow
agent), to be applied for purposes directed by the Issuer and such net cash
proceeds are excluded from clause (iii)(b) of the first paragraph above, then
the application of such net cash proceeds as set forth in such clause (iv)(b)(x)
shall be deemed "substantially concurrent" if they are subsequently released for
immediate application as contemplated by such clause (iv)(b)(x). In no event
shall a Restricted Payment made on the basis of consolidated financial
statements prepared in good faith in accordance with GAAP be subject to
rescission or constitute a Default by reason of any requisite subsequent
restatement of such financial statements which would have made such Restricted
Payment prohibited at the time that it was made.
In determining the amount of Restricted Payments permissible under clause
(iii) of the first paragraph of this covenant, amounts expended since the Prior
Issue Date (assuming that the Indenture had been in effect on the Prior Issue
Date) pursuant to clauses (i), (iv)(a), (iv)(b)(y), (v), (vi) and (ix) (to the
extent remaining outstanding) of the second preceding paragraph above shall be
included, without duplication, as Restricted Payments.
Limitation on Liens Securing Certain Indebtedness. The Indenture provides
that the Issuer will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Liens of any kind against or upon
any property or assets of the Issuer or any Restricted Subsidiary, whether now
owned or hereafter acquired, or any proceeds therefrom, which secure either (x)
Subordinated Indebtedness unless the Notes are secured by a Lien on such
property, assets or proceeds that is senior in priority to the Liens securing
such Subordinated Indebtedness or (y) Indebtedness of the Issuer that is not
Subordinated Indebtedness, unless the Notes are equally and ratably secured with
the Liens securing such other Indebtedness, except, in the case of this clause
(y), Permitted Liens.
Limitation on Business. The Indenture provides that the Issuer will not,
and will not permit any of the Restricted Subsidiaries to, engage in a business
which is not substantially an Internet Service Business.
Limitation on Certain Guarantees and Indebtedness of Restricted
Subsidiaries. The Indenture provides that the Issuer will not permit any
Restricted Subsidiary, directly or indirectly, to assume, guarantee or in any
other manner become liable with respect to (i) any Subordinated Indebtedness or
(ii) any Indebtedness of the Issuer that is not Subordinated Indebtedness (other
than, in the case of this clause (ii), Indebtedness under any Permitted Credit
Facility to the extent constituting Permitted Indebtedness), unless, in each
case, such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture providing for the guarantee of payment of the Notes by
such Restricted Subsidiary on a basis senior to any such Subordinated
Indebtedness or pari passu with any such other Indebtedness referred to in
clause (ii), as the case may be. Each guarantee created pursuant to such
provisions is referred to as a "Guarantee" and the issuer of each such
Guarantee, so long as the Guarantee remains outstanding, is referred to as a
"Guarantor."
Notwithstanding the foregoing, in the event of the unconditional release of
any Guarantor from its obligations in respect of the Indebtedness which gave
rise to the requirement that a Guarantee be given, such Guarantor shall be
released from all obligations under its Guarantee. In addition, upon any sale or
disposition (by merger or otherwise) of any Guarantor by the Issuer or a
Restricted Subsidiary of the Issuer to any person that is not an Affiliate of
the Issuer or any of its Restricted Subsidiaries which is otherwise in
compliance with the terms of the Indenture and as a result of which such
Guarantor ceases to be a Restricted Subsidiary of the Issuer, such Guarantor
will be deemed to be automatically and unconditionally released from all
obligations under its Guarantee; provided that each such Guarantor is sold or
disposed of in accordance with the "Disposition of Proceeds of Asset Sales"
covenant.
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Change of Control. Upon the occurrence of a Change of Control (the date of
such occurrence being the "Change of Control Date"), the Issuer shall make an
offer to purchase (the "Change of Control Offer"), on a business day (the
"Change of Control Payment Date") not later than 60 days following the Change of
Control Date, all Notes then outstanding at a purchase price equal to 101% of
the principal amount thereof on any Change of Control Payment Date, plus accrued
and unpaid interest, if any, to such Change of Control Payment Date. Notice of a
Change of Control Offer shall be given to holders of Notes, not less than 25
days nor more than 45 days before the Change of Control Payment Date. The Change
of Control Offer is required to remain open for at least 20 business days and
until the close of business on the Change of Control Payment Date.
Except as described above with respect to a Change of Control, the
Indenture will not contain provisions that permit the holders of the Notes to
require that the Issuer repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar transaction which may be highly leveraged.
If a Change of Control Offer is made, there can be no assurance that the
Issuer will have available funds sufficient to pay for all of the Notes that
might be delivered by holders of Notes seeking to accept the Change of Control
Offer. The Issuer shall not be required to make a Change of Control Offer
following a Change of Control if a third party makes the Change of Control Offer
in the manner, at the times and otherwise in compliance with the requirements
applicable to a Change of Control Offer made by the Issuer and purchases all
Notes validly tendered and not withdrawn under such Change of Control Offer.
If the Issuer is required to make a Change of Control Offer, the Issuer
will comply with all applicable tender offer laws and regulations, including, to
the extent applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and
any other applicable securities laws and regulations.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture provides that the Issuer will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, create or otherwise
enter into or cause to become effective any consensual encumbrance or consensual
restriction of any kind on the ability of any Restricted Subsidiary to (a) pay
dividends, in cash or otherwise, or make any other distributions on its Capital
Stock or any other interest or participation in, or measured by, its profits to
the extent owned by the Issuer or any Restricted Subsidiary, (b) pay any
Indebtedness owed to the Issuer or any Restricted Subsidiary, (c) make any
Investment in the Issuer or any Restricted Subsidiary or (d) transfer any of its
properties or assets to the Issuer or to any Restricted Subsidiary, except for
(in each case except as otherwise noted in the following clause (ii)), (i) any
encumbrance or restriction in existence on the Issue Date, (ii) any encumbrance
or restriction existing under agreements relating to an Investment in an ISP
(which in the case of clause (a) and (b) shall not be permitted in the case of
ISPs that are Restricted Subsidiaries) to the extent consistent with past
practice, (iii) customary non-assignment provisions, (iv) any encumbrances or
restrictions pertaining to an asset subject to a Lien to the extent set forth in
the security documentation governing such Lien, (v) any encumbrance or
restriction applicable to a Restricted Subsidiary at the time that it becomes a
Restricted Subsidiary that is not created in contemplation thereof, (vi) any
encumbrance or restriction existing under any agreement that refinances or
replaces an agreement containing a restriction permitted by clause (v) above;
provided that the terms and conditions of any such encumbrance or restriction
are not materially less favorable to the holders of Notes than those under or
pursuant to the agreement being replaced or the agreement evidencing the
Indebtedness refinanced, (vii) any encumbrance or restriction imposed upon a
Restricted Subsidiary pursuant to an agreement which has been entered into for
the sale or disposition of all or substantially all of the Capital Stock or
assets of such Restricted Subsidiary or any Asset Sale to the extent limited to
the Capital Stock or assets in question and (viii) any customary encumbrance or
restriction applicable to a Restricted Subsidiary that is contained in an
agreement or instrument governing or relating to Indebtedness contained in any
Permitted Credit Facility; provided that the provisions of such agreement permit
the payment of interest and principal and mandatory repurchases pursuant to the
terms of the Indenture and the Notes and other Indebtedness that is solely an
obligation of the Issuer, but, provided, further, that such agreement may
nevertheless contain customary net worth, leverage, invested capital and other
financial covenants, customary covenants regarding the merger of or sale of all
or any substantial part of
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the assets of the Issuer or any Restricted Subsidiary, customary restrictions on
transactions with affiliates, and customary subordination provisions governing
Indebtedness owed to the Issuer or any Restricted Subsidiary.
Disposition of Proceeds of Asset Sales. The Indenture provides that the
Issuer will not, and will not permit any Restricted Subsidiary to, make any
Asset Sale unless (a) the Issuer or such Restricted Subsidiary, as the case may
be, receives consideration at the time of such Asset Sale at least equal to the
Fair Market Value of the shares or assets sold or otherwise disposed of and (b)
at least 75% of such consideration consists of cash, Cash Equivalents or
Qualified Consideration; provided that the following shall be treated as cash
for purposes of this covenant: (x) the amount of any liabilities (other than
Subordinated Indebtedness or Indebtedness of a Restricted Subsidiary that would
not constitute Restricted Subsidiary Indebtedness) that are assumed by the
transferee of any such assets pursuant to an agreement that unconditionally
releases the Issuer or such Restricted Subsidiary from further liability
("assumed liabilities") and (y) the amount of any notes or other obligations
that within 30 days of receipt, are converted into cash (to the extent of the
cash received). The Issuer or the applicable Restricted Subsidiary, as the case
may be, may (i) apply the Net Cash Proceeds from such Asset Sale within 365 days
of the receipt thereof to repay an amount of Indebtedness (other than
Subordinated Indebtedness) of the Issuer in an amount not exceeding the Other
Senior Debt Pro Rata Share and elect to permanently reduce the amount of the
commitments thereunder by the amount of the Indebtedness so repaid, (ii) apply
the Net Cash Proceeds from such Asset Sale to repay any Restricted Subsidiary
Indebtedness and elect to permanently reduce the commitments thereunder by the
amount of the Indebtedness so repaid or (iii) apply such Net Cash Proceeds
within 365 days thereof, to an investment in properties and assets that will be
used in an Internet Service Business (or in Capital Stock and other securities
of any person that will become a Restricted Subsidiary as a result of such
investment to the extent such person owns properties and assets that will be
used in an Internet Service Business) of the Issuer or any Restricted Subsidiary
("Replacement Assets"). Any Net Cash Proceeds from any Asset Sale that are
neither used to repay, and permanently reduce the commitments under, any
Restricted Subsidiary Indebtedness as set forth in clause (ii) of the preceding
sentence or invested in Replacement Assets within the 365-day period as set
forth in clause (iii) shall constitute "Excess Proceeds." Any Excess Proceeds
not used as set forth in clause (i) of the second preceding sentence shall
constitute "Offer Excess Proceeds" subject to disposition as provided below.
When the aggregate amount of Offer Excess Proceeds equals or exceeds $10.0
million, the Issuer shall make an offer to purchase (an "Asset Sale Offer"),
from all holders of the Notes, that aggregate principal amount of Notes as can
be purchased by application of such Offer Excess Proceeds at a price in cash
equal to 100% of the principal amount thereof on any purchase date, plus accrued
and unpaid interest, if any, to any purchase date. Each Asset Sale Offer shall
remain open for a period of 20 business days or such longer period as may be
required by law. To the extent that the principal amount of Notes tendered
pursuant to an Asset Sale Offer is less than the Offer Excess Proceeds, the
Issuer or any Restricted Subsidiary may use such deficiency for general
corporate purposes. If the principal amount of Notes validly tendered and not
withdrawn by holders thereof exceeds the amount of Notes which can be purchased
with the Offer Excess Proceeds, Notes to be purchased will be selected on a pro
rata basis. Upon completion of such Asset Sale Offer, the amount of Offer Excess
Proceeds shall be reset to zero.
If the Issuer is required to make an Asset Sale Offer, the Issuer will
comply with all applicable tender offer rules, including, to the extent
applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any other
applicable securities laws and regulations.
Limitation on Issuances and Sales of Preferred Stock by Restricted
Subsidiaries. The Indenture provides that the Issuer will not permit any
Restricted Subsidiary to issue any Preferred Stock (other than to the Issuer or
a Restricted Subsidiary).
Limitation on Transactions with Affiliates. The Indenture provides that
the Issuer will not, and will not permit, cause or suffer any Restricted
Subsidiary to, conduct any business or enter into any transaction (or series of
related transactions which are similar or part of a common plan) with or for the
benefit of any of their respective Affiliates (other than Affiliates of a
Restricted Subsidiary that are not also Affiliates of the Issuer or any Wholly
Owned Restricted Subsidiary) or any beneficial holder of 10% or more of the
Common
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Stock of the Issuer or any officer or director of the Issuer (each, an
"Affiliate Transaction"), unless the terms of the Affiliate Transaction are set
forth in writing, and are fair and reasonable to the Issuer or such Restricted
Subsidiary, as the case may be. Each Affiliate Transaction involving aggregate
payments or other Fair Market Value in excess of $1.0 million shall be approved
by a majority of the Board, such approval to be evidenced by a Board Resolution
stating that the Board has determined that such transaction or transactions
comply with the foregoing provisions. In addition to the foregoing, each
Affiliate Transaction involving aggregate consideration of $5.0 million or more
shall be approved by a majority of the Disinterested Directors; provided that,
in lieu of such approval by the Disinterested Directors, the Issuer may obtain a
written opinion from an Independent Financial Advisor stating that the terms of
such Affiliate Transaction to the Issuer or the Restricted Subsidiary, as the
case may be, are fair from a financial point of view. For purposes of this
covenant, any Affiliate Transaction approved by a majority of the Disinterested
Directors or as to which a written opinion has been obtained from an Independent
Financial Advisor, on the basis set forth in the preceding sentence, shall be
deemed to be on terms that are fair and reasonable to the Issuer and the
Restricted Subsidiaries, as the case may be, and, therefore, shall be permitted
under this covenant.
Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to (i) transactions with or among, or solely for the benefit of,
the Issuer and/or any of the Restricted Subsidiaries, (ii) transactions pursuant
to agreements and arrangements existing on the Issue Date, (iii) transactions
related to the provision of internet services in the ordinary course of
business; provided that (x) such transactions are entered into on an arm's
length basis and are fair and reasonable to the Issuer or such Restricted
Subsidiary, as the case may be, and (y) in the good faith judgment of the Issuer
or the applicable Restricted Subsidiary, the Fair Market Value of the
consideration received by the Issuer or such Restricted Subsidiary, as the case
may be, reasonably approximates the Fair Market Value of the services provided,
(iv) dividends paid by the Issuer pursuant to and in compliance with the
covenant "Limitation on Restricted Payments," (v) customary directors' fees,
indemnification and similar arrangements, consulting fees, employee salaries
bonuses, employment agreements and arrangements, compensation or employee
benefit arrangements or legal fees, (vi) transactions contemplated by any of the
Permitted Affiliate Agreements as in effect on the Issue Date and (vii) grants
of customary registration rights with respect to securities of the Issuer.
The Issuer is required to use, or to cause each Restricted Subsidiary to
use, its commercially reasonable best efforts to ensure that each person in
which the Issuer or a Restricted Subsidiary makes an Investment that is an ISP
at the time of the Investment continues to meet the conditions and requirements
of the definition of "ISP" in all material respects until such time as a Rollup
shall have occurred with respect to such ISP.
Reports. Whether or not the Issuer has a class of securities registered
under the Exchange Act, the Issuer shall furnish without cost to each holder of
Notes and file with the Trustee and file with the Commission (i) within the
applicable time period required under the Exchange Act, after the end of each
fiscal year of the Issuer, the information required by Form 10-K (or any
successor form thereto) under the Exchange Act with respect to such period, (ii)
within the applicable time period required under the Exchange Act after the end
of each of the first three fiscal quarters of each fiscal year of the Issuer,
the information required by Form 10-Q (or any successor form thereto) under the
Exchange Act with respect to such period and (iii) any current reports on Form
8-K (or any successor forms) required to be filed under the Exchange Act.
Limitation on Designations of Unrestricted Subsidiaries. The Indenture
provides that the Issuer will not designate any Subsidiary of the Issuer (other
than a newly created Subsidiary in which no Investment has previously been made)
as an "Unrestricted Subsidiary" under the Indenture (a "Designation") unless:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation;
(b) except in the case of a Permitted Investment or an Investment made
pursuant to clause (vii) or (ix) of the third paragraph of the covenant
"Limitation on Restricted Payments," immediately after giving effect to
such Designation, the Issuer would be able to incur $1.00 of Indebtedness
under (x) the proviso of the covenant "Limitation on Additional
Indebtedness" or (y) solely in the case of a
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Designation with respect to a Subsidiary having assets which are
substantially comprised of cash, or Newly Acquired Assets, clause (g) of
the definition of Permitted Indebtedness; and
(c) the Issuer would not be prohibited under the Indenture (assuming
that the Indenture had been in effect on the Prior Issue Date) from making
an Investment at the time of Designation (assuming the effectiveness of
such Designation) in an amount (the "Designation Amount") equal to the Fair
Market Value of the net Investment of the Issuer or any other Restricted
Subsidiary in such Restricted Subsidiary on such date.
In the event of any such Designation made on or after the Prior Issue Date,
the Issuer shall be deemed to have made an Investment constituting a Restricted
Payment pursuant to the covenant "Limitation on Restricted Payments" for all
purposes of the Indenture in the Designation Amount. The Indenture will further
provide that neither the Issuer nor any Restricted Subsidiary shall at any time
(x) provide a guarantee of, or similar credit support to, any Indebtedness of
any Unrestricted Subsidiary (including of any undertaking, agreement or
instrument evidencing such Indebtedness); provided that the Issuer may pledge
Capital Stock or Indebtedness of any Unrestricted Subsidiary on a nonrecourse
basis such that the pledgee has no claim whatsoever against the Issuer other
than to obtain such pledged property, (y) be directly or indirectly liable for
any Indebtedness of any Unrestricted Subsidiary or (z) be directly or indirectly
liable for any other Indebtedness which provides that the holder thereof may
(upon notice, lapse of time or both) declare a default thereon (or cause the
payment thereof to be accelerated or payable prior to its final scheduled
maturity) upon the occurrence of a default with respect to any other
Indebtedness that is Indebtedness of an Unrestricted Subsidiary (including any
corresponding right to take enforcement action against such Unrestricted
Subsidiary), except in the case of clause (x) or (y) to the extent permitted
under the covenants "Limitation on Restricted Payments" and "Limitation on
Transactions with Affiliates."
The Indenture further provides that the Issuer will not revoke any
Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation")
unless:
(a) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of the
Indenture.
All Designations and Revocations must be evidenced by Board Resolutions
delivered to the Trustee certifying compliance with the foregoing provisions.
Limitation on Status as Investment Company. The Indenture provides that
the Issuer will not, and will not permit any of its Subsidiaries or controlled
Affiliates to, conduct its business in a fashion that would cause the Issuer to
be required to register as an "investment company" (as that term is defined in
the Investment Company Act of 1940, as amended (the "Investment Company Act")),
or otherwise become subject to regulation under the Investment Company Act. For
purposes of establishing the Issuer's compliance with this provision, any
exemption which is or would become available under Section 3(c)(1) or Section
3(c)(7) of the Investment Company Act will be disregarded.
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
The Indenture provides that the Issuer will not (i) consolidate or combine
with or merge with or into or, directly or indirectly, sell, assign, convey,
lease, transfer or otherwise dispose of all or substantially all of its
properties and assets to any person or persons in a single transaction or
through a series of transactions, or (ii) permit any of the Restricted
Subsidiaries to enter into any such transaction or series of transactions if it
would result in the disposition of all or substantially all of the properties or
assets of the Issuer and the Restricted Subsidiaries on a consolidated basis,
unless, in the case of either (i) or (ii), (a) the Issuer shall be the
continuing person or, if the Issuer is not the continuing person, the resulting,
surviving or transferee person (the "surviving entity") shall be a company
organized and existing under the laws of the United States or any State or
territory thereof; (b) the surviving entity shall expressly assume all of the
obligations of the
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Issuer under the Notes and the Indenture, and shall, if required by law to
effectuate such assumption, execute a supplemental indenture to effect such
assumption which supplemental indenture shall be delivered to the Trustee and
shall be in form and substance reasonably satisfactory to the Trustee; (c)
immediately after giving effect to such transaction or series of transactions on
a pro forma basis (including, without limitation, any Indebtedness incurred or
anticipated to be incurred in connection with or in respect of such transaction
or series of transactions), the Issuer or the surviving entity (assuming such
surviving entity's assumption of the Issuer's obligations under the Notes and
the Indenture), as the case may be, would be able to incur $1.00 of Indebtedness
under the proviso of the covenant "Limitation on Additional Indebtedness";
provided that, in the case of any transaction or series of transactions
comprised solely of one or more Rollups, this clause (c) shall be deemed
satisfied if the Issuer or the surviving entity and the Restricted Subsidiaries
would have been able to incur all of their outstanding Indebtedness as Permitted
Indebtedness; (d) immediately after giving effect to such transaction or series
of transactions on a pro forma basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions), no Default shall have
occurred and be continuing; and (e) the Issuer or the surviving entity, as the
case may be, shall have delivered to the Trustee an Officers' Certificate
stating that such transaction or series of transactions, and, if a supplemental
indenture is required in connection with such transaction or series of
transactions to effectuate such assumption, such supplemental indenture complies
with this covenant and that all conditions precedent in the Indenture relating
to the transaction or series of transactions have been satisfied.
Upon any consolidation or merger or any sale, assignment, conveyance,
lease, transfer or other disposition of all or substantially all of the assets
of the Issuer in accordance with the foregoing in which the Issuer or the
Restricted Subsidiary, as the case may be, is not the continuing corporation,
the successor corporation formed by such a consolidation or into which the
Issuer or such Restricted Subsidiary is merged or to which such transfer is
made, will succeed to, and be substituted for, and may exercise every right and
power of, the Issuer or such Restricted Subsidiary, as the case may be, under
the Indenture with the same effect as if such successor corporation had been
named as the Issuer or such Restricted Subsidiary therein; and thereafter,
except in the case of (i) any lease or (ii) any sale, assignment, conveyance,
transfer, lease or other disposition to a Restricted Subsidiary of the Issuer,
the Issuer shall be discharged from all obligations and covenants under the
Indenture and the Notes.
The Indenture provides that for all purposes of the Indenture and the Notes
(including the provision of this covenant and the covenants "Limitation on
Additional Indebtedness," "Limitation on Restricted Payments" and "Limitation on
Liens Securing Certain Indebtedness"), Subsidiaries of any surviving entity
will, upon such transaction or series of related transactions, become Restricted
Subsidiaries or Unrestricted Subsidiaries as provided pursuant to the covenant
"Limitation on Designations of Unrestricted Subsidiaries" and all Indebtedness,
and all Liens on property or assets, of the Issuer and the Restricted
Subsidiaries in existence immediately prior to such transaction or series of
related transactions will be deemed to have been incurred upon such transaction
or series of related transactions.
EVENTS OF DEFAULT
The following are "Events of Default" under the Indenture:
(i) default in the payment of interest on the Notes when it becomes due
and payable and continuance of such default for a period of 30 days or
more; or
(ii) default in the payment of the principal of, or premium, if any, on
the Notes when due; or
(iii) default in the performance, or breach, of any covenant described
under "-- Certain Covenants -- Change of Control," "-- Disposition of
Proceeds of Asset Sales" or "-- Consolidation, Merger, Sale of Assets,
Etc."; or
(iv) default in the performance, or breach, of any covenant in the
Indenture (other than defaults specified in clause (i), (ii) or (iii)
above), and continuance of such default or breach for a period of 30 days
or more after written notice to the Issuer by the Trustee or to the Issuer
and the Trustee by the
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holders of at least 25% in aggregate principal amount of the outstanding
Notes (in each case, when such notice is deemed received in accordance with
the Indenture); or
(v) failure to perform any term, covenant, condition or provision of one
or more classes or issues of Indebtedness in an aggregate principal amount
of $7.5 million or more under which the Issuer or a Material Restricted
Subsidiary is obligated, and either (a) such Indebtedness is already due
and payable in full or (b) such failure results in the acceleration of the
maturity of such Indebtedness; or
(vi) any holder of at least $7.5 million in aggregate principal amount
of Indebtedness of the Issuer or any Material Restricted Subsidiary shall
commence judicial proceedings or take any other action to foreclose upon,
or dispose of assets of the Issuer or any Material Restricted Subsidiary
having an aggregate Fair Market Value, individually or in the aggregate, of
$7.5 million or more or shall have exercised any right under applicable law
or applicable security documents to take ownership of any such assets in
lieu of foreclosure; provided that, in any such case, the Issuer or any
Material Restricted Subsidiary shall not have obtained, prior to any such
foreclosure or disposition of assets, a stay of all such actions that
remains in effect; or
(vii) one or more judgments, orders or decrees for the payment of money
of $7.5 million or more, either individually or in the aggregate, shall be
entered into against the Issuer or any Material Restricted Subsidiary or
any of their respective properties and shall not be discharged and there
shall have been a period of 60 days or more during which a stay of
enforcement of such judgment or order, by reason of pending appeal or
otherwise, shall not be in effect; or
(viii) certain events of bankruptcy, insolvency, reorganization,
administration or similar proceedings with respect to the Issuer or any
Material Restricted Subsidiary shall have occurred.
If an Event of Default (other than an Event of Default specified in clause
(viii) above with respect to the Issuer) occurs and is continuing, then the
Trustee or the holders of at least 25% in principal amount of the outstanding
Notes may, by written notice, and the Trustee upon the request of the holders of
not less than 25% in principal amount of the outstanding Notes shall, declare
the principal amount of, premium (if any) on, and any accrued and unpaid
interest on, all outstanding Notes to be immediately due and payable and upon
any such declaration such amounts shall become immediately due and payable. If
an Event of Default specified in clause (viii) above with respect to the Issuer
occurs and is continuing, then the principal amount of, premium (if any) on, and
any accrued and unpaid interest on, all outstanding Notes shall ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holder.
After a declaration of acceleration, the holders of a majority in aggregate
principal amount of outstanding Notes may, by notice to the Trustee, rescind
such declaration of acceleration if all existing Events of Default, other than
nonpayment of the principal of, premium (if any) on, and any accrued and unpaid
interest on, the Notes that has become due solely as a result of such
acceleration, have been cured or waived and if the rescission of acceleration
would not conflict with any judgment or decree. The holders of a majority in
principal amount of the outstanding Notes also have the right to waive past
defaults under the Indenture, except a default in the payment of principal of,
premium (if any) on, or any interest on, any outstanding Note, or in respect of
certain covenants or a provisions that cannot be modified or amended without the
consent of all holders of Notes.
No holder of any of the Notes has any right to institute any proceeding
with respect to the Indenture or any remedy thereunder, unless the holders of at
least 25% in principal amount of the outstanding Notes have made written
request, and offered reasonable security or indemnity, to the Trustee to
institute such proceeding as Trustee, the Trustee has failed to institute such
proceeding within 60 days after receipt of such notice and the Trustee has not
within such 60-day period received directions inconsistent with such written
request by holders of a majority in principal amount of the outstanding Notes.
Such limitations do not apply, however, to a suit instituted by a holder of a
Note for the enforcement of the payment of the principal of, premium (if any)
on, or any accrued and unpaid interest on, such Note on or after the respective
due dates expressed in such Note.
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During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default shall occur and be continuing, the Trustee is
not under any obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the holders unless such holders
shall have offered to such Trustee reasonable security or indemnity. Subject to
certain provisions concerning the rights of the Trustee, the holders of a
majority in principal amount of the outstanding Notes have the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the Trustee or exercising any trust or power conferred on the Trustee.
The Indenture provides that the Trustee will, within 45 days after the
occurrence of any Default, give to the holders of the Notes notice of such
Default known to it, unless such Default shall have been cured or waived;
provided that the Trustee shall be protected in withholding such notice if it
determines in good faith that the withholding of such notice is in the interest
of such holders.
The Issuer is required to furnish to the Trustee annually a statement as to
its compliance with all conditions and covenants under the Indenture.
DEFEASANCE
The Issuer may at any time terminate all of its obligations with respect to
the Notes ("defeasance"), except for certain obligations, including those
regarding any trust established for a defeasance and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes as required by the Indenture and to maintain agencies in respect of
Notes. The Issuer may at any time terminate its obligations under certain
covenants set forth in the Indenture, some of which are described under " --
Certain Covenants" above, and any omission to comply with such obligations shall
not constitute a Default with respect to the Notes ("covenant defeasance"). To
exercise either defeasance or covenant defeasance, the Issuer must irrevocably
deposit in trust, for the benefit of the holders of the Notes, with the Trustee
money (in United States dollars) or U.S. government obligations (denominated in
United States dollars), or a combination thereof, in such amounts as will be
sufficient to pay the principal of, and premium, if any, and interest on the
Notes to redemption or maturity and comply with certain other conditions,
including the delivery of a legal opinion as to certain tax matters.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of Notes)
as to all outstanding Notes when either (a) all such Notes theretofore
authenticated and delivered (except lost, stolen or destroyed Notes that have
been replaced or paid and Notes for whose payment money has theretofore been
deposited in trust or segregated and held in trust by the Issuer and thereafter
repaid to the Issuer or discharged from such trust) have been delivered to the
Trustee for cancellation; or (b)(i) all such Notes not theretofore delivered to
the Trustee for cancellation have become due and payable and the Issuer has
irrevocably deposited or caused to be deposited with the Trustee as trust funds
in trust for the purpose an amount of money sufficient to pay and discharge the
entire indebtedness on the Notes not theretofore delivered to the Trustee for
cancellation, for principal amount, premium, if any, and accrued interest to the
date of such deposit; (ii) the Issuer has paid all sums payable by it under the
Indenture; and (iii) the Issuer has delivered irrevocable instructions to the
Trustee to apply the deposited money toward the payment of the Notes at maturity
or on the redemption date, as the case may be. In addition, the Issuer must
deliver an Officers' Certificate and an Opinion of Counsel stating that all
conditions precedent to satisfaction and discharge have been complied with.
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AMENDMENT AND WAIVERS
From time to time, the Issuer, when authorized by resolutions of the Board,
and the Trustee, without the consent of the holders of the Notes, may amend,
waive or supplement the Indenture or the Notes for certain specified purposes,
including, among other things, curing ambiguities, defects or inconsistencies,
maintaining the qualification of the Indenture under the Trust Indenture Act or
making any change that does not adversely affect the rights of any holder. Other
amendments and modifications of the Indenture and the Notes may be made by the
Issuer and the Trustee by supplemental indenture with the consent of the holders
of not less than a majority of the aggregate principal amount of the outstanding
Notes; provided that no such modification or amendment may, without the consent
of the holder of each outstanding Note affected thereby, (i) reduce the
principal amount of, change the fixed maturity of, or alter the redemption
provisions of, the Notes, (ii) change the currency in which any Notes or amounts
owing thereon is payable, (iii) reduce the percentage of the aggregate principal
amount outstanding of Notes which must consent to an amendment, supplement or
waiver or consent to take any action under the Indenture or the Notes, (iv)
impair the right to institute suit for the enforcement of any payment on or with
respect to the Notes, (v) waive a default in payment with respect to the Notes,
(vi) reduce the rate or change the time for payment of interest on the Notes,
(vii) following the occurrence of a Change of Control or an Asset Sale, alter
the Issuer's obligation to purchase the Notes in accordance with the Indenture
or waive any default in the performance thereof, (viii) affect the ranking of
the Notes in a manner adverse to the holder of the Notes, or (ix) release any
Guarantee except in compliance with the terms of the Indenture.
GOVERNING LAW
The Indenture provides that the Indenture and the Notes are to be governed
by and construed in accordance with laws of the State of New York without giving
effect to principles of conflicts of law.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other capitalized terms used herein for which no
definition is provided.
"1997 Notes" means the Issuer's 13 1/2% Senior Notes due 2004.
"March 1998 Notes" means the Issuer's 10 3/8% Senior Notes due 2005.
"Acquired Indebtedness" means Indebtedness of a person existing at the time
such person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by such person and not incurred in connection with, or in
anticipation of, such person becoming a Restricted Subsidiary or such Asset
Acquisition; provided that Indebtedness of such person which is redeemed,
defeased, retired or otherwise repaid at the time of or immediately upon
consummation of the transactions by which such person becomes a Restricted
Subsidiary or such Asset Acquisition shall not constitute Acquired Indebtedness.
"Affiliate" of any specified person means any other person which, directly
or indirectly, controls, is controlled by or is under direct or indirect common
control with, such specified person. For the purposes of this definition,
"control" when used with respect to any person means the power to direct the
management and policies of such person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise, and the terms
"affiliated," "controlling" and "controlled" have meanings correlative to the
foregoing.
"Annualized ISP Operating Cash Flow" means, with respect to any ISP which
is not a Restricted Subsidiary, the product of (x) the net income of such ISP
and its consolidated Subsidiaries (determined on a basis consistent with the
calculation of Consolidated Net Income) for the most recent fiscal quarter for
which financial statements are available, increased, to the extent deducted in
calculating such net income for such fiscal quarter, by (i) the income tax
expense of such ISP and its consolidated Subsidiaries accrued according to GAAP
for such fiscal quarter (determined on a basis consistent with the calculation
of Consolidated Income Tax Expense and excluding taxes attributable to
extraordinary gains or losses and gains or losses from
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asset sales); (ii) interest expense of such ISP and its consolidated
Subsidiaries (determined on a basis consistent with the calculation of
Consolidated Interest Expense) for such fiscal quarter; (iii) depreciation of
such ISP and its consolidated Subsidiaries for such fiscal quarter; (iv)
amortization of such ISP and its consolidated Subsidiaries for such fiscal
quarter, including, without limitation, amortization of capitalized debt
issuance costs for such period, all determined on a consolidated basis in
accordance with GAAP; and (v) other non-cash charges decreasing such net income;
and (y) the number four.
"Annualized ISP Revenues" means, with respect to any ISP at any date of
determination, the consolidated net revenues of such ISP and its Subsidiaries
for the most recent quarter for which financial information concerning such ISP
is available (and determined on a basis consistent with the Issuer's accounting
principle) multiplied by four.
"Asset Acquisition" means (i) any capital contribution (by means of
transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise) by the Issuer or any
Restricted Subsidiary in any other person, or any acquisition or purchase of
Capital Stock of any other person by the Issuer or any Restricted Subsidiary, in
either case pursuant to which such person shall (a) become a Restricted
Subsidiary or (b) shall be merged with or into the Issuer or any Restricted
Subsidiary or (ii) any acquisition by the Issuer or any Restricted Subsidiary of
the assets of any person which constitute substantially all of an operating unit
or line of business of such person or which is otherwise outside of the ordinary
course of business.
"Asset Sale" means any direct or indirect sale, conveyance, transfer or
lease (that has the effect of a disposition and is not for security purposes) or
other disposition (that is not for security purposes) to any person other than
the Issuer or a Restricted Subsidiary, in one transaction or a series of related
transactions, of (i) any Capital Stock of any Restricted Subsidiary (other than
customary stock option programs), (ii) any assets of the Issuer or any
Restricted Subsidiary which constitute substantially all of an operating unit or
line of business of the Issuer and the Restricted Subsidiaries or (iii) any
other property or asset of the Issuer or any Restricted Subsidiary outside of
the ordinary course of business. For the purposes of this definition, the term
"Asset Sale" shall not include (i) any disposition of properties and assets of
the Issuer that is governed under "-- Consolidation, Merger, Sale of Assets,
Etc." above, (ii) sales of property or equipment that have become worn out,
obsolete or damaged or otherwise unsuitable for use in connection with the
business of the Issuer or any Restricted Subsidiary, as the case may be, and
(iii) for purposes of the covenant "Disposition of Proceeds of Asset Sales," any
sale, conveyance, transfer, lease or other disposition of any property or asset,
whether in one transaction or a series of related transactions occurring within
one year, either (x) involving assets with a Fair Market Value not in excess of
$500,000 or (y) which constitutes the incurrence of a Capitalized Lease
Obligation.
"Average Life to Stated Maturity" means, with respect to any Indebtedness,
as at any date of determination, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from such date to the date or dates
of each successive scheduled principal payment (including, without limitation,
any sinking fund requirements) of such Indebtedness multiplied by (b) the amount
of each such principal payment by (ii) the sum of all such principal payments;
provided that, in the case of any Capitalized Lease Obligation, all calculations
hereunder shall give effect to any applicable options to renew in favor of the
Issuer or any Restricted Subsidiary.
"Board" means the Board of Directors of the Issuer.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Issuer to have been duly adopted by the Board
and to be in full force and effect on the date of such certification, and
delivered to the Trustee.
"Capital Stock" means, with respect to any person, any and all shares,
interests, participations, rights in, or other equivalents (however designated
and whether voting and/or non-voting) of, such person's capital stock, whether
outstanding on the Issue Date or issued after the Issue Date, and any and all
rights (other than any evidence of Indebtedness), warrants or options
exchangeable for or convertible into such capital stock.
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"Capitalized Lease Obligation" means any obligation to pay rent or other
amounts under a lease of (or other agreement conveying the right to use) any
property (whether real, personal or mixed, immovable or movable) that is
required to be classified and accounted for as a capitalized lease obligation
under GAAP, and, for the purpose of the Indenture, the amount of such obligation
at any date shall be the capitalized amount thereof at such date, determined in
accordance with GAAP.
"Cash Equivalents" means (i) any evidence of Indebtedness (with, for
purposes of the covenant "Disposition of Proceeds of Asset Sales" only, a
maturity of 365 days or less) issued or directly and fully guaranteed or insured
by the United States or any agency or instrumentality thereof (provided that the
full faith and credit of the United States is pledged in support thereof or such
Indebtedness constitutes a general obligation of such country); (ii) deposits,
certificates of deposit or acceptances (with, for purposes of the covenant
"Disposition of Proceeds of Asset Sales" only, a maturity of 365 days or less)
of any financial institution that is a member of the Federal Reserve System, in
each case having combined capital and surplus and undivided profits (or any
similar capital concept) of not less than $500.0 million and whose senior
unsecured debt is rated at least "A-1" by S&P or "P-1" by Moody's; (iii)
commercial paper with a maturity of 365 days or less issued by a corporation
(other than an Affiliate of the Issuer) organized under the laws of the United
States or any State thereof and rated at least "A-1" by S&P or "P-1" by Moody's;
(iv) repurchase agreements and reverse repurchase agreements relating to
marketable direct obligations issued or unconditionally guaranteed by the United
States Government or issued by any agency thereof and backed by the full faith
and credit of the United States Government maturing within 365 days from the
date of acquisition; (v) other debt obligations maturing in 365 days or less
issued by a corporation (other than an Affiliate of the Issuer) organized under
the laws of the United States or any state thereof and rated at least "A-" by
S&P or "A3" by Moody's; and (vi) money market funds which invest substantially
all of their assets in securities of the type described in the preceding clauses
(i) through (v).
"Change of Control" is defined to mean the occurrence of any of the
following events: (a) any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act), excluding WorldCom, is or becomes
the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act, except that a person shall be deemed to have "beneficial ownership" of all
securities that such person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total Voting Stock of the Issuer; or (b) the
Issuer consolidates with, or merges with or into, another person or sells,
assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any person, or any person consolidates with,
or merges with or into, the Issuer, in any such event pursuant to a transaction
in which the outstanding Voting Stock of the Issuer is converted into or
exchanged for cash, securities or other property, other than any such
transaction where (i) the outstanding Voting Stock of the Issuer is converted
into or exchanged for (1) Voting Stock (other than Disqualified Stock) of the
surviving or transferee corporation or its parent corporation and/or (2) cash,
securities and other property in an amount which could be paid by the Issuer as
a Restricted Payment under the Indenture and (ii) immediately after such
transaction no "person" or "group" (as such terms are used in Sections 13(d) and
14(d) of the Exchange Act), excluding WorldCom, is the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person
shall be deemed to have "beneficial ownership" of all securities that such
person has the right to acquire, whether such right is exercisable immediately
or only after the passage of time), directly or indirectly, of more than 50% of
the total Voting Stock of the surviving or transferee corporation or its parent
corporation, as applicable; or (c) during any consecutive two-year period,
individuals who at the beginning of such period constituted the Board (together
with any new directors whose election by the Board or whose nomination for
election by the stockholders of the Issuer was approved by a vote of a majority
of the directors then still in office who were either directors at the beginning
of such period or whose election or nomination for election was previously so
approved) cease for any reason (other than by action of WorldCom) to constitute
a majority of the Board then in office. The good faith determination by the
Board, based upon advice of outside counsel, of the beneficial ownership of
securities of the Issuer within the meaning of Rules 13d-3 and 13d-5 under the
Exchange Act shall be conclusive, absent contrary controlling judicial precedent
or contrary written interpretation published by the Commission.
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"Common Stock" means, with respect to any person, any and all shares,
interest or other participations in, and other equivalents (however designated
and whether voting or nonvoting) of such person's common stock whether
outstanding at the Issue Date, and includes, without limitation, all series and
classes of such common stock.
"Consolidated Annualized Pro Forma Operating Cash Flow" means, at any date
of determination, Consolidated Operating Cash Flow for the latest fiscal quarter
for which consolidated financial statements of the Issuer are available
multiplied by four. For purposes of calculating "Consolidated Operating Cash
Flow" for any fiscal quarter for purposes of this definition, (i) any Subsidiary
of the Issuer that is a Restricted Subsidiary on the date of the transaction
(the "Transaction Date") giving rise to the need to calculate "Consolidated
Annualized Pro Forma Operating Cash Flow" shall be deemed to have been a
Restricted Subsidiary at all times during such fiscal quarter and (ii) any
Subsidiary of the Issuer that is not a Restricted Subsidiary on the Transaction
Date shall be deemed not to have been a Restricted Subsidiary at any time during
such fiscal quarter. In addition to and without limitation of the foregoing, for
purposes of this definition, "Consolidated Operating Cash Flow" shall be
calculated after giving effect on a pro forma basis for the applicable fiscal
quarter to, without duplication, any Asset Sales or Asset Acquisitions
(including, without limitation, any Asset Acquisition giving rise to the need to
make such calculation as a result of the Issuer or one of the Restricted
Subsidiaries (including any person who becomes a Restricted Subsidiary as a
result of the Asset Acquisition) incurring, assuming or otherwise being liable
for Acquired Indebtedness) occurring during the period commencing on the first
day of such fiscal quarter to and including the Transaction Date, as if such
Asset Sale or Asset Acquisition occurred on the first day of such fiscal
quarter.
"Consolidated Income Tax Expense" means, with respect to any period, the
provision for United States corporation, local, foreign and other income taxes
of the Issuer and the Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any period, without
duplication, the sum of (i) the interest expense of the Issuer and the
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP, including, without limitation, (a) any amortization of
debt discount, (b) the net cost under Interest Rate Obligations (including any
amortization of discounts), (c) the interest portion of any deferred payment
obligation, (d) all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing and similar
transactions and (e) all accrued interest, (ii) the interest component of
Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or
accrued by the Issuer and the Restricted Subsidiaries during such period as
determined on a consolidated basis in accordance with GAAP and (iii) the amount
of dividends in respect of Disqualified Stock paid by the Issuer and the
Restricted Subsidiaries during such period; provided that Consolidated Interest
Expense shall exclude the amortization of fees related to the issuance of the
Notes and fees related to any Indebtedness under a Permitted Credit Facility.
"Consolidated Net Income" means, with respect to any period, the
consolidated net income of the Issuer and the Restricted Subsidiaries for such
period, adjusted, to the extent included in calculating such consolidated net
income, by excluding, without duplication, (i) all extraordinary, unusual or
nonrecurring gains or losses of such person (net of fees and expenses relating
to the transaction giving rise thereto) for such period, (ii) income of the
Issuer and the Restricted Subsidiaries derived from or in respect of all
Investments in persons other than Restricted Subsidiaries, except to the extent
of any dividends or distributions actually received by the Issuer or any
Restricted Subsidiary, (iii) the portion of net income (or loss) of such person
allocable to minority interests in Restricted Subsidiaries for such period, (iv)
net income (or loss) of any other person combined with such person on a "pooling
of interests" basis attributable to any period prior to the date of combination,
(v) any gain or loss, net of taxes, realized by such person upon the termination
of any employee pension benefit plan during such period, (vi) gains or losses in
respect of any Asset Sales (net of fees and expenses relating to the transaction
giving rise thereto) during such period and (vii) except in the case of any
restriction or encumbrance permitted under clause (viii) of the covenant
"Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries," the net income of any Restricted Subsidiary for such period to
the extent that the declaration of dividends or similar distributions by that
Restricted Subsidiary of that income is not at the time permitted, directly or
indirectly, by operation of
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the terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulations applicable to that Restricted
Subsidiary or its stockholders.
"Consolidated Net Worth" means, with respect to any person, the
consolidated stockholders' or partners' equity of such person reflected on the
most recent financial statements of such person, determined in accordance with
GAAP, less any amounts attributable to redeemable capital stock (as determined
under applicable accounting standards by the Commission) of such person.
"Consolidated Operating Cash Flow" means, with respect to any period, the
Consolidated Net Income of the Issuer and the Restricted Subsidiaries for such
period increased, to the extent deducted in arriving at Consolidated Net Income
for such period, by the sum of (i) the Consolidated Income Tax Expense of the
Issuer and the Restricted Subsidiaries accrued according to GAAP for such period
(other than taxes attributable to extraordinary gains or losses and gains and
losses from Asset Sales); (ii) Consolidated Interest Expense for such period;
(iii) depreciation of the Issuer and the Restricted Subsidiaries for such
period; (iv) amortization of the Issuer and the Restricted Subsidiaries for such
period, including, without limitation, amortization of capitalized debt issuance
costs for such period, all determined on a consolidated basis in accordance with
GAAP; and (v) other non-cash charges decreasing Consolidated Net Income.
"consolidation" means, with respect to the Issuer, the consolidation of the
accounts of the Restricted Subsidiaries with those of the Issuer, all in
accordance with GAAP; provided that "consolidation" will not include
consolidation of the accounts of any Unrestricted Subsidiary with the accounts
of the Issuer. The term "consolidated" has a correlative meaning to the
foregoing.
"Debt Securities" means any debt securities issued by the Issuer in a
public offering or a private placement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designation" has the meaning set forth under " -- Certain
Covenants-Limitation on Designations of Unrestricted Subsidiaries."
"Disinterested Director" means, with respect to any transaction or series
of related transactions, a member of the Board other than a director who (i) has
any material direct or indirect financial interest in or with respect to such
transaction or series of related transactions or (ii) is an employee or officer
of the Issuer or an Affiliate that is itself a party to such transaction or
series of transactions or an Affiliate of a party to such transaction or series
of related transactions.
"Disqualified Stock" means, with respect to any person, any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or becomes mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or becomes exchangeable for Indebtedness at the option
of the holder thereof, or becomes redeemable at the option of the holder
thereof, in whole or in part, on or prior to the final maturity date of the
Notes; provided such Capital Stock shall only constitute Disqualified Stock to
the extent it so matures or becomes so redeemable or exchangeable on or prior to
the final maturity date of the Notes; provided, further, that any Capital Stock
of the Issuer or any Restricted Subsidiary that would not constitute
Disqualified Stock but for provisions thereof giving holders thereof the right
to require such person to repurchase or redeem such Capital Stock upon the
occurrence of an "asset sale" or "change of control" occurring prior to the
final maturity date of the Notes shall not constitute Disqualified Stock if the
"asset sale" or "change of control" provisions applicable to such Capital Stock
are no more favorable to the holders of such Capital Stock than the provisions
contained in "Disposition of Proceeds of Asset Sales" and "Change of Control"
covenants described above and such Capital Stock specifically provides that such
person will not repurchase or redeem any such stock pursuant to such provision
prior to the Issuer's repurchase of such Notes as are required to be repurchased
pursuant to the "Disposition of Proceeds of Asset Sales" and "Change of Control"
covenants described above.
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"Exchange Act" means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated thereunder.
"Existing ISP" means any ISP in which the Issuer or a Subsidiary of the
Issuer has an Investment on the Issue Date.
"Fair Market Value" means, with respect to any asset or property, the price
that could be negotiated in an arms-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under pressure
or compulsion to complete the transaction. Unless otherwise specified in the
Indenture, Fair Market Value shall be determined by the Board acting in good
faith and shall be evidenced by a Board Resolution.
"GAAP" means, at any date of determination, generally accepted accounting
principles in effect in the United States and which are applicable as of the
date of determination and which are consistently applied for all applicable
periods.
"guarantee" means, as applied to any obligation, (i) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner, of any part or all of
such obligation and (ii) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit.
"Hiway Technologies" means Best Internet Communications, Inc., a California
corporation, d/b/a Hiway Technologies.
"incur" means, with respect to any Indebtedness or other obligation of any
person, to create, issue, incur (by conversion, exchange or otherwise), assume,
guarantee or otherwise become liable in respect of such Indebtedness or other
obligation including by acquisition of Subsidiaries or the recording, as
required pursuant to GAAP or otherwise, of any such Indebtedness or other
obligation on the balance sheet of such person (and "incurrence," "incurred,"
"incurrable" and "incurring" shall have meanings correlative to the foregoing);
provided that a change in GAAP that results in an obligation of such person that
exists at such time becoming Indebtedness shall not be deemed an incurrence of
such Indebtedness and that neither the accrual of interest nor the accretion of
original issue discount shall be deemed an Incurrence of Indebtedness.
Indebtedness otherwise incurred by a person before it becomes a Subsidiary of
the Issuer (whether by merger, consolidation, acquisition or otherwise) shall be
deemed to have been incurred at the time at which such person becomes a
Subsidiary of the Issuer.
"Indebtedness" means, with respect to any person, without duplication, (i)
any liability, contingent or otherwise, of such person (A) for borrowed money
(whether or not the recourse of the lender is to the whole of the assets of such
person or only to a portion thereof) or (B) evidenced by a note, debenture or
similar instrument or letter of credit (including a purchase money obligation)
or (C) for the payment of money relating to a Capitalized Lease Obligation or
other obligation relating to the deferred purchase price of property (except to
the extent representing funds deposited in escrow to secure the deferred
purchase price of an acquisition of, or an Investment in, an ISP) or (D) in
respect of an Interest Rate Obligation or currency agreement; or (ii) any
liability of others of the kind described in the preceding clause (i) which the
person has guaranteed or which is otherwise its legal liability; or (iii) any
obligation secured by a Lien (other than (x) Permitted Liens of the types
described in clauses (b), (d) or (e) of the definition of Permitted Liens;
provided that the obligations secured would not constitute Indebtedness under
clauses (i) or (ii) or (iii) of this definition, and (y) Liens on Capital Stock
or Indebtedness of any Unrestricted Subsidiary) to which the property or assets
of such person are subject, whether or not the obligations secured thereby shall
have been assumed by or shall otherwise be such person's legal liability (the
amount of such obligation being deemed to be the lesser of the value of such
property or asset or the amount of the obligation so secured); (iv) all
Disqualified Stock valued at the greater of its voluntary or involuntary maximum
fixed repurchase price plus accrued and unpaid dividends; and (v) any and all
deferrals, renewals, extensions and refundings of, or amendments, modifications
or supplements to, any liability of the kind described in any of the preceding
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clauses (i), (ii), (iii) or (iv). In no event shall "Indebtedness" include trade
payables and accrued liabilities that are current liabilities incurred in the
ordinary course of business, excluding the current maturity of any obligation
which would otherwise constitute Indebtedness. For purposes of the covenants
"Limitation on Additional Indebtedness" and "Limitation on Restricted Payments"
and the definition of "Events of Default," in determining the principal amount
of any Indebtedness to be incurred by the Issuer or a Restricted Subsidiary or
which is outstanding at any date, (x) the principal amount of any Indebtedness
issued with original issue discount shall be the face amount of such
Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such date as determined in conformity with GAAP
and (y) the principal amount of any Indebtedness shall be reduced by any amount
of cash or Cash Equivalent collateral securing on a perfected basis, and
dedicated for disbursement exclusively to the payment of principal of and
interest on, such Indebtedness.
"Independent Financial Advisor" means a United States investment banking
firm of national or regional standing in the United States (i) which does not,
and whose directors, officers and employees or Affiliates do not have, a direct
or indirect financial interest in the Issuer and (ii) which, in the judgment of
the Board, is otherwise independent and qualified to perform the task for which
it is to be engaged.
"Interest Rate Obligations" means the obligations of any person pursuant to
any arrangement with any other person whereby, directly or indirectly, such
person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount and shall include without limitation, interest rate swaps, caps, floors,
collars, forward interest rate agreements and similar agreements.
"Internet Service Business" means any business operating an internet
connectivity or internet enhancement service as it exists from time to time,
including, without limitation, dial up or dedicated internet service, web
hosting or collocation services, security solutions, the provision and
development of software in connection therewith, configuration services,
electronic commerce, intranet solutions, data backup and restoral, business
content and collaboration, communications tools or network equipment products or
services (including, without limitation, any business conducted by the Issuer or
any Restricted Subsidiary on the Issue Date), and any business reasonably
related to the foregoing. A good faith determination by a majority of the Board
as to whether a business meets the requirements of this definition shall be
conclusive, absent manifest error.
"Investment" means, with respect to any person, any advance, loan, account
receivable (other than an account receivable arising in the ordinary course of
business), or other extension of credit (including, without limitation, by means
of any guarantee) or any capital contribution to (by means of transfers of
property to others, payments for property or services for the account or use of
others, or otherwise), or any purchase or ownership of any stocks, bonds, notes,
debentures or other securities of, any other person. Notwithstanding the
foregoing, in no event shall any issuance of Capital Stock (other than
Disqualified Stock) of the Issuer in exchange for Capital Stock, property or
assets of another person constitute an Investment by the Issuer in such other
person.
"ISP" means any person (a) engaged principally in an Internet Service
Business, (b) of which the Issuer or Wholly Owned Restricted Subsidiaries own
either (x) Qualifying Preferred Stock representing in aggregate from 20% to 50%
of such person's outstanding Capital Stock (on an economic basis) or (y) Common
Stock or Qualifying Preferred Stock representing in aggregate in excess of 50%
of such person's voting Capital Stock, (c) as to which the Issuer or a Wholly
Owned Restricted Subsidiary (x) has an option to acquire a majority of such
person's outstanding Capital Stock and (y) upon exercise of the option referred
to in the preceding clause (x), will have sufficient voting power with respect
to the outstanding Capital Stock of such person to effect the acquisition of
such person by the Issuer or any such Wholly Owned Restricted Subsidiary, as the
case may be, (d) as to which the Issuer or a Wholly Owned Restricted Subsidiary
has the right to appoint and has appointed at least one member of such person's
board of directors, in the case where such person would not be a Subsidiary of
the Issuer, or a majority of such person's board of directors, in the case where
such person would be a Subsidiary of the Issuer and (e) which has no outstanding
Indebtedness or Disqualified stock other than Indebtedness or Disqualified stock
of such person having an aggregate
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outstanding principal balance and liquidation preference, respectively, that (x)
in the case of a person that is a Restricted Subsidiary, is permitted to be
incurred under the covenant "Limitation on Additional Indebtedness" and (y) in
the case of a person that is not a Restricted Subsidiary, does not at any time
exceed the greater of (I) 50% of Annualized ISP Revenues or (II) 6.0x Annualized
ISP Operating Cash Flow.
"Issue Date" means the original date of issuance of the Notes.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or preference
or priority or other encumbrance upon or with respect to any property of any
kind. A person shall be deemed to own subject to a Lien any property which such
person has acquired or holds subject to the interest of a vendor or lessor under
any conditional sale agreement, capital lease or other title retention
agreement.
"Market Capitalization" of any person means, as of any day of
determination, the average Closing Price of such person's Common Stock over the
20 consecutive trading days immediately preceding such day. "Closing Price" on
any trading day with respect to the per share price of any shares of Common
Stock means the last reported sale price regular way or, in case no such
reported sale takes place on such day, the average of the reported closing bid
and asked prices regular way, in either case on the New York Stock Exchange or,
if such shares of Common Stock are not listed or admitted to trading on such
exchange, on the principal national securities exchange on which such shares are
listed or admitted to trading or, if not listed or admitted to trading on any
national securities exchange, on the National Association of Securities Dealers
Automated Quotations National Market System or, if such shares are not listed or
admitted to trading on any national securities exchange or quoted on such
automated quotation system but the issuer is a Foreign Issuer (as defined in
Rule 3b-4(b) under the Exchange Act) and the principal securities exchange on
which such shares are listed or admitted to trading is a Designated Offshore
Securities Market (as defined in Rule 902(a) under the Securities Act), the
average of the reported closing bid and asked prices regular way on such
principal exchange, or, if such shares are not listed or admitted to trading on
any national securities exchange or quoted on such automated quotation system
and the issuer and principal securities exchange do not meet such requirements,
the average of the closing bid and asked prices in the over-the-counter marked
as furnished by any New York Stock Exchange member firm that is selected from
time to time by the Issuer for that purpose and is reasonably acceptable to the
Trustee.
"Material Restricted Subsidiary" means any Restricted Subsidiary of the
Issuer, which, at any date of determination, is a "Significant Subsidiary" (as
that term is defined in Regulation S-X issued under the Securities Act), but
shall, in any event, include (x) any Guarantor or (y) any Restricted Subsidiary
of the Issuer which, at any date of determination, is an obligor under any
Indebtedness in an aggregate principal amount equal to or exceeding $7.5
million.
"Maturity Date" means, with respect to any Note, the date specified in such
Note as the fixed date on which the principal of such Note is due and payable.
"Moody's" means Moody's Investors Service.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash (including assumed liabilities and other items
deemed to be cash under the proviso to the first sentence of the covenant
"Disposition of Proceeds of Asset Sales") or Cash Equivalents including payments
in respect of deferred payment obligations when received in the form of cash or
Cash Equivalents (except to the extent that such obligations are financed or
sold with recourse to the Issuer or any Restricted Subsidiary) net of (i)
brokerage commissions and other fees and expenses (including fees and expenses
of legal counsel and investment bankers) related to such Asset Sale, (ii)
provisions for all taxes payable as a result of such Asset Sale, (iii) amounts
required to be paid to any person (other than the Issuer or any Restricted
Subsidiary) owning a beneficial interest in or having a Permitted Lien on the
assets subject to the Asset Sale and (iv) appropriate amounts to be provided by
the Issuer or any Restricted Subsidiary, as the case may be, as a reserve
required in accordance with GAAP against any liabilities associated with such
Asset Sale and retained by the Issuer or any Restricted Subsidiary, as the case
may be, after such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
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matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as reflected in an Officers' Certificate delivered to the
Trustee.
"New ISP" means any ISP in which the Issuer or a Subsidiary of the Issuer
makes its first Investment after the Prior Issue Date.
"Newly Acquired Assets" means any assets (other than cash) of the Issuer or
any Restricted Subsidiary which did not constitute assets of the Issuer, any
Restricted Subsidiary or any ISP on or prior to the Issue Date; provided that
Newly Acquired Assets shall not include (a) Capital Stock of Hiway Technologies,
(b) assets (other than cash) acquired by Hiway Technologies or any of its
Subsidiaries on or prior to the Issue Date, or (c) any assets (other than cash)
of any person which would be an ISP if Hiway Technologies were a Wholly Owned
Restricted Subsidiary, to the extent that such assets were acquired by such
person on or prior to the Issue Date.
"Other Senior Debt Pro Rata Share" means the amount of the applicable
Excess Proceeds obtained by multiplying the amount of such Excess Proceeds by a
fraction, (i) the numerator of which is the aggregate accreted value and/or
principal amount, as the case may be, of all Indebtedness (other than (x) the
Notes and (y) Subordinated Indebtedness) of the Issuer outstanding at the time
of the applicable Asset Sale with respect to which the Issuer is required to use
Excess Proceeds to repay or make an offer to purchase or repay and (ii) the
denominator of which is the sum of (a) the aggregate principal amount of all
Notes outstanding at the time of the applicable Asset Sale and (b) the aggregate
principal amount or the aggregate accreted value, as the case may be, of all
other Indebtedness (other than Subordinated Indebtedness) of the Issuer
outstanding at the time of the applicable Asset Sale Offer with respect to which
the Issuer is required to use the applicable Excess Proceeds to offer to repay
or make an offer to purchase or repay.
"Permitted Affiliate Agreement" means each of the Series A Purchase
Agreement, the Series B Purchase Agreement, the Series C Purchase Agreement and
the Stockholders Agreement, each as in effect on the Issue Date.
"Permitted Credit Facility" means any senior commercial term loan and/or
revolving credit facility (including any letter of credit subfacility) entered
into principally with commercial banks and/or other financial institutions
typically party to commercial loan agreements.
"Permitted Equipment Financing" means any credit facility or other
financing arrangement (including in the form of Capitalized Lease Obligations
and guarantees of Indebtedness of ISPs) entered into with any vendor or supplier
(or any financial institution acting on behalf of or for the purpose of directly
financing purchases from such vendor or supplier) to the extent the Indebtedness
thereunder is incurred for the purpose of financing the cost (including the cost
of design, development, site acquisition, construction, integration, manufacture
or acquisition) of real or personal property (tangible or intangible) used, or
to be used, in an Internet Service Business.
"Permitted Indebtedness" means the following Indebtedness (each of which
shall be given independent effect):
(a) Indebtedness under the Notes and the Indenture;
(b) Indebtedness of the Issuer and/or any Restricted Subsidiary
outstanding on the Issue Date, including, without limitation, the 1997
Notes and the March 1998 Notes;
(c) (i) Indebtedness of any Restricted Subsidiary owed to and held by
the Issuer or a Restricted Subsidiary and (ii) Indebtedness of the Issuer,
not secured by any Lien, owed to and held by any Restricted Subsidiary;
provided that an incurrence of Indebtedness shall be deemed to have
occurred upon (x) any sale or other disposition (excluding assignments as
security to financial institutions) of any Indebtedness of the Issuer or a
Restricted Subsidiary referred to in this clause (c) to a person (other
than the Issuer or a Restricted Subsidiary) or (y) any sale or other
disposition of Capital Stock of a Restricted Subsidiary, or Designation of
a Restricted Subsidiary, which holds Indebtedness of the Issuer or another
Restricted Subsidiary such that such Restricted Subsidiary, in any such
case, ceases to be a Restricted Subsidiary;
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(d) Interest Rate Obligations of the Issuer and/or any Restricted
Subsidiary relating to Indebtedness of the Issuer and/or such Restricted
Subsidiary, as the case may be (which Indebtedness (x) bears interest at
fluctuating interest rates and (y) is otherwise permitted to be incurred
under the "Limitation on Additional Indebtedness" covenant), but only to
the extent that the notional principal amount of such Interest Rate
Obligations does not exceed the principal amount of the Indebtedness
(and/or Indebtedness subject to commitments) to which such Interest Rate
Obligations relate;
(e) Indebtedness of the Issuer and/or any Restricted Subsidiary in
respect of performance bonds of the Issuer or any Restricted Subsidiary or
surety bonds provided by the Issuer or any Restricted Subsidiary incurred
in the ordinary course of business;
(f) Indebtedness of the Issuer and/or any Restricted Subsidiary to the
extent it represents a replacement, renewal, refinancing or extension (a
"Refinancing") of outstanding Indebtedness of the Issuer and/or of any
Restricted Subsidiary incurred or outstanding pursuant to clause (a), (b),
(g), (h) or (i) of this definition or the proviso of the covenant
"Limitation on Additional Indebtedness"; provided that (1) Indebtedness of
the Issuer may not be Refinanced to such extent under this clause (f) with
Indebtedness of any Restricted Subsidiary and (2) any such Refinancing
shall only be permitted under this clause (f) to the extent that (x) it
does not result in a lower Average Life to Stated Maturity of such
Indebtedness as compared with the Indebtedness being Refinanced and (y) it
does not exceed the sum of the principal amount (or, if such Indebtedness
provides for a lesser amount to be due and payable upon a declaration of
acceleration thereof, an amount no greater than such lesser amount) of the
Indebtedness being Refinanced plus the amount of accrued interest thereon
and the amount of any reasonably determined prepayment premium necessary to
accomplish such Refinancing and such reasonable fees and expenses incurred
in connection therewith;
(g) Indebtedness of the Issuer such that, after giving effect to the
incurrence thereof, the total aggregate principal amount of Indebtedness
incurred under this clause (g) and any Refinancings thereof otherwise
incurred in compliance with the Indenture plus the aggregate principal
amount of the Notes outstanding would not exceed 200% of Total Incremental
Equity;
(h) Indebtedness of the Issuer and/or any Restricted Subsidiary incurred
under any Permitted Credit Facility and/or Indebtedness of the Issuer
represented by Debt Securities of the Issuer, and any Refinancings of the
foregoing otherwise incurred in compliance with the Indenture, in an
aggregate principal amount not to exceed $150.0 million at any time
outstanding;
(i) Indebtedness of the Issuer and/or any Restricted Subsidiary incurred
under any Permitted Equipment Financing in an aggregate principal amount
not to exceed the Fair Market Value of the assets acquired with the
proceeds thereof;
(j) Indebtedness of the Issuer and/or any Restricted Subsidiary incurred
as a result of any Rollup of any ISP, and any Refinancings thereof
otherwise incurred in compliance with the Indenture, provided the aggregate
principal amount of all such Indebtedness does not exceed $50.0 million at
any time outstanding;
(k) Indebtedness of the Issuer and/or any Restricted Subsidiary incurred
in connection with the acquisition of, or an Investment in, a New ISP,
including any obligations in respect of the deferred purchase price
(whether or not subject to a contingency) of any such acquisition or
Investment, in an aggregate principal amount not to exceed $50.0 million at
any time outstanding; and
(l) in addition to the items referred to in clauses (a) through (j)
above, Indebtedness of the Issuer and/or the Restricted Subsidiaries having
an aggregate principal amount not to exceed $50.0 million at any time
outstanding.
"Permitted Investments" means (a) Cash Equivalents; (b) Investments in
prepaid expenses, negotiable instruments held for collection and lease, utility
and workers' compensation, performance and other similar deposits; (c) Interest
Rate Obligations incurred in compliance with the covenant "Limitation on
Additional Indebtedness"; and (d) the extension by the Issuer and the Restricted
Subsidiaries of (i) trade credit to
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Subsidiaries of the Issuer and the ISPs, represented by accounts receivable,
extended on usual and customary terms in the ordinary course of business or (ii)
guarantees of commitments for the purchase of goods or services by any ISP
incurred in the ordinary course of business so long as such guarantees to the
extent constituting Indebtedness are permitted to be incurred under the covenant
"Limitation on Additional Indebtedness."
"Permitted Liens" means (a) Liens on property of a person existing at the
time such person is merged into or consolidated with the Issuer or any
Restricted Subsidiary or becomes a Restricted Subsidiary; provided that such
Liens were in existence prior to the contemplation of such merger, consolidation
or acquisition and do not secure any property or assets of the Issuer or any
Restricted Subsidiary other than the property or assets subject to the Liens
prior to such merger or consolidation or acquisition; (b) Liens imposed by law,
such as carriers', warehousemen's and mechanics' Liens and other similar Liens
arising in the ordinary course of business that secure payment of obligations
not more than 60 days past due or that are being contested in good faith and by
appropriate proceedings; (c) Liens existing on the Issue Date; (d) Liens for
taxes, assessments or governmental charges or claims that are not yet delinquent
or that are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted; provided that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (e) easements, rights of way, restrictions and other similar
easements, licenses, restrictions on the use of properties, or minor
imperfections of title that, in the aggregate, are not material in amount and do
not in any case materially detract from the properties subject thereto or
interfere with the ordinary conduct of the business of the Issuer or the
Restricted Subsidiaries; (f) Liens to secure the performance of statutory
obligations, surety or appeal bonds, performance bonds or other obligations of a
like nature incurred in the ordinary course of business; (g) Liens securing any
Permitted Credit Facility or Permitted Equipment Financing; (h) Liens to secure
Indebtedness incurred in compliance with clause (k) of "Permitted Indebtedness"
to the extent relating to the asset subject of the particular Asset Acquisition
or Investment; (i) Liens to secure any Refinancing of any Indebtedness secured
by Liens referred to in the foregoing clauses (a) or (c), but only to the extent
that such Liens do not extend to any other property or assets and the principal
amount of the Indebtedness secured by such Liens is not increased; (j) Liens to
secure the Notes; and (k) Liens on real property incurred in connection with the
financing of the purchase of such real property (or incurred within 60 days of
purchase) by the Issuer or any Restricted Subsidiary.
"Preferred Stock" means, with respect to any person, any and all shares,
interests, participations or other equivalents (however designated) of such
person's preferred or preference stock whether now outstanding, or issued after
the Issue Date, and including, without limitation, all classes and series of
preferred or preference stock of such person.
"Prior Issue Date" means the original date of issuance of the March 1998
Notes.
"Public Capital Stock" means any class of Capital Stock which is traded on
the New York Stock Exchange, the American Stock Exchange or the Nasdaq National
Market.
"Public Equity Offering" means an underwritten public offering of Common
Stock (other than Disqualified Stock) made pursuant to a registration statement
filed with the Commission under the Securities Act.
"Qualified Consideration" means assets that will be used in an Internet
Service Business (or Capital Stock or securities of any person that will become
a Restricted Subsidiary as a result of the receipt of such Qualified
Consideration to the extent that such person owns properties or assets that will
be used in an Internet Service Business) of the Issuer or any Restricted
Subsidiary.
"Qualifying Preferred Stock" means preferred stock of an ISP (i) having a
liquidation and dividend preference at least equal to the amount of the
Investment made by the Issuer or a Restricted Subsidiary in such ISP, and (ii)
that is convertible into shares of Common Stock of such ISP at the option of the
holder.
"Refinancing" has the meaning set forth in clause (f) of the definition of
"Permitted Indebtedness."
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"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution on Capital Stock of the Issuer
or any payment made to the direct or indirect holders (in their capacities as
such) of Capital Stock of the Issuer (other than dividends or distributions
payable solely in Capital Stock (other than Disqualified Stock) of the Issuer or
in options, warrants or other rights to purchase Capital Stock (other than
Disqualified Stock) of the Issuer); (ii) the purchase, redemption or other
acquisition or retirement for value of any Capital Stock of the Issuer (other
than any such Capital Stock owned by the Issuer or a Wholly Owned Restricted
Subsidiary); (iii) the purchase, redemption, defeasance or other acquisition or
retirement for value prior to any scheduled repayment, sinking fund or maturity
of any Subordinated Indebtedness (other than any Subordinated Indebtedness held
by a Wholly Owned Restricted Subsidiary); or (iv) the making by the Issuer or
any Restricted Subsidiary of any Investment (other than a Permitted Investment)
in any person (other than an Investment by a Restricted Subsidiary in the Issuer
or an Investment by the Issuer or a Restricted Subsidiary in (a) a Wholly Owned
Restricted Subsidiary engaged principally in an Internet Service Business, (b) a
New ISP that is a Restricted Subsidiary; (c) a person (other than an Existing
ISP) engaged principally in an Internet Service Business that becomes a Wholly
Owned Restricted Subsidiary as a result of such Investment; (d) a New ISP that
becomes a Restricted Subsidiary as a result of such Investment; or (e) a
Restricted Subsidiary (other than an Existing ISP) or a person (other than an
Existing ISP) that becomes a Restricted Subsidiary as a result of such
Investment, provided that, in either case, such Restricted Subsidiary would, but
for failing to meet the requirements of clause (c) of the definition of "ISP,"
be a New ISP).
"Restricted Subsidiary" means any Subsidiary of the Issuer that has not
been designated by the Board, by a Board Resolution delivered to the Trustee, as
an Unrestricted Subsidiary pursuant to and in compliance with the covenant
"Limitation on Designations of Unrestricted Subsidiaries." Any such designation
may be revoked by a Board Resolution delivered to the Trustee, subject to the
provisions of such covenant.
"Restricted Subsidiary Indebtedness" means Indebtedness of any Restricted
Subsidiary (i) which is not subordinated to any other Indebtedness of such
Restricted Subsidiary and (ii) in respect of which the Issuer is not also
obligated (by means of a guarantee or otherwise) other than, in the case of this
clause (ii), Indebtedness under any Permitted Credit Facilities.
"Revocation" has the meaning set forth under "-- Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries."
"Rollup" means (i) an Investment in an Existing ISP or transaction or
series of related transactions as a result of which such Existing ISP becomes a
Wholly Owned Restricted Subsidiary or (ii) an Investment in a New ISP or
transaction or series of related transactions as a result of which such New ISP
becomes a Restricted Subsidiary or (iii) a merger or consolidation of any ISP
with the Issuer.
"S&P" means Standard & Poor's Corporation.
"Strategic Equity Investor" means any person engaged principally in one or
more communications businesses with a Market Capitalization or Consolidated Net
Worth of at least $1.0 billion.
"Subordinated Indebtedness" means any Indebtedness of the Issuer or any
Guarantor which is expressly subordinated in right of payment to any other
Indebtedness of the Issuer or such Guarantor.
"Subsidiary" means, with respect to any person, (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors shall at the time be owned,
directly or indirectly, by such person, or (ii) any other person of which at
least a majority of voting interest is at the time, directly or indirectly,
owned by such person.
"Total Consolidated Indebtedness" means, at any date of determination, an
amount equal to the aggregate amount of all Indebtedness of the Issuer and the
Restricted Subsidiaries outstanding as of the date of determination.
"Total Incremental Equity" means, at any time of determination, the sum of,
without duplication, (i) the aggregate cash proceeds received by the Issuer from
capital contributions in respect of existing Capital Stock (other than
Disqualified Stock) or the issuance or sale of Capital Stock (other than
Disqualified Stock but
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including Capital Stock issued upon the conversion of convertible Indebtedness
or from the exercise of options, warrants or rights to purchase Capital Stock
(other than Disqualified Stock)) subsequent to the Prior Issue Date, other than
to a Subsidiary of the Issuer, plus (ii) the Fair Market Value (determined at
the time of issuance) of any Capital Stock (other than Disqualified Stock) of
the Issuer issued as consideration for the acquisition of Capital Stock of an
ISP (other than the acquisition of Capital Stock of an Existing ISP), plus (iii)
the Fair Market Value (determined at the time of issuance) of any Capital Stock
(other than Disqualified Stock) of the Issuer issued as consideration for the
acquisition of Capital Stock of an Existing ISP in a transaction as a result of
which the Existing ISP becomes a Wholly Owned Restricted Subsidiary, plus (iv)
the aggregate cash proceeds received by the Issuer or any Restricted Subsidiary
from the sale, disposition or repayment (in whole or in part) of any Investment
that is or was made after the Prior Issue Date and that constitutes a Restricted
Payment (or which would have constituted a Restricted Payment if the Indenture
had been in effect as of the Prior Issue Date) that has been deducted from Total
Incremental Equity pursuant to clause (v) below in an amount equal to the lesser
of (a) the return of capital with respect to the applicable portion of such
Investment and (b) the cost of the applicable portion of such Investment, in
either case, less the cost of the disposition of such Investment, minus (v) the
aggregate amount of all Restricted Payments declared or made on and after the
Prior Issue Date (assuming that the Indenture had been in effect as of the Prior
Issue Date) (other than (1) a Restricted Payment constituting an Investment in
an ISP (other than the acquisition of Capital Stock of an Existing ISP in a
transaction as a result of which the Existing ISP becomes a Wholly Owned
Restricted Subsidiary) and (2) a Restricted Payment made pursuant to clauses
(iii), (viii) or (ix) (solely, in the case of clause (ix), to the extent the
Investment is made in a Restricted Subsidiary) of the third paragraph of the
covenant "Limitation on Restricted Payments," in each case assuming that the
Indenture had been in effect as of the Prior Issue Date).
"Unrestricted Subsidiary" means any Subsidiary of the Issuer designated as
such pursuant to and in compliance with the covenant "Limitation on Designations
of Unrestricted Subsidiaries." Any such designation may be revoked by a Board
Resolution delivered to the Trustee, subject to the provisions of such covenant.
"Voting Stock" means, with respect to any person, the Capital Stock of any
class or kind ordinarily having the power to vote for the election of directors
or other members of the governing body of such person.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of
which 99% or more of the outstanding Capital Stock is owned by the Issuer or
another Wholly Owned Restricted Subsidiary; provided NorthWestNet shall be
deemed a Wholly Owned Restricted Subsidiary notwithstanding its existing stock
option plan and any stock options issued thereunder. For the purposes of this
definition, any directors' qualifying shares or investments by foreign nationals
mandated by applicable law shall be disregarded in determining the ownership of
a Restricted Subsidiary.
"WorldCom" means WorldCom, Inc. (and its successors by merger or
consolidation) and its controlled Affiliates.
BOOK-ENTRY; DELIVERY AND FORM
Except as set forth under "-- Certificated Securities," the New Notes will
be issued in the form of one Global New Note. Such Global New Note will be
deposited with, or on behalf of, the Depository and registered in the name of
the Depository or its nominee. Except as set forth below, such Global New Note
may be transferred, in whole and not in part, only to the Depository or another
nominee of the Depository.
Investors may hold their beneficial interests in such Global New Note
directly through the Depository if they have an account with the Depository or
indirectly through organizations which have accounts with the Depository.
The Depository has advised the Issuer as follows: The Depository is a
limited purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code, and "a clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. The Depository
was created to hold securities of institutions that have accounts with the
Depository ("participants") and to facilitate the clearance and
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settlement of securities transactions among its participants in such securities
through electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. The
Depository's participants include securities brokers and dealers (which may
include the Initial Purchasers), banks, trust companies, clearing corporations
and certain other organizations. Access to the Depository's book-entry system is
also available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a participant,
whether directly or indirectly.
Upon the issuance of the Global New Note, the Depository will credit, on
its book-entry registration and transfer system, the principal amount of the New
Notes represented by such Global New Note to the accounts of participants.
Ownership of beneficial interests in such Global New Note will be limited to
participants or persons that may hold interests through participants. Ownership
of beneficial interests in such Global New Note will be shown on, and the
transfer of those ownership interests will be effected only through records
maintained by the Depository (with respect to participants' interest) and such
participants (with respect to the owners of beneficial interests in such Global
New Note other than participants). The laws of some jurisdictions may require
that certain purchasers of securities take physical delivery of such securities
in definitive form. Such limits and laws may impair the ability to transfer or
pledge beneficial interests in such Global New Note.
So long as the Depository, or its nominee, is the registered holder and
owner of a Global New Note, the Depository or such nominee, as the case may be,
will be considered the sole legal owner and holder of the related New Notes for
all purposes of such New Notes and the Indenture. Except as set forth below,
owners of beneficial interests in the Global New Note will not be entitled to
have the New Notes represented by the Global New Note registered in their names,
will not receive or be entitled to receive physical delivery of certificated New
Notes in definitive form and will not be considered to be the owners or holders
of any New Notes under the Global New Note. The Issuer understands that under
existing industry practice, in the event an owner of a beneficial interest in
the Global New Note desires to take any action that the Depository, as the
holder of the Global New Note is entitled to take, the Depository would
authorize the participants to take such action, and that the participants would
authorize beneficial owners owning through such participants to take such action
or would otherwise act upon the instructions of beneficial owners owning through
them.
Payment of principal of and interest on New Notes represented by a Global
New Note registered in the name of and held by the Depository or its nominee
will be made to the Depository or its nominee, as the case may be, as the
registered owner and holder of the Global New Note.
The Company expects that the Depository or its nominee, upon receipt of any
payment of principal of or interest on a Global New Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global New Note
as shown on the records of the Depository or its nominee. The Issuer also
expects that payments by participants to owners of beneficial interests in a
Global New Note held through such participants will be governed by standing
instructions and customary practices and will be the responsibility of such
participants. The Issuer will not have any responsibility or liability for any
aspect of the records relating to, or payments made on account of, beneficial
ownership interests in a Global New Note for any New Note or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests or for any other aspect of the relationship between the Depository and
its participants or the relationship between such participants and the owners of
beneficial interests in the Global New Notes owning through such participants.
Unless and until it is exchanged in whole or in part for certificated New
Notes in definitive form, the Global New Note may not be transferred except as a
whole by the Depository to a nominee of such Depository or by a nominee of such
Depository to such Depository or another nominee of such Depository.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global New Note among participants of
the Depository, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. None of the
Trustee, the Issuer nor the Paying Agent will have any responsibility for the
performance by the Depository or its
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participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
Certificated Securities. Interests in the Global New Note will be exchanged
for Certificated Securities if (i) DTC notifies the Issuer that it is unwilling
or unable to continue as depository for the Global New Note, or DTC ceases to be
a "Clearing Agency" registered under the Exchange Act, and a successor
depository is not appointed by the Issuer within 90 days, or (ii) an Event of
Default has occurred and is continuing with respect to the New Notes. Upon the
occurrence of any of the events described in the preceding sentence, the Issuer
will cause the appropriate Certificated Securities to be delivered.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material U.S. Federal income
tax considerations relevant to the exchange of Old Notes for New Notes pursuant
to the Exchange Offer and the ownership and disposition of the New Notes by
holders who acquire the New Notes pursuant to the Exchange Offer, but does not
purport to be a complete analysis of all potential tax effects. The discussion
is based upon the Internal Revenue Code of 1986, as amended (the "Code"), U.S.
Treasury Regulations (the "Regulations"), Internal Revenue Service ("IRS")
rulings and pronouncements and judicial decisions all in effect as of the date
hereof, all of which are subject to change at any time, and any such change may
be applied retroactively in a manner that could adversely affect a holder of the
New Notes. The discussion does not address all of the U.S. Federal income tax
consequences that may be relevant to a holder in light of such holder's
particular circumstances or to holders subject to special rules, such as certain
financial institutions, insurance companies, dealers in securities, tax-exempt
organizations and persons who hold the New Notes as part of a "straddle,"
"hedge" or "conversion transaction." In addition, this discussion is limited to
persons purchasing the Old Notes for cash at original issue. Moreover, the
effect of any applicable state, local or foreign tax laws is not discussed. The
discussion deals only with New Notes held as "capital assets" within the meaning
of Section 1221 of the Code.
As used herein, "U.S. holder" means a beneficial owner of New Notes who or
that (i) is a citizen or resident of the United States, (ii) is a corporation,
partnership or other entity created or organized in or under the laws of the
United States or political subdivision thereof (unless, in the case of a
partnership, the IRS provides otherwise by Regulations), (iii) is an estate the
income of which is subject to U.S. Federal income taxation regardless of its
source, (iv) is a trust if (A) a U.S. court is able to exercise primary
supervision over the administration of the trust and (B) one or more U.S.
persons (within the meaning of Section 7701(c)(30) of the Code) have authority
to control all substantial decisions of the trust, or (v) is otherwise subject
to U.S. Federal income tax on a net income basis in respect of the New Notes. As
used herein, a "non-U.S. holder" means a holder who or that is not a U.S.
holder.
The Company has not sought and will not seek any rulings from the IRS with
respect to the matters discussed below. There can be no assurance that the IRS
will not take a different position concerning the tax consequences of the
exchange of Old Notes for New Notes and the ownership or disposition of the New
Notes by holders who acquire the New Notes pursuant to the Exchange Offer or
that any such position would not be sustained.
PROSPECTIVE HOLDERS OF THE NEW NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS
WITH REGARD TO THE APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO
THEIR PARTICULAR SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL,
FOREIGN OR OTHER TAX LAWS, INCLUDING GIFT AND ESTATE TAX LAWS.
EXCHANGE OFFER
The exchange of Old Notes for New Notes pursuant to the Exchange Offer will
not be treated as an exchange or other taxable event for U.S. Federal income tax
purposes because, under the Regulations, the New Notes do not differ materially
in kind or extent from the Old Notes. Rather, the New Notes received by
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a holder will be treated as a continuation of the Old Notes in the hands of such
holder. As a result, there will be no U.S. Federal income tax consequences to
holders who exchange Old Notes for New Notes pursuant to the Exchange Offer and
any such holder will have the same tax basis and holding period in the New Notes
as it had in the Old Notes immediately before the exchange.
U.S. HOLDERS
Interest. The stated interest on the New Notes generally will be taxable to
a U.S. holder as ordinary income at that time that it is paid or accrued, in
accordance with the U.S. holder's method of accounting for federal income tax
purposes. The New Notes are not expected to give rise to "original issue
discount" income in the hands of U.S. holders.
Sale or Retirement of a Note. A U.S. holder of a New Note will recognize
gain or loss upon the sale, retirement, redemption or other taxable disposition
of such New Note in an amount equal to the difference between (a) the amount of
cash and the fair market value of other property received in exchange therefor
(other than amounts attributable to accrued but unpaid stated interest) and (b)
the U.S. holder's adjusted tax basis in such New Note. Subject to the market
discount rules discussed below, such gain or loss will be capital gain or loss.
U.S. holders should be aware that the resale of the New Notes may be
affected by the "market discount" rules of the Code under which a purchaser of a
New Note acquiring the New Note at a market discount generally would be required
to include as ordinary income a portion of the gain realized upon the
disposition or retirement of such New Note, to the extent of the market discount
that has accrued but not been included in income while the New Note was held by
such purchaser.
NON-U.S HOLDERS
U.S. Withholding Tax. Interest paid to non-U.S. holders of the New Notes
will not be subject to U.S. withholding tax, provided that (i) the non-U.S.
holder does not actually or constructively own 10 percent or more of the total
combined voting power of all classes of stock of the Company, (ii) the non-U.S.
holder is not (a) a controlled foreign corporation for U.S. Federal income tax
purposes that is related to the Company through stock ownership or (b) a bank
that received the New Note on an extension of credit made pursuant to a loan
agreement entered into in the ordinary course of its trade or business, and
(iii) the beneficial owner of the New Note provides a statement signed under
penalties of perjury that includes its name and address and certifies that it is
not a U.S. person in compliance with applicable Regulations or an exemption is
otherwise established. If these requirements cannot be made, a non-U.S. holder
will be subject to U.S. withholding tax at a rate of 30% (or lower treaty rate,
if applicable) on interest payments.
In general, any gain realized by any non-U.S. holder upon the sale,
exchange or redemption of a New Note will not be subject to United States
withholding tax. However, such gain will be subject to U.S. withholding tax if a
non-U.S. holder is an individual who is present in the United States for a total
of 183 days or more during the taxable year in which the gain is realized and
certain other conditions are satisfied.
U.S. Estate Tax. New Notes owned or treated as owned by an individual who
is not a citizen or resident (as specially defined for U.S. Federal estate tax
purposes) of the United States at the time of death ("Nonresident Decedent")
will not be includible in the Nonresident Decedent's gross estate for U.S.
Federal estate tax purposes as a result of the Nonresident Decedent's death,
provided that, at the time of death, the Nonresident Decedent does not own,
actually or constructively, 10% or more of the total combined voting power of
all classes of stock of the Company and payments with respect to such New Notes
would not have been effectively connected with the conduct of a trade or
business in the United States by the Nonresident Decedent. A Nonresident
Decedent's estate may be subject to U.S. Federal estate tax on property
includible in the estate for U.S. Federal estate tax purposes.
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INFORMATION REPORTING AND BACKUP WITHHOLDING
Certain noncorporate U.S. persons may be subject to information reporting
and backup withholding at a rate of 31% on payments of principal and interest on
the New Notes, and the proceeds from a disposition of the New Notes. Backup
withholding will only be imposed where the holder (i) fails to furnish its
taxpayer identification number ("TIN"), which, for an individual, would
ordinarily be his or her social security number, (ii) furnishes an incorrect
TIN, (iii) is notified by the IRS that it has failed to properly report payments
of interest or dividends, or (iv) under certain circumstances, fails to certify,
under penalties of perjury, that it has furnished a correct TIN and has not been
notified by the IRS that it is subject to backup withholding. The Company will
also institute backup withholding if instructed to do so by the IRS. Holders of
the New Notes should consult their own tax advisors regarding their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption, if applicable. However, interest paid with respect
to a New Note and received by a non-U.S. holder will not be subject to
information reporting or backup withholding if the payor has received
appropriate certification statements, provided that the payor does not have
actual knowledge that the holder is a U.S. person.
The payment of the proceeds from the disposition of New Notes to or through
the U.S. office of any broker, U.S. or foreign, will not be subject to
information reporting and possibly backup withholding if the owner certifies as
to its non-U.S. status under penalties of perjury or otherwise establishes an
exemption, provided that the broker does not have actual knowledge that the
holder is a U.S. person or that the conditions of any other exemption are not,
in fact, satisfied. The payment of the proceeds from the disposition of a New
Note to or through a non-U.S. office of a non-U.S. broker that is not a U.S.
related person will not be subject to information reporting or backup
withholding. For this purpose, a "U.S. related person" is (i) a controlled
foreign corporation for U.S. Federal income tax purposes or (ii) a foreign
person 50% or more of whose gross income from all sources for the three-year
period ending with the close of its taxable year preceding the payment (or for
such part of the period that the broker has been in existence) is derived from
activities that are effectively connected with the conduct of a U.S. trade or
business.
In the case of the payment of proceeds from the disposition of New Notes to
or through a non-U.S. office of a broker that is a U.S. related person, the
Regulations require information reporting on the payment unless the broker has
documentary evidence in its files that the owner is a non-U.S. holder and the
broker has no knowledge to the contrary. Backup withholding will not apply to
payments made through foreign offices of a broker that is a U.S. person or a
U.S. related person (absent actual knowledge that the payee is a U.S. person).
Any amounts withheld under the backup withholding rates from a payment to a
non-U.S. holder will be allowed as a credit against such non-U.S. holder's U.S.
Federal income tax liability, if any, or otherwise will be refunded, provided
that the requisite procedures are followed.
PROSPECTIVE FINAL REGULATIONS
On October 6, 1997, new Regulations ("New Regulations") were issued that
modify the requirements imposed on a non-U.S. holder and certain intermediaries
for establishing the recipient's status as a non-U.S. holder eligible for
exemption from or reduction in U.S. withholding tax and backup withholding
described above. The New Regulations generally are effective for payments made
after December 31, 1999, subject to certain transition rules. (However, new
Temporary Regulations, effective for payments made after December 31, 1997,
require some non-U.S. holders to satisfy certain residency requirements when
claiming the benefits of an applicable income tax treaty.) In general, the New
Regulations do not significantly alter the substantive withholding and
information reporting requirements but rather unify current certification
procedures and forms and clarify reliance standards. In addition, the New
Regulations impose more stringent conditions on the ability of financial
intermediaries acting for non-U.S. holders to provide certifications on behalf
of non-U.S. holders, which may include entering into an agreement with the IRS
to audit certain documentation with respect to such certifications. Non-U.S.
holders should consult their own tax advisors to determine the effects of the
application of the New Regulations to their particular circumstances.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, starting on the Expiration Date
and ending 180 days after the Expiration Date, it will make this Prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any such resale. In addition, until such date, all dealers effecting
transactions in the New Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sales of New Notes by
broker-dealers or others. New Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such methods
of resale, at market prices prevailing at the time of resale, at prices related
to such prevailing market prices or negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit from any such resale of New Notes and any
commissions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
holders of the respective Notes) other than commissions or concessions of any
brokers or dealers and will indemnify the holders of the Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the New Notes will be passed upon for Verio by Morrison &
Foerster LLP, San Francisco, California.
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<PAGE> 116
EXPERTS
The consolidated financial statements of Verio Inc. and subsidiaries as of
December 31, 1996 and 1997 and for the period from inception (March 1, 1996) to
December 31, 1996, and the year ended December 31, 1997 and the financial
statements of On-Ramp Technologies, Inc. as of and for the nine months ended
July 31, 1996; Global Enterprise Services -- Network Division (a Division of
Global Enterprise Services, Inc.) as of December 31, 1995 and 1996, and for each
of the years in the three-year period ended December 31, 1996 and the period
ended January 17, 1997; Compute Intensive Inc. as of December 31, 1995 and 1996,
and for each of the years in the two-year period ended December 31, 1996, and
the period ended February 18, 1997; NorthWestNet, Inc. as of and for the six
months ended June 30, 1996 and the eight months ended February 28, 1997,
Northwest Academic Computing Consortium, Inc. as of and for the year ended June
30, 1995 and the six months ended December 31, 1995; Aimnet Corporation as of
and for the year ended March 31, 1997 and for the period ended May 19, 1997;
West Coast Online, Inc. as of and for the nine months ended September 30, 1997;
Clark Internet Services, Inc. as of and for the year ended September 30, 1997
and for the period ended October 17, 1997; ATMnet as of and for the years ended
October 31, 1996 and 1997; Global Internet Network Services, Inc. as of December
31, 1996 and November 26, 1997 and for the year and period then ended;
Pennsylvania Research Partnership Network as of and for the years ended November
30, 1996 and 1997 and for the period ended December 24, 1997; Monumental Network
Systems, Inc. as of and for the years ended December 31, 1996 and 1997; Internet
Servers, Inc. as of December 31, 1996 and 1997 and for the period from inception
(August 23, 1995) to December 31, 1995 and the years ended December 31, 1996 and
1997; NSNet, Inc. as of and for the years ended December 31, 1996 and 1997;
Access One, Inc. as of and for the year ended December 31, 1997; STARnet, L.L.C.
as of and for the year ended December 31, 1997; Computing Engineers Inc. as of
and for the years ended December 31, 1996 and 1997; and LI Net, Inc. as of April
30, 1997 and January 31, 1998 and for the years ended April 30, 1996 and 1997
and the nine months ended January 31, 1998; and NTX, Inc. as of and for the nine
months ended June 30, 1998, have been included herein in reliance upon the
reports of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The consolidated financial statements of Best Internet Communications, Inc.
and subsidiaries included in this Statement/Prospectus as of December 31, 1996
and 1997 and for each of the years in the three-year period ended December 31,
1997, except as they relate to the financial statements of Hiway Florida as of
December 31, 1996, for the period from April 6, 1995 (date of incorporation) to
December 31,1995 and for the year ended December 31, 1996, have been audited by
PricewaterhouseCoopers LLP, independent certified public accountants, and,
insofar as they relate to the financial statements of Hiway Florida as of and
for the periods indicated, by DeMeo, Young, McGrath & Company, P.A., independent
accountants, whose reports thereon appear herein. Such financial statements have
been included in reliance on the reports of such independent accountants given
on the authority of said firms as experts in accounting and auditing.
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GLOSSARY OF TERMS
ATM........................ Asynchronous Transfer Mode. An information transfer
standard for routing traffic which uses packets
(cells) of a fixed length.
Backbone................... A centralized high-speed network that interconnects
smaller, independent networks.
Bandwidth.................. The number of bits of information which can move
through a communications medium in a given amount
of time; the capacity of a telecommunications
circuit/network to carry voice, data and video
information. Typically measured in kbps and Mbps.
Caching.................... Temporary storage or replication of a Web server
content at one or more locations throughout the
Internet to provide a quicker response to a browser
request.
CGI........................ Custom Gateway Interface.
CPE........................ Customer Premise Equipment.
DNS........................ Domain Name Server.
DS-3 or T-3................ A data communications circuit capable of
transmitting data at 45 Mbps. Equivalent to 28
T-1's of data capacity. Currently used only by
businesses/institutions and carriers for high end
applications.
Firewall................... A system placed between networks that filters data
passing through it and prevents unauthorized
traffic, thereby enhancing the security of the
network.
Frame Relay................ An information transfer standard for relaying
traffic based on an address contained in the
six-byte header of a variable length packet that is
up to 2,106 bytes long.
Hertz...................... The dimensional unit for measuring the frequency
with which an electromagnetic signal cycles through
the zero-value state between lowest and highest
states. One Hertz (abbreviated Hz) equals one cycle
per second. KHz (KiloHertz) stands for thousands of
Hertz; MHz (MegaHertz) stands for millions of
Hertz; GHz (GigaHertz) stands for billions of
Hertz.
Internet................... A global collection of interconnected computer
networks which use a specific communications
protocol.
IP......................... Internet Protocol. Network protocols that allow
computers with different architectures and
operating system software to communicate with other
computers on the Internet.
ISDN....................... Integrated Services Digital Network. An information
transfer standard for transmitting digital voice
and data over telephone lines at speeds up to 128
Kbps.
ISPs....................... Internet Service Providers. Companies formed to
provide access to the Internet to consumers and
business customers via local networks.
IXC........................ Interexchange Carrier. A telecommunications company
that provides telecommunications services between
local exchanges on an interstate or intrastate
basis.
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Kbps....................... Kilobits per second. A transmission rate. One
kilobit equals 1,024 bits of information.
LAN........................ Local Area Network. A data communications network
designed to interconnect personal computers,
workstations, minicomputers, file servers and other
communications and computing devices within a
localized environment.
Leased Line................ Telecommunications line dedicated to a particular
customer along predetermined routes.
LEC........................ Local Exchange Carrier. A telecommunications
company that provides telecommunications services
in a geographic area in which calls generally are
transmitted without toll charges. LECs include both
RBOCs and competitive local exchange carriers.
LMDS....................... Local Multipoint Distribution Service. Two blocks
of spectrum with total bandwidth of 1150 MHz and
150 MHz to be auctioned and used for various
wireless services.
Mbps....................... Megabits per second. A transmission rate. One
megabit equals 1,024 kilobits.
MMDS....................... Microwave Multipoint Distribution Service.
Modem...................... A device for transmitting digital information over
an analog telephone line.
MSAs....................... Metropolitan Statistical Areas. A designation by
the U.S. Census Bureau for metropolitan areas with
a central city or an urbanized area having a
minimum population of 50,000 with a total
metropolitan population of at least 100,000 and
including all counties that have strong economic
and social ties to the central city.
NAP........................ Network Access Point. A location at which ISPs
exchange each other's traffic.
National Node.............. National network access point where IP traffic is
exchanged between network links and where regional
networks access the national network.
NOC........................ Network Operations Center. Facility where the
Company monitors and manages the Company's network.
OC-3....................... A data communications circuit consisting of three
DS-3s capable of transmitting data at 155 Mbps.
OC-12...................... A data communications circuit capable of
transmitting data at 622 Mbps (4 X OC-3).
Peering.................... The commercial practice under which ISPs exchange
each other's traffic without the payment of
settlement charges. Peering occurs at both public
and private exchange points.
POP........................ Point of Presence. Telecommunications facility
where the Company locates network equipment used to
connect customers to its network backbone.
Proxy Server............... A server that acts on behalf of one or more other
servers, usually for screening, firewall, caching,
or a combination of these purposes. Typically, a
proxy server is used within a company to gather all
Internet requests, forward them out to Internet
servers, and then receive the
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responses and in turn forward them to the original
requestor within the company.
Router..................... Equipment placed between networks that relays data
to those networks based upon a destination address
contained in the data packets being routed.
SMTP....................... Simple Mail Transfer Protocol.
TCP/IP..................... Transmission Control Protocol/Internet Protocol. A
suite of network protocols that allow computers
with different architectures and operating system
software to communicate with other computers on the
Internet.
VPN........................ Virtual Private Network. A network capable of
providing the tailored services of a private
network (i.e. low latency, high throughput,
security and customization) while maintaining the
benefits of a public network (i.e. ubiquity and
economies of scale).
WAN........................ Wide Area Network. A data communications network
designed to interconnect personal computers,
workstations, mini computers, file servers and
other communications and computing devices across a
broad geographic region.
Web Site................... A server connected to the Internet from which
Internet users can obtain information.
World Wide Web or Web...... A collection of computer systems supporting a
communications protocol that permits multi-media
presentation of information over the Internet.
xDSL....................... A term referring to a variety of new Digital
Subscriber Line technologies. Some of these
varieties are asymmetric with different data rates
in the downstream and upstream directions. Others
are symmetric. Downstream speeds range from 384
kbps (or "SDSL") to 1.5-8 Mbps (or "ASDL").
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Unaudited Pro Forma Condensed Combined Financial Statements:
Pro Forma Condensed Combined Balance Sheet as of September
30, 1998 (unaudited)................................... F-7
Pro Forma Condensed Combined Statement of Operations for
the Nine Months Ended September 30, 1998 (unaudited)... F-8
Pro Forma Condensed Combined Statement of Operations for
the Year Ended December 31, 1997 (unaudited)........... F-10
Notes to Pro Forma Condensed Combined Financial Statements
(unaudited)............................................ F-12
Verio Inc. and Subsidiaries -- Consolidated Financial
Statements:
Independent Auditors' Report.............................. F-19
Consolidated Balance Sheets as of December 31, 1996 and
1997 and September 30, 1998 (unaudited)................ F-20
Consolidated Statements of Operations for the Period from
Inception (March 1, 1996) to December 31, 1996, the
Year Ended December 31, 1997 and the Nine Months Ended
September 30, 1998 and 1997 (unaudited)................ F-21
Consolidated Statements of Stockholders' Deficit for the
Period from Inception (March 1, 1996) to December 31,
1996, the Year Ended December 31, 1997 and the Nine
Months Ended September 30, 1998 (unaudited)............ F-22
Consolidated Statements of Cash Flows for the Period from
Inception (March 1, 1996) to December 31, 1996, the
Year Ended December 31, 1997 and the Nine Months Ended
September 30, 1998 and 1997 (unaudited)................ F-23
Notes to Consolidated Financial Statements................ F-24
On-Ramp Technologies, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-38
Balance Sheet as of July 31, 1996......................... F-39
Statement of Operations for the Nine Months Ended July 31,
1996................................................... F-40
Statement of Stockholders' Deficit for the Nine Months
Ended July 31, 1996.................................... F-41
Statement of Cash Flows for the Nine Months Ended July 31,
1996................................................... F-42
Notes to Financial Statements............................. F-43
Global Enterprises Services -- Network Division -- Financial
Statements:
Independent Auditors' Report.............................. F-46
Balance Sheets as of December 31, 1995 and 1996........... F-47
Statements of Operations and Owner's Deficit for the Years
Ended December 31, 1994, 1995, 1996 and Period Ended
January 17, 1997....................................... F-48
Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996 and Period Ended January 17,
1997................................................... F-49
Notes to Financial Statements............................. F-50
Compute Intensive, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-53
Balance Sheets as of December 31, 1995 and 1996........... F-54
Statements of Operations for the Years Ended December 31,
1995 and 1996 and Period Ended February 18, 1997....... F-55
Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1995 and 1996 and Period Ended
February 18, 1997...................................... F-56
Statements of Cash Flows for the Years Ended December 31,
1995 and 1996 and Period Ended February 18, 1997....... F-57
Notes to Financial Statements............................. F-58
</TABLE>
F-1
<PAGE> 121
<TABLE>
<S> <C>
NorthWestNet, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-63
Balance Sheets as of June 30, 1995 and 1996............... F-64
Statements of Operations for the Year Ended June 30, 1995
and the Six Months Ended December 31, 1995 and Six
Months Ended June 30, 1996 and the Eight Months Ended
February 28, 1997...................................... F-65
Statements of Stockholders' Equity and Fund Balance for
the Year Ended June 30, 1995 and the Six Months Ended
December 31, 1995 and Six Months Ended June 30, 1996
and the Eight Months Ended February 28, 1997........... F-66
Statements of Cash Flows for the Year Ended June 30, 1995
and the Six Months Ended December 31, 1995, and the Six
Months Ended June 30, 1996 and the Eight Months Ended
February 28, 1997...................................... F-67
Notes to Financial Statements............................. F-68
Aimnet Corporation -- Financial Statements:
Independent Auditors' Report.............................. F-75
Balance Sheet as of March 31, 1997........................ F-76
Statement of Operations for the Year Ended March 31, 1997
and Period Ended May 19, 1997.......................... F-77
Statement of Stockholders' Equity for the Year Ended March
31, 1997 and Period Ended May 19, 1997................. F-78
Statement of Cash Flows for the Year Ended March 31, 1997
and Period Ended May 19, 1997.......................... F-79
Notes to Financial Statements............................. F-80
West Coast Online, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-83
Balance Sheet as of September 30, 1997.................... F-84
Statement of Operations and Accumulated Deficit for the
Nine Months Ended September 30, 1997................... F-85
Statement of Cash Flows for the Nine Months Ended
September 30, 1997..................................... F-86
Notes to Financial Statements............................. F-87
Clark Internet Services, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-90
Balance Sheet as of September 30, 1997.................... F-91
Statements of Operations and Retained Earnings for the
Year Ended September 30, 1997 and Period Ended October
17, 1997............................................... F-92
Statements of Cash Flows for the Year Ended September 30,
1997 and Period Ended October 17, 1997................. F-93
Notes to Financial Statements............................. F-94
ATMnet -- Financial Statements:
Independent Auditors' Report.............................. F-96
Balance Sheets as of October 31, 1996 and 1997............ F-97
Statements of Operations for the Years Ended October 31,
1996 and 1997.......................................... F-98
Statements of Stockholders' Deficit for the Years Ended
October 31, 1996 and 1997.............................. F-99
Statements of Cash Flows for the Years Ended October 31,
1996 and 1997.......................................... F-100
Notes to Financial Statements............................. F-101
</TABLE>
F-2
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<TABLE>
<S> <C>
Global Internet Network Services, Inc. -- Financial
Statements:
Independent Auditors' Report.............................. F-105
Balance Sheets as of December 31, 1996 and November 26,
1997................................................... F-106
Statements of Operations for the Year Ended December 31,
1996 and the Period Ended November 26, 1997............ F-107
Statements of Stockholders' Equity (Deficit) for the Year
Ended December 31, 1996 and the Period Ended November
26, 1997............................................... F-108
Statements of Cash Flows for the Year Ended December 31,
1996 and the Period Ended November 26, 1997............ F-109
Notes to Financial Statements............................. F-110
Pennsylvania Research Partnership Network
(PREPnet) -- Financial Statements:
Independent Auditors' Report.............................. F-113
Balance Sheets as of November 30, 1996 and 1997........... F-114
Statements of Operations and Owner's Deficit for the Years
Ended November 30, 1996 and 1997 and the Period Ended
December 24, 1997...................................... F-115
Statements of Cash Flows for the Years Ended November 30,
1996 and 1997 and the Period Ended December 24, 1997... F-116
Notes to Financial Statements............................. F-117
Monumental Network Systems, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-120
Balance Sheets as of December 31, 1996 and 1997........... F-121
Statements of Operations for the Years Ended December 31,
1996 and 1997.......................................... F-122
Statements of Stockholders' Deficit for the Years Ended
December 31, 1996 and 1997............................. F-123
Statements of Cash Flows for the Years Ended December 31,
1996 and 1997.......................................... F-124
Notes to Financial Statements............................. F-125
Internet Servers, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-129
Balance Sheets as of December 31, 1996 and 1997........... F-130
Statements of Operations for the Period from Inception
(August 23, 1995) to December 31, 1995 and Years Ended
December 31, 1996 and 1997............................. F-131
Statements of Stockholders' Equity for the Period from
Inception (August 23, 1995) to December 31, 1995 and
Years ended December 31, 1996 and 1997................. F-132
Statements of Cash Flows for the Period from Inception
(August 23, 1995) to December 31, 1995 and Years Ended
December 31, 1996 and 1997............................. F-133
Notes to Financial Statements............................. F-134
NSNet, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-137
Balance Sheets as of December 31, 1996 and 1997........... F-138
Statements of Operations for the Years Ended December 31,
1996 and 1997.......................................... F-139
Statements of Owner's and Stockholder's Equity for the
Years Ended December 31, 1996 and 1997................. F-140
Statements of Cash Flows for the Years Ended December 31,
1996 and 1997.......................................... F-141
Notes to Financial Statements............................. F-142
Access One, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-145
Balance Sheet as of December 31, 1997..................... F-146
Statement of Operations and Accumulated Deficit for the
Year Ended December 31, 1997........................... F-147
Statement of Cash Flows for the Year Ended December 31,
1997................................................... F-148
Notes to Financial Statements............................. F-149
</TABLE>
F-3
<PAGE> 123
<TABLE>
<S> <C>
STARnet, L.L.C. -- Financial Statements:
Independent Auditors' Report.............................. F-153
Balance Sheet as of December 31, 1997..................... F-154
Statement of Operations for the Year Ended December 31,
1997................................................... F-155
Statement of Members' Equity for the Year Ended December
31, 1997............................................... F-156
Statement of Cash Flows for the Year Ended December 31,
1997................................................... F-157
Notes to Financial Statements............................. F-158
Computing Engineers Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-160
Balance Sheets as of December 31, 1996 and 1997........... F-161
Statements of Operations for the Years Ended December 31,
1996 and 1997.......................................... F-162
Statements of Stockholders' Equity for the Years Ended
December 31, 1996 and 1997............................. F-163
Statements of Cash Flows for the Years Ended December 31,
1996 and 1997.......................................... F-164
Notes to Financial Statements............................. F-165
LI Net, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-167
Balance Sheets as of April 30, 1997 and January 31,
1998................................................... F-168
Statements of Operations for the Years Ended April 30,
1996 and 1997 and the Nine Months Ended January 31,
1998................................................... F-169
Statements of Stockholders' Equity (Deficit) for the Years
Ended April 30, 1996 and 1997 and the Nine Months Ended
January 31, 1998....................................... F-170
Statements of Cash Flows for the Years Ended April 30,
1996 and 1997 and the Nine Months Ended January 31,
1998................................................... F-171
Notes to Financial Statements............................. F-172
NTX, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-176
Balance Sheet as of June 30, 1998......................... F-177
Statement of Operations for the Nine Months Ended June 30,
1998................................................... F-178
Statement of Stockholders' Deficit for the Nine Months
Ended June 30, 1998.................................... F-179
Statement of Cash Flows for the Nine Months Ended June 30,
1998................................................... F-180
Notes to Financial Statements............................. F-181
Best Internet Communications, Inc. and Subsidiaries --
Financial Statements:
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................ F-184
Report of De Meo, Young, McGrath & Company, P.A.,
Independent Accountants................................ F-185
Consolidated Balance Sheets as of December 31, 1996 and
1997 and September 30, 1998 (unaudited)................ F-186
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997 and the Nine Months
Ended September 30, 1997 and 1998 (unaudited).......... F-187
Consolidated Statements of Shareholders' Equity for the
Three Years Ended December 31, 1997 and Nine Months
Ended September 30, 1998 (unaudited)................... F-188
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997 and the Nine Months
Ended September 30, 1997 and 1998 (unaudited).......... F-189
Notes to Consolidated Financial Statements................ F-190
</TABLE>
F-4
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VERIO INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
During the period from August 1, 1996 through September 30, 1998, Verio
Inc. ("Verio" or the "Company") completed numerous business combinations,
whereby the Company acquired newly authorized redeemable, convertible preferred
stock, shares of common stock, or certain net assets of entities operating in
the Internet industry (ISPs), and completed the Buyout of the remaining equity
interests of certain ISPs in which it initially acquired a less-than-100% equity
position (collectively, the "September 30, 1998 Completed Acquisitions").
Business combinations, which are acquisitions of a 100% ownership interest in
the target business or of a majority ownership interest (upon conversion of the
preferred shares to common stock) on a fully diluted basis, are accounted for
using the purchase method of accounting. Acquisitions of minority interests
represented by preferred stock are accounted for using the equity method of
accounting, as described in Note 1 to the Consolidated Financial Statements. The
September 30, 1998 Completed Acquisitions are described in Note A to the
accompanying pro forma condensed combined financial statements. The Company also
had completed the acquisitions of PacketWorks, Inc., TerraNet, Inc. and
Smart.Connect (a division of FiberServices, Inc.) which were not considered to
be significant and, accordingly, have not been included in the accompanying pro
forma financial statements.
In addition, subsequent to September 30, 1998, the Company completed the
acquisition of an 80% interest in the outstanding common stock of WWW (the "WWW
Acquisition") and a 100% interest in the outstanding common stock of Hiway
Technologies, Inc. ("Hiway") (the "Hiway Acquisition") including Hiway's 20%
interest in WWW. The Company also completed the acquisition of Internet Access
Group, Inc. and related companies (d/b/a Qual.net) and Tinkelman Enterprises
Inc. (d/b/a new-york.net), which were not considered to be significant and,
accordingly have not been included in the accompanying pro forma financial
statements. These acquisitions have been accounted for using the purchase method
of accounting. The WWW and Hiway Acquisitions are also described in Note A to
the pro forma condensed combined financial statements.
While the Company now seeks to acquire 100% of new ISPs, the Company's
early acquisition strategy was to rapidly build mass and scale by acquiring less
than 100% of its ISPs. In each case where the Company acquired less than 100% of
an ISP initially, it obtained the right to Buyout the remaining equity in the
future at a price based on either agreed upon revenue multiples or the fair
market value of the ISP. As part of its integration strategy, the Company has
effected the Buyouts of all but one ISP in which it did not initially acquire a
100% interest, through the use of cash on hand and the issuance of equity.
During the six months ended June 30, 1998, Verio consummated the Buyout of the
following fifteen ISPs; On-Ramp Technologies, Inc.; NorthWestNet, Inc.; National
Knowledge Networks, Inc.; Access One, Inc.; Signet Partners, Inc.; Surf Network,
Inc.; Pacific Rim Network, Inc.; Internet Engineering Associates, Inc.; AimNet
Corporation; West Coast Online, Inc.; ServiceTech, Inc., Clark Internet
Services, Inc., Compute Intensive Inc., Structured Network Systems, Inc. and
Internet Online, Inc. With respect to the Buyout that has not yet been
completed, the Company has contractual rights to effect this Buyout and expects
to complete the Buyout during 1998. However, there can be no assurance that the
Company will be able to complete this Buyout at the time, or in accordance with
the terms and conditions, that it currently contemplates. This acquisition will
also be accounted for using the purchase method of accounting.
The unaudited pro forma condensed combined balance sheet assumes that the
WWW Acquisition and the Hiway Acquisition occurred on September 30, 1998 and
includes the September 30, 1998 historical consolidated balance sheets of Verio,
and WWW and Hiway adjusted for the pro forma effects of these acquisitions. The
assets and liabilities of the September 30, 1998 Completed Acquisitions,
adjusted for the application of the purchase method of accounting, are included
in the September 30, 1998 historical Verio consolidated balance sheet. The
unaudited pro forma condensed combined statements of operations for the year
ended December 31, 1997 and the nine months ended September 30, 1998 assume that
the September 30, 1998 Completed Acquisitions and the WWW and Hiway Acquisitions
had occurred on January 1, 1997 and include the historical consolidated
statements of operations of Verio and the acquired businesses for the year ended
December 31, 1997 and the nine months ended September 30, 1998, adjusted for the
pro forma effects of the acquisitions.
F-5
<PAGE> 125
The unaudited pro forma condensed combined statements of operations are not
necessarily indicative of the results of operations that would actually have
occurred if the transactions had been consummated as of January 1, 1997 and are
not intended to indicate the expected results for any future period. These
statements should be read in conjunction with the historical consolidated
financial statements and related notes thereto of Verio, and certain acquired
businesses, included herein.
The Company is in the process of completing valuations of the assets
acquired and liabilities assumed in connection with certain of the Company's
more significant acquisitions. These valuations will be utilized in determining
the final purchase accounting adjustments for these acquisitions. Accordingly,
the purchase accounting adjustments reflected in the accompanying pro forma
balance sheet will be revised and such revisions may be significant.
Specifically, the Company expects to record charges to operations for in-process
research and development relating to its acquisition of TABNet which will be
recorded as a charge to operations. The projects under development at TABNet at
the time of acquisition included credit card processing software, web site
development tools, the Star Page product, as well as various application and
database management tools which make the TABNet domain name registration product
faster to use, optimize search routines for customers seeking a domain name, and
enable TABNet to more effectively master and capture the "on-hold" database of
domain names, so that they can be sold to new customers as soon as they are
released. Management of Verio has identified the foregoing technology projects
as potential candidates for allocation of a portion of the purchase price it
paid in the TABNet acquisition to in-process research and development. However,
management is not yet able to determine or estimate the remaining efforts that
may be necessary to complete the development of the acquired technology, nor
determine whether the development of such technology will be completed. These
determinations and estimates depend, in part, on assessments of certain
technologies being developed or already developed at Hiway. Nonetheless,
management of Verio does not anticipate that the amount of the purchase price of
TABNet which may be allocated to in-process research and development would be
significant. There are a number of projects under development at Hiway (i) to
address scalability of Hiway's Web hosting technology platform in order to serve
increasing numbers of customers, and (ii) to develop new product offerings and
to support advanced Web-enabled products and services. A number of these
projects may be potential candidates for allocation of a portion of the purchase
price paid in the Hiway acquisition to in-process research and development.
Verio is aware that the Commission is reviewing the assumptions and
methodologies heretofore commonly used by companies in calculating such charges.
Verio intends to follow recent guidance published by the Commission in its
valuation of the assets acquired and liabilities assumed and, in particular, in
the valuation of in-process research and development.
F-6
<PAGE> 126
VERIO INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1998 (UNAUDITED)
AMOUNTS IN THOUSANDS
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL PRO FORMA COMBINED -- PRO FORMA PRO FORMA
------------------ ADJUSTMENTS VERIO AND HISTORICAL ADJUSTMENTS COMBINED
VERIO WWW (NOTE C) WWW HIWAY (NOTE C) VERIO
--------- ------ ----------- ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents... $ 245,912 $ 884 $(8,440)(1) $238,356 $ 3,569 $(180,000)(2) $ 61,925
Restricted cash and
securities................ 14,159 -- -- 14,159 -- -- 14,159
Receivables, net............ 13,687 403 -- 14,090 3,669 -- 17,759
Prepaid expenses and
other..................... 6,590 392 -- 6,982 1,239 -- 8,221
--------- ------ ------- -------- ------- --------- --------
Total current
assets.............. 280,348 1,679 (8,440) 273,587 8,477 (180,000) 102,064
Investments in affiliates..... 8,298 -- -- 8,298 464 -- 8,762
Restricted cash and
securities.................. 7,238 -- -- 7,238 -- -- 7,238
Equipment and leasehold
improvements, net........... 43,213 4 -- 43,217 15,351 -- 58,568
Other assets:
Goodwill, net............... 210,047 -- 6,953(1) 217,000 -- 242,664(2) 459,664
Other, net.................. 13,185 262 -- 13,447 2,385 -- 15,832
--------- ------ ------- -------- ------- --------- --------
Total assets.......... $ 562,329 $1,945 $(1,487) $562,787 $26,677 $ 62,664 $652,128
========= ====== ======= ======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued
expenses.................. $ 37,774 $ 263 $ -- $ 38,037 $ 3,980 $ -- $ 42,017
Lines of credit, notes
payable and current
portion of long-term debt
and capital lease
obligations............... 4,726 195 -- 4,921 382 -- 5,303
Deferred revenue............ 10,770 -- -- 10,770 4,205 -- 14,975
--------- ------ ------- -------- ------- --------- --------
Total current
liabilities......... 53,270 458 -- 53,728 8,567 -- 62,295
Long-term debt and capital
lease obligations, less
current portion............. 274,452 -- -- 274,452 6,054 -- 280,506
--------- ------ ------- -------- ------- --------- --------
Total liabilities..... 327,722 458 -- 328,180 14,621 -- 342,801
Stockholders' deficit:
Common stock and additional
paid-in capital........... 361,712 604 (604)(3) 361,712 8,206 (8,206)(3) 436,432
74,720(2)
Warrants.................... 12,675 -- -- 12,675 -- -- 12,675
Retained earnings
(deficit)................. (139,780) 883 (883)(3) (139,780) 3,850 (3,850)(3) (139,780)
--------- ------ ------- -------- ------- --------- --------
234,607 1,487 (1,487) 234,607 12,056 62,664 309,327
--------- ------ ------- -------- ------- --------- --------
Total liabilities and
stockholders' equity
(deficit)........... $ 562,329 $1,945 $(1,487) $562,787 $26,677 $ 62,664 $652,128
========= ====== ======= ======== ======= ========= ========
</TABLE>
F-7
<PAGE> 127
VERIO INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
PRO FORMA
COMBINED --
VERIO AND
SEPTEMBER 30, PRO FORMA
1998 PRO FORMA COMBINED -- PRO FORMA PRO FORMA
COMPLETED HISTORICAL ADJUSTMENTS VERIO AND HISTORICAL ADJUSTMENTS COMBINED
ACQUISITIONS WWW (NOTE C) WWW HIWAY (NOTE C) VERIO
------------- ---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity.... $ 59,267 $ -- $ -- $ 59,267 $ 5,203 $ -- $ 64,470
Enhanced services and
other.................. 37,235 4,625 -- 41,860 23,870 -- 65,730
----------- ------- ------- ----------- ------- ---------- -----------
Total revenue...... 96,502 4,625 -- 101,127 29,073 -- 130,200
----------- ------- ------- ----------- ------- ---------- -----------
Costs and expenses:
Internet services
operating costs........ 40,683 1,423 -- 42,106 7,088 -- 49,194
Selling, general and
administrative and
other.................. 90,871 2,064 -- 92,935 18,365 -- 111,300
Stock option related
compensation and
severance costs........ 6,680 -- -- 6,680 -- -- 6,680
Depreciation and
amortization........... 31,930 64 521(6) 32,515 1,023 18,204(6) 51,742
----------- ------- ------- ----------- ------- ---------- -----------
Total costs and
expenses......... 170,164 3,551 521 174,236 26,476 18,204 218,916
----------- ------- ------- ----------- ------- ---------- -----------
Earnings (loss) from
operations........... (73,662) (1,074) (521) (73,109) 2,597 (18,204) (88,716)
Other income (expense):
Interest income.......... 9,397 23 -- 9,420 -- -- 9,420
Interest expense......... (22,954) (2) -- (22,956) (25) -- (22,981)
Earnings (loss) before
minority interests,
income taxes, and
extraordinary item... (87,219) 1,095 (521) (86,645) 2,572 (18,204) (102,277)
Minority interests......... 184 -- -- 184 -- -- 184
Income taxes............... -- (222) 222 -- (99) 99(8) --
----------- ------- ------- ----------- ------- ---------- -----------
Earnings (loss) before
extraordinary item....... $ (87,035) $ 873 $ (299) $ (86,461) $ 2,473 $ (18,105) $ (102,093)
=========== ======= ======= =========== ======= ========== ===========
Weighted average shares
outstanding -- basic and
diluted.................. 17,462,447 17,462,447 4,920,000(9) 22,382,447
=========== =========== ========== ===========
Loss per common share
before extraordinary
item -- basic and
diluted.................. $ (4.98) $ (4.95) $ (4.56)
=========== =========== ===========
</TABLE>
F-8
<PAGE> 128
VERIO INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------------------- COMBINED --
SEPTEMBER 30, 1998 VERIO AND
COMPLETED PRO FORMA SEPTEMBER 30, 1998
ACQUISITIONS ADJUSTMENTS COMPLETED
VERIO (NOTE B) (NOTE C) ACQUISITIONS
----------- ------------------ ----------- ------------------
<S> <C> <C> <C> <C>
Revenue:
Internet connectivity.......... $ 53,196 $ 6,071 $ -- $ 59,267
Enhanced services and other.... 30,347 7,030 (142)(4) 37,235
----------- ------- ---------- -----------
Total revenue.......... 83,543 13,101 (142) 96,502
----------- ------- ---------- -----------
Costs and expenses:
Internet services operating
costs....................... 37,928 2,837 (82)(4) 40,683
Selling, general and
administrative and other.... 80,941 9,990 (60)(4) 90,871
Stock option related
compensation and severance
costs....................... 3,040 3,640 -- 6,680
Depreciation and
amortization................ 26,818 456 4,656(5) 31,930
----------- ------- ---------- -----------
Total costs and
expenses............. 148,727 16,923 4,514 170,164
----------- ------- ---------- -----------
Loss from operations........ (65,184) (3,822) (4,656) (73,662)
Other income (expense):
Interest income................ 9,381 16 -- 9,397
Interest expense............... (22,860) (94) -- (22,954)
----------- ------- ---------- -----------
Loss before minority
interests, income taxes,
and extraordinary item.... (78,663) (3,900) (4,656) (87,219)
Minority interests............... 545 -- (361)(7) 184
Income taxes..................... -- (100) 100(8) --
----------- ------- ---------- -----------
Loss before extraordinary
item........................ (78,118) (4,000) (4,917) (87,035)
Accretion of preferred stock to
liquidation value.............. (87) -- 87(3) --
----------- ------- ---------- -----------
Loss attributable to common
stockholders before
extraordinary item............. $ (78,205) $(4,000) $ (4,830) $ (87,035)
=========== ======= ========== ===========
Weighted average shares
outstanding -- basic and
diluted........................ 17,462,447 17,462,447
=========== ===========
Loss per common share before
extraordinary item -- basic and
diluted........................ $ (4.49) $ (4.98)
=========== ===========
</TABLE>
F-9
<PAGE> 129
VERIO INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 (UNAUDITED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
PRO FORMA
COMBINED --
VERIO AND PRO FORMA
SEPTEMBER 30, 1998 PRO FORMA COMBINED -- PRO FORMA PRO FORMA
COMPLETED HISTORICAL ADJUSTMENTS VERIO AND HISTORICAL ADJUSTMENTS COMBINED
ACQUISITIONS WWW (NOTE C) WWW HIWAY (NOTE C) VERIO
------------------ ---------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Internet
connectivity....... $ 64,938 $ -- $ -- $ 64,938 $ 7,231 $ -- $ 72,169
Enhanced services and
other.............. 30,448 3,712 -- 34,160 18,954 -- 53,114
---------- ------ ------- ---------- ------- ---------- ----------
Total Revenue.. 95,386 3,712 -- 99,098 26,185 -- 125,283
---------- ------ ------- ---------- ------- ---------- ----------
Costs and expenses:
Internet services
operating costs.... 39,946 1,234 -- 41,180 5,842 -- 47,022
Selling, general and
administrative and
other.............. 87,291 1,406 -- 88,697 14,101 -- 102,798
Depreciation and
amortization....... 30,997 -- 695(6) 31,692 1,371 24,271(6) 57,334
---------- ------ ------- ---------- ------- ---------- ----------
Total costs and
expenses..... 158,234 2,640 695 161,569 21,314 24,271 207,154
---------- ------ ------- ---------- ------- ---------- ----------
Earnings (loss)
from
operations....... (62,848) 1,072 (695) (62,471) 4,871 (24,271) (81,871)
Other income (expense):
Interest income...... 6,156 -- -- 6,156 67 -- 6,223
Interest expense..... (12,433) (10) -- (12,443) (142) -- (12,585)
---------- ------ ------- ---------- ------- ---------- ----------
Earnings (loss)
before income
taxes.......... (69,125) 1,062 (695) (68,758) 4,796 (24,271) (88,233)
Income taxes........... -- (319) 319 -- (361) 361(8) --
---------- ------ ------- ---------- ------- ---------- ----------
Net earnings (loss).... $ (69,125) $ 743 $ (376) $ (68,758) $ 4,435 $ (23,910) $ (88,233)
========== ====== ======= ========== ======= ========== ==========
Weighted average shares
outstanding -- basic
and diluted.......... 1,144,685 1,144,685 4,920,000(9) 6,064,685
========== ========== ========== ==========
Loss per common share
-- basic and
diluted.............. $ (60.37) $ (60.05) $ (14.55)
========== ========== ==========
</TABLE>
F-10
<PAGE> 130
VERIO INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 (UNAUDITED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
HISTORICAL
-------------------------- PRO FORMA
SEPTEMBER 30, COMBINED --
1998 VERIO AND
COMPLETED PRO FORMA SEPTEMBER 30, 1998
ACQUISITIONS ADJUSTMENTS COMPLETED
VERIO (NOTE B) (NOTE C) ACQUISITIONS
---------- ------------- ----------- ------------------
<S> <C> <C> <C> <C>
Revenue:
Internet connectivity................. $ 23,476 $41,560 $ (98)(4) $ 64,938
Enhanced services and other........... 12,216 18,232 -- 30,448
---------- ------- ---------- ----------
Total revenue................. 35,692 59,792 (98) 95,386
---------- ------- ---------- ----------
Costs and expenses:
Internet services operating costs..... 15,974 24,048 (76)(4) 39,946
Selling, general and administrative
and other.......................... 49,383 37,908 -- 87,291
Depreciation and amortization......... 10,624 3,436 16,937(5) 30,997
---------- ------- ---------- ----------
Total costs and expenses...... 75,981 65,392 16,861 158,234
---------- ------- ---------- ----------
Loss from operations............... (40,289) (5,600) (16,959) (62,848)
Other income (expense):
Interest income....................... 6,080 76 -- 6,156
Interest expense...................... (11,826) (607) -- (12,433)
Equity in losses of affiliates........ (1,958) -- 1,958(7) --
---------- ------- ---------- ----------
Loss before minority interests and
income taxes..................... (47,993) (6,131) (15,001) (69,125)
Minority interests...................... 1,924 -- (1,924)(7) --
Income taxes............................ -- (1,321) 1,321(8) --
---------- ------- ---------- ----------
Net loss...................... (46,069) (7,452) (15,604) (69,125)
Accretion of preferred stock to
liquidation value..................... (260) -- 260(3) --
---------- ------- ---------- ----------
Net loss attributable to common
stockholders.......................... $ (46,329) $(7,452) $ (15,344) $ (69,125)
========== ======= ========== ==========
Weighted average shares
outstanding -- basic and diluted...... 1,144,685 1,144,685
========== ==========
Loss per common share -- basic and
diluted............................... $ (40.47) $ (60.37)
========== ==========
</TABLE>
F-11
<PAGE> 131
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(A) BASIS OF PRESENTATION
During the period from inception (March 1, 1996) to September 30, 1998,
Verio completed numerous business combinations, and completed the Buyout of the
remaining equity interests of certain ISPs in which it initially acquired a
less-than-100% equity position. In addition, subsequent to September 30, 1998,
Verio completed the acquisition of an 80% interest in WWW and a 100% interest in
Hiway. All of the acquisitions have been accounted for using the purchase method
of accounting. Summary information regarding substantially all of the September
30, 1998 Completed Acquisitions, the WWW Acquisition and the Hiway Acquisition
is as follows:
<TABLE>
<CAPTION>
CONSIDERATION (IN THOUSANDS)
-------------------------------
PREFERRED
SEPTEMBER 30, 1998 ACQUISITION OWNERSHIP CASH AND OR COMMON
COMPLETED ACQUISITIONS DATE(S) PERCENTAGE NOTES STOCK(B) TOTAL(C)
---------------------- ------------------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
On-Ramp Technologies, Inc....................... August 1, 1996 51%
October 4, 1996 4%
February 26, 1998 45% $13,639 $ 6,985 $ 20,624
National Knowledge Networks, Inc................ August 2, 1996 26%
November 7, 1997 15%
February 27, 1998 59% 2,991 -- 2,991
RAINet, Inc..................................... August 2, 1996 100% 2,000 -- 2,000
Access One, Inc................................. December 12, 1996 20%
February 27, 1998 80% 6,107 -- 6,107
CCnet, Inc...................................... December 19, 1996 100% 1,800 -- 1,800
Signet Partners, Inc............................ December 19, 1996 25%
November 20, 1997 16%
February 26, 1998 59% 1,459 1,283 2,742
Global Enterprise Services -- Network
Division...................................... January 17, 1997 100% 2,350 -- 2,350
Surf Network, Inc............................... January 31, 1997 25%
December 22, 1997 75% 603 -- 603
Pacific Rim Network, Inc........................ February 4, 1997 27%
February 16, 1998 73% 880 -- 880
Pioneer Global Telecommunications, Inc.......... February 6, 1997 100% 1,011 -- 1,011
Compute Intensive Inc........................... February 18, 1997 55%
April 24, 1998 45% 7,505 11,655 19,160
NorthWestNet, Inc............................... February 28, 1997 85%
March 6, 1998 15% 12,330 1,937 14,267
Internet Engineering Associates, Inc............ March 4, 1997 20%
February 25, 1998 80% 207 1,607 1,814
Internet Online, Inc............................ March 5, 1997 35%
June 30, 1998 65% 5,250 -- 5,250
Structured Network Systems, Inc................. March 6, 1997 20%
April 16, 1998 80% 1,400 -- 1,400
RustNet, Inc.................................... March 14, 1997 100% 1,703 -- 1,703
AimNet Corporation.............................. May 19, 1997 55%
September 22, 1997 45% 7,613 -- 7,613
West Coast Online, Inc.......................... July 26, 1996 20%
April 29, 1997 12%
September 30, 1997 68% 2,000 -- 2,000
ServiceTech, Inc. .............................. August 1, 1997 40%
December 31, 1997 60% 2,055 -- 2,055
Branch Information Services, Inc................ September 17, 1997 100% 1,687 -- 1,687
Communique, Inc................................. October 2, 1997 100% 3,000 -- 3,000
Clark Internet Services, Inc.................... October 17, 1997 51%
February 25, 1998 49% 3,952 3,431 7,383
ATMnet.......................................... November 5, 1997 100% 5,522 -- 5,522
Global Internet Network Services, Inc........... December 1, 1997 100% 6,000 -- 6,000
Sesquinet....................................... December 24, 1997 100%(a) 732 -- 732
PREPnet......................................... December 24, 1997 100% 1,405 -- 1,405
Monumental Network Systems, Inc................. December 31, 1997 100% 3,962 -- 3,962
</TABLE>
F-12
<PAGE> 132
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
CONSIDERATION (IN THOUSANDS)
-------------------------------
PREFERRED
SEPTEMBER 30, 1998 ACQUISITION OWNERSHIP CASH AND OR COMMON
COMPLETED ACQUISITIONS DATE(S) PERCENTAGE NOTES STOCK(B) TOTAL(C)
---------------------- ------------------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Internet Servers, Inc........................... December 31, 1997 100% $ 9,800 $ 10,200 $ 20,000
NSNet, Inc...................................... February 27, 1998 100% 1,896 1,765 3,661
LI Net, Inc..................................... April 9, 1998 100% 6,500 -- 6,500
STARnet, L.L.C.................................. April 14, 1998 100% 3,500 -- 3,500
Computing Engineers Inc......................... April 15, 1998 100% 9,000 -- 9,000
Florida Internet Corporation.................... April 15, 1998 100% 2,200 -- 2,200
Matrix Online Media, Inc........................ May 5, 1998 100% 4,000 -- 4,000
NTX, Inc........................................ July 7, 1998 100% 45,500 -- $ 45,500
Magic Net, Inc.................................. July 23, 1998 100% 3,300 -- 3,300
--------
Total................................... $223,722
========
WWW............................................. October 21, 1998 80% 8,440 -- $ 8,440
========
Hiway........................................... January 5, 1999 100% 176,000 78,720 $254,720
========
</TABLE>
The total consideration, exclusive of acquisition costs of approximately
9.4 million, for the above acquisitions has been allocated as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
COMPLETED
ACQUISITIONS WWW HIWAY
------------------ ------ --------
<S> <C> <C> <C>
Equipment................................................ $ 17,966 $ 4 $ 15,351
Goodwill................................................. 219,470 6,953 242,664
Net current assets (liabilities)......................... (13,714) 1,483 (3,295)
-------- ------ --------
Total.......................................... $223,722 $8,440 $254,720
======== ====== ========
</TABLE>
- ---------------
(a) Assets of this entity were purchased by On-Ramp Technologies, Inc.
(b) Represents shares of Series D-1 Preferred Stock valued at $15 per share
prior to February 28, 1998 or $22 per share after February 28, 1998. For
NorthWestNet, Inc., the amount represents options to purchase Preferred
Stock at $15 per share. Such per share values for preferred or common stock
or options were determined by the Verio Board based on comparable
valuations of private and public companies, methodologies based on
multiples of revenue and discounted cash flows and arms-length negotiated
values.
(c) Total consideration does not include acquisition costs.
The accompanying unaudited pro forma condensed combined balance sheet as of
September 30, 1998 includes historical balances of the Company and the
businesses acquired including the acquisitions of the remaining interests in
certain consolidated subsidiaries and minority owned affiliates, adjusted for
the pro forma effects of the WWW and Hiway Acquisitions. All acquisitions are
assumed to have been completed for cash, debt or the issuance of preferred or
common stock of the Company. The unaudited pro forma condensed combined
statements of operations for the year ended December 31, 1997 and the nine
months ended September 30, 1998 include the historical results of operations of
the Company and the businesses acquired, including the acquisitions of the
remaining interests in certain consolidated subsidiaries and minority owned
affiliates, and the WWW and Hiway Acquisitions, adjusted for the pro forma
effects of the acquisitions.
F-13
<PAGE> 133
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(B) HISTORICAL CONDENSED STATEMENTS OF OPERATIONS INFORMATION -- SEPTEMBER 30,
1998 COMPLETED ACQUISITIONS
Historical condensed statement of operations information for the September
30, 1998 Completed Acquisitions for the year ended December 31, 1997 including
the periods from January 1, 1997 to the dates of consolidation is as follows:
<TABLE>
<CAPTION>
WEST
PIONEER GLOBAL COAST
YEAR ENDED AIMNET RUSTNET, COMPUTE NORTHWEST TELECOMMUNI- ONLINE,
DECEMBER 31, 1997 CORPORATION INC. GES INTENSIVE NET CATIONS, INC. INC.
----------------- ----------- -------- ----- --------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity............ $1,068 $ 310 $ 112 $ 468 $ 709 $ 62 $1,192
Enhanced services and other...... 101 69 -- 326 351 7 457
------ ----- ----- ----- ------ ---- ------
Total revenue.............. 1,169 379 112 794 1,060 69 1,649
Operating costs and expenses:
Internet services operating
costs.......................... 444 147 94 301 113 33 735
Selling, general and
administrative and other....... 978 319 133 673 1,661 37 981
Depreciation and amortization.... 248 17 -- 16 136 4 77
------ ----- ----- ----- ------ ---- ------
Total costs and expenses... 1,670 483 227 990 1,910 74 1,793
------ ----- ----- ----- ------ ---- ------
Earnings (loss) from
operations..................... (501) (104) (115) (196) (850) (5) (144)
Interest income.................... 8 -- --
Interest expense................... -- (8) -- (8) -- (2) --
------ ----- ----- ----- ------ ---- ------
Earnings (loss) before income
taxes........................ (493) (112) (115) (204) (850) (7) (144)
Income taxes....................... -- -- -- -- 118 (5) --
------ ----- ----- ----- ------ ---- ------
Net earnings (loss)........ $ (493) $(112) $(115) $(204) $ (732) $(12) $ (144)
====== ===== ===== ===== ====== ==== ======
<CAPTION>
BRANCH
YEAR ENDED INFORMATION
DECEMBER 31, 1997 SERVICES, INC.
----------------- --------------
<S> <C>
Revenue:
Internet connectivity............ $ 588
Enhanced services and other...... 84
-----
Total revenue.............. 672
Operating costs and expenses:
Internet services operating
costs.......................... 84
Selling, general and
administrative and other....... 298
Depreciation and amortization.... 2
-----
Total costs and expenses... 384
-----
Earnings (loss) from
operations..................... 288
Interest income.................... --
Interest expense................... --
-----
Earnings (loss) before income
taxes........................ 288
Income taxes....................... (101)
-----
Net earnings (loss)........ $ 187
=====
</TABLE>
<TABLE>
<CAPTION>
GLOBAL
CLARK INTERNET
INTERNET SURF NETWORK
COMMUNIQUE, SERVICES, NETWORK, SERVICES,
INC. INC. INC. SESQUINET ATMNET INC. PREPNET
----------- --------- -------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Internet connectivity.......................... $1,454 $2,582 $ 585 $1,124 $ 2,754 $2,501 $2,026
Enhanced services and other.................... 764 562 190 -- 73 1,284 121
------ ------ ------ ------ ------- ------ ------
Total revenue............................ 2,218 3,144 775 1,124 2,827 3,785 2,147
Operating costs and expenses:
Internet services operating costs.............. 690 1,394 431 538 2,976 2,679 793
Selling, general and administrative and
other........................................ 1,159 1,784 981 367 1,786 1,019 773
Depreciation and amortization.................. 5 116 76 54 40 280 121
------ ------ ------ ------ ------- ------ ------
Total costs and expenses..................... 1,854 3,294 1,488 959 4,802 3,978 1,687
------ ------ ------ ------ ------- ------ ------
Earnings (loss) from operations.............. 364 (150) (713) 165 (1,975) (193) 460
Interest income.................................. -- 2 -- -- -- -- --
Interest expense................................. -- (25) (33) -- (171) (8) (11)
------ ------ ------ ------ ------- ------ ------
Earnings (loss) before income taxes.......... 364 (173) (746) 165 (2,146) (201) 449
Income taxes..................................... (127) -- -- (58) -- -- (171)
------ ------ ------ ------ ------- ------ ------
Net earnings (loss)...................... $ 237 $ (173) $ (746) $ 107 $(2,146) $ (201) $ 278
====== ====== ====== ====== ======= ====== ======
</TABLE>
F-14
<PAGE> 134
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
INTERNET
INTERNET SERVICE PACIFIC RIM SIGNET ENGINEERING STRUCTURED
MONUMENTAL, SERVERS, TECH, NETWORK, PARTNERS, NSNET, ASSOCIATES, NETWORK
INC. INC. INC. INC. INC. INC. INC. SYSTEMS, INC.
----------- -------- ------- ----------- --------- ------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity....... $2,425 $ 704 $ 1,536 $ 472 $1,133 $1,832 $ 831 $ 859
Enhanced services and
other..................... 47 3,688 627 337 518 15 303 27
------ ------ ------- ------ ------ ------ ------ -----
Total revenue......... 2,472 4,392 2,163 809 1,651 1,847 1,134 886
Operating costs and expenses:
Internet services operating
costs..................... 1,162 536 1,229 385 336 471 323 473
Selling, general and
administrative and
other..................... 1,757 2,006 1,814 674 1,977 939 678 511
Depreciation and
amortization.............. 172 260 197 69 10 126 63 --
------ ------ ------- ------ ------ ------ ------ -----
Total costs and
expenses............ 3,091 2,802 3,240 1,128 2,323 1,536 1,064 984
------ ------ ------- ------ ------ ------ ------ -----
Earnings (loss) from
operations.............. (619) 1,590 (1,077) (319) (672) 311 70 (98)
Interest income............... -- 26 -- -- -- -- 14 --
Interest expense.............. (16) -- (42) (15) (5) (6) -- (17)
------ ------ ------- ------ ------ ------ ------ -----
Earnings (loss) before
income taxes............ (635) 1,616 (1,119) (334) (677) 305 84 (115)
Income taxes.................. -- (602) 33 (15) -- (116) (29) --
------ ------ ------- ------ ------ ------ ------ -----
Net earnings (loss)..... $ (635) $1,014 $(1,086) $ (349) $ (677) $ 189 $ 55 $(115)
====== ====== ======= ====== ====== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
NATIONAL FLORIDA COMPU- MATRIX
KNOWLEDGE LI INTERNET TING ONLINE
ACCESSONE, NETWORKS, NET, CORPO- ENGINEERS STARNET, MEDIA, NTX, MAGICNET,
INC. INC. INC. RATION INC. L.L.C. INC. INC. INC.
---------- --------- ------ -------- --------- -------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity........ $2,484 $1,169 $1,907 $1,172 $3,322 $1,202 $1,094 $ -- $1,883
Enhanced services and
other...................... 1,035 234 120 264 758 399 233 4,944 294
------ ------ ------ ------ ------ ------ ------ ------ ------
Total revenue.......... 3,519 1,403 2,027 1,436 4,080 1,601 1,327 4,944 2,177
Operating costs and expenses:
Internet services operating
costs...................... 1,510 669 792 773 1,026 717 393 1,006 795
Selling, general and
administrative and other... 2,251 1,282 1,573 578 2,341 570 787 4,192 1,029
Depreciation and
amortization............... 245 55 135 121 329 156 127 86 93
------ ------ ------ ------ ------ ------ ------ ------ ------
Total costs and
expenses............. 4,006 2,006 2,500 1,472 3,696 1,443 1,307 5,284 1,917
------ ------ ------ ------ ------ ------ ------ ------ ------
Earnings (loss) from
operations............... (487) (603) (473) (36) 384 158 20 (340) 260
Interest income................ -- 6 -- -- -- 9 2 6 3
Interest expense............... (26) (26) (39) (12) (96) (6) (19) -- (16)
------ ------ ------ ------ ------ ------ ------ ------ ------
Earnings (loss) before
income taxes............. (513) (623) (512) (48) 288 161 3 (334) 247
Income taxes................... -- (3) -- -- (110) (61) -- -- (74)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net earnings (loss).... $ (513) $ (626) $ (512) $ (48) $ 178 $ 100 $ 3 $(334) $ 173
====== ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
TOTAL
-------
<S> <C>
Revenue:
Internet connectivity........ $41,560
Enhanced services and
other...................... 18,232
-------
Total revenue.......... 59,792
Operating costs and expenses:
Internet services operating
costs...................... 24,048
Selling, general and
administrative and other... 37,908
Depreciation and
amortization............... 3,436
-------
Total costs and
expenses............. 65,392
-------
Earnings (loss) from
operations............... (5,600)
Interest income................ 76
Interest expense............... (607)
-------
Earnings (loss) before
income taxes............. (6,131)
Income taxes................... (1,321)
-------
Net earnings (loss).... $(7,452)
=======
</TABLE>
F-15
<PAGE> 135
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Historical condensed statement of operations information for the September
30, 1998 Completed Acquisitions for the nine months ended September 30, 1998
including the periods from January 1, 1998 to the dates of consolidation is as
follows:
<TABLE>
<CAPTION>
INTERNET
PACIFIC RIM SIGNET ENGINEERING STRUCTURED
NETWORK, PARTNERS, NSNET, ASSOCIATES, NETWORK ACCESSONE,
NINE MONTHS ENDED SEPTEMBER 30, 1998 INC. INC. INC. INC. SYSTEMS, INC. INC.
- ------------------------------------ ----------- --------- ------ ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity.......................... $ 73 $122 $275 $152 $318 $ 643
Enhanced services and other.................... 31 50 75 41 25 108
---- ---- ---- ---- ---- -----
Total Revenue............................ 104 172 350 193 343 751
Operating costs and expenses:
Internet services operating costs.............. 43 45 126 61 178 268
Selling, general and administrative and
other........................................ 88 142 287 124 240 535
Depreciation and amortization.................. 10 4 27 13 7 53
---- ---- ---- ---- ---- -----
Total costs and expenses................. 141 191 440 198 425 856
---- ---- ---- ---- ---- -----
Earnings (loss) from operations.............. (37) (19) (90) (5) (82) (105)
Interest income.................................. -- -- -- 1 2 --
Interest expense................................. (2) (1) -- -- (2) (11)
---- ---- ---- ---- ---- -----
Earnings (loss) before income taxes.......... (39) (20) (90) (4) (82) (116)
Income taxes..................................... -- -- -- -- -- --
---- ---- ---- ---- ---- -----
Net earnings (loss)........................ $(39) $(20) $(90) $ (4) $(82) $(116)
==== ==== ==== ==== ==== =====
</TABLE>
<TABLE>
<CAPTION>
NATIONAL MATRIX
KNOWLEDGE FLORIDA COMPUTING ONLINE
NETWORKS, LI INTERNET ENGINEERS STARNET, MEDIA, NTX, MAGICNET,
INC. NET, INC. CORPORATION INC. L.L.C. INC. INC. INC TOTAL
--------- --------- ----------- --------- -------- ------ ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity...... $265 $554 $435 $ 914 $472 $546 $ -- $1,302 $ 6,071
Enhanced services and
other.................... 68 147 180 491 26 155 5,430 203 7,030
---- ---- ---- ------ ---- ---- ------- ------ -------
Total revenue........ 333 701 615 1,405 498 701 5,430 1,505 13,101
Operating costs and
expenses:
Internet services operating
costs.................... 147 299 158 373 89 187 289 574 2,837
Selling, general and
administrative and
other.................... 246 408 415 873 326 437 8,781 728 13,630
Depreciation and
amortization............. 9 39 27 54 15 44 99 55 456
---- ---- ---- ------ ---- ---- ------- ------ -------
Total costs and
expenses............ 402 746 600 1,300 430 668 9,169 1,357 16,923
---- ---- ---- ------ ---- ---- ------- ------ -------
Earnings (loss) from
operations............. (69) (45) 15 105 68 33 (3,739) 148 (3,822)
Interest income............. -- -- -- 9 -- 1 3 -- 16
Interest expense............ -- (34) (3) (20) -- (18) -- (3) (94)
---- ---- ---- ------ ---- ---- ------- ------ -------
Earnings (loss) before
income taxes........... (69) (79) 12 94 68 16 (3,736) 145 (3,900)
Income taxes................ -- -- (4) (28) (20) (5) -- (43) (100)
---- ---- ---- ------ ---- ---- ------- ------ -------
Net earnings
(loss).............. $(69) $(79) $ 8 $ 66 $ 48 $ 11 $(3,736) $ 102 $(4,000)
==== ==== ==== ====== ==== ==== ======= ====== =======
</TABLE>
(C) PRO FORMA ADJUSTMENTS
The following pro forma adjustments have been made to the condensed
combined balance sheet as of September 30, 1998 and the condensed combined
statements of operations for the year ended December 31, 1997 and the nine
months ended September 30, 1998. The purchase accounting adjustments relating to
the September 30, 1998 Completed Acquisitions are included in the historical
consolidated balance sheet of the Company as of September 30, 1998.
(1) To reflect cash of $8,440,000 used in connection with the
acquisition of an 80% interest in WWW, and the allocation of the excess
purchase price to goodwill in the amount of $6,953,000.
F-16
<PAGE> 136
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(2) To reflect cash of $180.0 million, including estimated acquisition
costs of $4.0 million, and the issuance of 4.92 million shares of common
stock (including 1.78 million shares to be issued for outstanding options
and warrants) valued at approximately $74.7 million in connection with the
Hiway Acquisition, and the allocation of the excess purchase price to
goodwill in the amount of approximately $242.7 million. The assumed value
of the common stock, options and warrants is based on the quoted price per
share on November 16, 1998, one day prior to the date of the Merger
Agreement less the estimated exercise price of the options and warrants. It
is anticipated that the Company will record a charge to operations for
in-process research and development in connection with the Hiway
Acquisition and such charge may be significant. However, such amount is not
presently determinable.
(3) To eliminate the equity accounts of the acquisitions and the
accretion of preferred stock to liquidation value.
(4) To eliminate intercompany revenue, expenses, receivables and
payables.
(5) To adjust amortization expense due to increase in carrying value of
goodwill resulting from the September 30, 1998 Completed Acquisitions,
using a ten-year life, and additional amortization of goodwill on 1997
acquisitions for the period from January 1, 1997 through the date of
acquisition as if the acquisitions had occurred as of January 1, 1997 and
amortization of goodwill on 1998 acquisitions for the period from January
1, 1998 through the date of acquisition as if the acquisitions had occurred
as of January 1, 1997.
(6) To adjust amortization expense due to increase in carrying value of
goodwill resulting from the WWW Acquisition and the Hiway Acquisition,
using a ten-year life, as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ ----------------
<S> <C> <C>
WWW.............................................. $ 695 $ 521
======= =======
Hiway............................................ $24,271 $18,204
======= =======
</TABLE>
The above amounts do not include the effect of the potential allocation
of a portion of the Hiway purchase price to in-process research and
development (IPR&D), which will result in an immediate charge to
operations. Such amount is not presently determinable.
The impact on goodwill and net loss of the allocation of a portion of
the Hiway purchase price to IPR&D is as follows (in thousands):
<TABLE>
<CAPTION>
PERCENTAGE OF PURCHASE PRICE
ALLOCATED TO IPR&D
----------------------------
10% 20% 50%
------- ------- --------
<S> <C> <C> <C>
Decrease in goodwill as of September 30,
1998......................................... $25,472 $50,944 $127,360
======= ======= ========
Increase in net loss:
Nine months ended September 30, 1998:
IPR&D..................................... $25,472 $50,944 $127,360
Decrease in amortization expense.......... (1,910) (3,820) (9,550)
------- ------- --------
Net increase......................... $23,562 $47,124 $117,810
======= ======= ========
Year ended December 31, 1997:
IPR&D..................................... $25,472 $50,944 $127,360
Decrease in amortization expense.......... (2,547) (5,094) (12,736)
------- ------- --------
Net increase......................... $22,925 $45,850 $114,624
======= ======= ========
</TABLE>
F-17
<PAGE> 137
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(7) To eliminate minority interests share of equity and equity in losses
of affiliates upon acquisition of 100% ownership interests.
(8) To eliminate income tax expense or benefit of acquired businesses
due to consolidated net operating loss for the year ended December 31, 1997
and the nine months ended September 30, 1998.
(9) To reflect the issuance of 4.92 million shares of common stock in
connection with the Hiway Acquisition.
F-18
<PAGE> 138
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying consolidated balance sheets of Verio Inc.
and subsidiaries as of December 31, 1996 and 1997, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the period
from inception (March 1, 1996) to December 31, 1996 and the year ended December
31, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Verio Inc.
and subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for the period from inception (March 1, 1996) to
December 31, 1996 and the year ended December 31, 1997 in conformity with
generally accepted accounting principles.
KPMG LLP
Denver, Colorado
February 25, 1998
F-19
<PAGE> 139
VERIO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1997 1998
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $66,467 $ 72,586 $ 245,912
Restricted cash and securities (notes 3 and 4)............ -- 21,015 14,159
Receivables:
Trade, net of allowance for doubtful accounts of $117,
$1,233, and $3,698.................................... 611 7,565 13,687
Affiliates.............................................. 119 735 --
Prepaid expenses and other................................ 410 3,921 6,590
------- -------- ---------
Total current assets............................... 67,607 105,822 280,348
Restricted cash and securities (notes 3 and 4).............. -- 19,539 7,238
Investments in affiliates, at cost (note 2)................. 1,536 2,378 8,298
Equipment and leasehold improvements:
Internet access and computer equipment.................... 4,485 30,535 54,858
Furniture, fixtures and computer software................. 220 3,301 4,930
Leasehold improvements.................................... 141 1,596 3,780
------- -------- ---------
4,846 35,432 63,568
Less accumulated depreciation and amortization............ (359) (7,219) (20,355)
------- -------- ---------
Net equipment and leasehold improvements.............. 4,487 28,213 43,213
Other assets:
Goodwill, net of accumulated amortization of $303, $3,595,
and $15,670 (note 2).................................... 8,736 83,216 210,047
Debt issuance costs, net of accumulated amortization of
$330, and $1,169........................................ -- 4,858 8,796
Organization costs and other, net......................... 262 2,445 4,389
------- -------- ---------
Total assets....................................... $82,628 $246,471 $ 562,329
======= ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 2,132 $ 7,389 $ 9,263
Accrued expenses.......................................... 931 11,401 15,402
Accrued interest payable.................................. -- 844 13,109
Accrued preferred stock issuance costs.................... 1,110 -- --
Lines of credit, notes payable and current portion of
long-term debt (note 3)................................. 2,573 2,751 774
Current portion of capital lease obligations (note 4)..... 64 1,575 3,952
Deferred revenue.......................................... 659 7,177 10,770
------- -------- ---------
Total current liabilities.......................... 7,469 31,137 53,270
Long-term debt, less current portion, net of discount (note
3)........................................................ 20 139,376 268,440
Capital lease obligations, less current portion (note 4).... 86 2,945 6,012
------- -------- ---------
Total liabilities.................................. 7,575 173,458 327,722
------- -------- ---------
Minority interests in subsidiaries (note 2)................. 2,231 2,765 --
Redeemable preferred stock (converted to common stock in
1998)(note 5):
Series A, convertible, $.001 par value; 6,100,000 shares
authorized; 6,033,333 shares issued and outstanding at
December 31, 1996 and 1997.............................. 18,078 18,080 --
Series B, convertible, $.001 par value; 10,117,000 shares
authorized; 10,000,000 and 10,028,334 shares issued and
outstanding at December 31, 1996 and 1997............... 58,799 59,193 --
Series C, convertible, $.001 par value; 2,500,000 shares
authorized; issued and outstanding at December 31,
1997.................................................... -- 19,976 --
------- -------- ---------
76,877 97,249 --
------- -------- ---------
Stockholders' equity (deficit) (note 6):
Preferred stock, Series D-1, convertible, $.001 par value;
3,000,000 shares authorized; 680,000 shares issued and
outstanding at December 31, 1997 (converted to common
stock in 1998)(note 5).................................. -- 10,200 --
Common stock, $.001 par value; 125,000,000 shares
authorized; 1,090,000, 1,254,533 and, 32,789,776 shares
issued and outstanding at December 31, 1996 and 1997 and
September 30, 1998...................................... 1 1 33
Additional paid-in capital................................ 1,089 14,272 374,354
Accumulated deficit....................................... (5,145) (51,474) (139,780)
------- -------- ---------
Total stockholders' equity (deficit)............... (4,055) (27,001) 234,607
------- -------- ---------
Commitments (notes 2, 4 and 5)
Total liabilities and stockholders' equity
(deficit)........................................ $82,628 $246,471 $ 562,329
======= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE> 140
VERIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEAR NINE MONTHS ENDED
(MARCH 1, 1996) ENDED SEPTEMBER 30,
TO DECEMBER 31, DECEMBER 31, -------------------
1996 1997 1997 1998
--------------- ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Internet connectivity:
Dedicated............................... $ 1,100 $ 16,383 $ 10,120 $ 36,924
Dial-up................................. 1,139 7,093 4,314 16,272
Enhanced services and other................ 126 12,216 7,853 30,347
------- -------- -------- --------
Total revenue...................... 2,365 35,692 22,287 83,543
Costs and expenses:
Internet services operating costs.......... 974 15,974 9,504 37,928
Selling, general and administrative and
other................................... 7,002 49,383 31,233 80,941
Stock option related compensation and
severance costs (note 6)................ -- -- -- 3,040
Depreciation and amortization.............. 669 10,624 6,737 26,818
------- -------- -------- --------
Total costs and expenses........... 8,645 75,981 47,474 148,727
------- -------- -------- --------
Loss from operations............... (6,280) (40,289) (25,187) (65,184)
Other income (expense):
Interest income............................ 593 6,080 4,068 9,381
Interest expense........................... (115) (11,826) (5,899) (22,860)
Equity in losses of affiliates............. -- (1,958) (1,642) --
------- -------- -------- --------
Loss before minority interests and
extraordinary item............... (5,802) (47,993) (28,660) (78,663)
Minority interests........................... 680 1,924 1,638 545
------- -------- -------- --------
Loss before extraordinary item..... (5,122) (46,069) (27,022) (78,118)
Extraordinary item -- loss related to debt
repurchase (note 3)........................ -- -- -- (10,101)
------- -------- -------- --------
Net loss........................... (5,122) (46,069) (27,022) (88,219)
Accretion of preferred stock to liquidation
value...................................... (23) (260) (179) (87)
------- -------- -------- --------
Net loss attributable to common
stockholders..................... $(5,145) $(46,329) $(27,201) $(88,306)
======= ======== ======== ========
Weighted average number of common shares
outstanding -- basic and diluted........... 972 1,145 1,128 17,462
======= ======== ======== ========
Loss per common share -- basic and diluted:
Loss per common share before extraordinary
item.................................... (5.29) (40.47) (24.11) (4.49)
Extraordinary item......................... -- -- -- (0.57)
------- -------- -------- --------
Loss per common share.............. $ (5.29) $ (40.47) $ (24.11) $ (5.06)
======= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE> 141
VERIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
PREFERRED ------------------- PAID-IN ACCUMULATED
STOCK SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ---------- ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT INCEPTION.............. $ -- -- $-- $ -- $ -- $ --
Issuance of common stock for
cash............................. -- 1,090,000 1 1,089 -- 1,090
Accretion of redeemable preferred
stock to liquidation value....... -- -- -- -- (23) (23)
Net loss........................... -- -- -- -- (5,122) (5,122)
-------- ---------- --- -------- --------- --------
BALANCES AT DECEMBER 31, 1996...... -- 1,090,000 1 1,089 (5,145) (4,055)
Issuance of common stock for
exercise of options.............. -- 76,200 148 -- 148
Issuance of common stock for
cash............................. -- 88,333 360 -- 360
Warrants issued in connection with
debt offering (note 3)........... -- -- -- 12,675 -- 12,675
Issuance of preferred stock in
business combination (note 5).... 10,200 -- -- -- -- 10,200
Accretion of redeemable preferred
stock to liquidation value....... -- -- -- (260) (260)
Net loss........................... -- -- -- (46,069) (46,069)
-------- ---------- --- -------- --------- --------
BALANCES AT DECEMBER 31, 1997...... 10,200 1,254,533 1 14,272 (51,474) (27,001)
Issuance of common stock for
exercise of options.............. -- 114,725 -- 485 -- 485
Issuance of common stock for
exercise of warrants............. -- 415,461 1 -- -- 1
Issuance of common stock in initial
public offering, net of expenses
(note 6)......................... -- 5,735,000 6 120,814 -- 120,820
Issuance of common stock to private
investor (note 6)................ -- 4,493,877 4 99,995 -- 99,999
Issuance of Series D-1 preferred
stock in business combinations
(notes 2 and 5).................. 26,726 -- -- -- -- 26,726
Accretion of redeemable preferred
stock to liquidation value....... -- -- -- -- (87) (87)
Issuance of common stock pursuant
to conversion of Series D-1
preferred stock (note 5)......... (36,926) 2,214,513 2 36,924 -- --
Issuance of common stock pursuant
to conversion of Series A, B and
C redeemable preferred stock
(note 5)......................... -- 18,561,667 19 97,287 -- 97,306
Issuance of common stock options in
business combinations............ -- -- -- 1,937 -- 1,937
Stock option related compensation
and severance costs (note 6)..... -- -- -- 2,640 -- 2,640
Net loss........................... (88,219) (88,219)
-------- ---------- --- -------- --------- --------
BALANCE AT SEPTEMBER 30, 1998
(UNAUDITED)...................... $ -- 32,789,776 $33 $374,354 $(139,780) $234,607
======== ========== === ======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE> 142
VERIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION NINE MONTHS ENDED
(MARCH 1, 1996) YEAR ENDED SEPTEMBER 30,
TO DECEMBER 31, DECEMBER 31, --------------------
1996 1997 1997 1998
--------------- ------------ -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(5,122) $ (46,069) $(27,022) $ (88,219)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization..................... 669 10,624 6,737 26,818
Minority interests' share of losses............... (680) (1,924) (1,638) (545)
Stock option related compensation and severance
costs........................................... -- -- -- 3,040
Equity in losses of affiliates.................... -- 1,958 1,642 --
Extraordinary item -- loss related to the
repurchase of debt.............................. -- -- -- 10,101
Changes in operating assets and liabilities,
excluding effects of business combinations:
Receivables..................................... (265) (1,561) (2,110) (1,979)
Prepaid expenses and other current assets....... (284) (2,305) (2,593) (899)
Accounts payable................................ 1,439 (1,656) (359) (889)
Accrued expenses................................ 1,910 3,082 (1,531) 3,720
Accrued interest payable........................ -- 844 5,400 13,040
Deferred revenue................................ 7 1,684 1,012 (445)
------- --------- -------- ---------
Net cash used by operating activities........ (2,326) (35,323) (20,462) (36,257)
------- --------- -------- ---------
Cash flows from investing activities:
Acquisition of equipment and leasehold
improvements...................................... (3,430) (14,547) (11,002) (15,327)
Acquisition of net assets in business combinations
and investments in affiliates, net of cash
acquired.......................................... (5,627) (64,023) (28,796) (121,432)
Change in restricted cash and securities............ (40,554) (48,532) 19,689
Other............................................... (66) (1,206) (1,045) (2,242)
------- --------- -------- ---------
Net cash used by investing activities........ (9,123) (120,330) (89,375) (119,312)
------- --------- -------- ---------
Cash flows from financing activities:
Proceeds from lines of credit, notes payable and
long-term debt.................................... -- 145,512 145,478 168,827
Repayments of lines of credit and notes payable..... (20) (3,468) (2,566) (58,784)
Repayments of capital lease obligations............. (8) (950) (440) (2,452)
Proceeds from issuance of common and preferred
stock, net of issuance costs...................... 77,944 20,678 20,530 221,304
------- --------- -------- ---------
Net cash provided by financing activities.... 77,916 161,772 163,002 328,895
------- --------- -------- ---------
Net increase in cash and cash equivalents.... 66,467 6,119 53,165 173,326
Cash and cash equivalents:
Beginning of period................................. -- 66,467 66,467 72,586
------- --------- -------- ---------
End of period....................................... $66,467 $ 72,586 $119,632 $ 245,912
======= ========= ======== =========
Supplemental disclosures of cash flow information:
Cash paid for interest.............................. $ -- $ 10,982 $ -- $ 10,393
======= ========= ======== =========
Supplemental disclosures of non-cash investing and
financing activities:
Equipment acquired through capital lease
obligations....................................... $ 58 $ 3,301 $ 1,923 $ 7,209
======= ========= ======== =========
Acquisition of net assets in business combination
through issuance of notes payable................. $ 6,675 $ 4,718 $ -- $ --
======= ========= ======== =========
Acquisition of net assets in business combination
through issuance of preferred stock and preferred
stock options..................................... $ -- $ 10,200 $ -- $ 28,663
======= ========= ======== =========
Warrants issued in connection with debt offering.... $ -- $ 12,675 $ 12,675 $ --
======= ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE> 143
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE SIX-MONTH PERIODS ENDED
SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Basis of Presentation
Verio Inc. (Verio or the Company) was incorporated on March 1, 1996 to
capitalize on the growing demand for Internet access and enhanced services by
business users through the acquisition, integration, and growth of existing
independent Internet service providers with a business customer focus in
targeted geographic regions. The goal of the Company is to be the dominant,
full-service national provider of Internet connectivity and enhanced Internet
services to small and medium sized businesses. The Company commenced operations
in April 1996 and had no activity other than the sale of common stock to
founders prior to April 1, 1996.
The accompanying unaudited financial information as of September 30, 1998
and for the nine-month periods ended September 30, 1997 and 1998 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 for the nine months ended September 30,
1997 and 1998 have been included. Operating results for the nine-month period
ending September 30, 1998 are not necessarily indicative of the results that may
be expected for the full year.
The accompanying consolidated financial statements include the accounts of
Verio and its majority owned subsidiaries, as described in Note 2. All
significant intercompany balances and transactions have been eliminated in
consolidation. The preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
(b) Cash and Cash Equivalents and Restricted Cash
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. Included in cash
equivalents as of December 31, 1996, December 31, 1997 and September 30, 1998
are U.S. government, municipal and corporate debt securities, money market
accounts and commercial paper, totaling $61,769,000, $75,442,000 (exclusive of
cash overdraft in the amount of $11,228,000) and $233,975,000, respectively,
with maturities ranging from thirty to ninety days.
Restricted cash and securities include U.S. government securities which are
classified as securities held to maturity and recorded at cost. At December 31,
1997 and September 30, 1998, cost approximated market value.
(c) Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost. Depreciation is
provided over the estimated useful lives of the assets ranging from 3 to 5 years
using the straight-line method. Leasehold improvements are amortized over the
shorter of the lease term or the estimated useful life of the asset.
(d) Investments in Affiliates and Consolidation of Subsidiaries
Investments in affiliates represent newly issued preferred shares of
various affiliates. The preferred shares are convertible at the option of the
Company into common shares on a one-for-one basis and represent future common
stock ownership interests, upon conversion, of less than 50%. As the Company did
not acquire a
F-24
<PAGE> 144
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock ownership interest, these investments are recorded at cost until
such time as the preferred shares are converted to common. In addition, if these
entities incur losses resulting in the equity of the common shareholders being
reduced to zero, the Company will utilize the equity method of accounting for
these investments and will generally recognize 100% of all losses of the
affiliates from that date, up to the amount of the Company's investment, based
on the inability of the majority common shareholders to fund additional losses.
During the year ended December 31, 1997, the Company recognized equity in losses
of affiliates of $1,958,000 under this method of accounting. Such losses were
not significant for the nine months ended September 30, 1998.
The Company has also acquired preferred shares in certain entities which
are convertible into future common stock ownership interests of greater than
50%. In these situations, the Company has majority representation on the Board
of Directors and majority voting rights, exercises significant control over the
entities' operations, and intends to acquire a 100% common ownership interest in
the future. Accordingly, the accounts of these investees have been consolidated
with those of the Company in the accompanying consolidated financial statements
from the dates of acquisition (see note 2).
As of September 30, 1998, the Company had acquired a 100% ownership
interest in all but one affiliate. Accordingly, the accounts of these investees
are consolidated with those of the Company as of September 30, 1998.
(e) Other Assets
The excess of cost over the fair value of net assets acquired, or goodwill,
is amortized using the straight-line method over a 10-year period. Other
intangibles are amortized using the straight-line method over periods ranging
from three to seven years.
(f) Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lives Assets to be Disposed
Of (SFAS 121). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations, including goodwill, when indications of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. In addition, the
recoverability of goodwill is further evaluated under the provisions of APB
Opinion No. 17, Intangible Assets, based upon undiscounted cash flows. If such
assets are impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the estimated fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
value or fair value, less costs to sell.
(g) Revenue Recognition
Revenue related to Internet and enhanced services is recognized as the
services are provided, and deferred and amortized to operations for amounts
billed relating to future periods. Installation and customer set-up fees are
recognized upon completion of the services. Revenue from consulting services is
recognized as the services are provided. Revenue from hardware and software
sales is recognized upon shipment of the respective products.
(h) Peering Relationships
The Company does not pay any fees in connection with its peering
relationships with other companies and does not record revenue or expense in
connection with those arrangements. The nature of these relationships is that
the parties share the responsibility for communications that occur between their
respective local networks. These peering relationships are essentially exchanges
of similar productive assets rather than the culmination of an earnings process.
Accordingly, these arrangements are appropriately not reflected in the
operations of the Company.
F-25
<PAGE> 145
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(i) Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109).
SFAS 109 requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the difference is expected to reverse.
(j) Stock-Based Compensation
The Company accounts for its stock-based employee compensation plans using
the intrinsic value based method prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations (APB 25). The Company has provided pro forma disclosures of net
loss and loss per share as if the fair value based method of accounting for the
plans, as prescribed by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123), had been applied. Pro forma
disclosures include the effects of employee stock options granted during the
period and year ended December 31, 1996 and 1997.
(k) Loss Per Share
Loss per share is presented in accordance with the provisions of Statement
of Financial Accounting Standards No. 128, Earnings Per Share, (SFAS 128). SFAS
128 replaced the presentation of primary and fully diluted earnings (loss) per
share (EPS), with a presentation of basic EPS and diluted EPS. Under SFAS 128,
basic EPS excludes dilution for common stock equivalents and is computed by
dividing income or loss available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock and resulted in the
issuance of common stock. Basic and diluted EPS are the same in 1996, 1997 and
1998, as all potential common stock instruments are antidilutive.
F-26
<PAGE> 146
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) BUSINESS COMBINATIONS AND INVESTMENTS IN AFFILIATES
During the period from inception (March 1, 1996) to December 31, 1996, the
Company completed seven business combinations and investments for cash and notes
payable. All of the acquisitions were accounted for using the purchase method of
accounting, and represent the acquisition of stock or net assets. Outstanding
stock options of acquired businesses were included in the determination of the
purchase prices based on fair values. For those businesses acquired and
consolidated, the results of operations for the acquired businesses are included
in the Company's consolidated statement of operations from the dates of
acquisition. Summary information regarding the business combinations is as
follows:
Consolidated acquisitions in 1996:
<TABLE>
<CAPTION>
TOTAL
OWNERSHIP
OWNERSHIP INTEREST AT APPROXIMATE
INTEREST DECEMBER 31, PURCHASE
BUSINESS NAME ACQUISITION DATE PURCHASED(A) 1996(A) PRICE
------------- ----------------- ------------ --------------- -----------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C> <C> <C>
On-Ramp Technologies, Inc...... August 1, 1996 51%
October 4, 1996 4% 55%(b) $ 8,775
RAINet, Inc.................... August 2, 1996 100% 100%(c) 2,000
CCnet Inc...................... December 19, 1996 100% 100%(c) 1,800
-------
$12,575
Acquisition costs.............. 284
-------
$12,859
=======
</TABLE>
The aggregate purchase price, including acquisition costs was allocated
based upon fair value as follows:
<TABLE>
<S> <C>
Equipment.................................................. $ 1,359
Goodwill................................................... 9,039
Net current assets......................................... 2,461
-------
Total purchase price............................. $12,859
=======
</TABLE>
Unconsolidated investments in 1996:
<TABLE>
<CAPTION>
TOTAL
OWNERSHIP
OWNERSHIP INTEREST AT APPROXIMATE
INTEREST DECEMBER 31, PURCHASE
BUSINESS NAME ACQUISITION DATE PURCHASED(A) 1996(A) PRICE
------------- ----------------- ------------ --------------- -----------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C> <C> <C>
West Coast Online, July 26, 1996 20% 20%(b) $ 225
Inc....................
National Knowledge August 2, 1996 26% 26%(b) 300
Networks, Inc..........
Access One, Inc.......... December 12, 1996 20% 20%(b) 506
Signet Partners, Inc..... December 19, 1996 25% 25%(b) 403
-------
$ 1,434
Acquisition costs........ 102
-------
$ 1,536
=======
</TABLE>
F-27
<PAGE> 147
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the year ended December 31, 1997, the Company completed 23 business
combinations and investments for cash, notes payable and preferred stock. All of
the acquisitions were accounted for using the purchase method of accounting. For
those businesses acquired and consolidated, the results of operations for the
acquired businesses are included in the Company's consolidated statement of
operations from the dates of acquisition. Seventeen subsidiaries were acquired
and newly consolidated during 1997. In addition, the Company formed two new
start-up subsidiaries. Summary information regarding these acquisitions is as
follows:
Consolidated acquisitions in 1997:
<TABLE>
<CAPTION>
TOTAL
OWNERSHIP
OWNERSHIP INTEREST AT APPROXIMATE
INTEREST DECEMBER 31, PURCHASE
BUSINESS NAME ACQUISITION DATE PURCHASED(A) 1997(A) PRICE(E)
------------- ------------------ ------------ --------------- -----------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C> <C> <C>
Global Enterprise Services --
Network Division............ January 17, 1997 100% 100%(d) $ 2,350
Pioneer Global
Telecommunications, Inc..... February 6, 1997 100% 100%(c) 1,011
Compute Intensive Inc......... February 18, 1997 55% 55%(b) 4,900
NorthWestNet, Inc............. February 28, 1997 85% 85%(c) 9,464
RUSTnet, Inc.................. March 14, 1997 100% 100%(c) 1,703
Aimnet Corporation............ May 19, 1997 55%
September 22, 1997 45% 100%(c) 7,613
Branch Information Services,
Inc......................... September 17, 1997 100% 100%(c) 1,687
West Coast Online, Inc........ April 29, 1997 12%
September 30, 1997 68% 100%(b) 1,775
Communique, Inc............... October 2, 1997 100% 100%(c) 3,000
Clark Internet Services,
Inc......................... October 17, 1997 51% 51%(b) 3,520
ATMnet........................ November 5, 1997 100% 100%(d) 5,522
Global Internet Network
Services, Inc............... December 1, 1997 100% 100%(c) 6,000
Surf Network, Inc............. January 31, 1997 25%
December 22, 1997 75% 100%(b) 603
PREPnet....................... December 24, 1997 100% 100%(d) 1,405
Sesquinet..................... December 24, 1997 100% 100%(d) 732
Service Tech, Inc............. August 1, 1997 40%
December 31, 1997 60% 100%(b) 2,055
Monumental Network Systems,
Inc......................... December 31, 1997 100% 100%(c) 3,962
Internet Servers, Inc......... December 31, 1997 100% 100%(c) 20,000
-------
$77,302
Acquisition costs............. 3,396
-------
$80,698
=======
</TABLE>
F-28
<PAGE> 148
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate purchase price, including acquisition costs was allocated
based upon fair values as follows:
<TABLE>
<S> <C>
Equipment.................................................. $12,378
Goodwill................................................... 77,772
Net current liabilities.................................... (9,452)
-------
Total purchase price............................. $80,698
=======
</TABLE>
Unconsolidated investments in 1997:
<TABLE>
<CAPTION>
TOTAL OWNERSHIP
OWNERSHIP INTEREST AT APPROXIMATE
INTEREST DECEMBER 31, PURCHASE
BUSINESS NAME ACQUISITION DATE PURCHASED(A) 1997(A) PRICE(E)
------------- ----------------- ------------ --------------- -----------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C> <C> <C>
Pacific Rim Network, Inc..... February 4, 1997 27% 27%(b) $ 150
Internet Engineering
Associates, Inc............ March 4, 1997 20% 20%(b) 206
Internet Online, Inc......... March 5, 1997 35% 35%(b) 1,050
Structured Network Systems,
Inc........................ March 6, 1997 20% 20%(b) 150
National Knowledge Networks,
Inc........................ November 7, 1997 15% 41%(b) 599
Signet Partners, Inc......... November 20, 1997 16% 41%(b) 414
------
$2,569
Acquisition costs............ 253
------
$2,822
======
</TABLE>
During the nine months ended September 30, 1998, the Company purchased
additional investments in eleven of the Company's affiliates and acquired 10 new
internet service providers for a combination of cash and Series D-1 Preferred
Stock. All acquisitions were accounted for using the purchase method of
accounting. For those businesses acquired and consolidated, the results of
operations for the acquired businesses are included in the Company's
consolidated statement of operations from the dates of acquisition. Summary
information regarding the business combinations is as follows:
Consolidated acquisitions in 1998:
<TABLE>
<CAPTION>
TOTAL OWNERSHIP
OWNERSHIP INTEREST AT APPROXIMATE
INTEREST JUNE 30, PURCHASE
BUSINESS NAME ACQUISITION DATE PURCHASED(A) 1998(A) PRICE(E)
------------- ----------------- ------------ --------------- -----------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C> <C> <C>
Signet Partners, Inc........... January 30, 1998 14% -- --
February 26, 1998 45% 100% $ 1,925
Pacific Rim Network, Inc....... February 16, 1998 73% 100% 730
Clark Internet Services,
Inc.......................... February 25, 1998 49% 100% 3,863
Internet Engineering
Associates, Inc.............. February 25, 1998 80% 100% 1,608
On-Ramp Technologies, Inc...... February 26, 1998 45% 100% 11,849
National Knowledge Networks,
Inc.......................... February 27, 1998 59% 100% 2,092
</TABLE>
F-29
<PAGE> 149
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
TOTAL OWNERSHIP
OWNERSHIP INTEREST AT APPROXIMATE
INTEREST JUNE 30, PURCHASE
BUSINESS NAME ACQUISITION DATE PURCHASED(A) 1998(A) PRICE(E)
------------- ----------------- ------------ --------------- -----------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C> <C> <C>
Access One, Inc................ February 27, 1998 80% 100% 5,601
NSNet, Inc..................... February 27, 1998 100% 100% 3,661
NorthWestNet, Inc.............. March 6, 1998 15% 100% 4,803
LI Net, Inc.................... April 9, 1998 100% 100% 6,500
STARnet, L.L.C................. April 14, 1998 100% 100% 3,500
Computing Engineers Inc........ April 15, 1998 100% 100% 9,000
Florida Internet Corporation... April 15, 1998 100% 100% 2,200
Structured Network Systems,
Inc.......................... April 16, 1998 80% 100% 1,250
Compute Intensive Inc.......... April 24, 1998 45% 100% 14,260
Matrix Online Media, Inc....... May 5, 1998 100% 100% 4,000
PacketWorks, Inc............... June 19, 1998 100% 100% 852
Internet Online, Inc........... June 30, 1998 65% 100% 4,200
NTX, Inc. (TABNet)............. July 7, 1998 100% 100% 45,500
MagicNet, Inc. ................ July 23, 1998 100% 100% 3,300
TerraNet....................... August 7, 1998 100% 100% 4,271
--------
134,965
Acquisition costs.............. 5,314
--------
$140,279
========
</TABLE>
The aggregate purchase price, including acquisition costs was allocated
based upon fair values as follows:
<TABLE>
<S> <C>
Equipment................................................ $ 5,506
Goodwill................................................. 137,863
Net current liabilities.................................. (3,090)
--------
Total purchase price........................... $140,279
========
</TABLE>
- ---------------
(a) Represents existing ownership interest or, in the case of investments in
preferred stock, ownership upon conversion of preferred shares to common,
on a fully diluted basis.
(b) Represents ownership of preferred stock of affiliate or subsidiary.
(c) Represents ownership of common stock of affiliate or subsidiary.
(d) Represents acquisition of net assets.
(e) Purchase prices are comprised of cash, notes payable, the issuance of
shares of Series D-1 preferred stock, and the granting of an option to
purchase shares of Series D-1 preferred stock. The value of such shares,
which were converted to common stock of the Company in May 1998, as
described in note 5, was generally determined by the Company's Board of
Directors based on comparable valuations of private and public companies,
methodologies based on multiples of revenue and discounted cash flows, and
arms-length negotiated values.
F-30
<PAGE> 150
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited condensed pro forma information presents the
unaudited results of operations of the Company as if substantially all of the
above consolidated acquisitions had occurred on January 1, 1996:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -------------------
1996 1997 1997 1998
---------- ---------- -------- --------
(AMOUNTS IN THOUSANDS,
EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue.................................... $ 57,712 $ 95,386 $ 68,286 $ 96,502
Loss before extraordinary item and
accretion of preferred stock............. (42,469) (69,125) (43,297) (87,035)
Net loss attributable to common
stockholders............................. (42,492) (69,125) (43,476) (97,223)
Loss per common share -- basic and
diluted.................................. $ (43.73) $ (60.37) $ (38.54) $ (5.57)
</TABLE>
The pro forma results do not necessarily represent results that would have
occurred if the consolidated acquisitions had taken place as of January 1, 1996
nor are they necessarily indicative of the results of future operations.
Subsequent to September 30, 1998, the Company completed one acquisition for
total consideration of approximately $8.4 million in cash. In addition, in
August 1998, the Company entered into a definitive agreement to purchase Hiway
for total consideration of $254.7 million, consisting of cash of $176.0 million
and approximately 4.92 million fully diluted shares of Verio Inc. Common Stock.
(3) DEBT
Lines of credit, notes payable and long-term debt consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1997 1998
------- -------- -------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
10 3/8% Senior Notes due 2005(b)................... $ -- $ -- $175,000
13 1/2% Senior Notes due in 2004, net of
unamortized discount of $12,130,136 and 7,900,515
as of December 31, 1997 and September 30, 1998,
respectively(a).................................. -- 137,870 92,494
Revolving lines of credit, bearing interest at .5%
to 2.00% above prime, (9.0% to 10.5% at December
31, 1997) due primarily on demand, secured by
restricted cash of $765,000...................... -- 788 --
Unsecured notes payable bearing interest primarily
at 7%, due in 1998 and 1999...................... 2,500 2,809 1,418
Other.............................................. 93 660 302
------- -------- --------
2,593 142,127 269,214
Less current portion............................... (2,573) (2,751) (774)
======= ======== ========
Long-term debt, less current portion............... $ 20 $139,376 $268,440
======= ======== ========
</TABLE>
- ---------------
(a) In June 1997, the Company 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 at $.01 per share, which were valued at
approximately $12,675,000 based on the Company's most recent equity
offering. Interest on the 1997 Notes is payable semi-annually on June 15
and December 15 of each year. The value attributed to the warrants has been
recorded as debt discount and is being amortized to interest expense using
the interest method over the term of the 1997 Notes. Upon closing, the
Company
F-31
<PAGE> 151
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deposited U.S. Treasury securities in an escrow account in an amount that,
together with interest on the securities, will be sufficient to fund the
first five interest payments (through December 1999) on the 1997 Notes.
This restricted cash and securities balance totaled $38,195,404 at December
31, 1997. The 1997 Notes are redeemable on or after June 15, 2002 at 103%
of the face value.
The indenture covering the 1997 Notes includes various covenants
restricting the payment of dividends, additional indebtedness, disposition of
assets, and transactions with affiliates.
(b) On March 25, 1998, the Company completed the private placement of $175.0
million principal amount of senior notes (the "March 1998 Notes"). The
March 1998 Notes are redeemable at the option of the Company 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
the Company ranking pari passu 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. The Company used
approximately $54.5 million of the proceeds plus accrued interest to
repurchase $50.0 million principal amount of the $150,000,000 13 1/2%
Senior Notes due 2004. As a result, the Company was refunded approximately
$13.3 million from the escrow account for the 1997 Notes, of which
approximately $1.9 million was used to pay accrued and unpaid interest on
the $50.0 million principal amount of 1997 Notes repurchased from Brooks
Fiber Properties, Inc. This transaction resulted in an extraordinary loss
of $10.1 million.
Maturities of lines of credit, notes payable and long-term debt are as
follows (in thousands):
<TABLE>
<S> <C>
1998..................................................... $ 2,751
1999..................................................... 1,032
2000..................................................... 474
2001..................................................... --
2002..................................................... --
Thereafter............................................... 137,870
--------
$142,127
========
</TABLE>
The Company has received commitments from a group of commercial lending
institutions to provide an aggregate of up to $70.0 million pursuant to a
two-year revolving credit financing facility. No borrowings are outstanding
under this facility as of September 30, 1998.
F-32
<PAGE> 152
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) LEASES AND COMMITMENTS
The Company leases office space, certain facilities storing internet points
of presence and certain computer and office equipment under capital and
operating leases expiring at various dates through 2003. Future minimum annual
lease payments under these leases as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
1998........................................................ $ 2,279 $ 5,786
1999........................................................ 1,840 5,178
2000........................................................ 1,128 3,485
2001........................................................ 42 1,393
2002........................................................ 9 487
Thereafter.................................................. -- 172
------- -------
Total minimum payments............................ $ 5,298 $16,501
=======
Less amount representing interest........................... (778)
-------
Present value of net minimum lease payments....... 4,520
Less current portion........................................ (1,575)
-------
$ 2,945
=======
</TABLE>
Rent expense for the period from inception (March 31, 1996) to December 31,
1996 and the year ended December 31, 1997 and the nine months ended September
30, 1998 was $128,000, $1,856,000, and $3,036,000, respectively.
In addition, the Company has entered into agreements with two
telecommunications companies to provide the Company with products and services
to be used in its operations. Under one agreement, the minimum payments as of
September 30, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $1,200
1999........................................................ 1,900
2000........................................................ 2,400
2001........................................................ 800
------
Total minimum payments............................ $6,300
======
</TABLE>
Under the second agreement, the Company is obligated to spend a total of
$39 million between June 16, 1997 and June 16, 2002 of which approximately
$3,300,000 had been paid as of September 30, 1998. Annual payments will be based
on actual usage by the Company.
On March 31, 1998, the Company entered into a 15-year Capacity and Services
Agreement (the "Capacity Agreement") with Qwest Communications Corporation
("Qwest"), under which the Company will have access to long haul capacity and
ancillary services on Qwest's planned 16,285 mile MacroCapacity(sm) Fiber
Network. Over the first seven years of the term of the Capacity Agreement (the
"Commitment Term"), the Company must purchase, and Qwest must provide, not less
than $100.0 million, in the aggregate, of such capacity and services (the
"Commitment"), at agreed upon prices. The amount of capacity represented by the
Commitment would satisfy less than 50% of the Company's currently projected long
haul capacity requirements over the Commitment Term. However, the Company has
the right to order capacity and services in excess of the Commitment, and after
the expiration of the Commitment Term, at the same agreed upon prices.
The Company had an outstanding irrevocable letter of credit in the amount
of $1.4 million as of September 30, 1998. This letter of credit, which is
automatically renewed after one year at the discretion of the bank, not to be
extended beyond January 31, 2003, is to collateralize the Company's lease
obligation to a
F-33
<PAGE> 153
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
third party. The fair value of this letter of credit approximates contract value
which is fixed over the life of the commitment. Restricted cash in the amount of
$1,500,000 secures the letter of credit.
(5) PREFERRED STOCK
Series A, B and C preferred shares were issued in 1996 and 1997 at $3, $6
and $8 per share, respectively, for total proceeds of $18,100,001, $60,170,004
and $20,000,000, respectively. The Series A, B, and C preferred shares were
subject to mandatory redemption and were convertible into common stock initially
on a one-for-one basis. In December 1997, the Company also issued 680,000 shares
of Series D-1 preferred stock at $15 per share in connection with an
acquisition. The Series D-1 preferred shares were not redeemable. From January
1, 1998 through April 30, 1998, the Company issued 1,534,513 additional shares
of Series D-1 preferred stock ranging from $15 to $22 per share in connection
with business combinations. The preferred shares were entitled to receive
dividends equal, on an as-converted basis, to any amount paid to common
stockholders. In the event of any liquidation or dissolution of the Company,
including certain mergers, consolidations and asset sales, holders of the
preferred shares were entitled to receive an amount equal to the original
issuance price, plus any declared and unpaid dividends. In connection with the
Company's initial public offering of common stock discussed in note 6, all
outstanding preferred shares were converted to common stock in May 1998.
(6) STOCKHOLDERS' EQUITY
Common Stock Offerings
On May 15, 1998, the Company completed its initial public offering of
common stock. The Company issued 5,500,000 shares for net proceeds, after
offering costs, of approximately $115.7 million.
Concurrently with the above offering, the Company also sold an additional
4,493,877 shares to a strategic investor for total proceeds of approximately
$100 million.
Subsequent to the above offering, the Company sold an additional 235,000
shares, in connection with the underwriters exercise of their over-allotment
option, for net proceeds of approximately $5.1 million.
Stock-Based Compensation Plans
The Company has established Incentive Stock Option Plans (the Plans)
whereby, at the discretion of the Board of Directors (the Board), the Company
may grant stock options to employees of the Company and its controlled
subsidiaries. As of September 30, 1998, the Company had reserved 4,633,084
shares for issuance under the Plans. The option price is determined by the Board
at the time the option is granted, but generally such price is not less than the
fair market value of the Company's common stock at the date of grant, as
determined by the Board. As of December 31, 1996 and December 31, 1997, options
had been granted entitling the holders to purchase 707,200 and 2,237,050 shares
of the Company's common stock, respectively, at exercise prices of $1, $3, $6,
$6.75 and $8.50 per share. Options granted on or before December 19, 1997, vest
over a five year period, and expire ten years from the date of grant. Options
granted December 20, 1997, or later, vest over a four year period, and expire
eight years from the date of grant. In certain circumstances, options vest
earlier or later based upon the fair value of the Company's common shares or
upon reaching certain performance targets, as defined, and in the case that such
performance targets are not met, such performance-based options vest seven years
from the date of grant. Performance based options granted on or before December
19, 1997, expire ten years from the date of grant, and performance based options
granted December 20, 1997, or later, expire eight years from the date of grant.
As of December 31, 1997, 54,700 options, in total, were vested and exercisable.
Options may be exercised prior to their scheduled vesting date, but are subject
to a repurchase by the Company at the exercise price until the scheduled vesting
date. The weighted average contractual term of outstanding options was
approximately 5 years at December 31, 1997.
F-34
<PAGE> 154
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes option activity for the period from
inception (March 1, 1996) through September 30, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- --------
<S> <C> <C>
Options granted at the following exercise prices:
$1 per share.............................................. 60,000
$3 per share.............................................. 647,700
---------
Options outstanding at December 31, 1996.................... 707,700 $ 2.83
Options granted at the following exercise prices:
$3 per share.............................................. 6,000
$6 per share.............................................. 924,550
$6.75 per share........................................... 635,450
$8.50 per share........................................... 191,250
Options forfeited......................................... (151,700) $ 5.95
Options exercised......................................... (76,200) $ 1.95
--------- ------
Options outstanding at December 31, 1997.................... 2,237,050 $ 5.55
Options granted at the following exercise prices:
$12.75 per share.......................................... 467,150
$13.50 per share.......................................... 1,042,284
$17.00 per share.......................................... 18,500
$17.38 per share.......................................... 180,750
$17.75 per share.......................................... 250,000
$19.00 per share.......................................... 555,187
$20.50 per share.......................................... 30,000
$20.81 per share.......................................... 70,000
$21.13 per share.......................................... 177,700
$22.75 per share.......................................... 7,750
$23.00 per share.......................................... 180,000
$27.25 per share.......................................... 104,350
$29.13 per share.......................................... 104,900
$30.03 per share.......................................... 39,500
Options forfeited......................................... (751,650) $10.72
Options exercised......................................... (80,387) $ 4.65
--------- ------
Options outstanding at September 30, 1998 (unaudited)....... 4,633,084 $12.90
========= ======
</TABLE>
Options outstanding does not include approximately 165,000 options assumed
in connection with the Buyout of NorthWestNet.
During the period and year ended December 31, 1996 and 1997, the per share
weighted-average fair value of stock options granted was $.46 and $1.08,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions: no dividends or volatility,
risk-free interest rate of 6%, and expected life of three years. If the Company
had recorded compensation expense for the period and year ended December 31,
1996 and 1997, based on the fair value of the options at the grant date under
SFAS No. 123, net loss available to common stockholders would increase to
$5,210,000 and $46,737,000, respectively, and basic and diluted net loss per
common share would increase to $4.78 and $40.83, respectively.
F-35
<PAGE> 155
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Since inception, the Company has generally granted stock options with
exercise prices equal to the fair value of the underlying common stock, as
determined by the Company's Board of Directors and based on the Company's other
equity transactions. Accordingly, the Company has not recorded compensation
expense related to the granting of stock options in 1996, 1997 and through
February 28, 1998. Subsequent to February 28, 1998, the Company granted options
to employees with exercise prices less than the fair value per share based upon
the Company's estimated price per share in the initial public offering.
Accordingly the Company will record compensation expense totaling approximately
$10.6 million. Such compensation expense will be recognized pro rata over the
forty-eight month vesting period of the options. This compensation expense
totaled approximately $1,269,000 for the nine months ended September 30, 1998.
It is the intention of the Company to generally grant future stock options with
exercise prices equal to the fair value of the underlying Common Stock at the
date of grant. In addition, the Company incurred $1.4 million in compensation
expense during the nine-months ended September 30, 1998 related to accelerated
vesting of options and approximately $0.4 million in compensation expense
related to options issued to the Company's new president.
(7) INCOME TAXES
Income tax benefit for the period and year ended December 31, 1996 and
1997, differs from the amounts that would result from applying the federal
statutory rate of 34% as follows in thousands:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1996 1997
------- --------
<S> <C> <C>
Expected tax benefit........................................ $(1,749) $(15,752)
State income taxes, net of federal benefit.................. (180) (1,622)
Nondeductible goodwill amortization......................... 26 820
Change in valuation allowance for deferred tax assets,
exclusive of effect of acquired net operating losses...... 1,877 16,472
Other....................................................... 26 82
------- --------
Actual income tax benefit................................. $ -- $ --
======= ========
</TABLE>
No tax benefit was recorded for the nine months ended September 30, 1997
and 1998 due to the increase in the valuation allowance for deferred tax assets,
relating primarily to net operating loss carryforwards.
Temporary differences that give rise to the components of deferred tax
assets as of December 31, 1996 and 1997 and June 30, 1998 are as follows in
thousands:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1997 1998
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Net operating loss carryforwards, including
acquisitions...................................... $ 2,238 $ 18,586 $ 52,500
Other, net.......................................... 39 163 250
------- -------- --------
Gross deferred tax asset.................. 2,277 18,749 52,750
Valuation allowance................................. (2,277) (18,749) (52,750)
------- -------- --------
Net deferred tax asset.................... $ -- $ -- $ --
======= ======== ========
</TABLE>
At December 31, 1997, the Company has a net operating loss carryforward for
federal income tax purposes of approximately $49.9 million, of which $5.9
million and $44.0 million is available to offset future federal taxable income,
if any, through 2011 and 2012, respectively. As a result of various preferred
stock transactions during 1996 and 1997, management believes the Company has
undergone an "ownership
F-36
<PAGE> 156
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
change" as defined by section 382 of the Internal Revenue Code. Accordingly, the
utilization of a portion of the net operating loss carryforward may be limited.
Due to this limitation, and the uncertainty regarding the ultimate utilization
of the net operating loss carryforward, no tax benefit for losses has been
recorded by the Company in 1996, 1997 and 1998, and a valuation allowance has
been recorded for the entire amount of the deferred tax asset.
(8) CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable. As of December 31, 1996 and 1997 and September 30, 1998,
the Company had no concentrations of credit risk. Concentrations of credit risk
with respect to trade receivables are limited due to the large number of
customers comprising the Company's customer base and the relatively minor
balances of each individual account. At December 31, 1996 and 1997 and September
30, 1998, the fair value of the Company's financial instruments approximate
their carrying value, based on their terms and interest rates.
(9) EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Plan (the Plan) for all full time employees of the
Company. The Company may make discretionary contributions to the Plan on behalf
of employees that meet certain contribution eligibility requirements defined
under the terms of the Plan. The Company did not make any contributions to the
Plan during 1996, 1997 or 1998.
(10) QUARTERLY FINANCIAL DATA (UNAUDITED)
Summary quarterly financial information for the Company is as follows. The
second quarter of 1996 represents the period from inception (March 1, 1996) to
June 30, 1996 (Amounts in Thousands Except Per Share Data).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------
1996 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
- ---- -------- ------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
Revenue......................... $ -- $ -- $ 678 $ 1,687 $ 2,365
Loss from operations............ -- (329) (1,395) (4,556) (6,280)
Net loss........................ -- (329) (1,442) (3,374) (5,145)
Loss per common share -- basic
and diluted................... -- (0.34) (1.48) (3.47) (5.29)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------
1997 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
- ---- -------- ------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
Revenue......................... $ 4,414 $ 8,249 $ 9,624 $ 13,405 $ 35,692
Loss from operations............ (5,592) (8,854) (10,741) (15,102) (40,289)
Net loss........................ (4,677) (9,274) (13,250) (19,128) (46,329)
Loss per common share -- basic
and diluted................... (4.29) (8.32) (11.26) (16.63) (40.47)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------
1998 MARCH 31 JUNE 30 SEPTEMBER 30 TOTAL
- ---- -------- -------- ------------ --------
<S> <C> <C> <C> <C>
Revenue............................... $ 21,198 $ 28,541 $ 33,804 $ 83,543
Loss from operations.................. (14,717) (21,327) (29,140) (65,184)
Net loss.............................. (28,384) (26,316) (33,606) (88,306)
Loss per common share -- basic and
diluted............................. (22.44) (1.44) (1.03) (5.06)
</TABLE>
F-37
<PAGE> 157
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheet of On-Ramp Technologies,
Inc. as of July 31, 1996, and the related statements of operations,
stockholders' deficit, and cash flows for the nine months then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of On-Ramp Technologies, Inc.
as of July 31, 1996, and the results of its operations and its cash flows for
the nine months then ended in conformity with generally accepted accounting
principles.
KPMG LLP
Denver, Colorado
April 11, 1997
F-38
<PAGE> 158
ON-RAMP TECHNOLOGIES, INC.
BALANCE SHEET
JULY 31, 1996
ASSETS
<TABLE>
<S> <C>
Current assets:
Trade receivables, net of allowance for doubtful accounts
of $80,812............................................. $ 433,075
Prepaid expenses and other................................ 25,079
-----------
Total current assets.............................. 458,154
Equipment, net (note 2)..................................... 867,388
-----------
Total assets...................................... $ 1,325,542
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Cash overdraft............................................ $ 91,342
Accounts payable.......................................... 448,460
Accrued liabilities....................................... 61,750
Current portion of note payable (note 3).................. 55,003
Deferred revenue.......................................... 652,965
-----------
Total current liabilities......................... 1,309,520
Note payable, less current portion (note 3)................. 58,692
-----------
Total liabilities................................. 1,368,212
-----------
Stockholders' equity (deficit) (note 5):
Common stock, $0.001 par value, 40,000,000 shares
authorized, 1,079,000 shares issued.................... 1,079
Additional paid-in capital................................ 1,804,871
Accumulated deficit....................................... (1,822,620)
Treasury stock -- 689,971 shares at cost.................. (26,000)
-----------
Total stockholders' deficit....................... (42,670)
-----------
Commitments and contingencies (note 4):
Total liabilities and stockholders' deficit....... $ 1,325,542
===========
</TABLE>
See accompanying notes to financial statements.
F-39
<PAGE> 159
ON-RAMP TECHNOLOGIES, INC.
STATEMENT OF OPERATIONS
NINE MONTHS ENDED JULY 31, 1996
<TABLE>
<S> <C>
Revenue:
Internet services......................................... $2,959,650
Computer hardware and software sales...................... 312,487
Consulting services....................................... 92,881
----------
Total revenue..................................... 3,365,018
----------
Cost and expenses:
Internet services operating costs......................... 606,249
Cost of hardware and software sales....................... 249,990
Selling, general and administrative....................... 2,210,706
Provision for bad debts................................... 497,742
Depreciation.............................................. 260,194
----------
Total operating expenses.......................... 3,824,881
----------
Loss from operations.............................. (459,863)
Other income (expense):
Interest income........................................... 8,035
Interest expense.......................................... (7,991)
----------
Net loss.......................................... $ (459,819)
==========
</TABLE>
See accompanying notes to financial statements.
F-40
<PAGE> 160
ON-RAMP TECHNOLOGIES, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
NINE MONTHS ENDED JULY 31, 1996
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL STOCKHOLDERS'
COMMON PAID-IN ACCUMULATED TREASURY EQUITY
STOCK CAPITAL DEFICIT STOCK (DEFICIT)
------- ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES AT NOVEMBER 1, 1995............ 1,079 1,799,699 (1,362,801) (26,000) 411,977
Capital contribution.................... -- 5,172 -- -- 5,172
Net loss................................ -- -- (459,819) -- (459,819)
------ --------- ---------- ------- --------
BALANCES AT JULY 31, 1996............... $1,079 1,804,871 (1,822,620) (26,000) (42,670)
====== ========= ========== ======= ========
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE> 161
ON-RAMP TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JULY 31, 1996
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(459,819)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation........................................... 260,194
Provision for bad debts................................ 497,742
Changes in operating assets and liabilities:
Trade receivables.................................... (375,867)
Prepaid expenses..................................... 6,103
Accounts payable..................................... (170,123)
Accrued liabilities.................................. 4,891
Deferred revenue..................................... 227,140
---------
Net cash used by operating activities............. (9,739)
---------
Cash flows from investing activities --
purchases of equipment.................................... (222,564)
---------
Cash flows from financing activities:
Increase in cash overdraft................................ 91,342
Principal payments on note payable........................ (26,919)
Capital contribution...................................... 5,172
---------
Net cash used by financing activities............. 69,595
---------
Decrease in cash.................................. (162,708)
Cash at beginning of period................................. 162,708
---------
Cash at end of period....................................... $ --
=========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 7,991
=========
</TABLE>
See accompanying notes to financial statements.
F-42
<PAGE> 162
ON-RAMP TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Basis of Presentation
On-Ramp Technologies, Inc. (the Company) was incorporated in the State of
Texas on December 27, 1993. The Company's business consists of providing
regional internet access services, and hardware and software sales and
consulting, to customers in Texas and Georgia.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance.
Revenue from consulting services is recognized as the services are
provided. Revenue from hardware and software sales is recognized upon shipment
of the respective products.
Equipment
Equipment is stated at cost, less accumulated depreciation. Depreciation is
recorded using the straight-line method over the estimated useful life of the
related assets of three years. Costs for normal repairs and maintenance are
expensed as incurred.
Income Taxes
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, (SFAS 109).
Under SFAS 109, deferred income taxes are recognized for the future tax
consequences of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121). This
statement was effective for financial statements for fiscal years beginning
after December 15, 1995. Statement No. 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. The adoption of SFAS 121 as of November
1, 1995 did not have a significant effect on the Company's financial position or
results of operations.
Stock Based Compensation
In October 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, (SFAS No. 123), which establishes a fair
F-43
<PAGE> 163
ON-RAMP TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
value-based method of accounting for stock-based compensation plans. Companies
are encouraged to adopt all provisions of SFAS No. 123 and are required to
comply with the disclosure requirements of SFAS No. 123, which was effective for
fiscal years beginning after December 15, 1995. The Company will continue to
account for stock based compensation under the provisions of APB Opinion No. 25
and will provide the pro forma disclosures required by SFAS 123.
(2) EQUIPMENT
Equipment consisted of the following at July 31, 1996:
<TABLE>
<S> <C>
Internet and computer equipment............................. $1,155,370
Furniture and office equipment.............................. 119,973
Leasehold improvements...................................... 6,668
----------
1,282,011
Less accumulated depreciation............................... (414,623)
----------
$ 867,388
==========
</TABLE>
(3) DEBT
Debt as of July 31, 1996 consists of the following:
<TABLE>
<S> <C>
Note payable bearing interest at 18%, monthly principal and
interest payments of $7,020 through April 1, 1998......... $113,695
Less current portion...................................... (55,003)
--------
$ 58,692
========
</TABLE>
(4) COMMITMENTS AND CONTINGENCIES
Future minimum annual lease payments under operating leases for each of the
years ending July 31, are as follows:
<TABLE>
<S> <C>
1997........................................................ $129,377
1998........................................................ 326,781
1999........................................................ 324,755
2000........................................................ 211,920
--------
$992,833
========
</TABLE>
Rent expense for the nine months ended July 31, 1996 totaled $90,999.
Concentration of Credit Risk and Financial Instruments
The Company provides unsecured credit to customers in the normal course of
business. Failure of the customers to pay could result in losses up to the
recorded receivable balances. The Company does not have any customers that
represent greater than 5% of total revenue at July 31, 1996.
The Company conducts business in Texas and Georgia. Customers who operate
in Texas represent approximately 97% of the Company's customer base and accounts
receivable.
At July 31, 1996, the fair values of the Company's financial instruments
approximate their carrying values based on their terms and interest rates.
F-44
<PAGE> 164
ON-RAMP TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) STOCKHOLDERS' EQUITY
Effective August 1, 1996, the Company issued 1,250,000 shares of newly
authorized redeemable, convertible preferred stock to Verio Inc. (Verio) for
cash consideration of $2,336,816, cancellation of indebtedness in the amount of
$1,663,184, and a note receivable of $4,175,000. The preferred shares are
convertible into common shares on a one for one basis and represent a 50.82%
interest in the Company upon conversion. The preferred shares are redeemable at
the option of the holder at any time, vote on an as-converted basis, and have a
liquidation preference equal to the issuance price. On October 4, 1996, Verio
purchased 100,000 shares of common stock from two Company shareholders for cash
consideration of $600,000, representing an additional 4.07% interest in the
Company. In addition, Verio acquired an option to acquire a 100% common stock
ownership in the Company in the future upon the occurrence of certain events,
including an initial public offering of Verio common stock.
The Company established a stock option plan (the Plan) which provides that
salaried officers or key employees, non-employee directors, and consultants who
provide services to the Company may, at the discretion of the Board of
Directors, be granted options to purchase shares of common stock. 130,560 shares
of the Company's Common Stock have been authorized for issuance under the Plan,
of which 59,878 shares were granted during the nine months ended July 31, 1996,
with an exercise price of $6.34 per share. There were no options exercised or
canceled during the nine months ended July 31, 1996. As of July 31, 1996, 11,976
options were exercisable.
Generally, options vest 20% or 25% on the date of grant of the option and
the balance vests thereafter over a 4 or 3 year period.
During the nine months ended July 31, 1996, the per share weighted-average
fair values of stock options granted was $.71 on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions; expected dividend yield 0%, risk-free interest rate of 6%, and
expected life of four years. If the Company determined compensation expense for
the nine months ended July 31, 1996 based on the fair value of the options at
the grant date under SFAS No. 123, net loss would have been approximately
$468,000.
(6) INCOME TAXES
At December 31, 1995, the Company has a net operating loss carryforward for
federal income tax purposes of $534,000 which is available to offset future
federal taxable income, if any, through 2010. Management believes the Company
has undergone an ownership change under section 382 of the Internal Revenue Code
and, accordingly, the utilization of the net operating loss carryforward
incurred prior to this ownership change is limited. Due to this limitation and
the uncertainty regarding the ultimate utilization of the net operating loss
carryforward a valuation allowance has been recorded for the full amount of the
deferred tax asset related to the net operating loss carryforward, which
represents the only significant temporary difference as of December 31, 1996.
F-45
<PAGE> 165
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheets of Global Enterprise
Services -- Network Division (a Division of Global Enterprise Services, Inc.) as
of December 31, 1995 and 1996, and the related statements of operations and
owners' deficit, and cash flows for each of the years in the three-year period
ended December 31, 1996 and the period ended January 17, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Global Enterprise
Services -- Network Division (a Division of Global Enterprises Services, Inc.)
as of December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1996 and
for the period ended January 17, 1997, in conformity with generally accepted
accounting principles.
KPMG LLP
Denver, Colorado
February 25, 1998
F-46
<PAGE> 166
GLOBAL ENTERPRISE SERVICES -- NETWORK DIVISION
(A DIVISION OF GLOBAL ENTERPRISE SERVICES, INC.)
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
ASSETS
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash...................................................... $ 31,072 33,018
Accounts receivable, net of allowance for doubtful
accounts of $67,247 in 1995 and $84,510 in 1996........ 843,980 822,823
Prepaid expenses and other assets......................... 26,286 10,424
----------- -----------
Total current assets.............................. 901,338 866,265
Equipment, net (note 2)..................................... 1,672,045 2,388,509
Other assets................................................ 43,487 118,888
----------- -----------
Total assets...................................... $ 2,616,870 3,373,662
=========== ===========
LIABILITIES AND OWNER'S DEFICIT
Current liabilities:
Accounts payable.......................................... $ 1,223,510 2,450,316
Accrued expenses.......................................... 378,400 449,270
Deferred revenue.......................................... 1,293,360 1,545,884
Current portion of capital lease obligations (note 6)..... 213,041 548,608
Due to related party (note 3)............................. 866,840 2,183,256
----------- -----------
Total current liabilities......................... 3,975,151 7,177,334
Capital lease obligations, less current portion (note 6).... 454,122 824,034
----------- -----------
Total liabilities................................. 4,429,273 8,001,368
Owner's deficit............................................. (1,812,403) (4,627,706)
----------- -----------
Total liabilities and owner's deficit............. $ 2,616,870 3,373,662
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE> 167
GLOBAL ENTERPRISE SERVICES -- NETWORK DIVISION
(A DIVISION OF GLOBAL ENTERPRISE SERVICES, INC.)
STATEMENTS OF OPERATIONS AND OWNER'S DEFICIT
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND PERIOD ENDED JANUARY 17, 1997
<TABLE>
<CAPTION>
PERIOD ENDED
1994 1995 1996 JANUARY 17, 1997
---------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
Internet services revenue, net........... $3,386,621 3,642,063 3,958,049 155,170
Costs and expenses:
Internet services operating costs...... 1,965,110 2,484,276 3,227,766 163,076
Selling, general and administrative.... 1,716,853 1,953,712 2,847,300 107,179
Depreciation and amortization.......... 191,983 291,541 556,112 33,126
---------- ----------- ----------- -----------
Total operating costs and
expenses..................... 3,873,946 4,729,529 6,631,178 303,381
---------- ----------- ----------- -----------
Loss from operations........... (487,325) (1,087,466) (2,673,129) (148,211)
Interest expense, net.................... (6,479) (39,960) (142,174) (6,622)
---------- ----------- ----------- -----------
Net loss....................... (493,804) (1,127,426) (2,815,303) (154,833)
Owner's deficit at beginning of period... (191,173) (684,977) (1,812,403) (4,627,706)
---------- ----------- ----------- -----------
Owner's deficit at end of period......... $ (684,977) (1,812,403) (4,627,706) (4,782,539)
========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE> 168
GLOBAL ENTERPRISE SERVICES -- NETWORK DIVISION
(A DIVISION OF GLOBAL ENTERPRISE SERVICES, INC.)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND PERIOD ENDED JANUARY 17, 1997
<TABLE>
<CAPTION>
PERIOD ENDED
JANUARY 17,
1994 1995 1996 1997
-------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................. (493,804) (1,127,426) (2,815,303) $(154,833)
Adjustments to reconcile net loss to
net cash provided (used) by
operating activities:
Depreciation and amortization...... 191,983 291,541 556,112 33,126
Provision for doubtful accounts.... 30,644 31,714 25,993 --
Changes in operating assets and
liabilities:
Accounts receivable.............. 170,528 (291,457) (4,836) 148,984
Prepaid expenses and other
current assets................ (26,819) 11,404 15,862 (9,636)
Other assets..................... (27,258) 3,771 (75,401) 60,000
Accounts payable................. 286,981 766,581 1,226,806 (52,610)
Accrued expenses................. 63,273 (3,735) 70,870 116,785
Deferred revenue................. 297,900 (387,288) 252,524 (155,171)
-------- ---------- ----------- ---------
Net cash provided (used) by
operating activities........ 493,428 (704,895) (747,373) (13,355)
-------- ---------- ----------- ---------
Cash flows from investing
activities -- purchases of
equipment............................. (321,399) (497,168) (345,436) --
-------- ---------- ----------- ---------
Cash flows from financing activities:
Net change in due to related party.... (142,215) 1,318,772 1,316,416 (153,663)
Proceeds from debt.................... -- -- -- 134,000
Principal repayments on capital lease
obligations........................ (22,739) (93,738) (221,661) --
-------- ---------- ----------- ---------
Net cash provided (used) by
financing activities........ (164,954) 1,225,034 1,094,755 (19,663)
-------- ---------- ----------- ---------
Net increase (decrease) in cash......... 7,075 22,971 1,946 (33,018)
Cash at beginning of period............. 1,026 8,101 31,072 33,018
-------- ---------- ----------- ---------
Cash at end of period................... 8,101 31,072 33,018 $ --
======== ========== =========== =========
Supplemental disclosure of cash flow
information:
Cash paid during the year for
interest........................... 6,073 35,249 70,535 $ 6,622
======== ========== =========== =========
Supplemental disclosure of non-cash
investing activities -- equipment
acquired through capital leases....... 10,908 735,088 927,140 $ --
======== ========== =========== =========
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE> 169
GLOBAL ENTERPRISE SERVICES -- NETWORK DIVISION
(A DIVISION OF GLOBAL ENTERPRISE SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Business and Basis of Presentation
Global Enterprise Services, Inc. (GES) was formed in August 1992 to provide
internet services to subscribers on a national and international basis through a
high performance telecommunications network. The accompanying financial
statements include the accounts of the domestic operations (Network Division),
assuming that the Network Division had been operated separately as of January 1,
1994 and thereafter.
In preparing the accompanying financial statements, management has
allocated certain assets, liabilities, revenue and expenses based upon the
characteristics of the accounts and the business divisions to which they relate.
Expenses which are not directly related to a particular division are allocated
based upon revenue or payroll expense of the division which, in the opinion of
management, represents a reasonable and appropriate method of allocation.
Effective January 17, 1997, the net assets of the Network Division were
acquired by Verio Inc.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
Internet services are recognized as the services are provided. The Network
Division records deferred revenue for amounts billed and/or collected in
advance.
Equipment
Equipment, including any assets under capital leases, is stated at cost,
less accumulated depreciation and amortization. Depreciation and amortization is
recorded using the straight-line method over the estimated useful lives of the
related assets or the lease term, which range from five to seven years. Costs
for normal repairs and maintenance are expensed as incurred.
Income Taxes
The operations of the Network Division are included in the income tax
returns of GES, which was treated as a subchapter S Corporation in 1994 and
through August 14, 1995, and a C Corporation beginning on August 15, 1995.
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, (SFAS 109).
Under SFAS 109, deferred income taxes are recognized for the future tax
consequences of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
No tax benefit has been allocated to the Network Division in 1994, 1995 and
1996 or for the period ended January 17, 1997, due to losses at the GES level
for which no tax benefit has been provided for financial statement purposes.
F-50
<PAGE> 170
GLOBAL ENTERPRISE SERVICES -- NETWORK DIVISION
(A DIVISION OF GLOBAL ENTERPRISE SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk and Financial Instruments
The Network Division provides unsecured credit to customers in the normal
course of business. Failure of the customers to pay could result in losses up to
the recorded receivable balances. The Network Division does not have any
customers that represent greater than 5% of total revenue for the years ended
December 31, 1994, 1995 and 1996 or for the period ended January 17, 1997.
At December 31, 1996, the fair values of the Network Division's financial
instruments approximate their carrying values based on their terms and interest
rates.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121). This
statement was effective for financial statements for fiscal years beginning
after December 15, 1995. Statement No. 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. The adoption of SFAS 121 effective
January 1, 1996 did not have a significant effect on the Network Division's
financial position or results of operations.
(2) EQUIPMENT
Equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Internet and computer equipment............................. $2,277,949 3,286,929
Furniture and office equipment.............................. 5,889 64,709
Leasehold improvements...................................... 27,165 204,624
---------- -----------
2,311,003 3,556,262
Less accumulated depreciation and amortization.............. (638,958) (1,167,753)
---------- -----------
$1,672,045 2,388,509
========== ===========
</TABLE>
(3) RELATED PARTY TRANSACTIONS
Amounts due to related party represent net cash transfers between the
Network Division and the other divisions of GES, and are non interest bearing.
(4) EMPLOYEE BENEFIT PLAN
GES has established a defined contribution savings plan which provides for
eligible employees who have met certain age and service requirements to
participate by electing to contribute up to 15% of their gross salary to the
plan, as defined, with GES and the Network Division matching 25% of a
participant's contribution up to a maximum of 10% of gross salary, as defined.
Employee contributions are immediately vested. Contributions to the savings plan
on behalf of the Network Division employees for the years ended December 31,
1994, 1995 and 1996 were $3,253, $1,697 and $6,838, respectively.
F-51
<PAGE> 171
GLOBAL ENTERPRISE SERVICES -- NETWORK DIVISION
(A DIVISION OF GLOBAL ENTERPRISE SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) NATIONAL SCIENCE FOUNDATION GRANTS
The Network Division receives grant revenue from the National Science
Foundation (NSF) to provide network connections to certain not-for-profit
educational institutions. Funding is received on a per entity basis. The grant
revenue is recognized ratably over the term of the contract with the
not-for-profit educational institution, which is generally twelve months. Grant
revenue amounted to $131,166, $99,487 and $47,112, in 1994, 1995 and 1996,
respectively. Total amounts receivable at December 31, 1994, 1995 and 1996 were
$34,990, $72,199 and $23,243, respectively.
In September 1994, GES and the Network Division entered into a four year
cooperative agreement with the NSF to provide for interregional connectivity for
the Network Division's United States research and educational customers in the
aggregate amount of $625,115. Pursuant to the agreement, the Network Division
will be reimbursed by the NSF for costs associated with upgrading the Network
Division's existing telecommunications network. The level of funding for each
year will be determined based upon a progress review of the Network Division by
the NSF and the availability of NSF funds. The Network Division is required to
submit an annual plan to the NSF. For the years ended December 31, 1995 and
1996, respectively, the Network Division recognized $154,344 and $196,169 as a
reduction to internet services operating costs. No amounts were recognized for
the year ended December 31, 1994. Total amounts receivable were $30,904 and
$10,326 as of December 31, 1995 and 1996, respectively.
(6) LEASES
The Network Division has entered into capital and operating leases for
telecommunications equipment and office space. Future minimum lease commitments
under all leases at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ ---------- ---------
<S> <C> <C>
1997................................... $ 650,731 344,562
1998................................... 468,940 360,623
1999................................... 392,382 360,830
2000................................... 89,056 372,295
2001................................... -- 191,466
---------- ---------
Total minimum lease payments............................. 1,601,109 1,629,776
=========
Less amount representing interest.......................... (228,467)
----------
Present value of minimum lease payments.................. $1,372,642
Less current portion....................................... (548,608)
----------
$ 824,034
==========
</TABLE>
Rent expense for the years ended December 31, 1994, 1995 and 1996 was
$193,904, $218,408 and $455,936, respectively.
The Network Division has guaranteed monthly usage levels with its primary
communications vendors at December 31, 1996 as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1997.................................................... $205,000
1998.................................................... 205,000
1999.................................................... 51,250
--------
Total.............................................. $461,250
========
</TABLE>
F-52
<PAGE> 172
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheets of Compute Intensive, Inc.
as of December 31, 1995 and 1996, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the two
year period ended December 31, 1996 and for the period ended February 18, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Compute Intensive, Inc. as
of December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the years in the two year period ended December 31, 1996 and
for the period ended February 18, 1997 in conformity with generally accepted
accounting principles.
KPMG LLP
Denver, Colorado
February 25, 1998
F-53
<PAGE> 173
COMPUTE INTENSIVE INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
ASSETS
<TABLE>
<CAPTION>
1995 1996
-------- ---------
<S> <C> <C>
Current assets:
Cash...................................................... $ 20,335 44,328
Trade receivables, net of allowance for doubtful accounts
of $35,033 and $105,858 in 1995 and 1996,
respectively........................................... 455,148 506,017
Income taxes receivable................................... 9,612 15,510
Deferred income taxes (note 7)............................ 16,362 --
Prepaid expenses and other................................ 5,937 183,834
-------- ---------
Total current assets.............................. 507,394 749,689
Equipment, net (note 2)..................................... 344,988 604,358
Other assets................................................ 15,408 48,587
-------- ---------
Total assets...................................... $867,790 1,402,634
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Revolving lines of credit (note 3)........................ $ 28,193 207,115
Current portion of note payable to related party (note
3)..................................................... 18,341 --
Current portion of obligations under capital leases (note
4)..................................................... 60,220 121,535
Accounts payable.......................................... 373,146 809,791
Accrued liabilities....................................... 113,218 142,235
Deferred revenue.......................................... 43,343 53,295
-------- ---------
Total current liabilities......................... 636,461 1,333,971
Note payable to related party, less current portion (note
3)........................................................ 70,384 --
Capital lease obligations, less current portion (note 4).... 104,048 169,476
Deferred income taxes (note 7).............................. 27,790 --
-------- ---------
Total liabilities................................. 838,683 1,503,447
Stockholders' equity (deficit):
Common stock, no par value, 1,000,000 shares authorized,
900,000 shares issued and outstanding.................. 900 900
Additional paid-in capital................................ 41,112 106,266
Accumulated deficit....................................... (12,905) (207,979)
-------- ---------
Total stockholders' equity (deficit).............. 29,107 (100,813)
-------- ---------
Commitments and contingencies (note 4)
Total liabilities and stockholders' equity
(deficit)....................................... $867,790 1,402,634
======== =========
</TABLE>
See accompanying notes to financial statements.
F-54
<PAGE> 174
COMPUTE INTENSIVE INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND PERIOD ENDED FEBRUARY 18, 1997
<TABLE>
<CAPTION>
PERIOD
ENDED
FEBRUARY 18,
1995 1996 1997
---------- --------- ------------
<S> <C> <C> <C>
Revenue:
Internet services....................................... $ 584,174 2,013,098 519,127
Consulting services..................................... 1,562,814 1,878,336 187,812
Computer hardware sales................................. 263,924 387,215 44,540
Computer software sales................................. 5,345 37,881 17,375
Other................................................... 69,145 60,037 24,736
---------- --------- --------
Total revenue................................... 2,485,402 4,376,567 793,590
---------- --------- --------
Operating expenses:
Cost of consulting services............................. 503,454 537,000 107,604
Cost of internet services............................... 317,768 670,158 144,457
Cost of hardware sales.................................. 227,913 292,941 26,394
Cost of software sales.................................. 5,859 28,043 15,032
Marketing and selling................................... 348,006 541,426 137,449
General and administrative.............................. 1,001,736 2,331,945 544,350
Depreciation and amortization........................... 46,174 133,280 15,954
---------- --------- --------
Total operating expenses........................ 2,450,910 4,534,793 991,240
---------- --------- --------
Earnings (loss) from operations................. 34,492 (158,226) (197,650)
Interest expense.......................................... (23,319) (54,174) (7,254)
---------- --------- --------
Earnings (loss) before income taxes............. 11,173 (212,400) (204,904)
Income tax benefit (expense) (note 7)..................... (7,308) 17,326 --
---------- --------- --------
Net earnings (loss)............................. $ 3,865 (195,074) (204,904)
========== ========= ========
</TABLE>
See accompanying notes to financial statements.
F-55
<PAGE> 175
COMPUTE INTENSIVE INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND PERIOD ENDED FEBRUARY 18, 1997
<TABLE>
<CAPTION>
TOTAL
COMMON ADDITIONAL STOCKHOLDERS'
COMMON STOCK PAID-IN ACCUMULATED EQUITY
STOCK SUBSCRIBED CAPITAL DEFICIT (DEFICIT)
------ ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1995........ $ -- 900 41,112 (16,770) 25,242
Issuance of common stock........... 900 (900) -- -- --
Net earnings....................... -- -- -- 3,865 3,865
---- ---- ------- -------- ---------
BALANCES AT DECEMBER 31, 1995...... 900 -- 41,112 (12,905) 29,107
Capital contribution (note 3)...... -- -- 65,154 -- 65,154
Net loss........................... -- -- -- (195,074) (195,074)
---- ---- ------- -------- ---------
BALANCES AT DECEMBER 31, 1996...... 900 -- 106,266 (207,979) (100,813)
Net loss........................... -- -- -- (204,904) (204,904)
---- ---- ------- -------- ---------
BALANCES AT FEBRUARY 18, 1997...... $900 -- 106,266 (412,883) (305,717)
==== ==== ======= ======== =========
</TABLE>
See accompanying notes to financial statements.
F-56
<PAGE> 176
COMPUTE INTENSIVE INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND PERIOD ENDED FEBRUARY 18, 1997
<TABLE>
<CAPTION>
PERIOD
ENDED
FEBRUARY 18,
1995 1996 1997
--------- -------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss).................................... $ 3,865 (195,074) (204,904)
Adjustments to reconcile net earnings (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization....................... 46,174 133,280 15,954
Deferred income tax expense (benefit)............... 11,972 (11,428) --
Provision for bad debts............................. 35,015 135,593 5,580
Changes in operating assets and liabilities:
Increase in receivables........................... (306,539) (186,462) (64,719)
Decrease (increase) in prepaid expenses and
other.......................................... 4,463 (117,897) (33,368)
Increase in other assets.......................... (7,678) (35,191) (2,251)
Increase in accounts payable...................... 306,005 372,637 78,036
Increase in accrued liabilities................... 22,478 29,017 49,219
Increase in income tax receivable................. (17,064) (5,898) 15,510
Increase in deferred revenue...................... 34,358 9,952 (18,215)
--------- -------- ---------
Net cash provided (used) by operating
activities................................... 133,049 128,529 (159,428)
--------- -------- ---------
Cash flows from investing activities -- Purchases of
equipment.............................................. (131,193) (158,549) (119,999)
--------- -------- ---------
Cash flows from financing activities:
Borrowings under revolving lines of credit............. 19,000 305,258 66,057
Repayments of revolving lines of credit................ (1,808) (126,336) (98,225)
Borrowings (payments) on note payable to related
party............................................... (11,275) (19,563) 200,000
Principal payments on capital lease obligations........ (24,880) (105,346) (12,717)
Cash overdraft......................................... -- -- 79,984
--------- -------- ---------
Net cash provided (used) by financing
activities................................... (18,963) 54,013 235,099
--------- -------- ---------
Increase (decrease) in cash.................... (17,107) 23,993 (44,328)
Cash, beginning of period................................ 37,442 20,335 44,328
--------- -------- ---------
Cash, end of period...................................... $ 20,335 44,328 --
========= ======== =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes........................................ $ 10,800 -- $ --
========= ======== =========
Interest............................................ $ 21,571 54,175 $ 7,253
========= ======== =========
Noncash investing and financing activities -- Equipment
acquired through capital lease obligations............. $ 158,006 232,089 $ --
========= ======== =========
</TABLE>
See accompanying notes to financial statements.
F-57
<PAGE> 177
COMPUTE INTENSIVE INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Compute Intensive, Inc. (the Company) was incorporated in the State of
California on December 31, 1993. The Company has three distinct areas of
business; providing regional internet access services to customers in California
and New Mexico, software and hardware consulting and sales, and software
development and implementation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance.
Revenue from consulting services is recognized when services have been
rendered. On fixed price contracts, revenue is recognized over the course of the
contract using the percentage-of-completion method. The Company provides for any
anticipated losses on such contracts in the period in which such losses are
first determinable.
Revenue from hardware and software sales is recognized upon shipment of the
respective products if the Company has no significant future obligations and
collectibility is probable.
Equipment
Equipment, including any assets under capital leases, is stated at cost,
less accumulated depreciation and amortization. Depreciation and amortization is
recorded using the straight-line method over the estimated useful lives of the
related assets on the lease term, which range from five to seven years. Costs
for normal repairs and maintenance are expensed as incurred.
Income Taxes
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, (SFAS 109).
Under SFAS 109, deferred income taxes are recognized for the future tax
consequences of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of December 31, 1995 and 1996 approximate their
carrying values based on their terms and interest rates. The use of different
market assumptions and/or estimation methodologies may have a significant effect
on the estimated fair values.
F-58
<PAGE> 178
COMPUTE INTENSIVE INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121). This
statement was effective for financial statements for fiscal years beginning
after December 15, 1995. Statement No. 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at lower of the carrying amount or
fair value less costs to sell. The adoption of SFAS 121 in 1996 did not have a
significant effect on the Company's financial position or results of operations.
Stock Based Compensation
In October 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, (SFAS No. 123), which establishes a fair value-based method of
accounting for stock-based compensation plans. Companies are encouraged to adopt
all provisions of SFAS No. 123 and are required to comply with the disclosure
requirements of SFAS No. 123, which was effective for fiscal years beginning
after December 15, 1995. The Company will continue to account for stock based
compensation under the provisions of APB Opinion No. 25 and will provide the pro
forma disclosures required by SFAS 123.
Reclassifications
Certain reclassifications have been made to the 1995 financial statements
to conform with the 1996 presentation.
(2) EQUIPMENT
Equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Internet and computer equipment............................. $342,407 730,143
Furniture and office equipment.............................. 55,016 57,718
Leasehold improvements...................................... 1,892 2,092
-------- --------
399,315 789,953
Less accumulated depreciation and amortization.............. (54,327) (185,595)
-------- --------
$344,988 604,358
======== ========
</TABLE>
Equipment includes assets owned under capital leases with a net book value
of $173,607 and $315,303 at December 31, 1995 and 1996, respectively.
(3) DEBT
At December 31, 1995 and 1996, the Company had an $100,000 unsecured
revolving line of credit agreement with a bank, under which $28,193 and $32,167
was outstanding, respectively. Borrowings under the line bear interest at the
bank's prime lending rate plus 4.75% or 4.5%, based on an average daily balance,
payable monthly (12.75% at December 31, 1996) and are due in 1997.
F-59
<PAGE> 179
COMPUTE INTENSIVE INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On October 16, 1996, the Company entered into an additional $200,000
revolving line of credit agreement with a bank, under which $174,948 was
outstanding at December 31, 1996. Borrowings under the line bear interest at the
bank's prime lending rate plus 2%, based on an average daily balance, payable
monthly (10.25% at December 31, 1996) and are due in 1997.
Note payable to related party at December 31, 1995 bore interest at 7.5%
and was due in monthly installments through 2000. During 1996, the unpaid
balance of $65,154 was assumed by the Company's majority stockholder and was
forgiven and recorded as a capital contribution. The Company borrowed $200,000
from Verio Inc. (Verio) (See note 6), during the period ended February 18, 1997.
Such amount was non interest bearing and was repaid in connection with Verio's
investment in the Company.
(4) COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain computer and office equipment under capital
leases. The Company also leases office space under noncancelable operating
leases expiring at various dates through 1997.
Future minimum annual lease payments under capital and noncancelable
operating leases for each of the years ending December 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ---------
<S> <C> <C>
1997........................................................ $ 166,477 200,490
1998........................................................ 123,363 269,220
1999........................................................ 50,815 281,820
2000........................................................ 24,352 307,020
2001........................................................ 11,823 313,320
--------- ---------
Total minimum payments.................................... 376,830 1,371,870
=========
Less amount representing interest........................... (85,819)
---------
Present value of net minimum lease payments............... 291,011
Less current portion........................................ (121,535)
---------
$ 169,476
=========
</TABLE>
Rent expense for the years ended December 31, 1995 and 1996 and the period
ended February 18, 1997 was $83,148, $128,130 and $27,800, respectively.
Concentration of Credit Risk
The Company provides unsecured credit to customers in the normal course of
business. Failure of the customers to pay could result in losses up to the
recorded receivable balances. The Company's largest customer represented
approximately 32% and 20% of total revenues for the years ended December 31,
1995 and 1996, respectively.
The Company conducts business in California and New Mexico. Customers who
operate in California represent at least 75% of the Company's customer base and
accounts receivable.
(5) EMPLOYEE BENEFIT PLAN
The Company has a Simplified Employee Pension Plan (the Plan) covering all
employees who meet certain eligibility requirements. The Company may make
discretionary contributions to the Plan on behalf of
F-60
<PAGE> 180
COMPUTE INTENSIVE INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
employees that meet certain contribution eligibility requirements defined under
the terms of the Plan. The Company did not make any contributions to the Plan
during 1995 or 1996.
(6) STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
On February 18, 1997, the Company issued 770,234 shares of newly authorized
redeemable, convertible preferred stock to Verio for cash consideration of
$4,899,998. The preferred shares are convertible into common shares on a 1.000
for 1.0017 basis and represent a 55% ownership interest in the Company upon
conversion. The preferred shares are redeemable at the option of the holder at
any time, vote on an as-converted basis, and include a liquidation preference
equal to the issuance price. In addition, Verio acquired an option to acquire a
100% common stock ownership in the Company which it may exercise at any time on
or after one year following the issuance date of the preferred shares. Upon the
initial public offering of Verio common stock or a significant strategic
investor in Verio, Verio is required to exercise the option.
The Company's 1995 Stock Option/Stock Issuance Plan (the Plan) was adopted
by the Board of Directors and approved by the shareholders of the Company in
March 1995. The Plan provides that salaried officers or key employees,
non-employee directors, and consultants who provide services to the Company may,
at the discretion of the plan administrator, be granted options to purchase
shares of common stock. 250,000 shares of the Company's Common Stock have been
authorized for issuance under the Plan, of which 131,000 and 29,500 nonqualified
options were granted in 1995 and 1996, respectively, with an exercise price of
$.05 and $.001 per share, respectively. All options were granted at fair value
at the date of grant, as determined by the Company's Board of Directors. There
were no options exercised and 18,176 were canceled during 1996.
Generally, options vest 25% on the first anniversary of the option grant
date and the balance vests thereafter in equal successive monthly installments
over the next 36 months of service. Option grants to nonemployee directors must
be approved by the Board.
During 1995 and 1996, the per share weighted-average fair values of stock
options granted was $.01 and $.65, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for both years; expected dividend yield 0%, risk-free interest rate
of 6%, and expected life of three years. If the Company determined compensation
expense in 1995 and 1996 based on the fair value of the options at the grant
date under SFAS No. 123, net loss and net earnings would not have been
significantly different than the historical results of operations.
(7) INCOME TAXES
Income tax expense (benefit) consists of the following for the years ended
December 31:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Current:
Federal.................................................. $(3,838) (6,698)
State.................................................... (826) 800
------- -------
(4,664) (5,898)
------- -------
Deferred:
Federal.................................................. 9,261 (8,717)
State.................................................... 2,711 (2,711)
------- -------
11,972 (11,428)
------- -------
$ 7,308 (17,326)
======= =======
</TABLE>
F-61
<PAGE> 181
COMPUTE INTENSIVE INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
No tax benefit was recorded for the period ended February 18, 1997 due to
uncertainty as to realization of the net operating loss for the period.
Income taxes expense (benefit) for the years ended December 31 differs from
the amounts that would result from applying the federal statutory rate of 34% as
follows:
<TABLE>
<CAPTION>
1995 1996
------ -------
<S> <C> <C>
Expected tax expense (benefit).............................. $3,798 (72,216)
State income taxes, net of federal benefit.................. 335 (6,373)
Nondeductible expenses...................................... 3,175 7,142
Increase in valuation allowance for deferred tax assets..... -- 41,066
Other....................................................... -- 13,055
------ -------
Actual income tax expense (benefit).................... $7,308 (17,326)
====== =======
</TABLE>
Temporary differences that give rise to the components of deferred tax
assets and liabilities as of December 31 are as follows:
<TABLE>
<CAPTION>
1995 1996
-------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ -- 50,231
Accounts receivable, due to allowance for doubtful
accounts for financial statement purposes only......... 15,169 37,983
Other..................................................... 1,193 --
-------- -------
Gross deferred tax asset.......................... 16,362 88,214
Valuation allowance......................................... -- (41,066)
-------- -------
Net deferred tax asset............................ 16,362 47,148
-------- -------
Deferred tax liability:
Equipment, due to differences in depreciation for
financial statement and tax purposes................... (23,696) (43,054)
Other..................................................... (4,094) (4,094)
-------- -------
Total deferred tax liability...................... (27,790) (47,148)
-------- -------
Net deferred tax liability........................ $ 11,428 --
======== =======
</TABLE>
As of December 31, 1996, the Company has a net operating loss carryforward
of approximately $132,000 for federal income tax purposes which will expire in
2011, if not utilized. A valuation allowance has been recorded for a portion of
the related deferred tax asset due to the uncertainty relating to the
realization of the entire net operating loss carryforward in the future.
F-62
<PAGE> 182
INDEPENDENT AUDITORS' REPORT
The Board of Directors
NorthWestNet, Inc.:
We have audited the accompanying balance sheet of NorthWestNet, Inc. as of
June 30, 1996, and the related statements of operations, stockholders' equity,
and cash flows for the six months ended June 30, 1996 and the eight months ended
February 28, 1997. We have also audited the accompanying balance sheet of
Northwest Academic Computing Consortium, Inc. (Predecessor Company) as of June
30, 1995 and the related statements of operations, fund balance and cash flows
for the year ended June 30, 1995 and the six months ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NorthWestNet, Inc. as of
June 30, 1996, and the results of its operations and its cash flows for the six
months ended June 30, 1996, and the eight months ended February 28, 1997 and the
financial position of Northwest Academic Computing Consortium, Inc. as of June
30, 1995 and the results of its operations and its cash flows for the year ended
June 30, 1995 and the six months ended December 31, 1995 in conformity with
generally accepted accounting principles.
KPMG LLP
Seattle, Washington
January 31, 1998
F-63
<PAGE> 183
NORTHWESTNET, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY NORTHWESTNET, INC.
----------- ------------------
JUNE 30, JUNE 30,
1995 1996
----------- ------------------
<S> <C> <C>
Cash and cash equivalents................................... $ 563,952 277,284
Accounts receivable, net.................................... 842,753 1,243,981
Prepaids and other assets................................... 29,605 32,505
---------- ---------
Total current assets.............................. 1,436,310 1,553,770
Equipment, furniture and leasehold improvements, net........ 1,246,180 1,613,981
Deferred income taxes....................................... -- 46,000
---------- ---------
Total assets...................................... $2,682,490 3,213,751
========== =========
LIABILITIES, STOCKHOLDERS' EQUITY AND FUND BALANCE
Accounts payable............................................ $ 108,297 165,606
Accrued liabilities......................................... 102,010 340,677
Deferred revenues and customer advances..................... 965,589 1,374,708
---------- ---------
Total current liabilities......................... 1,175,896 1,880,991
---------- ---------
Stockholders' equity:
Common stock, $.01 par value. Authorized 10,000,000
shares; issued and outstanding 4,000,000 shares and
4,000,100 shares at June 30, 1995 and June 30, 1996,
respectively........................................... -- 40,000
Additional paid-in capital................................ -- 1,193,402
Retained earnings......................................... -- 99,358
---------- ---------
Total stockholders' equity........................ -- 1,332,760
---------- ---------
Fund balance................................................ 1,506,594 --
---------- ---------
Total liabilities and stockholders' equity........ $2,682,490 3,213,751
========== =========
</TABLE>
See accompanying notes to financial statements.
F-64
<PAGE> 184
NORTHWESTNET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR COMPANY NORTHWESTNET, INC.
-------------------------- --------------------------
SIX MONTHS SIX MONTHS EIGHT MONTHS
YEAR ENDED ENDED ENDED ENDED
JUNE 30, DECEMBER 31, JUNE 30, FEBRUARY 28,
1995 1995 1996 1997
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Revenue:
Internet access and connection fees..... $2,218,354 1,197,690 1,655,211 2,572,917
Online information service fees......... 430,031 310,430 380,522 976,404
Grants.................................. 10,000 146,734 78,342 85,795
Other................................... 117,835 15,407 16,949 47,019
---------- --------- --------- ---------
Total revenue................... 2,776,220 1,670,261 2,131,024 3,682,135
Operating expenses:
Salaries and employee benefits.......... 1,145,224 770,215 886,958 2,728,589
Network operations and circuits......... 225,570 356,711 320,396 547,031
Professional fees....................... 254,982 126,789 39,307 61,047
Marketing and advertising............... 55,222 32,460 66,209 114,544
General and administrative.............. 624,314 309,961 364,418 673,541
Depreciation and amortization........... 507,693 248,770 311,261 509,122
---------- --------- --------- ---------
Total operating expenses........ 2,813,005 1,844,906 1,988,549 4,633,874
---------- --------- --------- ---------
Operating income (loss)................... (36,785) (174,645) 142,475 (951,739)
Interest income........................... 46,108 25,639 15,883 25,083
---------- --------- --------- ---------
Earnings (loss) before income
taxes......................... 9,323 (149,006) 158,358 (926,656)
---------- --------- --------- ---------
Income tax expense (benefit).............. -- -- 59,000 (135,000)
---------- --------- --------- ---------
Net earnings (loss)............. $ 9,323 (149,006) 99,358 (791,656)
========== ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-65
<PAGE> 185
NORTHWESTNET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY AND FUND BALANCE
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS TOTAL
FUND COMMON PAID-IN (ACCUMULATED STOCKHOLDERS'
BALANCE STOCK CAPITAL DEFICIT) EQUITY
----------- ------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCES AT JUNE 30, 1994............... $ 1,497,271 -- -- -- --
Net earnings............................ 9,323 -- -- -- --
----------- ------ --------- -------- ---------
BALANCES AT JUNE 30, 1995............... 1,506,594 -- -- -- --
Net loss for the six months ended
December 31, 1995..................... (149,006) -- -- -- --
Distribution to stockholder............. (124,186) -- -- -- --
----------- ------ --------- -------- ---------
BALANCES AT DECEMBER 31, 1995........... 1,233,402 -- -- -- --
Issuance of common stock to effect
corporate reorganization.............. (1,233,402) 40,000 1,193,402 -- 1,233,402
Net earnings for the six months ended
June 30, 1996......................... -- -- -- 99,358 99,358
----------- ------ --------- -------- ---------
BALANCES AT JUNE 30, 1996............... -- 40,000 1,193,402 99,358 1,332,760
Exercise of stock options............... -- 1 86 -- 87
Contingent stock compensation expense... -- -- 451,696 -- 451,696
Net loss for the eight months ended
February 28, 1997..................... -- -- -- (791,656) (791,656)
----------- ------ --------- -------- ---------
BALANCES AT FEBRUARY 28, 1997........... $ -- 40,001 1,645,184 (692,298) 992,887
=========== ====== ========= ======== =========
</TABLE>
See accompanying notes to financial statements.
F-66
<PAGE> 186
NORTHWESTNET, INC.
STATEMENTS OF CASH FLOWS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
PREDECESSOR COMPANY NORTHWESTNET, INC.
------------------------- -------------------------
SIX MONTHS SIX MONTHS EIGHT MONTHS
YEAR ENDED ENDED ENDED ENDED
JUNE 30, DECEMBER 31, JUNE 30, FEBRUARY 28,
1995 1995 1996 1997
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)................... $ 9,323 (149,006) 99,358 (791,656)
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Depreciation and amortization...... 507,693 248,770 311,261 509,122
Contingent stock option
compensation..................... -- -- -- 451,696
Loss on disposition of equipment... -- -- -- 10,526
Deferred tax benefit............... -- -- (46,000) (74,000)
Increases and decreases in:
Accounts receivable.............. (272,151) 418,635 (819,863) 624,707
Prepaids and other assets........ (18,841) (28,347) 25,447 (1,396,570)
Accounts payable................. (73,064) (48,302) (37,056) 304,296
Accrued liabilities.............. (9,079) 110,275 128,392 1,069,605
Deferred revenue................. 331,904 76,759 332,360 (599,775)
--------- ---------- --------- -----------
Net cash provided by (used in)
operating activities........ 475,785 628,784 (6,101) 107,951
--------- ---------- --------- -----------
Cash flows from investing activities:
Purchase of equipment, furniture and
leasehold improvements............. (760,922) (260,850) (524,315) (1,047,283)
Disposition of equipment.............. -- -- -- 22,678
--------- ---------- --------- -----------
Net cash used in investing
activities.................. (760,922) (260,850) (524,315) (1,024,605)
--------- ---------- --------- -----------
Cash flows from financing activities:
Advances from Verio, Inc. ............ -- -- -- 2,560,294
Distribution to stockholder........... -- -- (124,186) --
Exercise of stock options............. -- -- -- 87
--------- ---------- --------- -----------
Net cash provided by (used in)
financing activities........ -- -- (124,186) 2,560,381
--------- ---------- --------- -----------
Increase (decrease) in cash
and cash equivalents........ (285,137) 367,934 (654,602) 1,643,727
Cash and cash equivalents at beginning
of period............................. 849,089 563,952 931,886 277,284
--------- ---------- --------- -----------
Cash and cash equivalents at end of
period................................ $ 563,952 931,886 277,284 1,921,011
========= ========== ========= ===========
Supplemental disclosures of cash flow
information -- cash paid during the
period for income taxes............... $ 900 -- 82,000 118,000
========= ========== ========= ===========
Supplemental schedule of noncash
financing and investing activities:
Accounts payable related to purchase
of equipment....................... $ 15,140 13,523 129,144 --
========= ========== ========= ===========
Issuance of common stock to effect
corporate reorganization........... $ -- 1,233,402 -- --
========= ========== ========= ===========
</TABLE>
See accompanying notes to financial statements.
F-67
<PAGE> 187
NORTHWESTNET, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996 AND FEBRUARY 28, 1997
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
NorthWestNet, Inc. (NorthWestNet), a for-profit corporation incorporated in
the state of Oregon, is a subsidiary of Northwest Academic Computing Consortium,
Inc. (NWACC). NorthWestNet provides Internet access and related on-line
information services to businesses, educational institutions and other
organizations located principally in the Northwest.
(b) Corporate Reorganization
NWACC, a nonprofit corporation organized to promote research, education and
economic development in the Northwest, had been providing Internet access to
businesses and organizations in the Northwest since 1991.
On January 1, 1996, NWACC completed a transaction that included the
creation of NorthWestNet. The transaction consisted of the transfer of
substantially all of NWACC's operating assets and liabilities to NorthWestNet in
exchange for 4,000,000 shares of common stock, which represented all of the
outstanding common stock of NorthWestNet. This transaction represented a
tax-free transfer pursuant to the Internal Revenue Code (IRC) section 351. In
connection with the transaction, all NWACC employees became NorthWestNet
employees.
NWACC's relationship to NorthWestNet, is now that of a stockholder,
currently the majority stockholder. NWACC intends to maintain its tax-exempt
status under IRC section 501(c)(3); however, its activities are independent of
NorthWestNet and its employees.
(c) Basis of Presentation
There was no change in the carrying amounts of assets and liabilities
transferred from NWACC to NorthWestNet effective January 1, 1996. The
accompanying financial statements include the accounts of NWACC through December
31, 1995, presented as Predecessor Company.
The carrying amounts of net assets transferred from NWACC to NorthWestNet
effective January 1, 1996 are summarized as follows:
<TABLE>
<S> <C>
Cash and cash equivalents................................... $ 807,700
Accounts receivable, net.................................... 424,118
Prepaids and other assets................................... 57,952
Equipment, furniture and leasehold improvements, net........ 1,271,783
----------
Total assets...................................... 2,561,553
----------
Accounts payable............................................ 73,518
Accrued expenses............................................ 212,285
Deferred revenue............................................ 1,042,348
----------
Total liabilities................................. 1,328,151
----------
Net assets........................................ $1,233,402
==========
</TABLE>
(d) Cash Equivalents
All short-term investments with original maturities of three months or less
at date of purchase are considered to be cash equivalents.
F-68
<PAGE> 188
NORTHWESTNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(e) Concentrations of Credit Risk
Financial instruments that potentially subject NorthWestNet to
concentrations of credit risk consist principally of cash equivalents and
accounts receivable. NorthWestNet's cash equivalents represent investments in
money market funds which are readily convertible to cash. Accounts receivable
are principally from NorthWestNet's customers located throughout the Northwest.
(f) Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of (SFAS 121). This
statement was effective for financial statements for fiscal years beginning
after December 15, 1995. Statement No. 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. The adoption of SFAS 121 effective July
1, 1996 did not have a significant effect on the NorthWestNet's financial
position or results of operations.
(g) Revenue Recognition
Revenues consist primarily of Internet access fees, connection fees and
on-line information service fees. Internet access fees consist of fixed monthly
amounts and are recognized ratably over the terms of the service contracts.
Connection fees, representing customer site equipment and installation charges,
are recognized upon installation of a customer's Internet connectivity. Fixed
on-line information service fees are recognized ratably over the terms of the
service contracts. Volume-based on-line information service fees are recognized
as such services are delivered. Payments received in advance of providing
services are deferred until the period such services are provided.
(h) Advertising Costs
Advertising costs are expensed as incurred.
(i) Depreciation and Amortization
Equipment, furniture and leasehold improvements are stated at cost.
Depreciation and amortization are provided on the straight-line method over the
estimated useful lives of the assets, or the lease term, if shorter. The
estimated useful lives of the assets are as follows:
<TABLE>
<S> <C>
Network equipment........................................... 3 - 4 years
Computer and office equipment............................... 2 - 3 years
Furniture and fixtures...................................... 7 years
Leasehold improvements...................................... 5 years
</TABLE>
(j) Use of Estimates
NorthWestNet management has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, revenues and expenses, and
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
F-69
<PAGE> 189
NORTHWESTNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(k) Income Taxes
NorthWestNet accounts for income taxes using the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts and tax bases of existing assets and liabilities.
NWACC was exempt from the payment of Federal income taxes under IRC section
501(c)(3). Therefore, no provision for income taxes was required through
December 31, 1995.
(l) Stock-Based Compensation
Prior to July 1, 1996, NorthWestNet accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations. As
such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
July 1, 1996, NorthWestNet adopted Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, which permits entities
to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows
entities to continue to apply the provisions of APB Opinion No. 25 for
transactions with employees and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied to these transactions. NorthWestNet has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123.
(2) EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Equipment, furniture and leasehold improvements and related accumulated
depreciation and amortization consist of the following:
<TABLE>
<CAPTION>
JUNE 30
------------------------
1995 1996
----------- ---------
<S> <C> <C>
Network equipment........................................... $ 1,645,558 1,878,787
Computer and office equipment............................... 603,051 586,653
Furniture and fixtures...................................... 102,010 77,011
Leasehold improvements...................................... 50,301 50,301
----------- ---------
Total cost........................................ 2,400,920 2,592,752
Less accumulated depreciation and amortization.............. (1,154,740) (978,771)
----------- ---------
$ 1,246,180 1,613,981
=========== =========
</TABLE>
(3) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
JUNE 30
-------------------
1995 1996
-------- -------
<S> <C> <C>
Accrued compensation and benefits........................... $102,010 153,447
Network operations and circuits............................. -- 129,080
Other....................................................... -- 58,150
-------- -------
$102,010 340,677
======== =======
</TABLE>
F-70
<PAGE> 190
NORTHWESTNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) BORROWING AGREEMENT
NorthWestNet had a borrowing agreement with a commercial bank, which
expired in June 1997, that provided for a $400,000 operating line of credit
(Line of Credit) and a $600,000 equipment term loan (Term Loan). Borrowings
under the Line of Credit were limited to 75% of eligible accounts receivable and
bear interest at the bank's prime rate plus 1.75%. The Term Loan bore interest
at the bank's prime rate plus 2%. Borrowings under this agreement were secured
by substantially all of NorthWestNet's assets. There were no borrowings under
the Line of Credit or Term Loan as of June 30, 1996.
(5) INCOME TAXES
The components of NorthWestNet's income tax expense (benefit) for the six
months ended June 30, 1996 and the eight months ended February 28, 1997 are as
follows:
<TABLE>
<CAPTION>
SIX EIGHT
MONTHS MONTHS
ENDED ENDED
JUNE 30, FEBRUARY 28,
1996 1997
-------- ------------
<S> <C> <C>
Current:
Federal..................................................... $100,000 (66,000)
State....................................................... 5,000 5,000
Deferred -- Federal......................................... (46,000) (74,000)
-------- --------
$ 59,000 (135,000)
======== ========
</TABLE>
Deferred income taxes result from temporary differences in the recognition
of income and expense between financial statement and income tax reporting.
Temporary differences at June 30, 1996 are primarily attributable to
depreciation and amortization of equipment, furniture and leasehold
improvements. The tax effects of these temporary differences result in deferred
tax assets which are classified as noncurrent on the accompanying June 30, 1996
balance sheet. Actual tax expense for the six months ended June 30, 1996
approximates the amount calculated using the Federal statutory rate of 34%, plus
the provision for state taxes. The tax benefit for the eight months ended
February 28, 1997 differs from the expected benefit, calculated using the
Federal statutory rate of 34%, primarily due to non-deductible stock option
compensation.
(6) STOCKHOLDERS' EQUITY -- EMPLOYEE STOCK OPTION PLAN
NorthWestNet adopted a stock option plan (Plan) in January 1996 to
compensate its employees for future services and has reserved 1.5 million shares
of common stock for option grants under the Plan. Of the reserved shares,
500,000 are for options which are exercisable, upon reaching defined corporate
objectives (Contingent Options), at an exercise price of $.875 per share. The
date the defined corporate objectives are met, any excess of fair market value
per share over the exercise price per share of the outstanding options would be
charged to salaries and benefits expense in the statement of operations with a
corresponding increase in stockholder's equity. As of December 31, 1996, 370,000
contingent shares were outstanding. The remaining 1 million reserved shares are
for options which generally vest, based on continued employment, over periods
ranging from three to four years in equal monthly increments beginning the month
after the grant (Noncontingent Options). All options expire ten years from the
date of grant and are exercisable at the fair market value of the common stock
at the grant date.
F-71
<PAGE> 191
NORTHWESTNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of stock option activity under the Plan follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------------------
WEIGHTED-
SHARES AVERAGE
AVAILABLE NON- EXERCISE
FOR GRANT CONTINGENT CONTINGENT PRICE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Authorization of Plan.......................... 1,500,000 -- -- $ --
Options granted................................ (988,000) 583,000 405,000 0.875
Options relinquished........................... 76,771 (41,771) (35,000) 0.875
Balances at June 30, 1996...................... 588,771 541,229 370,000 0.875
Options granted................................ (54,000) 54,000 -- 1.956
Options exercised.............................. -- (100) -- 0.875
Options relinquished........................... 3,229 (3,229) -- 0.875
Options surrendered for cash................... -- (192,265) -- 0.875
Balances at February 28, 1997.................. 538,000 399,635 370,000 $0.951
</TABLE>
NorthWestNet applies APB Opinion No. 25 in accounting for its Plans, and,
because the Company grants options at fair value, as determined by the Company's
Board of Directors, no compensation cost has been recognized for its employee
stock options in the financial statements. Had NorthWestNet determined
compensation cost of employee stock options based on the fair value at the grant
date for its stock options under SFAS No. 123, NorthWestNet's net earnings would
have been reported as the pro forma amounts indicated below:
<TABLE>
<CAPTION>
SIX EIGHT
MONTHS MONTHS
ENDED ENDED
JUNE 30, FEBRUARY 28,
1996 1997
-------- ------------
<S> <C> <C>
Net earnings (loss):
As reported............................................... $99,359 (791,656)
Pro forma................................................. 26,469 (892,205)
</TABLE>
The per share weighted-average fair value of stock options granted during
the six months ended June 30, 1996 and the eight months ended February 28, 1997
was $0.28 and $0.70 respectively, on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions: six months
ended June 30, 1996 -- expected dividend yield 0%, risk-free interest rate of
5.51% and an expected life of 7 years; eight months ended February 28,
1997 -- expected dividend yield 0%, risk-free interest rate of 6.55%, and an
expected life of 7 years.
F-72
<PAGE> 192
NORTHWESTNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
under the Plan at June 30, 1996 and February 28, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE
--------------- ----------- ---------------------
<S> <C> <C>
June 30, 1996:
$0.875............................................... 911,229 9.5 years
-------
February 28, 1997:
$0.875............................................... 715,635
1.375............................................... 6,000
2.000............................................... 34,500
$ 2.10............................................... 13,500
-------
$0.875-2.000......................................... 769,635 9.5 years
-------
</TABLE>
All options became vested and exercisable upon completion of the ownership
change described in note 10.
(7) LEASES
NorthWestNet leases its office and certain network operations facilities
under operating leases which expire in 2002. NorthWestNet subleases a portion of
its office space as sublessor under operating leases which expire in 1996 and
1997. Rental expense, net of sublease income, is included in general and
administrative expenses and is comprised of the following:
<TABLE>
<CAPTION>
MINIMUM SUBLEASE
RENTALS INCOME TOTAL
-------- -------- -------
<S> <C> <C> <C>
Year ended June 30, 1995................................ $142,318 34,665 107,653
Six months ended December 31, 1995...................... 88,960 28,623 60,337
Six months ended June 30, 1996.......................... 88,795 24,423 64,372
Eight months ended February 28, 1997.................... 119,696 25,455 94,241
</TABLE>
NorthWestNet leases circuit lines from various vendors under month-to-month
operating leases. Rent expense on these circuit line leases amounted to
$225,570, $316,712, $270,395, and $413,697 for fiscal year ended 1995, the six
months ended December 31, 1995 and June 30, 1996, and the eight months ended
February 28, 1997, respectively, and is included in network operations and
circuits in the statements of operations.
In November 1996, NorthWestNet amended its existing operating lease for its
office facilities. The amendment increased the space leased by NorthWestNet by
approximately 9,000 square feet, beginning in February 1997, and extended the
lease term of existing space to February 2002. Additionally, in December 1996,
NorthWestNet entered into an operating lease for network operations facilities.
The initial term of the lease is five years, beginning in March 1997, with two
three-year extensions available at NorthWestNet's option.
(8) DEFINED CONTRIBUTION PLAN
NorthWestNet and NWACC both sponsor defined contribution plans. For the
NorthWestNet plan, employees who have worked a minimum of three months and
attained age 20 are eligible to participate and employee contributions are
matched by NorthWestNet up to certain limits. Sponsor contributions to the
F-73
<PAGE> 193
NORTHWESTNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
plans totaled $35,765, $17,589, $26,781, and $68,855 for the year ended June 30,
1995 and the six months ended December 31, 1995 and June 30, 1996, and the eight
months ended February 28, 1997, respectively.
(9) BUSINESS CONCENTRATION
One customer accounted for approximately 25%, 23%, 27%, and 23% of revenues
for the year ended June 30, 1995, the six months ended December 31, 1995 and
June 30, 1996, and the eight months ended February 28, 1997, respectively. Such
customer had account receivable balance of $227,662 at June 30, 1996.
Additionally, another customer accounted for approximately 14% of revenues
for the eight months ended February 28, 1997.
(10) OWNERSHIP CHANGE
On January 22, 1997, NorthWestNet, NWACC and Verio Inc. (Verio) executed a
Stock Purchase Agreement (Agreement) pursuant to which Verio acquired all of the
common stock of NorthWestNet owned by NWACC. Under the Agreement, Verio also
agreed to contribute at least $3.4 million to NorthWestNet, of which
approximately $2.3 million was funded in February 1997. The transaction closed
on February 28, 1997.
In connection with the sale to Verio, 370,000 contingent options became
exercisable and $451,696 of compensation expense was recorded by NorthWestNet in
February 1997 which was funded by Verio in addition to the $3.4 million. (See
note 6). In addition, the Plan was amended to provide for Verio's right to
acquire all of the securities outstanding under that plan.
F-74
<PAGE> 194
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
VERIO INC.:
We have audited the accompanying balance sheet of Aimnet Corporation
(wholly-owned by Aimquest Corporation) as of March 31, 1997 and the related
statements of operations, stockholder's equity, and cash flows for the year
ended March 31, 1997 and the period ended May 19, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aimnet Corporation as of
March 31, 1997, and the results of its operations and its cash flows for the
year ended March 31, 1997 and the period ended May 19, 1997 in conformity with
generally accepted accounting principles.
KPMG LLP
Denver, Colorado
February 25, 1998
F-75
<PAGE> 195
AIMNET CORPORATION
(WHOLLY-OWNED BY AIMQUEST CORPORATION)
BALANCE SHEET
MARCH 31, 1997
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash...................................................... $ 201,074
Trade receivables, net of allowance for doubtful accounts
of $52,770............................................. 460,611
Inventory................................................. 39,344
Prepaid expenses and other................................ 44,867
-----------
Total current assets.............................. 745,896
Equipment, net (note 2)..................................... 880,224
-----------
Total assets...................................... $ 1,626,120
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable.......................................... $ 141,680
Accrued expenses.......................................... 31,260
Deferred revenue.......................................... 19,251
Due to parent (note 3).................................... 514,122
Current portion of obligations under capital lease
obligations (note 4)................................... 8,153
-----------
Total current liabilities......................... 714,466
Capital lease obligations, less current portion (note 4).... 17,409
-----------
Total liabilities................................. 731,875
Stockholder's equity (note 6):
Common stock, no par value, 1,000 shares authorized, 100
shares issued and outstanding.......................... 2,307,640
Accumulated deficit....................................... (1,413,395)
-----------
Total stockholder's equity........................ 894,245
Commitments (note 4)
-----------
Total liabilities and stockholder's equity........ $ 1,626,120
===========
</TABLE>
See accompanying notes to financial statements.
F-76
<PAGE> 196
AIMNET CORPORATION
(WHOLLY-OWNED BY AIMQUEST CORPORATION)
STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, 1997 AND PERIOD ENDED MAY 19, 1997
<TABLE>
<CAPTION>
PERIOD ENDED
MAY 19,
1997 1997
----------- ------------
<S> <C> <C>
Revenue:
Internet services......................................... $ 2,649,839 303,600
Other (note 3)............................................ 215,279 87,788
----------- --------
Total revenue..................................... 2,865,118 391,388
----------- --------
Operating expenses:
Internet services and other operating costs............... 1,225,329 124,275
Selling, general and administrative....................... 2,098,958 437,292
Provision for bad debts................................... 425,295 --
Depreciation.............................................. 528,931 94,801
----------- --------
Total operating expenses.......................... 4,278,513 656,368
----------- --------
Net loss.......................................... $(1,413,395) (264,980)
=========== ========
</TABLE>
See accompanying notes to financial statements.
F-77
<PAGE> 197
AIMNET CORPORATION
(WHOLLY-OWNED BY AIMQUEST CORPORATION)
STATEMENT OF STOCKHOLDER'S EQUITY
YEAR ENDED MARCH 31, 1997 AND PERIOD ENDED MAY 19, 1997
<TABLE>
<CAPTION>
INTERCOMPANY
COMMON ACCOUNT ACCUMULATED
STOCK WITH PARENT DEFICIT TOTAL
---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Balance as of March 31, 1996................ $ -- 1,592,490 -- 1,592,490
Incorporation as wholly owned subsidiary and
additional capital contribution by
parent.................................... 2,307,640 (1,592,490) -- 715,150
Net loss.................................... -- -- (1,413,395) (1,413,395)
---------- ---------- ---------- ----------
Balances as of March 31, 1997............... $2,307,640 -- (1,413,395) 894,245
Net loss.................................... -- -- (264,980) (264,980)
---------- ---------- ---------- ----------
Balances as of May 19, 1997................. $2,307,640 -- (1,678,375) 629,265
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-78
<PAGE> 198
AIMNET CORPORATION
(WHOLLY-OWNED BY AIMQUEST CORPORATION)
STATEMENT OF CASH FLOWS
YEAR ENDED MARCH 31, 1997 AND PERIOD ENDED MAY 19, 1997
<TABLE>
<CAPTION>
PERIOD ENDED
MAY 19,
1997 1997
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(1,413,395) (264,980)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation........................................... 528,931 94,801
Provision for bad debts................................ 425,295 --
Changes in operating assets and liabilities:
Decrease (increase) in trade receivables............. (375,042) 40,670
Decrease (increase) in inventory..................... (5,423) 13,107
Decrease in prepaid expenses and other............... 7,047 4,416
Decrease in accounts payable......................... (44,692) (7,459)
Increase (decrease) in accrued expenses.............. (15,248) 18,522
Increase (decrease) in deferred revenue.............. 10,968 (5,171)
----------- --------
Net cash used by operating activities............. (881,559) (106,094)
----------- --------
Cash flows from investing activities -- purchases of
equipment................................................. (320,809) (54,458)
----------- --------
Cash flows from financing activities:
Cash capital contribution by parent....................... 715,150 --
Increase in due to related party.......................... 514,122 55,264
Principal payments on capital lease obligations........... (3,255) (1,548)
----------- --------
Net cash provided by financing activities......... 1,226,017 53,716
----------- --------
Increase (decrease) in cash....................... 23,649 (106,836)
Cash, beginning of period................................... 177,425 201,074
----------- --------
Cash, end of period......................................... $ 201,074 94,238
=========== ========
Noncash investing and financing activities --
Equipment acquired through capital lease obligations...... $ 28,817 --
=========== ========
</TABLE>
See accompanying notes to financial statements.
F-79
<PAGE> 199
AIMNET CORPORATION
(WHOLLY-OWNED BY AIMQUEST CORPORATION)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Aimnet Corporation (the Company) was incorporated in the State of
California on September 26, 1996 as a wholly owned subsidiary of Aimquest
Corporation (Aimquest). Prior to incorporation, the Company's assets,
liabilities, and operations were included in the financial statements of
Aimquest. The Company provides regional internet access services, and hardware
and software sales to customers in California. The accompanying financial
statements include the operations of the Company assuming that the Company had
been operated separately as of April 1, 1996 and thereafter.
Effective May 19, 1997, Verio Inc. acquired a 55% ownership interest in the
Company (see note 6).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance. Revenue
from hardware and software sales is recognized upon shipment of the respective
products.
Inventory
Inventory, consisting of systems hardware and software and maintenance
parts and supplies is recorded at the lower of cost (first-in, first-out) or
market.
Equipment
Equipment, including assets held under capital leases, is stated at cost,
less accumulated depreciation and amortization. Depreciation and amortization is
recorded using the straight-line method over the shorter of the estimated useful
lives of the related assets or the lease term, which are two or three years.
Costs for normal repairs and maintenance are expensed as incurred.
Income Taxes
The Company is included in the tax returns of Aimquest. Income taxes are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, (SFAS 109). Under SFAS 109,
deferred income taxes are recognized for the future tax consequences of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and statutory rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized.
No tax benefit has been allocated to the Company due to the Company's net
loss and the uncertainty regarding the ultimate utilization of such loss in the
consolidated income tax returns of Aimquest. A valuation allowance has been
recorded for the entire balance of the deferred tax asset related to the
Company's net loss.
F-80
<PAGE> 200
AIMNET CORPORATION
(WHOLLY-OWNED BY AIMQUEST CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of March 31, 1997 approximate their carrying values
based on their terms and interest rates. The use of different market assumptions
and/or estimation methodologies may have a significant effect on the estimated
fair values.
Customers who operate in California represent substantially all of the
Company's customer base and accounts receivable. However, no single customer
comprised more than 5% of accounts receivable or total revenue as of or for the
year ended March 31, 1997 or the period ended May 19, 1997.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121). This
statement was effective for financial statements for fiscal years beginning
after December 15, 1995. Statement No. 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value, less costs to sell. The adoption of SFAS 121 effective
April 1, 1996 did not have a significant effect on the Company's financial
position or results of operations.
(2) EQUIPMENT
Equipment consisted of the following at March 31, 1997:
<TABLE>
<S> <C>
Internet and computer equipment.......................... $1,712,000
Furniture................................................ 29,144
----------
1,741,144
Less accumulated depreciation............................ (860,920)
----------
$ 880,224
==========
</TABLE>
Equipment includes assets owned under capital leases with a net book value
of $25,562 at March 31, 1997.
(3) RELATED PARTY TRANSACTIONS
The Company provides internet services to Aimquest which totaled $5,924 for
the year ended March 31, 1997 and $20,386 for the period ended May 19, 1997.
Amounts due to parent represent cash transfers from Aimquest which are
noninterest bearing.
F-81
<PAGE> 201
AIMNET CORPORATION
(WHOLLY-OWNED BY AIMQUEST CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain computer and office equipment under capital
leases. The Company also leases office space under noncancelable operating
leases expiring at various dates through 2001. Future minimum annual lease
payments under capital and noncancelable operating leases for each of the years
ending March 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ----------
<S> <C> <C>
1998.................................................... $12,396 327,146
1999.................................................... 12,396 283,916
2000.................................................... 8,780 279,810
2001.................................................... -- 109,488
Less future minimum payments to be received under
noncancelable subleases............................... -- (31,059)
------- -------
Total minimum payments................................ 33,572 969,301
=======
Less amount representing interest....................... (8,010)
-------
Present value of net minimum lease payments........... 25,562
Less current portion.................................... (8,153)
-------
$17,409
=======
</TABLE>
Rent expense for the year ended March 31, 1997 and the period ended May 19,
1997 totaled $314,890 and $38,203, respectively.
(5) EMPLOYEE BENEFIT PLAN
Aimquest has a 401(k) (the Plan) covering all employees of the Company who
meet certain eligibility requirements. Employer contributions are not required
and the Company did not make any contributions to the Plan during the year ended
March 31, 1997 or the period ended May 19, 1997.
(6) SUBSEQUENT EVENT
Effective May 19, 1997, Verio Inc. (Verio) acquired 77 shares of the
Company's series A preferred stock for cash consideration of approximately
$4,171,000. The preferred shares represent a 55% ownership interest in the
Company, on a fully diluted basis, and are convertible into common shares on a
one for one basis. In addition, the preferred shares have a liquidation
preference equal to the issuance price. Verio also acquired an option to acquire
a 100% ownership in the Company in the future upon the occurrence of certain
events, including an initial public offering of Verio common stock.
F-82
<PAGE> 202
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheet of West Coast Online, Inc.
as of September 30, 1997 and the related statements of operations and
accumulated deficit, and cash flows for the nine months then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of West Coast Online, Inc. as
of September 30, 1997, and the results of its operations and its cash flows for
the nine months then ended in conformity with generally accepted accounting
principles.
KPMG LLP
Denver, Colorado
November 21, 1997
F-83
<PAGE> 203
WEST COAST ONLINE, INC.
BALANCE SHEET
SEPTEMBER 30, 1997
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash...................................................... $ 25,907
Trade receivables, net of allowance for doubtful accounts
of $3,588.............................................. 96,659
Prepaid expenses and other................................ 4,933
---------
Total current assets.............................. 127,499
Equipment, net (note 2)..................................... 524,474
Other assets................................................ 7,148
---------
Total assets...................................... $ 659,121
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable:
Trade.................................................. $ 41,270
Related party (note 5)................................. 27,009
Accrued liabilities....................................... 105,487
Deferred revenue.......................................... 99,679
Current portion of capital lease obligations (note 3)..... 57,874
---------
Total current liabilities......................... 331,319
Capital lease obligations, less current portion (note 3).... 69,994
Total liabilities................................. 401,313
---------
Redeemable preferred stock, 2,000,000 shares authorized
(note 4):
Series A, 60,000 shares issued and outstanding............ 225,000
Series B, 50,710 shares issued and outstanding............ 250,000
---------
Total redeemable preferred stock.................. 475,000
---------
Stockholders' deficit (note 4):
Common stock, no par value, 1,000,000 shares authorized,
246,000 shares issued and outstanding.................. 79,775
Accumulated deficit....................................... (296,967)
---------
Total stockholders' deficit....................... (217,192)
Commitments (note 3)
Total liabilities and stockholders' deficit....... $ 659,121
=========
</TABLE>
See accompanying notes to financial statements.
F-84
<PAGE> 204
WEST COAST ONLINE, INC.
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
<S> <C>
Revenue:
Internet services......................................... $1,354,911
Computer hardware sales................................... 171,818
Other..................................................... 126,394
----------
Total revenue..................................... 1,653,123
----------
Operating expenses:
Internet services operating costs......................... 641,106
Cost of hardware sales.................................... 136,978
Selling, general and administrative....................... 913,743
Depreciation.............................................. 106,185
----------
Total operating expenses.......................... 1,798,012
----------
Loss from operations.............................. (144,889)
Interest expense............................................ (22,772)
----------
Net loss.......................................... (167,661)
Accumulated deficit at beginning of period.................. (129,306)
----------
Accumulated deficit at end of period........................ $ (296,967)
==========
</TABLE>
See accompanying notes to financial statements.
F-85
<PAGE> 205
WEST COAST ONLINE, INC.
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(167,661)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation........................................... 106,185
Provision for bad debts................................ 3,588
Changes in operating assets and liabilities:
Receivables.......................................... (39,945)
Prepaid expenses and other current assets............ 5,197
Other assets......................................... (7,148)
Accounts payable and accrued liabilities............. 12,802
Deferred revenue..................................... 35,944
---------
Net cash used by operating activities............. (51,038)
---------
Cash flows from investing activities -- purchase of
equipment................................................. (154,301)
---------
Cash flows from financing activities:
Proceeds from issuance of redeemable preferred stock...... 250,000
Principal payments under capital lease obligations........ (36,541)
---------
Net cash provided by financing activities......... 213,459
---------
Net increase in cash.............................. 8,120
Cash at beginning of period................................. 17,787
---------
Cash at end of period....................................... $ 25,907
=========
Supplemental disclosure of cash flow information -- cash
paid during the year for interest......................... $ 22,772
=========
Noncash investing and finance activities -- equipment
acquired through capital lease obligations................ $ 67,064
=========
</TABLE>
See accompanying notes to financial statements.
F-86
<PAGE> 206
WEST COAST ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
West Coast Online, Inc. (the Company) was incorporated in the State of
California on January 30, 1996. The Company provides internet access services
and computer hardware sales to customers primarily in California.
As of September 30, 1997, Verio Inc. (Verio) acquired all of the
outstanding common stock of the Company, resulting in 100% ownership.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Equipment
Equipment is stated at cost, less accumulated depreciation. Depreciation is
recorded using the straight-line method over the shorter of the estimated useful
lives of the related assets or the lease term, which range from three to five
years. Costs of normal repairs and maintenance are expensed as incurred.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations, including goodwill, when indications of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the estimated fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value, less costs to sell.
Revenue Recognition
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance.
Revenue from hardware sales is recognized upon shipment of the respective
products if the Company's future obligations are not significant and
collectibility is probable.
Income Taxes
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109).
Under SFAS 109, deferred income taxes are recognized for the future tax
consequences of differences between the tax bases of assets and liabilities and
their financial reporting amounts at September 30, 1997 based on enacted tax
laws and statutory rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company has a net operating loss carryforward of approximately $181,000
which expires in 2012. No tax benefit has been recorded by the Company for the
nine months ended September 30, 1997 due to the Company's net loss and the
uncertainty regarding the ultimate utilization of such loss carryforward. A
valuation allowance has been
F-87
<PAGE> 207
WEST COAST ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
recorded for the entire balance of the deferred tax asset related to the
carryforward. Other temporary differences between financial statement and income
tax bases of assets and liabilities are not significant.
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of December 31, 1997 approximate their carrying values
based on their terms and interest rates. The use of different market assumptions
and/or estimation methodologies may have a significant effect on the estimated
fair values.
Customers who operate in California represent substantially all of the
Company's customer base. However, no single customer comprised more than 10% of
accounts receivable or total revenue for the nine months ended September 30,
1997.
(2) EQUIPMENT
Equipment consisted of the following at September 30, 1997:
<TABLE>
<S> <C>
Internet and computer equipment............................. $ 733,411
Furniture and office equipment.............................. 21,312
---------
754,723
Less accumulated depreciation and amortization.............. (230,249)
---------
$ 524,474
=========
</TABLE>
Equipment includes assets held under capital leases with a net book value
of $134,362 at September 30, 1997.
(3) COMMITMENTS
The Company leases certain computer and office equipment under capital
leases. The Company also leases office space under noncancelable leases expiring
at various dates through 2001. Future minimum annual lease payments under
noncancelable operating leases for each of the years ending September 30 are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1998................................................... $ 70,104 $ 72,160
1999................................................... 63,728 36,342
2000................................................... 18,974 10,743
2001................................................... -- 7,162
-------- --------
Total minimum payments............................... $152,806 $126,407
========
Less amount representing interest...................... (24,938)
--------
Present value of net minimum lease payments.......... 127,868
Less current portion................................... (57,874)
--------
$ 69,994
========
</TABLE>
Rent expense for the nine months ended September 30, 1997 totaled $64,820.
F-88
<PAGE> 208
WEST COAST ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) REDEEMABLE PREFERRED STOCK
The Company issued 60,000 Series A and 50,710 Series B shares of
redeemable, convertible preferred stock in 1996 and 1997, respectively, to
Verio. The preferred shares were convertible into common shares on a one for one
basis and were mandatorily redeemable in 2000. On September 30, 1997, in
connection with the Verio Acquisition, as described in Note 1, Verio converted
these preferred shares to common stock.
(5) TRANSACTIONS WITH RELATED PARTY
During the nine months ended September 30, 1997, the Company received
certain network services from Verio Inc. The entire cost of these services
remain in Accounts Payable-Related Party at September 30, 1997 and is included
in internet services and network operating costs.
F-89
<PAGE> 209
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheet of Clark Internet Services,
Inc. as of September 30, 1997, and the related statements of operations and
retained earnings, and cash flows for the year ended September 30, 1997 and the
period ended October 17, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Clark Internet Services,
Inc. as of September 30, 1997, and the results of its operations and its cash
flows for the year ended September 30, 1997 and the period ended October 17,
1997 in conformity with generally accepted accounting principles.
KPMG LLP
Denver, Colorado
February 25, 1998
F-90
<PAGE> 210
CLARK INTERNET SERVICES, INC.
BALANCE SHEET
SEPTEMBER 30, 1997
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents................................. $ 54,293
Trade accounts receivable, net of allowance for doubtful
accounts of $28,154.................................... 438,186
Related party receivable (note 5)......................... 42,104
Prepaid expenses and other................................ 122,894
----------
Total current assets.............................. 657,477
Equipment, net (note 2)..................................... 650,001
Other assets, net........................................... 112,475
----------
Total assets...................................... $1,419,953
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 261,194
Accrued liabilities....................................... 91,474
Salaries and commissions payable.......................... 98,220
Deferred revenue and customer advances.................... 514,555
Current portion of long-term debt (note 3)................ 175,800
----------
Total current liabilities......................... 1,141,243
Long-term debt, net of current portion (note 3)............. 264,950
Total liabilities................................. 1,406,193
Stockholders' equity:
Common stock, no par value, 1,000,000 shares authorized,
860,000 shares issued and outstanding.................. 4,000
Retained earnings......................................... 9,760
----------
Total stockholders' equity........................ 13,760
----------
Commitments (note 4)
Total liabilities and stockholders' equity........ $1,419,953
==========
</TABLE>
See accompanying notes to financial statements.
F-91
<PAGE> 211
CLARK INTERNET SERVICES, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
YEAR ENDED SEPTEMBER 30, 1997 AND PERIOD ENDED OCTOBER 17, 1997
<TABLE>
<CAPTION>
PERIOD ENDED
OCTOBER 17,
1997 1997
---------- ------------
<S> <C> <C>
Revenue:
Internet services......................................... $3,601,491 159,079
Other..................................................... 114,193 48,917
---------- -------
Total revenue..................................... 3,715,684 207,996
---------- -------
Operating expenses:
Internet services......................................... 1,672,046 48,346
Selling, general and administrative....................... 2,053,619 195,610
Depreciation and amortization............................. 139,379 9,547
---------- -------
Total operating expenses.......................... 3,865,044 253,503
---------- -------
Loss from operations.............................. (149,360) (45,507)
Other income (expense):
Interest income........................................... 2,702 (1,054)
Interest expense.......................................... (26,929) --
---------- -------
Net loss.......................................... (173,587) (46,561)
Retained earnings (deficit):
Beginning of period....................................... 183,347 9,760
---------- -------
End of period............................................. $ 9,760 (36,801)
========== =======
</TABLE>
See accompanying notes to financial statements.
F-92
<PAGE> 212
CLARK INTERNET SERVICES, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1997 AND PERIOD ENDED OCTOBER 17, 1997
<TABLE>
<CAPTION>
PERIOD ENDED
OCTOBER 17,
1997 1997
--------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(173,587) (46,561)
Adjustments to reconcile net loss to net cash provided by
operating activities -- depreciation and
amortization........................................... 139,379 9,547
Changes in operating assets and liabilities:
Trade and related party accounts receivable, net....... (362,396) 2,483
Prepaid expenses and other............................. (19,671) 32,793
Accounts payable....................................... 157,360 (78,954)
Accrued liabilities, and salaries and commissions
payable............................................... 92,849 30,677
Deferred revenue and customer advances................. 245,114 30,809
Other assets, net...................................... (61,263) 12,179
--------- -------
Net cash provided (used) by operating
activities...................................... 17,785 (7,027)
Cash flows used by investing activities --
purchases of equipment.................................... (425,477) --
--------- -------
Cash flows used by financing activities:
Proceeds from bank lines of credit........................ 90,000 --
Proceeds from bank loan................................... 375,000 --
Repayment of bank loan.................................... (51,929) --
--------- -------
Net cash provided by financing activities......... 413,071 --
--------- -------
Net increase (decrease) in cash and cash
equivalents..................................... 5,379 (7,027)
Cash and cash equivalents, at beginning of period........... 48,914 54,293
--------- -------
Cash and cash equivalents, at end of period................. $ 54,293 47,266
========= =======
Supplemental disclosures of cash flow information --
cash paid during year for interest........................ $ 26,929 1,053
========= =======
</TABLE>
See accompanying notes to financial statements.
F-93
<PAGE> 213
CLARK INTERNET SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Clark Internet Services, Inc. (the Company) is a provider of internet
access services to businesses and individuals, primarily in the Maryland,
Washington DC, and Northern Virginia regions.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Effective October 17, 1997, Verio Inc. acquired 51% of the outstanding
common stock of the Company.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
Equipment
Equipment is recorded at cost. Depreciation is provided over the estimated
useful lives of the assets ranging from 3 to 5 years using the straight-line
method.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of (Statement No. 121). Statement No. 121 requires impairment losses to be
recorded on long-lived assets used in operations, including goodwill, when
indicators of impairment are present and the undiscounted future cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. If such assets are impaired, the impairment to be recognized is measured
by the amounts by which the carrying amount of the assets exceeds the fair value
of the assets. Assets to be disposed of are reported at the lower of the
carrying value or fair value, less costs to sell.
Revenue Recognition
Internet services revenue is recognized as the services are provided.
Installation charges and set-up fees are recognized when installation is
completed. The Company records deferred revenue for accounts billed and/or
collected in advance.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109).
SFAS 109 requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
At December 31, 1997, the Company has a net operating loss carryforward for
federal income tax purposes of $235,000 which is available to offset future
federal taxable income, if any, through 2012. Due to the uncertainty regarding
the ultimate utilization of the net operating loss carryforward a valuation
allowance
F-94
<PAGE> 214
CLARK INTERNET SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
has been recorded for the full amount of the deferred tax asset related to the
net operating loss carryforward, which represents the only significant temporary
difference as of September 30, 1997.
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statements purposes. Management estimates that the fair values of all
financial instruments as of September 30, 1997 approximate their carrying values
based on their terms and interest rates. The use of different market assumptions
and/or estimation methodologies may have a significant effect on the estimated
fair values.
(2) EQUIPMENT
Equipment consisted of the following at September 30, 1997:
<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures...................................... $ 337,163
Computer and equipment...................................... 656,496
---------
993,659
Less accumulated depreciation............................... (343,658)
---------
$ 650,001
=========
</TABLE>
Depreciation expense for the year ended September 30, 1997 and the period
ended October 17, 1997 totaled $138,054 and $9,547, respectively.
(3) BANK LINE OF CREDIT AND NOTES PAYABLE
In April 1997, the Company entered into a $200,000 line of credit agreement
with a bank, with interest at the prime rate plus 1.5% (10.0% at September 30,
1997). Borrowings under the line of credit are due in April 1998.
In addition, the Company also borrowed $375,000 from a bank under a loan
secured by the Small Business Administration with interest at the prime rate
plus 2% (10.5% at September 30, 1997). Monthly principal payments of $6,250 are
due through April 2002.
(4) LEASES
The Company leases its facilities under long-term operating leases expiring
at various dates through 2002. Future minimum lease payments consist of the
following at September 30:
<TABLE>
<CAPTION>
<S> <C>
1998........................................................ $363,000
1999........................................................ 182,155
2000........................................................ 42,926
2001........................................................ 25,320
2002........................................................ 13,811
--------
Total minimum lease payments...................... $627,212
========
</TABLE>
Rent expense totaled $484,162 for the year ended September 30, 1997.
(5) TRANSACTION WITH RELATED PARTY
The related party receivable at September 30, 1997 is due from an entity
owned by the Company's Chief Executive Officer, for whom the Company provides
general accounting and administrative services. These amounts were repaid
subsequent to September 30, 1997.
F-95
<PAGE> 215
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheets of ATMnet as of October 31,
1996 and 1997, and the related statements of operations, stockholders' deficit,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ATMnet as of October 31,
1996 and 1997, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
KPMG LLP
Denver, Colorado
December 13, 1997
F-96
<PAGE> 216
ATMNET
BALANCE SHEETS
OCTOBER 31, 1996 AND 1997
ASSETS
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash...................................................... $ 76,037 11,739
Trade receivables, net of allowance for doubtful accounts
of $30,000 and $25,981................................. 279,871 192,726
Other receivables......................................... 13,646 --
Other..................................................... 56,607 65,886
----------- -----------
Total current assets.............................. 426,161 270,351
Equipment and leasehold improvements, net (note 2).......... 1,404,863 1,120,396
Investment in affiliate (note 3)............................ 87,500 --
Intangible assets, net of accumulated amortization of
$99,758 and $52,952....................................... 181,081 134,273
----------- -----------
Total assets...................................... $ 2,099,605 1,525,020
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,736,880 2,738,070
Accrued liabilities....................................... 162,381 589,794
Due to related parties (note 6)........................... 16,235 41,209
Deferred revenue.......................................... 176,481 115,393
Subordinated notes payable to stockholders and related
parties (note 4)....................................... -- 908,979
Current portion of capital lease obligations (note 7)..... 140,223 150,134
----------- -----------
Total current liabilities......................... 2,232,200 4,543,579
Capital lease obligations, less current portion............. 164,514 14,379
----------- -----------
Total liabilities................................. 2,396,714 4,557,958
Stockholders' deficit (note 5):
Common stock, no par value, 83,000,000 shares authorized;
29,100,000 shares issued and outstanding............... 1,158,532 1,158,532
Accumulated deficit....................................... (1,455,641) (4,191,470)
----------- -----------
Total stockholders' deficit....................... (297,109) (3,032,938)
Commitments (note 7)........................................
----------- -----------
Total liabilities and stockholders' deficit....... $ 2,099,605 1,525,020
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-97
<PAGE> 217
ATMNET
STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Revenue:
Internet services (note 6)................................ $ 1,236,478 $ 2,730,732
Equipment sales........................................... 440,315 513,941
----------- -----------
Total revenue..................................... 1,676,793 3,244,673
----------- -----------
Operating expenses:
Cost of internet services................................. 845,465 1,963,858
Cost of equipment sold.................................... 258,517 381,043
Other operating expenses.................................. 645,710 721,012
Selling, general and administrative....................... 957,253 1,927,589
Depreciation and amortization............................. 343,682 649,510
----------- -----------
Total operating expenses.......................... 3,050,627 5,643,012
----------- -----------
Loss from operations...................................... (1,373,834) (2,398,339)
Other expenses:
Interest expense.......................................... (36,203) (167,864)
Other..................................................... (21,000) (169,626)
----------- -----------
Net loss.......................................... $(1,431,037) $(2,735,829)
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-98
<PAGE> 218
ATMNET
STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED OCTOBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON ACCUMULATED
STOCK DEFICIT TOTAL
---------- ----------- -----------
<S> <C> <C> <C>
BALANCE AS OF NOVEMBER 1, 1995....................... $ 458,200 $ (24,604) $ 433,596
Issuance of common stock for cash.................... 700,332 -- 700,332
Net loss............................................. -- (1,431,037) (1,431,037)
---------- ----------- -----------
BALANCES AS OF OCTOBER 31, 1996...................... 1,158,532 (1,455,641) (297,109)
Net loss............................................. -- (2,735,829) (2,735,829)
---------- ----------- -----------
BALANCES AS OF OCTOBER 31, 1997...................... $1,158,532 $(4,191,470) $(3,032,938)
========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-99
<PAGE> 219
ATMNET
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(1,431,037) $(2,735,829)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization.......................... 343,682 649,510
Provision for doubtful accounts........................ 62,000 58,686
Loss on write-off of investment........................ -- 87,500
Changes in operating assets and liabilities:
Trade receivables.................................... (302,792) 28,459
Other receivables.................................... 46,354 13,646
Other current assets................................. (51,943) (9,279)
Accounts payable..................................... 1,710,981 1,001,190
Accrued liabilities and due to related parties....... 172,852 452,387
Deferred revenue..................................... 171,898 (61,088)
----------- -----------
Net cash provided (used) by operating
activities..................................... 721,995 (514,818)
----------- -----------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements.......... (1,235,719) (318,235)
Investment in affiliates, at cost......................... (87,500) --
----------- -----------
Net cash used by investing activities............. (1,323,219) (318,235)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of subordinated debt............... -- 1,018,979
Proceeds from issuance of common stock.................... 700,332 --
Principal payments on subordinated debt................... -- (110,000)
Principal payments on capital lease obligations........... (114,166) (140,224)
----------- -----------
Net cash provided by financing activities......... 586,166 768,755
----------- -----------
Net decrease in cash.............................. (15,058) (64,298)
Cash, beginning of year..................................... 91,095 76,037
----------- -----------
Cash, end of year........................................... $ 76,037 $ 11,739
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest............................................... $ 36,203 $ 25,765
=========== ===========
Noncash investing and financing activities -- equipment
acquired through capital lease obligations................ $ 345,046 $ --
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-100
<PAGE> 220
ATMNET
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
ATMnet (the Company) was incorporated in the State of California on
February 26, 1997. The Company provides regional internet access services, and
hardware sales to customers mainly in California.
Effective November 5, 1997, Verio Inc. acquired substantially all of the
net assets of the Company.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance. Revenue
from hardware sales is recognized upon shipment of the respective products.
Equipment and Leasehold Improvements
Equipment and leasehold improvements, including assets held under capital
leases, is stated at cost, less accumulated depreciation and amortization.
Depreciation and amortization is recorded using the straight-line method over
the shorter of the estimated useful lives of the related assets or the lease
term, which are two or three years. Costs for normal repairs and maintenance are
expensed as incurred.
Investment in Affiliates
Investment in affiliate represents common stock of an affiliate
representing less than a 20% ownership interest which is accounted for using the
cost method.
Intangible Assets
The excess of cost over the fair value of net assets acquired, or goodwill,
and organization costs are amortized using the straight-line method over five
years.
Income Taxes
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109).
Under SFAS 109, deferred income taxes are recognized for the future tax
consequences of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
The Company has a net operating loss carryforward for income tax purposes
of approximately $3,883,000 which expires in 2012. No tax benefit has been
recorded by the Company in fiscal 1996 and 1997 due to the Company's net loss
and the uncertainty regarding the ultimate utilization of such loss
carryforward. A valuation allowance has been recorded for the entire balance of
the deferred tax asset related to the carryforward. Other temporary differences
between financial statement and income tax bases of assets and liabilities are
not significant.
F-101
<PAGE> 221
ATMNET
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1996 AND 1997
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of October 31, 1997 and 1996 approximate their carrying
values based on their terms and interest rates. The use of different market
assumptions and/or estimation methodologies may have a significant effect on the
estimated fair values.
Customers who operate in California represent substantially all of the
Company's customer base and accounts receivable. However, no single customer
comprised more than 5% of accounts receivable or total revenue as of or for the
year ended October 31, 1997 or 1996.
Long-Lived Assets
The Company accounts for long-lived assets under the provisions of
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
(SFAS 121). Statement No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value, less
costs to sell.
Stock-Based Compensation
The Company applies APB Opinion 25 and related interpretations in
accounting for its stock compensation plan. Accordingly, since the Company
grants stock options with exercise prices equal to fair value at the date of
grant, no compensation expense has been recognized in 1996 or 1997. Under
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123), entities are permitted to adopt the fair value method
of accounting for employee stock-based compensation plans. However, SFAS 123
allows an entity to continue using the intrinsic value method under APB Opinion
No. 25, but requires the entity to make pro forma disclosures of net income or
loss as if the fair value method of accounting had been applied.
(2) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment consisted of the following at October 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
---------- ---------
<S> <C> <C>
Internet and computer equipment............................. $1,613,305 1,786,575
Furniture and fixtures...................................... 77,668 133,730
Leasehold improvements...................................... 12,080 100,983
---------- ---------
1,703,053 2,021,288
Less accumulated depreciation............................... (298,190) (900,892)
---------- ---------
$1,404,863 1,120,396
========== =========
</TABLE>
Equipment and leasehold improvements includes assets owned under capital
leases with a net book value of $195,294 and $333,079 at October 31, 1996 and
1997, respectively.
F-102
<PAGE> 222
ATMNET
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1996 AND 1997
(3) INVESTMENT IN AFFILIATE
During fiscal 1996, the Company acquired a 10% interest in Turpike
Corporation for a purchase price of $87,500. The investment was written off in
fiscal 1997.
(4) SUBORDINATED NOTES PAYABLE
Subordinated notes payable as of October 31, 1997 consists of notes payable
to stockholders and related parties, with interest at rates varying from prime
plus 2% (10.5% at October 31, 1997) to 18%, due in June 1998. The notes are
subordinate to all other senior indebtedness of the Company. Interest expense
related to the subordinated notes totaled $104,130 in 1997.
(5) STOCK COMPENSATION PLANS
The Company established a Stock Option Plan in March 1996, whereby. at the
discretion of the Board of Directors (the Board), the Company may grant stock
options to certain key employees of the Company. The option price is determined
by the Board at the time the option is granted, but in no event is less than the
fair market value of the Company's common stock at the date of grant, as
determined by the Board. The options vest over a five year period or, in certain
circumstances, earlier based on the fair value of the Company's common shares,
as defined, and expire ten years from the date of grant. As of October 31, 1997,
no options had been exercised or are exercisable. The weighted-average
contractual life of outstanding options as of October 31, 1997 is approximately
two years.
The following table summarizes option activity for two years ended October
31, 1997:
Options granted during fiscal 1996 at the following exercise price:
<TABLE>
<S> <C>
Options granted during fiscal 1996 at the following exercise
price:
$0.30 per share........................................... 4,410,000
$0.33 per share........................................... 1,000,000
----------
Options outstanding at October 31, 1996..................... 5,410,000
Options cancelled......................................... (1,545,000)
----------
Options outstanding at October 31, 1997..................... 3,865,000
==========
Weighted average exercise price of outstanding options...... $.31
==========
</TABLE>
During the years ended October 31, 1996 and 1997, the per share
weighted-average fair value of stock options granted was $.03 on the date of
grant using the Black-Scholes opinion-pricing model with the following
weighted-average assumptions; no dividends or volatility, risk-free interest
rate of 6%, and expected life of two years. If the Company had determined
compensation expense for the years ended October 31, 1996 and 1997 based on the
fair value of the options at the grant dates under SFAS No. 123, net loss would
increase to $1,595,000 and $2,854,000, respectively.
(6) RELATED PARTY TRANSACTIONS
The Company provides internet services to a company whose founder and CEO
is a shareholder of ATMnet. Revenue earned by ATMnet from this company totaled
$15,523 and $22,581 during the years ended October 31, 1996 and 1997,
respectively.
Amounts due to related parties are for services provided, are non-interest
bearing and are due within one year.
F-103
<PAGE> 223
ATMNET
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1996 AND 1997
(7) LEASES
The Company leases certain computer and office equipment under capital
leases. The Company also leases office space under noncancelable operating
leases expiring at various dates through 2000. Future minimum annual lease
payments under capital and noncancelable operating leases for each of the years
ending October 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ---------
<S> <C> <C>
1998........................................................ $ 161,028 173,868
1999........................................................ 22,524 142,068
2000........................................................ -- 26,209
--------- -------
Total minimum payments.................................... 183,552 342,145
=======
Less amount representing interest........................... (19,039)
---------
Present value of net minimum lease payments............... 164,513
Less current portion........................................ (150,134)
---------
$ 14,379
=========
</TABLE>
Rent expense for the years ended October 31, 1996 and 1997 totaled $72,686
and $168,410, respectively.
F-104
<PAGE> 224
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheets of Global Internet Network
Services, Inc. (wholly-owned by Global Internet.Com Inc.) as of December 31,
1996 and November 26, 1997, and the related statements of operations,
stockholder's equity (deficit), and cash flows for the year ended December 31,
1996 and the period ended November 26, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Global Internet Network
Services, Inc. as of December 31, 1996 and November 26, 1997 and, and the
results of its operations and its cash flows for the year ended December 31,
1996 and the period ended November 26, 1997 in conformity with generally
accepted accounting principles.
KPMG LLP
Denver, Colorado
February 20, 1998
F-105
<PAGE> 225
GLOBAL INTERNET NETWORK SERVICES, INC.
(WHOLLY-OWNED BY GLOBAL INTERNET.COM INC.)
BALANCE SHEETS
DECEMBER 31, 1996 AND NOVEMBER 26, 1997
ASSETS
<TABLE>
<CAPTION>
1996 1997
---------- ---------
<S> <C> <C>
Current assets:
Cash...................................................... $ 132,118 30,681
Trade receivables, net of allowance for doubtful accounts
of $59,777 in 1996 and $86,166 in 1997................. 935,979 449,959
Receivables from affiliates (note 3)...................... 40,497 53,542
Inventory................................................. 126,020 102,801
Prepaid expenses and other................................ 60,869 83,323
---------- ---------
Total current assets.............................. 1,295,483 720,306
Equipment, net (note 2)..................................... 557,142 799,179
Other assets................................................ 3,864 3,723
---------- ---------
Total assets...................................... $1,856,489 1,523,208
========== =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 631,660 109,651
Accrued liabilities....................................... 17,996 18,168
Deferred revenue.......................................... 486,167 418,885
Current portion of obligations under capital leases (note
4)..................................................... 37,828 106,720
Due to parent (note 3).................................... 942,098 --
---------- ---------
Total current liabilities......................... 2,115,749 653,424
Capital lease obligations, less current portion (note 4).... 31,687 193,630
---------- ---------
Total liabilities................................. 2,147,436 847,054
---------- ---------
Stockholder's equity (deficit):
Common stock, $1.00 par value, 10,000 shares authorized,
5,000 shares issued and outstanding.................... 5,000 5,000
Additional paid-in capital................................ 245,000 1,412,849
Accumulated deficit....................................... (540,947) (741,695)
---------- ---------
Total stockholder's equity (deficit)................... (290,947) 676,154
---------- ---------
Commitments (note 4)
Total liabilities and stockholder's equity (deficit)... $1,856,489 1,523,208
========== =========
</TABLE>
See accompanying notes to financial statements.
F-106
<PAGE> 226
GLOBAL INTERNET NETWORK SERVICES, INC.
(WHOLLY-OWNED BY GLOBAL INTERNET.COM INC.)
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 AND
PERIOD ENDED NOVEMBER 26, 1997
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Revenue:
Internet services......................................... $1,979,201 2,501,037
Consulting services (note 3).............................. 344,233 564,150
Computer hardware and software sales (note 3)............. 853,396 355,731
National Science Foundation revenue (note 7).............. 440,119 114,982
Other..................................................... 80,401 248,816
---------- ----------
Total revenue..................................... 3,697,350 3,784,716
---------- ----------
Operating expenses:
Internet services operating costs......................... 1,530,020 1,960,653
Cost of hardware and software sales....................... 591,227 292,874
Engineering and network................................... 507,843 425,430
Marketing and selling..................................... 248,986 238,982
General and administrative................................ 956,052 785,960
Depreciation and amortization............................. 259,956 280,445
---------- ----------
Total operating expenses.......................... 4,094,084 3,984,344
---------- ----------
Loss from operations.............................. (396,734) (199,628)
Other income (expense):
Interest expense.......................................... (9,897) (8,229)
Other, net................................................ 43,577 7,109
---------- ----------
Net loss.......................................... $ (363,054) (200,748)
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-107
<PAGE> 227
GLOBAL INTERNET NETWORK SERVICES, INC.
(WHOLLY-OWNED BY GLOBAL INTERNET.COM INC.)
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31, 1996 AND
PERIOD ENDED NOVEMBER 26, 1997
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL STOCKHOLDER'S
COMMON PAID-IN ACCUMULATED EQUITY
STOCK CAPITAL DEFICIT (DEFICIT)
------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1996..................... $5,000 245,000 (177,893) 72,107
Net loss........................................ -- -- (363,054) (363,054)
------ --------- -------- --------
BALANCES AT DECEMBER 31, 1996................... 5,000 245,000 (540,947) (290,947)
Transfer of net assets to parent (note 6)....... -- (101,088) -- (101,088)
Conversion of note payable to parent to equity
(note 6)...................................... -- 1,156,437 -- 1,156,437
Capital contribution by parent (note 6)......... -- 112,500 -- 112,500
Net loss........................................ -- -- (200,748) (200,748)
------ --------- -------- --------
BALANCES AT NOVEMBER 26, 1997................... $5,000 1,412,849 (741,695) 676,154
====== ========= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-108
<PAGE> 228
GLOBAL INTERNET NETWORK SERVICES, INC.
(WHOLLY-OWNED BY GLOBAL INTERNET.COM INC.)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996 AND
PERIOD ENDED NOVEMBER 26, 1997
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(363,054) (200,748)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization.......................... 259,956 280,445
Provision for bad debts................................ 70,445 95,913
Changes in operating assets and liabilities:
Trade receivables.................................... (231,005) 377,062
Inventory............................................ (43,335) 23,219
Other current assets................................. (26,954) (22,454)
Accounts payable..................................... 575,188 (522,009)
Accrued liabilities.................................. (382,897) 172
Deferred revenue..................................... 58,277 (67,282)
Other................................................ (3,241) --
--------- ---------
Net cash used by operating activities............. (86,620) (35,682)
--------- ---------
Cash flows from investing activities -- purchases of
equipment................................................. (336,795) (334,161)
--------- ---------
Cash flows from financing activities:
Capital contribution by parent............................ -- 112,500
Advances by parent........................................ 544,707 214,339
Principal payments made under capital lease obligations... (39,720) (58,433)
--------- ---------
Net cash provided by financing activities......... 504,987 268,406
--------- ---------
Increase (decrease) in cash....................... 81,572 (101,437)
Cash, beginning of year..................................... 50,546 132,118
--------- ---------
Cash, end of year........................................... $ 132,118 30,681
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 10,095 15,681
========= =========
Noncash investing and financing activities:
Equipment acquired through capital lease obligations... $ -- 299,940
========= =========
Transfer of assets to parent........................... $ -- 101,088
========= =========
</TABLE>
See accompanying notes to financial statements.
F-109
<PAGE> 229
GLOBAL INTERNET NETWORK SERVICES, INC.
(WHOLLY-OWNED BY GLOBAL INTERNET.COM INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND NOVEMBER 26, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Global Internet Network Services, Inc. (the Company) is engaged in
providing regional internet access services, software and hardware consulting
and sales to customers in a ten state region. The Company was incorporated in
Nebraska in September 1987, as Midnet Inc., a nonprofit corporation organized to
promote research, education and economic development. On July 15, 1994, Midnet
Inc. became a for profit corporation and was purchased by Global Internet.Com
Inc. (Parent) on August 8, 1994. On March 12, 1997, the Company changed its
corporate name from Midnet Inc. to Global Internet Network Services, Inc.
Effective November 26, 1997, Verio Inc. (Verio) acquired a 100% ownership
interest in the Company. (see note 6).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance. Revenue
from consulting services is recognized when services have been rendered. Revenue
from hardware and software sales is recognized upon shipment of the respective
products.
Inventory
Inventory, consisting of systems hardware and software and maintenance
parts and supplies is recorded at the lower of cost (first-in, first-out) or
market.
Equipment
Equipment, including any assets held under capital leases, is recorded at
cost, less accumulated depreciation and amortization. Depreciation and
amortization is recorded using the straight-line method over the estimated
useful lives of the related assets or the lease term, which range from three to
five years. Costs for normal repairs and maintenance are expensed as incurred.
Income Taxes
The Company is included in the tax returns of the Parent. Income taxes are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (SFAS 109). Under SFAS 109,
deferred income taxes are recognized for the future tax consequences of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and statutory rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized.
The Company has a net operating loss carryforward of approximately
$518,000, which expires in 2012. No tax benefit has been recorded by the Company
for 1996 or 1997 due to the Company's net loss and the uncertainty regarding the
ultimate utilization of such loss in the consolidated income tax returns of the
Parent. A valuation allowance has been recorded for the entire balance of the
deferred tax asset related to the
F-110
<PAGE> 230
GLOBAL INTERNET NETWORK SERVICES, INC.
(WHOLLY-OWNED BY GLOBAL INTERNET.COM INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company's net loss. Other temporary differences between financial statement and
income tax bases of assets and liabilities are not significant.
Concentration of Credit Risk
The Company provides unsecured credit to customers in the normal course of
business. Failure of the customers to pay could result in losses up to the
recorded receivable balances. The Company did not have any customers that
represent greater than 5% of total revenue for the year ended December 31, 1996
and the period ended November 26, 1997, respectively.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121). This
statement was effective for financial statements for fiscal years beginning
after December 15, 1995. Statement No. 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at lower of the carrying amount or
fair value less costs to sell. SFAS 121 did not have a significant effect on the
Company's financial position or results of operations in 1997 and 1996.
(2) EQUIPMENT
Equipment is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 26,
1996 1997
------------ ------------
<S> <C> <C>
Internet and computer equipment............................ $821,921 1,342,321
Furniture and office equipment............................. 137,847 150,254
Leasehold improvements..................................... 1,228 2,001
-------- ---------
960,996 1,494,576
Less accumulated depreciation and amortization............. (403,854) (695,397)
-------- ---------
$557,142 799,179
======== =========
</TABLE>
(3) TRANSACTIONS WITH PARENT
Amounts due to Parent represent noninterest bearing cash transfers from the
Parent (see note 6).
Hardware and software sales and consulting revenue from affiliates of the
Parent for the year ended December 31, 1996 and the period ended November 27,
1997 were $92,273 and $561,438, respectively.
(4) LEASES
The Company leases certain internet and computer equipment under capital
leases. At December 31, 1996 and November 26, 1997, leased equipment was
included in internet and computer equipment with net book values of $80,117 and
$367,003, respectively. The Company also leases office space under a
noncancelable operating lease expiring in November 2002.
F-111
<PAGE> 231
GLOBAL INTERNET NETWORK SERVICES, INC.
(WHOLLY-OWNED BY GLOBAL INTERNET.COM INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum annual lease payments under capital and noncancelable
operating leases for years ending November 30 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ---------
<S> <C> <C>
1998........................................................ $ 131,748 47,634
1999........................................................ 116,448 50,016
2000........................................................ 95,435 52,516
2001........................................................ -- 55,142
2002........................................................ -- 57,899
--------- -------
Total minimum payments.................................... 343,631 263,207
=======
Less amount representing interest........................... (43,281)
---------
Present value of net minimum lease payments............... 300,350
Less current portion........................................ (106,720)
---------
$ 193,630
=========
</TABLE>
Rent expense for the year ended December 31, 1996 and the period ended
November 26, 1997 was $71,738 and $63,724, respectively.
(5) EMPLOYEE BENEFIT PLAN
The Parent has a 401(k) (the Plan) covering all employees of the Company
who meet certain eligibility requirements. Employer contributions are not
required and the Parent did not make any contributions to the Plan during the
year ended December 31, 1996 and the period ended November 26, 1997.
(6) STOCKHOLDER'S EQUITY
In connection with the acquisition of common stock of the Company by Verio
Inc. (Verio) amounts due to parent totaling $1,156,437 were converted to equity
and the Parent made a cash contribution to the Company in the amount of
$112,500.
Prior to the Verio acquisition in November 1997, the Company transferred
certain net assets of a division to the Parent in the amount of $101,088, which
division was not acquired by Verio.
(7) NATIONAL SCIENCE FOUNDATION GRANTS
The Company receives grant revenue under contracts with the National
Science Foundation (NSF) to provide network connections to certain
not-for-profit educational institutions. Grant revenue is recognized ratably
over the term of the contract, which is generally twelve months. Grant revenue
amounted to $440,119 and $114,982 for the year ended December 31, 1996 and the
period ended November 26, 1997, respectively. Total amounts receivable at
December 31, 1996 and November 26, 1997 were $65,858 and $16,439, respectively.
F-112
<PAGE> 232
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheets of the Pennsylvania
Research Partnership Network (PREPnet) as of November 30, 1996 and 1997, and the
related statements of operations and owners' deficit, and cash flows for the
years then ended and the period ended December 24, 1997. These financial
statements are the responsibility of PREPnet's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Pennsylvania Research
Partnership Network (PREPnet) as of November 30, 1996 and 1997, and the results
of its operations and its cash flows for the years then ended and for the period
ended December 24, 1997 in conformity with generally accepted accounting
principles.
KPMG LLP
Denver, Colorado
February 20, 1998
F-113
<PAGE> 233
THE PENNSYLVANIA RESEARCH PARTNERSHIP NETWORK
(PREPNET)
BALANCE SHEETS
NOVEMBER 30, 1996 AND 1997
ASSETS
<TABLE>
<CAPTION>
1996 1997
----------- ---------
<S> <C> <C>
Current assets:
Trade receivables, net of allowance for doubtful accounts
of $14,631 and $13,313, respectively................... $ 73,943 $ 102,041
Prepaid expenses and other................................ 1,769 15,409
----------- ---------
Total current assets.............................. 75,712 117,450
Equipment, net (note 2)..................................... 200,538 138,008
----------- ---------
Total assets...................................... $ 276,250 $ 255,458
=========== =========
LIABILITIES AND OWNER'S DEFICIT
Current liabilities:
Accounts payable.......................................... $ 88,639 $ 132,039
Accrued liabilities....................................... 44,555 3,020
Current portion of obligations under capital leases (note
3)..................................................... 57,468 56,262
Deferred revenue.......................................... 1,084,501 683,371
----------- ---------
Total current liabilities......................... 1,275,163 874,692
Capital lease obligations, less current portion (note 3).... 55,502 --
----------- ---------
Total liabilities................................. 1,330,665 874,692
Owners' deficit............................................. (1,054,415) (619,234)
Commitments (note 3)
----------- ---------
Total liabilities and owner's deficit............. $ 276,250 $ 255,458
=========== =========
</TABLE>
See accompanying notes to financial statements.
F-114
<PAGE> 234
THE PENNSYLVANIA RESEARCH PARTNERSHIP NETWORK
(PREPNET)
STATEMENTS OF OPERATIONS AND OWNERS' DEFICIT
YEARS ENDED NOVEMBER 30, 1996 AND 1997 AND PERIOD ENDED DECEMBER 24, 1997
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 24,
1996 1997 1997
----------- ----------- ------------
<S> <C> <C> <C>
Revenue:
Internet services.................................... $ 2,027,682 $ 2,026,439 $ 156,459
Grant revenue (note 4)............................... 194,343 98,711 --
Other................................................ 6,309 22,477 --
----------- ----------- ----------
Total revenue................................ 2,228,334 2,147,627 156,459
----------- ----------- ----------
Costs and expenses:
Internet services operating costs.................... 588,543 792,684 80,972
Selling, general and administrative (note 5)......... 831,230 773,174 64,625
Depreciation......................................... 92,251 121,192 8,285
----------- ----------- ----------
Total costs and expenses..................... 1,512,024 1,687,050 153,882
----------- ----------- ----------
Earnings from operations..................... 716,310 460,577 2,577
Interest expense, net.................................. (18,331) (11,261) (938)
----------- ----------- ----------
Net earnings................................. 697,979 449,316 1,639
Owners' deficit at beginning of period................. (726,569) (1,054,415) (619,234)
Net advances to owners................................. (1,025,825) (14,135) (23,911)
----------- ----------- ----------
Owners' deficit at end of period....................... $(1,054,415) $ (619,234) $ (641,506)
=========== =========== ==========
Pro forma information:
Historical net earnings.............................. $ 697,979 $ 449,316 $ 1,639
Pro forma adjustment for income tax expense.......... (265,000) (171,000) (600)
----------- ----------- ----------
Pro forma net earnings....................... $ 432,979 $ 278,316 $ 1,039
=========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-115
<PAGE> 235
THE PENNSYLVANIA RESEARCH PARTNERSHIP NETWORK
(PREPNET)
STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 1996 AND 1997 AND PERIOD ENDED DECEMBER 24, 1997
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 24,
1996 1997 1997
----------- --------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings........................................ $ 697,979 $ 449,316 $ 1,639
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation..................................... 92,251 121,192 8,285
Provision for bad debts.......................... 14,631 13,313 --
Changes in operating assets and liabilities:
Trade receivables.............................. 58,406 (41,411) (38,747)
Prepaid expenses and other assets.............. -- (13,640) 6,294
Accounts payable and accrued liabilities....... 100,318 1,865 (5,400)
Deferred revenue............................... 178,313 (401,130) 57,131
----------- --------- ---------
Net cash provided by operating activities... 1,141,898 129,505 29,202
----------- --------- ---------
Cash flows from investing activities -- purchase of
equipment........................................... (61,987) (58,662) --
----------- --------- ---------
Cash flows from financing activities:
Repayments of capital lease obligations............. (54,086) (56,708) (5,291)
Net advances to owners.............................. (1,025,825) (14,135) (23,911)
----------- --------- ---------
Net cash used by financing activities....... (1,079,911) (70,843) (29,202)
----------- --------- ---------
Net change in cash and cash at beginning and
end of period............................. $ -- $ -- $ --
=========== ========= =========
Supplemental disclosure of cash flow
information -- cash paid for interest............... $ 18,331 $ 11,261 $ 938
=========== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-116
<PAGE> 236
THE PENNSYLVANIA RESEARCH PARTNERSHIP NETWORK
(PREPNET)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
The accompanying financial statements include the accounts of the
Pennsylvania Research Partnership Network (PREPnet), the data communications
network of a consortium of research institutions in Pennsylvania. A joint
venture between Carnegie Mellon University and the University of Pittsburgh
serves as the legal entity and coordinator of the consortium. The accompanying
financial statements have been prepared assuming that PREPnet had been operated
separately as of December 1, 1995 and thereafter. PREPnet provides internet
services to businesses, educational institutions, not-for-profit organizations,
and individual subscribers.
Effective December 24, 1997, the net assets of PREPnet were acquired by
Verio Inc. in a purchase business combination.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
Internet services are recognized as the services are provided. PREPnet
records deferred revenue for amounts billed and/or collected in advance.
Equipment
Equipment, including any assets held under capital leases, is stated at
cost, less accumulated depreciation. Depreciation is recorded using the
straight-line method over the estimated useful lives of the related assets or
the lease term, which is 3 years. Costs for normal repairs and maintenance are
expensed as incurred.
Long-Lived Assets
PREPnet evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). Statement No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
Income Taxes
The operations of PREPnet are included in the income tax returns of the
joint venture, which is a non-profit entity and is exempt from income taxes.
However, pro forma information has been included in the accompanying statement
of operations to reflect a pro forma adjustment for income tax expense as if
PREPnet had been a separate taxable entity subject to federal and state income
taxes for all periods presented.
F-117
<PAGE> 237
THE PENNSYLVANIA RESEARCH PARTNERSHIP NETWORK
(PREPNET)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statements purposes. Management estimates that the fair values of all
financial instruments as of November 30, 1996 and 1997 approximate their
carrying values based on their terms and interest rates. The use of different
market assumptions and/or estimation methodologies may have a significant effect
on the estimated fair values.
(2) EQUIPMENT
Equipment consisted of the following at November 30:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Internet and computer equipment............................. $ 321,434 $ 376,014
Furniture and office equipment.............................. 5,854 9,936
--------- ---------
327,288 385,950
Less accumulated depreciation and amortization.............. (126,750) (247,942)
--------- ---------
$ 200,538 $ 138,008
========= =========
</TABLE>
(3) COMMITMENTS
PREPnet leases certain computer and office equipment under capital leases.
PREPnet also leases office space under noncancelable operating leases expiring
at various dates through 2001.
Future minimum annual lease payments under capital and noncancelable
operating leases for each of the years ending November 30 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1998........................................................ $ 58,810 $ 50,731
1999........................................................ -- 50,341
2000........................................................ -- 27,867
2001........................................................ -- 49,171
-------- --------
Total minimum payments.................................... 58,810 $178,110
========
Less amount representing interest........................... (2,548)
--------
Present value of net minimum lease payments............... 56,262
Less current portion........................................ (56,262)
--------
$ --
========
</TABLE>
Rent expense for the years ended November 30, 1996 and 1997 and the period
ended December 24, 1997 was $47,674, $73,218 and $6,102, respectively.
(4) GRANT REVENUE
PREPnet receives grant revenue from the National Science Foundation and
other government agencies to provide network connections to certain
not-for-profit educational institutions. Grant revenue is recognized ratably
over the term of the contract, which is generally twelve months. Total deferred
grant revenue at November 30, 1996 was $71,667.
F-118
<PAGE> 238
THE PENNSYLVANIA RESEARCH PARTNERSHIP NETWORK
(PREPNET)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) RELATED PARTY TRANSACTIONS
Carnegie Mellon University provides administrative support and use of
facilities to PREPnet and allocates the cost of these services to the entity.
Such allocations totalled approximately $69,188 and $81,886 for the years ended
November 30, 1996 and 1997, respectively.
F-119
<PAGE> 239
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheets of Monumental Network
Systems, Inc. as of December 31, 1996 and 1997, and the related statements of
operations, stockholders' deficit, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Monumental Network Systems,
Inc. as of December 31, 1996 and 1997, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
KPMG LLP
Denver, Colorado
February 25, 1998
F-120
<PAGE> 240
MONUMENTAL NETWORK SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
ASSETS
<TABLE>
<CAPTION>
1996 1997
--------- -----------
<S> <C> <C>
Current assets:
Cash...................................................... $ 63,693 $ --
Trade receivables, net of allowance for doubtful accounts
of $15,363 and $41,207................................. 138,263 214,440
--------- -----------
Total current assets.............................. 201,956 214,440
Equipment, net (note 2)..................................... 359,327 440,406
Other assets, net........................................... 17,664 66,562
--------- -----------
Total assets...................................... $ 578,947 $ 721,408
========= ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 186,526 $ 258,319
Accrued liabilities....................................... 23,052 163,436
Current portion of notes payable (note 3):
Related party.......................................... 30,025 132,954
Other.................................................. 9,789 49,694
Current portion of obligations under capital lease (note
4)..................................................... 70,736 82,194
Deferred revenue.......................................... 326,924 573,057
Cash overdraft............................................ -- 166,157
--------- -----------
Total current liabilities......................... 647,052 1,425,811
Notes payable, less current portion (note 3)................ 8,915 21,067
Capital lease obligations, less current portion (note 4).... 114,764 97,208
--------- -----------
Total liabilities................................. 770,731 1,544,086
Stockholders' deficit:
Common stock, $1.00 par value, 500,000 shares authorized,
300,944 and 302,779 shares issued and outstanding as of
December 31, 1996 and 1997............................. 300,944 302,779
Additional paid-in capital................................ 197,494 199,329
Accumulated deficit....................................... (690,222) (1,324,786)
--------- -----------
Total stockholders' deficit....................... (191,784) (822,678)
Commitments (note 4)
--------- -----------
Total liabilities and stockholders' deficit....... $ 578,947 $ 721,408
========= ===========
</TABLE>
See accompanying notes to financial statements.
F-121
<PAGE> 241
MONUMENTAL NETWORK SYSTEMS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Revenue:
Internet services......................................... $1,250,789 $2,425,121
Computer hardware and software sales...................... 95,557 41,733
Other..................................................... 24,197 4,653
---------- ----------
Total revenue..................................... 1,370,543 2,471,507
---------- ----------
Operating expenses:
Internet services operating costs......................... 385,439 743,524
Cost of hardware and software sales....................... 198,486 417,559
Selling, general and administrative....................... 1,246,716 1,756,956
Depreciation.............................................. 74,607 172,092
---------- ----------
Total operating expenses.......................... 1,905,248 3,090,131
---------- ----------
Loss from operations.............................. (534,705) (618,624)
Interest expense, net....................................... 18,448 15,940
---------- ----------
Net loss.......................................... $ (553,153) $ (634,564)
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-122
<PAGE> 242
MONUMENTAL NETWORK SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
------------------ PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1996.............. 114,015 $114,015 $ -- $ (137,069) $ (23,054)
Issuance of common shares for cash....... 100,000 100,000 100,000 -- 200,000
Issuance of common shares for services or
equipment.............................. 86,929 86,929 97,494 -- 184,423
Net loss................................. -- -- -- (553,153) (553,153)
------- -------- -------- ----------- ---------
BALANCES AT DECEMBER 31, 1996............ 300,944 300,944 197,494 (690,222) (191,784)
Issuance of common shares for cash....... 1,000 1,000 1,000 -- 2,000
Issuance of common shares for services... 835 835 835 -- 1,670
Net loss................................. -- -- -- (634,564) (634,564)
------- -------- -------- ----------- ---------
BALANCES AT DECEMBER 31, 1997............ 302,779 $302,779 $199,329 $(1,324,786) $(822,678)
======= ======== ======== =========== =========
</TABLE>
See accompanying notes to financial statements.
F-123
<PAGE> 243
MONUMENTAL NETWORK SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(553,153) $(634,564)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation........................................... 74,607 172,092
Provision for bad debts................................ 15,363 170,634
Changes in operating assets and liabilities:
Trade receivables.................................... (127,442) (246,811)
Other assets......................................... (15,691) (48,898)
Accounts payable..................................... 120,414 71,793
Accrued liabilities.................................. 13,704 140,384
Deferred revenue..................................... 278,172 246,133
--------- ---------
Net cash used by operating activities............. (194,026) (129,237)
--------- ---------
Cash flows from investing activities -- purchases of
equipment................................................. (142,367) (178,377)
--------- ---------
Cash flows from financing activities:
Net change in cash overdraft.............................. -- 166,157
Borrowings under note payable to related parties.......... 30,848 130,000
Principal payments on note payable to related parties..... (823) (27,071)
Borrowings under notes payable............................ 18,704 66,229
Repayments of notes payable............................... -- (14,172)
Principal payments on capital lease obligations........... (36,824) (80,892)
Issuance of common stock.................................. 384,423 3,670
--------- ---------
Net cash provided by financing activities......... 396,328 243,921
--------- ---------
Increase (decrease) in cash....................... 59,935 (63,693)
Cash at beginning of year................................... 3,758 63,693
--------- ---------
Cash at end of year......................................... $ 63,693 $ --
========= =========
Supplemental disclosure of cash flow information -- cash
paid during the year for interest......................... $ 18,739 $ 16,508
========= =========
Noncash investing and financing activities -- equipment
acquired through capital lease obligations................ $ 219,242 $ 74,794
========= =========
</TABLE>
See accompanying notes to financial statements.
F-124
<PAGE> 244
MONUMENTAL NETWORK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Monumental Network Systems, Inc. (the Company) was incorporated in the
State of Virginia on April 13, 1994. The Company's business consists of
providing regional internet access services, hardware and software sales, and
consulting to customers in Virginia, Maryland and the Washington D.C. area.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Effective December 31, 1997, Verio Inc. acquired all of the outstanding
common stock of the Company.
Equipment
Equipment, including any assets held under capital leases, is stated at
cost, less accumulated depreciation. Depreciation is recorded using the
straight-line method over the estimated useful lives of the related assets, or
over the lease term, which range from three to seven years. Costs for normal
repairs and maintenance are expensed as incurred.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). Statement No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at lower of the carrying amount or fair value less
costs to sell.
Revenue Recognition
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance.
Revenue from consulting services is recognized when services have been
rendered.
Revenue from hardware and software sales is recognized upon shipment of the
respective products, if significant future vendor obligations do not exist and
collectibility is probable.
Income Taxes
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109).
Under SFAS 109, deferred income taxes are recognized for the future tax
consequences of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
F-125
<PAGE> 245
MONUMENTAL NETWORK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of December 31, 1996 and 1997 approximate their
carrying values based on their terms and interest rates. The use of different
market assumptions and/or estimation methodologies may have a significant effect
on the estimated fair values.
Customers who operate in Virginia, Maryland and the Washington D.C. area
represent substantially all of the Company's customer base. No single customer
comprised more than 10% of accounts receivable or total revenue as of or for the
years ended December 31, 1996 or 1997.
Stock-Based Compensation
The Company accounts for its stock-based employee compensation plan using
the intrinsic value based method prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations (APB 25). The Company has provided pro forma disclosures of net
loss as if the fair value based method of accounting for the plan, as prescribed
by Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123), had been applied. Pro forma disclosures
include the effects of employee stock options granted during the years ended
December 31, 1996 and 1997.
(2) EQUIPMENT
Equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
-------- ---------
<S> <C> <C>
Equipment................................................... $413,615 $ 642,498
Furniture and office equipment.............................. 39,310 55,505
Leasehold improvements...................................... -- 8,093
-------- ---------
452,925 706,096
Less accumulated depreciation............................... (93,598) (265,690)
-------- ---------
$359,327 $ 440,406
======== =========
</TABLE>
Equipment includes assets held under capital leases with a net book value
of $198,445 and $201,745 at December 31, 1996 and 1997, respectively.
Depreciation expense totaled $74,607 and $172,092 for the years ended December
31, 1996 and 1997, respectively.
(3) DEBT
Notes payable consists of the following as of December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Notes payable with interest rates ranging from 8.25% to
8.39%, secured by vehicles due through 2002............... $14,319 $ 34,625
Unsecured notes payable to vendors with interest at 15% due
in 1998................................................... 4,385 36,136
------- --------
18,704 70,761
Less current portion........................................ (9,789) (49,694)
------- --------
$ 8,915 $ 21,067
======= ========
</TABLE>
F-126
<PAGE> 246
MONUMENTAL NETWORK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During 1996, the Company issued notes payable to stockholders of the
Company in the amount of $30,848, with interest at 6%, and monthly payments of
principal and interest due in various dates through 1998. The total unpaid
balance as of December 31, 1997 was $30,025.
During 1997, the Company issued additional notes payable to stockholders of
the Company totaling $130,000, which bear interest at 9%, with interest payable
annually, and are due on demand.
(4) COMMITMENTS
The Company leases certain computer and office equipment under capital
leases. The Company also leases office space under noncancelable operating
leases expiring at various dates through 2001. Future minimum annual lease
payments under capital and noncancelable operating leases for each of the years
ending December 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1998........................................................ $103,978 $29,132
1999........................................................ 66,919 5,736
2000........................................................ 39,031 1,710
2001........................................................ 3,818 --
-------- -------
Total minimum payments.................................... 213,746 $36,578
=======
Less amount representing interest........................... (34,344)
--------
Present value of net minimum lease payments............... 179,402
Less current portion........................................ (82,194)
--------
$ 97,208
========
</TABLE>
Rent expense for the years ended December 31, 1996 and 1997 was $38,967 and
$53,084, respectively.
(5) INCOME TAXES
As of December 31, 1997, the Company has a net operating loss carryforward
of approximately $470,000 which will expire in 2012, if not utilized. A
valuation allowance has been recorded for the entire deferred tax asset related
primarily to the net operating loss carryforward due to the uncertainty relating
to the realization of the benefit of the deferred tax asset in the future.
(6) STOCK OPTION PLAN
The Company's 1997 Option Plan (the Plan) was adopted by the Board of
Directors and approved by the stockholders of the Company on January 1, 1997.
The Plan provides that salaried officers or key employees, non-employee
directors, and consultants who provide services to the Company may, at the
discretion of the plan administrator, be granted Incentive or Non-statutory
stock options to purchase shares of common stock. 200,000 shares of the
Company's common stock have been authorized for issuance under the Plan, of
which 11,872 incentive stock options were granted in 1997, with an exercise
price of $2.00 per share. None of the options were exercised or canceled during
1997.
Options vest 25% on the first anniversary of the option grant date and 25%
on each of the following three anniversary dates. As of December 31, 1997, no
options were vested or exercisable. The weighted average contractual term of
outstanding options was approximately 9 years at December 31, 1997.
The per share weighted-average fair value of stock options granted was $.33
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions; expected dividend
F-127
<PAGE> 247
MONUMENTAL NETWORK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
yield 0%, risk-free interest rate of 6%, and expected life of three years. If
the Company determined compensation expense in 1997 based on the fair value of
the options at the grant date under SFAS No. 123, net loss would not have been
significantly different from the historical results of operations other than for
compensation expense recognized for options granted at less than fair value, as
discussed below.
None of the incentive stock option shares were exercisable or vested as of
December 31, 1997. However, in accordance with the acquisition agreement between
the Company and Verio Inc., Monumental Network Systems, Inc. purchased the
11,872 options outstanding as of December 31,1997 at fair market value, less the
exercise price per share, and recorded a charge to operations of $84,152.
F-128
<PAGE> 248
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheets of Internet Servers, Inc.
as of December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for the period from inception (August 23,
1995) to December 31, 1995 and the years ended December 31, 1996 and 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Internet Servers, Inc. as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for the period from inception (August 23, 1995) to December 31, 1995 and the
years ended December 31, 1996 and 1997 in conformity with generally accepted
accounting principles.
KPMG LLP
Denver, Colorado
March 2, 1998
F-129
<PAGE> 249
INTERNET SERVERS, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
ASSETS
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 18,021 $1,161,510
Receivables:
Trade, net of allowance for doubtful accounts of
$11,029 in 1997....................................... 98,675 220,571
Employees.............................................. -- 67,000
Prepaid expenses and other................................ -- 85,478
-------- ----------
Total current assets.............................. 116,696 1,534,559
Equipment, net (note 2)..................................... 484,240 714,205
-------- ----------
Total assets...................................... $600,936 $2,248,764
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 35,061 $ 118,241
Accrued liabilities....................................... 11,731 159,366
Income taxes payable...................................... 111,314 316,456
Deferred revenue.......................................... -- 14,388
-------- ----------
Total current liabilities......................... 158,106 608,451
Stockholders' equity (note 5):
Common stock, no par value, 100,000 shares authorized,
10,895 and 11,092 shares issued and outstanding........ 70,918 426,129
Retained earnings......................................... 371,912 1,214,184
-------- ----------
Total stockholders' equity........................ 442,830 1,640,313
Commitments (note 4)
-------- ----------
Total liabilities and stockholders' equity........ $600,936 $2,248,764
======== ==========
</TABLE>
See accompanying notes to financial statements.
F-130
<PAGE> 250
INTERNET SERVERS, INC.
STATEMENTS OF OPERATIONS
PERIOD FROM INCEPTION (AUGUST 23, 1995) TO DECEMBER 31, 1995 AND
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 23,
1995) TO
DECEMBER 31,
1995 1996 1997
------------ ---------- ----------
<S> <C> <C> <C>
Revenue:
Enhanced services................................... $48,380 $1,507,875 $3,476,045
Internet services................................... -- -- 704,187
Other............................................... 2,520 -- 211,962
------- ---------- ----------
Total revenue............................... 50,900 1,507,875 4,392,194
======= ========== ==========
Operating costs and expenses:
Enhanced and internet services operating costs...... 8,240 631,111 1,820,757
Selling, general and administrative................. 35,698 166,751 721,337
Depreciation........................................ 5,728 90,343 259,984
------- ---------- ----------
Total costs and expenses.................... 49,666 888,205 2,802,078
------- ---------- ----------
Earnings from operations.................... 1,234 619,670 1,590,116
Other income, net..................................... -- 322 26,215
------- ---------- ----------
Earnings before income taxes................ 1,234 619,992 1,616,331
Income tax expense (note 3)........................... -- (111,314) (602,059)
------- ---------- ----------
Net earnings................................ $ 1,234 $ 508,678 $1,014,272
======= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-131
<PAGE> 251
INTERNET SERVERS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM INCEPTION (AUGUST 23, 1995) TO DECEMBER 31, 1995 AND
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK
------------------ RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ -------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCES AT INCEPTION......................... -- $ -- $ -- $ --
Issuances of common stock for cash............ 9,800 13,000 -- 13,000
Net earnings.................................. -- -- 1,234 1,234
------ -------- ---------- ----------
BALANCES AT DECEMBER 31, 1995................. 9,800 13,000 1,234 14,234
Issuance of common stock for services......... 1,095 57,918 -- 57,918
Dividends paid in cash........................ -- -- (138,000) (138,000)
Net earnings.................................. -- -- 508,678 508,678
------ -------- ---------- ----------
BALANCES AT DECEMBER 31, 1996................. 10,895 70,918 371,912 442,830
Issuance of common stock for services......... 197 355,211 -- 355,211
Dividends paid in cash........................ -- -- (172,000) (172,000)
Net earnings.................................. -- -- 1,014,272 1,014,272
------ -------- ---------- ----------
BALANCES AT DECEMBER 31, 1997................. 11,092 $426,129 $1,214,184 $1,640,313
====== ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-132
<PAGE> 252
INTERNET SERVERS, INC.
STATEMENTS OF CASH FLOWS
PERIOD FROM INCEPTION (AUGUST 23, 1995) TO DECEMBER 31, 1995 AND
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 23,
1995) TO
DECEMBER 31,
1995 1996 1997
------------ --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings......................................... $ 1,234 $ 508,678 $1,014,272
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation...................................... 5,728 90,343 259,984
Provision for bad debts........................... -- -- 58,371
Common stock issued for services.................. -- 57,918 355,211
Changes in operating assets and liabilities:
Receivables..................................... (12,611) (86,064) (247,267)
Prepaid expenses and other...................... -- -- (85,478)
Accounts payable................................ 13,224 21,837 83,180
Accrued liabilities............................. 4,896 6,835 147,635
Income taxes payable............................ -- 111,314 205,142
Deferred revenue................................ -- -- 14,388
-------- --------- ----------
Net cash provided by operating activities.... 12,471 710,861 1,805,438
-------- --------- ----------
Cash flows from investing activities -- purchases of
equipment............................................ (35,144) (545,167) (489,949)
-------- --------- ----------
Cash flows from financing activities:
Borrowings on debt................................... 7,000 -- --
Repayments of debt................................... -- (7,000) --
Proceeds from issuance of common stock............... 13,000 -- --
Dividends............................................ -- (138,000) (172,000)
Net change in cash overdraft......................... 2,673 (2,673) --
-------- --------- ----------
Net cash provided (used) by financing
activities................................. 22,673 (147,673) (172,000)
-------- --------- ----------
Increase in cash and cash equivalents........ -- 18,021 1,143,489
Cash and cash equivalents at beginning of period....... -- -- 18,021
-------- --------- ----------
Cash and cash equivalents at end of period............. $ -- $ 18,021 $1,161,510
======== ========= ==========
Supplemental disclosure of cash flow information --
cash paid during the year for income taxes........... $ -- $ 40,000 $ 349,743
======== ========= ==========
</TABLE>
See accompanying notes to financial statements.
F-133
<PAGE> 253
INTERNET SERVERS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Internet Servers, Inc. (the Company) was incorporated in the State of Utah
on August 23, 1995. The Company's business consists of providing regional
internet enhanced services and consulting to customers in Utah and throughout
the Western states.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Effective December 31, 1997, Verio Inc. acquired 100% of the outstanding
common stock of the Company.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue Recognition
Revenue related to enhanced and internet services is recognized as the
services are provided. Enhanced services consists primarily of web hosting
services to customers. The Company records deferred revenue for accounts billed
and/or collected in advance.
Revenue from hardware and software sales is recognized upon shipment of the
respective products if the Company's future obligations are not significant and
collectibility is probable.
Equipment
Equipment is stated at cost, less accumulated depreciation. Depreciation is
provided over the estimated useful lives of the assets ranging from three to
seven years using the straight-line method. Costs for normal repairs and
maintenance are expensed as incurred.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations including goodwill when indications of impairment are
present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
impaired the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the estimated fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value less costs to sell.
Income Taxes
From inception to September 1, 1996, the Company elected to be treated as a
subchapter S Corporation for income tax purposes. Accordingly, taxable income
through September 1, 1996 was included in the income tax returns of the
shareholders. On September 1, 1996, the Company converted to a C Corporation.
F-134
<PAGE> 254
INTERNET SERVERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109).
SFAS 109 requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the difference is expected to reverse.
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of December 31, 1996 and 1997 approximate their
carrying values based on their terms and interest rates. The use of different
market assumptions and/or estimation methodologies may have a significant effect
on the estimated fair values.
Customers who operate in Utah represent substantially all of the Company's
customer base and accounts receivable. However, no single customer comprised
more than 10% of accounts receivable or total revenue as of or for the years
ended December 31, 1995, 1996 or 1997.
(2) EQUIPMENT
Equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Internet and computer equipment............................. $561,296 $1,044,691
Furniture and office equipment.............................. 19,015 25,569
-------- ----------
580,311 1,070,260
Less accumulated depreciation and amortization.............. (96,071) (356,055)
-------- ----------
$484,240 $ 714,205
======== ==========
</TABLE>
(3) INCOME TAXES
Income tax expense consists of the following for the years ended December
31:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Current:
Federal...................................... $ 91,314 $548,794
State........................................ 20,000 53,265
-------- --------
$111,314 $602,059
======== ========
</TABLE>
Income tax expense for the years ended December 31 differs from the amounts
computed using the federal statutory tax rate of 34% to earnings before income
taxes as follows:
<TABLE>
<CAPTION>
1996 1997
--------- --------
<S> <C> <C>
Expected tax expense........................................ $ 210,797 $549,553
State income taxes, net of federal benefit.................. 20,460 53,341
S Corporation taxable income................................ (120,693) --
Other....................................................... 750 (835)
--------- --------
Actual income tax expense......................... $ 111,314 $602,059
========= ========
</TABLE>
F-135
<PAGE> 255
INTERNET SERVERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Temporary differences in the bases of assets and liabilities for financial
statement and income tax purposes are not significant as of December 31, 1996
and 1997.
(4) COMMITMENTS
The Company leases certain computer equipment and office space under
noncancelable operating leases expiring at various dates through 2000. Future
minimum annual lease payments under noncancelable operating leases for each of
the years ending December 31 are as follows:
<TABLE>
<S> <C>
1998.............................................. $359,139
1999.............................................. 345,684
2000.............................................. 148,654
--------
Total minimum payments............................ $853,477
========
</TABLE>
Rent expense for the years ended December 31, 1996 and 1997 was $14,500 and
$241,402, respectively.
(5) STOCKHOLDERS' EQUITY
On October 21, 1996, the Company entered into an employment agreement with
an officer. The agreement included a compensation and benefit package which also
included a long-term incentive provision consisting of the granting of shares of
the Company's common stock equal to two percent of the total common shares
outstanding. As of December 31, 1996, 25 shares had been issued resulting in
compensation expense of $45,078 based on the estimated fair value of the stock,
as determined by the Company's Board of Directors.
In accordance with the acquisition agreement between the Company and Verio
Inc., the unvested shares under the employment agreement were fully vested at
December 31, 1997. An additional 197 shares were issued as of December 31, 1997
and compensation expense of $355,211 was recognized by the Company based on the
estimated fair value of the stock using the acquisition price in the Verio Inc.
transaction.
F-136
<PAGE> 256
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheets of NSNet, Inc. as of
December 31, 1996 and 1997, and the related statements of operations, owner's
and stockholder's equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NSNet, Inc. as of December
31, 1996 and 1997, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
KPMG LLP
Denver, Colorado
March 13, 1998
F-137
<PAGE> 257
NSNET, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
ASSETS (NOTE 3)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Current assets:
Cash...................................................... $ 4,188 $ 20,169
Receivables:
Trade, net of allowance for doubtful accounts of $3,133
and $12,158 in 1996 and 1997, respectively............ 27,494 85,881
Other.................................................. -- 20,377
Prepaid expenses and other................................ 124,829 333,130
-------- --------
Total current assets.............................. 156,511 459,557
Equipment, net (note 2)..................................... 177,410 378,874
Other assets................................................ -- 67,665
-------- --------
Total assets...................................... $333,921 $906,096
======== ========
LIABILITIES AND OWNER'S AND STOCKHOLDER'S EQUITY
Current liabilities:
Cash overdraft............................................ $ 41,057 $ --
Accounts payable.......................................... 7,614 94,252
Accrued liabilities....................................... 37,778 44,866
Revolving lines of credit (note 3)........................ -- 200,000
Current portion of capital lease obligations (note 4)..... -- 34,231
Deferred revenue and customer advances.................... 42,827 82,699
-------- --------
Total current liabilities......................... 129,276 456,048
Capital lease obligations, less current portion (note 4).... -- 61,636
-------- --------
Total liabilities................................. 129,276 517,684
Owner's and Stockholder's equity:
Owner's equity............................................ 204,645 --
Common stock, no par value, 2,000,000 shares authorized,
100,000 shares issued and outstanding at December 31,
1997................................................... -- 204,645
Retained earnings......................................... -- 183,767
-------- --------
Total owner's and stockholder's equity............ 204,645 388,412
Commitments (note 4)
-------- --------
Total liabilities and owner's and stockholder's
equity.......................................... $333,921 $906,096
======== ========
</TABLE>
See accompanying notes to financial statements.
F-138
<PAGE> 258
NSNET, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Revenue:
Internet services......................................... $887,939 $1,832,374
Other..................................................... -- 14,550
-------- ----------
Total revenue..................................... 887,939 1,846,924
-------- ----------
Operating expenses:
Internet services operating costs......................... 210,517 471,247
Selling, general and administrative....................... 485,128 938,523
Depreciation.............................................. 61,106 126,301
-------- ----------
Total operating expenses.......................... 756,751 1,536,071
-------- ----------
Earnings from operations.......................... 131,188 310,853
Other income (expense), net................................. 1,885 (5,508)
-------- ----------
Net earnings...................................... $133,073 305,345
======== ==========
Pro forma information:
Historical net earnings................................... 133,073 305,345
Pro forma adjustment for income tax expense............... (51,000) (116,000)
-------- ----------
Pro forma net earnings............................ $ 82,073 $ 189,345
======== ==========
</TABLE>
See accompanying notes to financial statements.
F-139
<PAGE> 259
NSNET, INC.
STATEMENTS OF OWNER'S AND STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
TOTAL
OWNER'S COMMON RETAINED STOCKHOLDER'S
EQUITY STOCK EARNINGS EQUITY
--------- -------- --------- -------------
<S> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1996..................... $ 75,037 $ -- $ -- $ 75,037
Distributions................................. (3,465) -- -- (3,465)
Net earnings.................................. 133,073 -- -- 133,073
--------- -------- --------- ---------
BALANCES AT DECEMBER 31, 1996................... 204,645 -- -- 204,645
Issuance of common stock upon incorporation
(note 1)................................... (204,645) 204,645 -- --
Distributions................................. -- -- (121,578) (121,578)
Net earnings.................................. -- -- 305,345 305,345
--------- -------- --------- ---------
BALANCES AT DECEMBER 31, 1997................... $ -- $204,645 $ 183,767 $ 388,412
========= ======== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-140
<PAGE> 260
NSNET, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 133,073 $ 305,345
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation........................................... 61,106 126,301
Provision for bad debts................................ 3,133 24,334
Changes in operating assets and liabilities:
Receivables.......................................... (17,073) (103,098)
Prepaid expenses and other........................... (124,829) (208,301)
Accounts payable and accrued liabilities............. 26,911 93,726
Deferred revenue and customer advances............... 25,647 39,872
--------- ---------
Net cash provided by operating activities......... 107,968 278,179
--------- ---------
Cash flows from investing activities:
Purchases of equipment.................................... (141,372) (217,958)
Increase in other assets.................................. -- (67,665)
--------- ---------
Net cash used by investing activities............. (141,372) (285,623)
--------- ---------
Cash flows from financing activities:
Cash overdraft............................................ 41,057 (41,057)
Borrowings under revolving lines of credit................ -- 240,000
Repayments under revolving lines of credit................ -- (40,000)
Principal payments under capital lease obligations........ -- (13,940)
Distributions............................................. (3,465) (121,578)
--------- ---------
Net cash provided by financing activities......... 37,592 23,425
--------- ---------
Increase in cash.................................. 4,188 15,981
Cash at beginning of year................................... -- 4,188
--------- ---------
Cash at end of year......................................... $ 4,188 $ 20,169
========= =========
Supplemental disclosure of cash flow information -- cash
paid during the year for interest......................... $ -- $ 5,508
========= =========
Noncash investing and financing activities -- equipment
acquired through capital lease obligations................ $ -- $ 109,807
========= =========
</TABLE>
See accompanying notes to financial statements.
F-141
<PAGE> 261
NSNET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
NSNet, Inc. (the Company) was incorporated as a subchapter S Corporation in
the State of California on January 1, 1997. Prior to incorporation, the Company
was operating as NextGen Systems Internet Services, a sole proprietorship formed
in 1992. All assets and liabilities of the sole proprietorship were contributed
to the Company upon incorporation and recorded at historical cost. The Company
provides internet access services to customers in California.
Effective February 27, 1998, Verio Inc. acquired 100% of the outstanding
common stock of the Company.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
Internet services are recognized as the services are provided. The Company
records deferred revenue for accounts billed and/or collected in advance.
Equipment
Equipment, including assets held under capital leases, is stated at cost,
less accumulated depreciation. Depreciation is recorded using the straight-line
method over the shorter of the estimated useful lives of the related assets or
the lease term, which is three years. Costs for normal repairs and maintenance
are expensed as incurred.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations, including goodwill, when indications of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the estimated fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value, less costs to sell.
Income Taxes
No provision for income taxes has been included in the accompanying
financial statement for 1996 or 1997 due to the Company's status as a sole
proprietorship and subchapter S Corporation. Accordingly, net earnings as of
December 31, 1996 were included in owner's equity and taxable income has been
included in the tax returns of the owner and stockholder. However, pro forma
information has been included in the accompanying statements of operations to
reflect a pro forma adjustment for income tax expense as if the Company had been
a separate taxable entity subject to federal and state income taxes for both
years presented.
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair
F-142
<PAGE> 262
NSNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
values of all financial instruments as of December 31, 1996 and 1997 approximate
their carrying values based on their terms and interest rates. The use of
different market assumptions and/or estimation methodologies may have a
significant effect on the estimated fair values.
Customers who operate in California represent substantially all of the
Company's customer base. No single customer comprised more than 10% of accounts
receivable or total revenue as of or for the years ended December 31, 1996 or
1997.
(2) EQUIPMENT
Equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
-------- ---------
<S> <C> <C>
Internet and computer equipment............................. $255,112 $ 568,239
Furniture................................................... 10,000 24,638
-------- ---------
265,112 592,877
Less accumulated depreciation............................... (87,702) (214,003)
-------- ---------
$177,410 $ 378,874
======== =========
</TABLE>
Equipment includes assets held under capital leases with a net book value
of $94,248 at December 31, 1997.
(3) DEBT
At December 31, 1997, the Company had a $150,000 unsecured revolving line
of credit agreement with a bank, under which $100,000 was outstanding.
Borrowings under the line bear interest at the bank's prime rate plus 2.975%
(11.475% at December 31, 1997), and are due in 1998. The agreement included
various restrictive covenants including limitations on indebtedness and payment
of dividends. As of December 31, 1997, the Company was not in compliance with
the restrictions on additional indebtedness. All borrowings under this line were
paid in full subsequent to the acquisition by Verio, Inc.
At December 31, 1997, the Company had an additional $125,000 revolving line
of credit agreement with a second bank, secured by substantially all of the
assets of the Company, under which $100,000 was outstanding. Borrowings under
the line bear interest at the bank's prime rate plus 1.5% (10% at December 31,
1997), and are due in 1998.
(4) COMMITMENTS
The Company leases certain computer and office equipment under capital
leases. The Company also leases office space under noncancelable operating
leases expiring at various dates through 2002. Future
F-143
<PAGE> 263
NSNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
minimum annual lease payments under capital and noncancelable operating leases
for each of the years ending December 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1998........................................................ $ 43,434 $ 95,767
1999........................................................ 43,434 110,092
2000........................................................ 23,227 114,004
2001........................................................ -- 118,862
2002........................................................ -- 108,956
-------- --------
Total minimum payments.................................... 110,095 $547,681
========
Less amount representing interest........................... (14,228)
--------
Present value of net minimum lease payments............... 95,867
Less current portion........................................ (34,231)
--------
$ 61,636
========
</TABLE>
Rent expense for the years ended December 31, 1996 and 1997 totaled $19,801
and $34,082, respectively.
F-144
<PAGE> 264
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheet of Access One, Inc. as of
December 31, 1997 and the related statements of operations and accumulated
deficit, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Access One, Inc. as of
December 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
KPMG LLP
Denver, Colorado
April 9, 1998
F-145
<PAGE> 265
ACCESS ONE, INC.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash...................................................... $ 259,144
Trade receivables, net of allowance for doubtful accounts
of $148,040 (note 3)................................... 344,773
Inventory................................................. 40,635
Prepaid expenses and other................................ 105,365
----------
Total current assets.............................. 749,917
Equipment, net (notes 2 and 3).............................. 678,752
Other assets................................................ 9,853
----------
Total assets...................................... $1,438,522
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Revolving line of credit.................................. $ 110,000
Accounts payable:
Trade.................................................. 144,297
Related party (note 5)................................. 273,306
Accrued liabilities....................................... 376,330
Notes payable (note 3).................................... 88,550
Current portion of capital lease obligations (note 4)..... 8,858
Note payable to related party (note 5).................... 32,194
Deferred revenue.......................................... 294,266
----------
Total current liabilities......................... 1,327,801
Capital lease obligations, less current portion (note 4).... 6,812
----------
Total liabilities................................. 1,334,613
Redeemable preferred stock, $0.01 par value, 500,000 shares
authorized, 200,000 shares issued and outstanding (note
6)........................................................ 508,748
Stockholders' deficit (note 6):
Common stock, $0.01 par value, 2,000,000 shares
authorized, 800,000 shares issued and outstanding...... 8,000
Additional paid-in capital................................ 85,476
Accumulated deficit....................................... (498,315)
----------
Total stockholders' deficit....................... (404,839)
Commitments (note 4)
----------
Total liabilities and stockholders' deficit....... $1,438,522
==========
</TABLE>
See accompanying notes to financial statements.
F-146
<PAGE> 266
ACCESS ONE, INC.
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Revenue:
Internet services......................................... $2,485,583
Enhanced services......................................... 702,639
Computer hardware and software sales...................... 303,465
Other..................................................... 27,019
----------
Total revenue..................................... 3,518,706
----------
Operating expenses:
Internet and enhanced services operating costs (note 5)... 613,084
Cost of hardware and software sales....................... 226,205
Selling, general and administrative (note 5).............. 2,922,073
Depreciation.............................................. 245,003
----------
Total operating expenses.......................... 4,006,365
----------
Loss from operations.............................. (487,659)
Other expense:
Interest expense.......................................... (21,833)
Other, net................................................ (3,808)
----------
Net loss.......................................... $ (513,300)
==========
Retained earnings at beginning of year...................... 14,985
Accumulated deficit at end of year.......................... (498,315)
==========
</TABLE>
See accompanying notes to financial statements.
F-147
<PAGE> 267
ACCESS ONE, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(513,300)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation......................................... 245,003
Provision for bad debts.............................. 386,983
Changes in operating assets and liabilities:
Receivables....................................... (445,284)
Inventory......................................... (40,635)
Prepaid expenses and other current assets......... (96,000)
Other assets...................................... (9,708)
Accounts payable and accrued liabilities.......... 541,280
Deferred revenue.................................. 148,798
---------
Net cash provided by operating activities.... 217,137
---------
Cash flows from investing activities -- purchase of
equipment................................................. (559,530)
---------
Cash flows from financing activities:
Borrowings under revolving line of credit................. 110,000
Borrowings under note payable............................. 127,916
Principal payments on note payable........................ (39,366)
Borrowings under notes to related parties................. 6,965
Principal payments under capital lease obligations........ (15,501)
---------
Net cash provided by financing activities.... 190,014
---------
Net decrease in cash......................... (152,379)
Cash at beginning of year................................... 411,523
---------
Cash at end of year......................................... $ 259,144
=========
Supplemental disclosure of cash flow information -- cash
paid during the year for interest......................... $ 21,822
=========
</TABLE>
See accompanying notes to financial statements.
F-148
<PAGE> 268
ACCESS ONE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Access One, Inc. (the Company) was originally organized as a limited
liability company on July 1, 1994. The Company reincorporated on December 9,
1996 as a C corporation in the state of Washington. The Company provides
internet access and enhanced services and computer hardware and software sales
to customers primarily in Washington.
Effective February 27, 1998, Verio Inc. (Verio) acquired all of the
outstanding common stock of the Company, resulting in 100% ownership (see Note
6).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Equipment
Equipment is stated at cost, less accumulated depreciation. Depreciation is
recorded using the straight-line method over the shorter of the estimated useful
lives of the related assets or the lease terms, which range from three to five
years. Costs for normal repairs and maintenance are expensed as incurred.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations, including goodwill, when indications of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the estimated fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value, less costs to sell.
Revenue Recognition
Internet and enhanced services are recognized as the services are provided.
Enhanced services consist primarily of web hosting and collocation services to
customers. The Company records deferred revenue for amounts billed and/or
collected in advance.
Revenue from hardware sales is recognized upon shipment of the respective
products if the Company's future obligations are not significant and
collectibility is probable.
Income Taxes
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109).
Under SFAS 109, deferred income taxes are recognized for the future tax
consequences of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
F-149
<PAGE> 269
ACCESS ONE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has a net operating loss carryforward for income tax purposes
of approximately $337,000 which expires in 2012. No tax benefit has been
recorded by the Company in 1997 due to the Company's net loss and the
uncertainty regarding the ultimate utilization of such loss carryforward. The
Company also has a deferred tax asset related to the allowance for doubtful
accounts of approximately $56,000. A valuation allowance has been recorded for
the entire balance of the deferred tax asset related to the carryforward and the
allowance for doubtful accounts. Other temporary differences between financial
statement and income tax bases of assets and liabilities are not significant.
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of December 31, 1997 approximate their carrying values
based on their terms and interest rates. The use of different market assumptions
and/or estimation methodologies may have a significant effect on the estimated
fair values.
Customers who operate in Washington represent substantially all of the
Company's customer base. No single customer comprised more than 10% of revenue
or accounts receivable as of or for the year ended December 31, 1997.
(2) EQUIPMENT
Equipment consisted of the following at December 31, 1997:
<TABLE>
<S> <C>
Internet and computer equipment........................... $ 926,175
Furniture and office equipment............................ 120,657
----------
1,046,832
Less accumulated depreciation and amortization.............. (368,080)
----------
$ 678,752
==========
</TABLE>
Equipment includes assets held under capital lease with a net book value of
$12,990 at December 31, 1997.
(3) DEBT
Lines of credit and notes payable consist of the following as of December
31, 1997:
<TABLE>
<S> <C>
Revolving line of credit, maximum credit available of
$300,000, bearing interest at 1.5% above the bank's prime
lending rate, (10% at December 31, 1997), due in 1998, and
secured by accounts receivable............................ $ 110,000
Notes payable, bearing interest at 10.25%, due on demand, or
if no demand is made, in monthly payments of principal and
interest of $5,945 through April, 1999, and secured by
certain equipment of the Company.......................... 88,550
---------
198,550
Less current portion........................................ (198,550)
---------
Long-term debt, less current portion...................... $ --
=========
</TABLE>
The Company's revolving line of credit includes various restrictive
covenants including limitations on indebtedness and maintaining a specified debt
to equity ratio. As of December 31, 1997, the Company was not
F-150
<PAGE> 270
ACCESS ONE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
in compliance with limitations placed by the debt to equity ratio. All
borrowings under the line were repaid upon completion of the buyout by Verio
Inc. in February 1998.
(4) COMMITMENTS
Leases
The Company leases certain computer and office equipment under capital
leases. The Company also leases office space under noncancelable operating
leases expiring at various dates through 1999. Future minimum annual lease
payments under noncancelable capital and operating leases for each of the years
ending December 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1998.................................... $ 8,280 $80,808
1999.................................... 7,589 1,512
------- -------
Total minimum payments................ $15,869 $82,320
======= =======
Less amount representing interest....... (199)
-------
Present value of net minimum lease
payments.............................. 15,670
Less current portion.................... (8,858)
-------
$ 6,812
=======
</TABLE>
Rent expense for the year ended December 31, 1997 totaled $219,500.
The Company has commitments with two different telecommunications companies
to receive future services from such companies. Future payments under these
agreements total $8,200 per month through September 1999.
(5) TRANSACTIONS WITH RELATED PARTIES
During 1997, the Company received customer service, technical support, and
backbone transport services provided by Verio. Total amounts charged to the
Company by Verio in this manner were $79,421 included in internet and enhanced
services operating costs and $178,969 included in selling, general, and
administrative expenses. Verio also purchased approximately $14,916 of equipment
on behalf of the Company. Amounts due to related party at December 31, 1997
relate to these services and purchases of equipment and are non interest
bearing.
Note payable to related party is a non interest bearing, unsecured note
payable to the majority stockholder of the Company.
(6) REDEEMABLE PREFERRED STOCK
During 1996, the Company issued 200,000 shares of redeemable, convertible
Series A preferred stock to Verio. The preferred shares are convertible into
common shares on a one for one basis and are mandatorily redeemable in 2002. In
connection with the Verio acquisition disclosed in note 1, the preferred shares
were converted to common stock.
F-151
<PAGE> 271
ACCESS ONE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(7) EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) Plan (the Plan) for all full time employees.
The Company makes matching contributions of 25% of employee contributions up to
6% of the respective employee's salary. During 1997 the Company made
contributions to the Plan totaling $11,876.
F-152
<PAGE> 272
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheet of STARnet, L.L.C. as of
December 31, 1997 and the related statements of operations, members' equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of STARnet, L.L.C. as of
December 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
KPMG LLP
Denver, Colorado
March 27, 1998
F-153
<PAGE> 273
STARNET, L.L.C.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash...................................................... $210,089
Trade receivables, net of allowance for doubtful accounts
of $22,944............................................. 111,541
Inventory................................................. 69,089
Prepaid expenses and other................................ 18,779
--------
Total current assets.............................. 409,498
Equipment, net (note 2)..................................... 208,336
Other assets................................................ 4,583
--------
Total assets...................................... $622,417
========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 31,371
Accrued liabilities....................................... 12,895
Deferred revenue.......................................... 371,608
--------
Total current liabilities......................... 415,874
Members' equity............................................. 206,543
Commitments (note 3)
--------
Total liabilities and members' equity............. $622,417
========
</TABLE>
See accompanying notes to financial statements.
F-154
<PAGE> 274
STARNET, L.L.C.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Revenue:
Internet services......................................... $1,201,504
Computer hardware sales................................... 386,376
Other..................................................... 13,094
----------
Total revenue..................................... 1,600,974
----------
Operating expenses:
Internet services operating costs......................... 397,019
Cost of hardware sales.................................... 319,486
Selling, general and administrative....................... 570,461
Depreciation.............................................. 155,968
----------
Total operating expenses.......................... 1,442,934
----------
Earnings from operations.......................... 158,040
Other income (expense):
Interest income........................................... 9,411
Other, net................................................ (6,282)
----------
Net earnings...................................... $ 161,169
==========
Pro forma information:
Historical net earnings................................... 161,169
Pro forma adjustment for income tax expense............... (61,000)
----------
Pro forma net earnings............................ $ 100,169
==========
</TABLE>
See accompanying notes to financial statements.
F-155
<PAGE> 275
STARNET, L.L.C.
STATEMENT OF MEMBERS' EQUITY
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Balance at January 1, 1997.................................. $ 290,109
Distributions to members.................................... (244,735)
Net earnings................................................ 161,169
---------
Balance at December 31, 1997................................ $ 206,543
=========
</TABLE>
See accompanying notes to financial statements.
F-156
<PAGE> 276
STARNET, L.L.C.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 161,169
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation........................................... 155,968
Provision for bad debts................................ 44,484
Loss on sale of assets................................. 6,282
Changes in operating assets and liabilities:
Receivables.......................................... (40,725)
Inventory............................................ 50,205
Prepaid expenses and other current assets............ (13,944)
Other assets......................................... 834
Accounts payable and accrued liabilities............. (54,304)
Deferred revenue..................................... (3,346)
---------
Net cash provided by operating activities......... 306,623
---------
Cash flows from investing activities -- purchase of
equipment................................................. (117,202)
---------
Cash flows from financing activities -- distributions to
members................................................... (244,735)
---------
Net decrease in cash.............................. (55,314)
Cash at beginning of year................................... 265,403
---------
Cash at end of year......................................... $ 210,089
=========
</TABLE>
See accompanying notes to financial statements.
F-157
<PAGE> 277
STARNET, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
STARnet, L.L.C. (the Company) was originally organized as a limited
liability company in the State of Missouri as Internetix, L.L.C. on June 21,
1994. On August 18, 1997, the Company changed its name to STARnet, L.L.C. The
Company provides internet access services and computer hardware sales to
customers primarily in Missouri and Illinois.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Equipment
Equipment is stated at cost, less accumulated depreciation. Depreciation is
recorded using a method that estimates the straight-line method over the
estimated useful lives of the related assets, which is three years. Costs for
normal repairs and maintenance are expensed as incurred.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations, including goodwill, when indications of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the estimated fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value, less costs to sell.
Revenue Recognition
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance.
Revenue from hardware sales is recognized upon shipment of the respective
products if the Company's future obligations are not significant and
collectibility is probable.
Income Taxes
No provision for income taxes has been included in the accompanying
financial statements due to the Company's status as a limited liability
corporation. Accordingly, taxable income has been included in the tax returns of
the members. However, pro forma information has been included in the
accompanying statement of operations to reflect a pro forma adjustment for
income tax expense as if the Company had been a separate taxable entity subject
to federal and state income taxes for the year ended December 31, 1997.
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of December 31, 1997 approximate their carrying values
based on their
F-158
<PAGE> 278
STARNET, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
terms and interest rates. The use of different market assumptions and/or
estimation methodologies may have a significant effect on the estimated fair
values.
Customers who operate in Missouri and Illinois represent substantially all
of the Company's customer base. Three customers comprised approximately 38% of
accounts receivable as of December 31, 1997. However, no single customer
comprised more than 10% of revenue for the year ended December 31, 1997.
(2) EQUIPMENT
Equipment consisted of the following at December 31, 1997:
<TABLE>
<S> <C>
Internet and computer equipment............................. $ 503,324
Furniture and office equipment.............................. 2,750
---------
506,074
Less accumulated depreciation and amortization.............. (297,738)
---------
$ 208,336
=========
</TABLE>
(3) COMMITMENTS
The Company leases office space and equipment under noncancelable leases
expiring at various dates through 2002. Future minimum annual lease payments
under noncancelable operating leases for each of the years ending December 31
are as follows:
<TABLE>
<S> <C>
1998............................................... $32,873
1999............................................... 26,236
2000............................................... 2,716
2001............................................... 870
2002............................................... 400
-------
Total minimum payments................... $63,095
=======
</TABLE>
Rent expense for the year ended December 31, 1997 totaled $39,630.
In addition, the Company has a verbal agreement to guarantee certain
obligations of a related party with a telecommunications company for one year in
the amount of $250,000.
F-159
<PAGE> 279
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheets of Computing Engineers Inc.
as of December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Computing Engineers Inc. as
of December 31, 1996 and 1997, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
KPMG LLP
Denver, Colorado
March 27, 1998
F-160
<PAGE> 280
COMPUTING ENGINEERS INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
ASSETS (NOTE 3)
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Current assets:
Cash...................................................... $ -- $ 15,995
Trade receivables, net of allowance for doubtful accounts
of $133,739 and $62,085 in 1996 and 1997,
respectively........................................... 340,799 429,171
Inventory................................................. -- 37,411
Prepaid expenses and other................................ 2,014 2,014
---------- ----------
Total current assets.............................. 342,813 484,591
Equipment, net (note 2)..................................... 821,637 1,049,662
Other assets, net........................................... -- 20,420
---------- ----------
Total assets...................................... $1,164,450 $1,554,673
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft............................................ $ 54,352 $ --
Accounts payable.......................................... 355,223 225,153
Accrued liabilities....................................... 5,252 33,373
Current portion of note payable (note 3).................. -- 84,352
Current portion of obligations under capital leases (note
4)..................................................... 193,873 223,826
Deferred revenue.......................................... 146,010 249,817
---------- ----------
Total current liabilities......................... 754,710 816,521
Note payable, less current portion (note 3)................. -- 585,002
Capital lease obligations, less current portion (note 4).... 49,776 28,811
---------- ----------
Total liabilities................................. 804,486 1,430,334
Stockholders' equity:
Common stock, $10 par value, 1,000 shares authorized, 100
shares issued and outstanding.......................... 1,000 1,000
Additional paid-in capital................................ 5,000 5,000
Retained earnings......................................... 353,964 118,339
---------- ----------
Total stockholders' equity........................ 359,964 124,339
---------- ----------
Commitments (note 4)
Total liabilities and stockholders' equity........ $1,164,450 $1,554,673
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-161
<PAGE> 281
COMPUTING ENGINEERS INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Revenue:
Internet services......................................... $2,326,898 $3,321,562
Consulting services....................................... -- 162,683
Computer hardware and software sales...................... 88,664 537,057
Other..................................................... -- 58,176
---------- ----------
Total revenue..................................... 2,415,562 4,079,478
---------- ----------
Operating expenses:
Internet services operating costs......................... 606,522 632,653
Costs of hardware and software sales...................... 148,770 392,676
Marketing and selling..................................... 47,155 299,990
General and administrative................................ 1,179,149 2,041,265
Depreciation and amortization............................. 144,953 329,296
---------- ----------
Total operating expenses.......................... 2,126,549 3,695,880
---------- ----------
Earnings from operations.......................... 289,013 383,598
Interest expense............................................ (19,254) (95,223)
---------- ----------
Net earnings...................................... $ 269,759 $ 288,375
========== ==========
Pro forma information:
Historical net earnings................................... $ 269,759 $ 288,375
Pro forma adjustment for income tax expense............... (103,000) (110,000)
---------- ----------
Pro forma net earnings............................ $ 166,759 $ 178,375
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-162
<PAGE> 282
COMPUTING ENGINEERS INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1996............ 100 $1,000 $5,000 $ 207,104 $ 213,104
Distributions to stockholders.......... -- -- -- (122,899) (122,899)
Net earnings........................... -- -- -- 269,759 269,759
--- ------ ------ --------- ---------
BALANCES AT DECEMBER 31, 1996.......... 100 1,000 5,000 353,964 359,964
Distributions to stockholders.......... -- -- -- (524,000) (524,000)
Net earnings........................... -- -- -- 288,375 288,375
--- ------ ------ --------- ---------
BALANCES AT DECEMBER 31, 1997.......... 100 $1,000 $5,000 $ 118,339 $ 124,339
=== ====== ====== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-163
<PAGE> 283
COMPUTING ENGINEERS INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 269,759 $ 288,375
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization.......................... 144,953 329,296
Provision for bad debts................................ 133,739 165,153
Changes in operating assets and liabilities:
Trade receivables.................................... (472,524) (253,525)
Inventory............................................ -- (37,411)
Prepaid expenses and other........................... 142 --
Accounts payable..................................... 355,223 (130,070)
Accrued liabilities.................................. 238 28,121
Deferred revenue..................................... 146,010 103,807
--------- ---------
Net cash provided by operating activities......... 577,540 493,746
--------- ---------
Cash flows from investing activities -- purchases of
equipment................................................. (336,776) (228,892)
--------- ---------
Cash flows from financing activities:
Net change in cash overdraft.............................. (15,314) (54,352)
Borrowings under note payable............................. -- 700,000
Debt issuance costs....................................... -- (20,420)
Principal payments on note payable........................ -- (30,646)
Principal payments on capital lease obligations........... (102,551) (319,441)
Distributions to shareholders............................. (122,899) (524,000)
--------- ---------
Net cash used by financing activities............. (240,764) (248,859)
--------- ---------
Increase in cash.................................. -- 15,995
Cash at beginning of year................................... -- --
--------- ---------
Cash at end of year......................................... $ -- $ 15,995
========= =========
Supplemental disclosure of cash flow information -- cash
paid during the year for interest......................... $ 19,254 $ 95,223
========= =========
Noncash investing and financing activities -- equipment
acquired through capital lease obligations................ $ 346,200 $ 328,429
========= =========
</TABLE>
See accompanying notes to financial statements.
F-164
<PAGE> 284
COMPUTING ENGINEERS INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Computing Engineers Inc. (the Company) was incorporated in the State of
Illinois on November 1, 1993. The Company is a provider of internet access
services to businesses and individuals, primarily in Illinois.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Equipment
Equipment, including any assets held under capital leases, is stated at
cost, less accumulated depreciation and amortization. Depreciation and
amortization is recorded using the straight-line method over the shorter of the
estimated useful lives of the related assets or the lease term, which is three
years. Costs for normal repairs and maintenance are expensed as incurred.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). Statement No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at lower of the carrying amount or fair value less
costs to sell.
Revenue Recognition
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance.
Revenue from consulting services is recognized when services have been
rendered.
Revenue from hardware and software sales is recognized upon shipment of the
respective products if the Company's future obligations are not significant and
collectibility is probable.
Income Taxes
No provision for income taxes has been included in the accompanying
financial statements for 1996 or 1997 due to the Company's status as a
subchapter S corporation. Accordingly, taxable income has been included in the
tax returns of the stockholders. However, pro forma information has been
included in the accompanying statements of operations to reflect a pro forma
adjustment for income tax expense as if the Company had been a separate taxable
entity subject to federal and state income taxes for all periods presented.
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of December 31, 1996 and 1997 approximate their
carrying values based
F-165
<PAGE> 285
COMPUTING ENGINEERS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
on their terms and interest rates. The use of different market assumptions
and/or estimation methodologies may have a significant effect on the estimated
fair values.
(2) EQUIPMENT
Equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
--------- ----------
<S> <C> <C>
Internet and computer equipment............................ $ 973,392 $1,522,201
Furniture and office equipment............................. 22,048 30,560
--------- ----------
995,440 1,552,761
Less accumulated depreciation and amortization............. (173,803) (503,099)
--------- ----------
$ 821,637 $1,049,662
========= ==========
</TABLE>
Equipment includes assets owned under capital leases with a net book value
of $305,530 and $474,893 at December 31, 1996 and 1997, respectively.
(3) DEBT
Debt consists of the following as of December 31, 1997:
<TABLE>
<S> <C>
Note payable bearing interest at prime plus 2.75% (11.25% at
December 31, 1997), monthly principal and interest
payments of $11,986 through May 12, 2004, secured by
substantially all the assets of the Company............... $669,354
Less current portion........................................ (84,352)
--------
$585,002
========
</TABLE>
(4) COMMITMENTS
The Company leases certain computer and office equipment under capital
leases. The Company also leases office space under noncancelable operating
leases expiring at various dates through 2005. Future minimum annual lease
payments under capital and noncancelable operating leases for each of the years
ending December 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
1998........................................................ $ 252,242 $ 234,353
1999........................................................ 29,695 219,153
2000........................................................ -- 192,161
2001........................................................ -- 197,120
2002........................................................ -- 202,079
Thereafter.................................................. -- 472,345
--------- ----------
Total minimum payments.................................... 281,937 $1,517,211
==========
Less amount representing interest........................... (29,300)
---------
Present value of net minimum lease payments............... 252,637
Less current portion........................................ (223,826)
---------
$ 28,811
=========
</TABLE>
Rent expense for the years ended December 31, 1996 and 1997 was $93,501 and
$134,777, respectively.
F-166
<PAGE> 286
INDEPENDENT AUDITORS' REPORT
The Board of Directors
LI Net, Inc.:
We have audited the accompanying balance sheets of LI Net, Inc. as of April
30, 1997 and January 31, 1998, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the years ended April 30,
1996 and 1997 and the nine months ended January 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LI Net, Inc. as of April 30,
1997 and January 31, 1998, and the results of its operations and its cash flows
for the years ended April 30, 1996 and 1997 and the nine months ended January
31, 1998 in conformity with generally accepted accounting principles.
KPMG LLP
Denver, Colorado
March 27, 1998
F-167
<PAGE> 287
LI NET, INC.
BALANCE SHEETS
APRIL 30, 1997 AND JANUARY 31, 1998
ASSETS
<TABLE>
<CAPTION>
1997 1998
-------- ---------
<S> <C> <C>
Current assets:
Cash...................................................... $ 49,036 $ 24,575
Receivables (note 3):
Trade, net of all allowance for doubtful accounts of
$28,948 and $50,000, respectively..................... 157,643 225,148
Other.................................................. -- 6,000
Prepaid expenses and other................................ 3,850 3,850
-------- ---------
Total current assets.............................. 210,529 259,573
Equipment, net (notes 2 and 3).............................. 355,906 500,654
Other assets................................................ 25,057 28,708
-------- ---------
Total assets...................................... $591,492 $ 788,935
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $171,038 $ 245,777
Accrued liabilities....................................... 13,942 22,521
Current portion of notes payable (note 3):
Bank................................................... -- 22,476
Related party (note 6)................................. 9,038 8,885
Revolving line of credit (note 3)......................... 15,265 39,993
Current portion of obligations under capital leases (note
4)..................................................... 52,090 81,652
Deferred revenue.......................................... 77,766 158,740
-------- ---------
Total current liabilities......................... 339,139 580,044
Notes payable, less current portion (note 3):
Bank...................................................... -- 93,542
Related party (note 6).................................... 126,052 114,029
Capital lease obligations, less current portion (note 4).... 87,826 62,453
-------- ---------
Total liabilities................................. 553,017 850,068
Stockholders' equity (deficit):
Common stock, no par value, 100 shares authorized and
issued................................................. 44,000 44,000
Additional paid-in capital................................ -- 273,100
Retained earnings (deficit)............................... 6,375 (378,233)
Treasury stock -- 5 shares at April 30, 1997, at cost..... (11,900) --
-------- ---------
Total stockholders' equity (deficit).............. 38,475 (61,133)
-------- ---------
Commitments (note 4)
Total liabilities and stockholders' equity
(deficit)....................................... $591,492 $ 788,935
======== =========
</TABLE>
See accompanying notes to financial statements.
F-168
<PAGE> 288
LI NET, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED APRIL 30, 1996 AND 1997 AND NINE MONTHS ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
1996 1997 1998
-------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Internet services..................................... $608,714 $1,033,595 $1,430,480
Computer hardware sales............................... 152,854 325,723 90,233
-------- ---------- ----------
Total revenue................................. 761,568 1,359,318 1,520,713
-------- ---------- ----------
Operating expenses:
Internet services operating costs..................... 197,025 317,225 551,993
Costs of hardware sold................................ 73,370 156,347 42,987
Selling, general and administrative expenses(note
7)................................................. 358,627 769,898 1,180,146
Depreciation.......................................... 64,470 77,762 100,902
-------- ---------- ----------
Total operating expenses...................... 693,492 1,321,232 1,876,028
Earnings (loss) from operations............... 68,076 38,086 (355,315)
Interest expense........................................ (10,596) (55,325) (29,293)
-------- ---------- ----------
Earnings (loss) before income taxes........... 57,480 (17,239) (384,608)
Income tax expense (note 5)............................. (7,600) -- --
-------- ---------- ----------
Net earnings (loss)........................... $ 49,880 $ (17,239) $ (384,608)
======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-169
<PAGE> 289
LI NET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED APRIL 30, 1996 AND 1997 AND NINE MONTHS ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL RETAINED STOCKHOLDERS'
COMMON PAID-IN EARNINGS TREASURY EQUITY
STOCK CAPITAL (DEFICIT) STOCK (DEFICIT)
------- ---------- --------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES AT MAY 1, 1995............ $44,000 $ -- $ (26,266) $ -- $ 17,734
Purchase of treasury stock......... -- -- -- (10,000) (10,000)
Net earnings....................... -- -- 49,880 -- 49,880
------- -------- --------- -------- ---------
BALANCES AT APRIL 30, 1996......... 44,000 -- 23,614 (10,000) 57,614
Purchase of treasury stock......... -- -- -- (13,800) (13,800)
Issuance of treasury stock for
services (note 7)................ -- -- -- 11,900 11,900
Net loss........................... -- -- (17,239) -- (17,239)
------- -------- --------- -------- ---------
BALANCES AT APRIL 30, 1997......... 44,000 -- 6,375 (11,900) 38,475
Issuance of treasury stock for
services (note 7)................ -- 273,100 -- 11,900 285,000
Net loss........................... -- -- (384,608) -- (384,608)
------- -------- --------- -------- ---------
BALANCES AT JANUARY 31, 1998....... $44,000 $273,100 $(378,233) $ -- $ (61,133)
======= ======== ========= ======== =========
</TABLE>
See accompanying notes to financial statements.
F-170
<PAGE> 290
LI NET, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED APRIL 30, 1996 AND 1997 AND NINE MONTHS ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)..................................... $ 49,880 $ (17,239) $(384,608)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation......................................... 64,470 77,762 100,902
Provision for bad debts.............................. -- 28,948 50,000
Issuance of treasury stock for services.............. -- 11,900 285,000
Changes in operating assets and liabilities:
Receivables........................................ (66,218) (103,079) (123,505)
Prepaid expenses and other current assets.......... -- (3,850) --
Other assets....................................... (13,602) (6,580) (3,651)
Accounts payable and accrued liabilities........... 88,042 67,313 83,318
Deferred revenue................................... -- 77,766 80,974
--------- --------- ---------
Net cash provided by operating activities....... 122,572 132,941 88,430
--------- --------- ---------
Cash flows from investing activities -- purchases of
equipment............................................... (149,667) (94,633) (182,471)
--------- --------- ---------
Cash flows from financing activities:
Borrowings under revolving lines of credit.............. -- 15,265 24,728
Proceeds from borrowings from bank...................... -- -- 130,000
Principal payments on notes payable to bank............. -- -- (13,982)
Proceeds from borrowings from related parties........... 107,713 -- --
Principal payments on notes payable to related party.... (21,128) (13,677) (12,176)
Principal payments on capital lease obligations......... -- (39,872) (58,990)
Purchase of treasury stock.............................. (10,000) (13,800) --
--------- --------- ---------
Net cash provided (used) by financing
activities.................................... 76,585 (52,084) 69,580
--------- --------- ---------
Net increase (decrease) in cash................. 49,490 (13,776) (24,461)
Cash at beginning of year................................. 13,322 62,812 49,036
--------- --------- ---------
Cash at end of year....................................... $ 62,812 $ 49,036 $ 24,575
========= ========= =========
Supplemental disclosure of cash flow information -- cash
paid during the year for interest....................... $ 10,596 $ 39,621 $ 22,593
========= ========= =========
Noncash investing and financing activities -- equipment
acquired through capital lease obligations.............. $ 32,876 $ 146,912 $ 63,179
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-171
<PAGE> 291
LI NET, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1996 AND 1997 AND NINE MONTHS ENDED JANUARY 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
LI Net, Inc. (the Company) was incorporated in the State of New York and
provides regional internet access services to customers in New York.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Equipment
Equipment, including assets held under capital leases, is stated at cost,
less accumulated depreciation. Depreciation is recorded using the straight-line
method over the shorter of the estimated useful lives of the related assets or
the lease terms, which range from three to five years. Costs for normal repairs
and maintenance are expensed as incurred.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of (SFAS 121). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations, including goodwill, when indications of impairment
are present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. If such assets are
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the estimated fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value, less costs to sell.
Revenue Recognition
Internet services are recognized as the services are provided. The Company
records deferred revenue for amounts billed and/or collected in advance.
Revenue from hardware sales is recognized upon shipment of the respective
products if the Company's future obligations are not significant and
collectibility is probable.
Income Taxes
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, (SFAS 109).
Under SFAS 109, deferred income taxes are recognized for the future tax
consequences of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
Concentration of Credit Risk and Financial Instruments
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of April 30, 1997 and January 31, 1998, approximate
their carrying
F-172
<PAGE> 292
LI NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
values based on their terms and interest rates. The use of different market
assumptions and/or estimation methodologies may have a significant effect on the
estimated fair values.
(2) EQUIPMENT
Equipment consisted of the following at April 30, 1997 and January 31,
1998:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Internet and computer equipment............................. $ 409,376 $ 641,881
Furniture and office equipment.............................. 67,532 80,677
Leasehold improvements...................................... 32,297 32,297
--------- ---------
509,205 754,855
Less accumulated depreciation and amortization.............. (153,299) (254,201)
--------- ---------
$ 355,906 $ 500,654
========= =========
</TABLE>
Equipment includes assets held under capital leases with a net book value
of approximately $139,000 and $155,000 at April 30, 1997 and January 31, 1998,
respectively.
(3) DEBT
During fiscal 1998, the Company entered into a loan agreement with a bank
and borrowed $130,000. The loan is secured by the Company's equipment, and bears
interest at 8.75%. Principal and interest payments of $2,683 are due monthly
through 2002. At January 31, 1998, the outstanding balance was $116,018.
At April 30, 1997 and January 31, 1998, the Company had a $50,000 revolving
line of credit agreement with a bank, secured by receivables, under which
$15,265 and $39,993 was outstanding, respectively. Borrowings under the line
bear interest at the bank's prime lending rate plus 2% (10.5% at January 31,
1997) and are due in 1998.
Maturities of the line of credit and note payable for each of the years
ending January 31 are as follows:
<TABLE>
<S> <C>
1999.............................................. $ 62,469
2000.............................................. 25,384
2001.............................................. 27,247
2002.............................................. 29,732
2003.............................................. 11,179
--------
$156,011
========
</TABLE>
(4) COMMITMENTS
The Company leases certain computer and office equipment under capital
leases. The Company also leases office space under noncancelable operating
leases expiring at various dates through 2002.
F-173
<PAGE> 293
LI NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum annual lease payments under capital and noncancelable
operating leases for each of the years ending January 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1999........................................................ $100,042 $ 63,879
2000........................................................ 53,085 47,121
2001........................................................ 17,937 23,386
2002........................................................ 10,060 5,459
-------- --------
Total minimum payments.................................... 181,124 $139,845
========
Less amount representing interest........................... (37,019)
--------
Present value of net minimum lease payments............... 144,105
Less current portion........................................ (81,652)
--------
$ 62,453
========
</TABLE>
Rent expense for the years ended April 30, 1996 and 1997 and nine months
ended January 31, 1998, was $25,335, $35,353, and $52,779 respectively.
(5) INCOME TAXES
Income tax expense (benefit) for the years ended April 30, 1996 and 1997
and nine months ended January 31, 1998 differs from the amounts that would
result from applying the federal statutory rate of 34% as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- ---------
<S> <C> <C> <C>
Expected tax expense (benefit)...................... $19,543 $(5,861) $(130,777)
State income taxes, net of federal benefit.......... 2,300 (690) (15,374)
Nondeductible expenses.............................. -- 622 1,653
Change in valuation allowance for deferred tax
assets............................................ (14,243) 5,929 144,498
------- ------- ---------
Actual income tax expense................. $ 7,600 $ -- $ --
======= ======= =========
</TABLE>
Temporary differences that give rise to the components of deferred tax
assets and liabilities as of April 30, 1997 and January 31, 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
-------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 12,738 $ 148,824
Accounts receivable, due to allowance for doubtful
accounts for financial statement purposes only......... 11,000 30,000
Other..................................................... 173 140
-------- ---------
Total deferred tax assets......................... 23,911 178,964
Valuation allowance....................................... (5,929) (150,427)
-------- ---------
Net deferred tax assets........................... 17,982 28,537
-------- ---------
Deferred tax liability:
Equipment, due to differences in depreciation for
financial statement and tax purposes................... (17,982) (28,537)
-------- ---------
Net deferred tax asset (liability)................ $ -- $ --
======== =========
</TABLE>
F-174
<PAGE> 294
LI NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of January 31, 1998, the Company has a net operating loss carryforward
of approximately $392,000 for federal income tax purposes which will expire in
2013, if not utilized. A valuation allowance has been recorded for a portion of
the related deferred tax asset due to the uncertainty relating to the
realization of the net operating loss carryforward in the future.
(6) TRANSACTIONS WITH RELATED PARTIES
Notes payable to related party at April 30, 1997 and January 31, 1998
included $93,917 and $89,334, respectively, of unsecured notes due to
stockholders of the Company. The loans bear interest at 10% with the principal
and interest due in total on July 1, 1999 or upon sale of 50% or more of the
stock of the stockholders.
Also included in notes payable to related party at April 30, 1997 and
January 31, 1998 was an unsecured note due to a relative of a stockholder of the
Company. Principal outstanding on the note was $41,176 and $33,580 at April 30,
1997 and January 31, 1998, respectively. The note bears interest at 10% and is
payable in monthly principal and interest payments of $1,062 until 2001.
Maturities of notes payable to related parties for each of the years ending
January 31 are as follows:
<TABLE>
<S> <C>
1999.............................................. $ 8,885
2000.............................................. 100,087
2001.............................................. 11,878
2002.............................................. 2,064
--------
$122,914
========
</TABLE>
(7) STOCKHOLDERS' EQUITY
During the year ended April 30, 1997 and the nine months ended January 31,
1998, the Company issued treasury shares to an officer as compensation for
services. The Company recorded compensation expense of $11,900 and $285,000,
respectively, which, in the opinion of the Company's Board of Directors,
represented fair value of the shares at the date of issuance.
F-175
<PAGE> 295
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheet of NTX, Inc. as of June 30,
1998, and the related statements of operations, stockholders' deficit, and cash
flows for the nine months then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NTX, Inc. as of June 30,
1998, and the results of its operations and its cash flows for the nine months
then ended, in conformity with generally accepted accounting principles.
KPMG LLP
Denver, Colorado
August 5, 1998
F-176
<PAGE> 296
NTX, INC.
BALANCE SHEET
JUNE 30, 1998
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash...................................................... $ 91,373
Restricted cash........................................... 537,572
Receivables:
Trade, net of allowance for doubtful accounts of
$337,063.............................................. 1,080,965
Other.................................................. 25,000
Prepaid expenses and other................................ 20,523
-----------
Total current assets.............................. 1,755,433
Equipment and leasehold improvements, net (note 2).......... 525,942
Other assets, net........................................... 21,231
-----------
Total assets...................................... $ 2,302,606
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 721,248
Accrued liabilities....................................... 346,370
Deferred revenue.......................................... 1,904,564
-----------
Total current liabilities......................... 2,972,182
-----------
Stockholders' deficit (note 3):
Common stock, no par value, 4,210,524 shares authorized,
issued and outstanding................................. 3,640,000
Accumulated deficit....................................... (4,309,576)
-----------
Total stockholders' deficit....................... (669,576)
-----------
Commitments (note 4)
Total liabilities and stockholders' deficit....... $ 2,302,606
===========
</TABLE>
See accompanying notes to financial statements.
F-177
<PAGE> 297
NTX, INC.
STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1998
<TABLE>
<S> <C>
Revenue:
Web hosting............................................... $ 3,552,716
Domain name registration.................................. 2,733,506
Other..................................................... 316,320
-----------
Total revenue..................................... 6,602,542
-----------
Costs and expenses:
Operating................................................. 1,315,039
Selling, general and administrative....................... 5,750,785
Stock-based compensation (note 3)......................... 3,640,000
Depreciation and amortization............................. 124,818
-----------
Total costs and expenses.......................... 10,830,642
-----------
Loss from operations.............................. (4,228,100)
-----------
Other income (expense):
Interest income........................................... 6,131
Interest expense.......................................... (380)
-----------
Net loss.......................................... $(4,222,349)
===========
</TABLE>
See accompanying notes to financial statements.
F-178
<PAGE> 298
NTX, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
NINE MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
TOTAL
MEMBERS' COMMON ACCUMULATED STOCKHOLDERS'
DEFICIT STOCK DEFICIT DEFICIT
--------- --------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCES AT OCTOBER 1, 1997................. $(160,936) -- $ -- $ (160,936)
Contributions from members.................. 73,709 -- -- 73,709
Issuance of common stock in connection with
reincorporation........................... 87,227 -- (87,227) --
Stock-based compensation expense (note 3)... -- 3,640,000 -- 3,640,000
Net loss.................................... -- -- (4,222,349) (4,222,349)
--------- --------- ----------- -----------
BALANCE AT JUNE 30, 1998.................... $ -- 3,640,000 $(4,309,576) $ (669,576)
========= ========= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-179
<PAGE> 299
NTX, INC.
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(4,222,349)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 124,818
Provision for bad debts................................ 259,499
Stock-based compensation expense....................... 3,640,000
Changes in operating assets and liabilities:
Trade and other accounts receivable.................. (1,118,363)
Prepaid expenses and other........................... (20,523)
Accounts payable..................................... 434,822
Accrued liabilities.................................. 209,994
Deferred revenue..................................... 1,469,194
Other assets, net.................................... (21,231)
-----------
Net cash provided by operating activities......... 755,861
-----------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements......... (419,386)
Restricted cash........................................... (461,841)
-----------
Net cash used by investing activities............. (881,227)
-----------
Cash flows from financing activities -- contributions from
members................................................... 73,709
-----------
Net decrease in cash.............................. (51,657)
Cash at the beginning of period............................. 143,030
-----------
Cash at end of period....................................... $ 91,373
===========
</TABLE>
See accompanying notes to financial statements.
F-180
<PAGE> 300
NTX, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
NTX, Inc. d/b/a TABNet (the Company), was incorporated as a subchapter S
Corporation in the State of California on November 24, 1997. Prior to
incorporation as a subchapter S Corporation, the Company was operating as NTX,
L.L.C., a limited liability corporation. All assets and liabilities of the
L.L.C. were contributed to the Company upon incorporation and recorded at
historical cost. The Company provides web hosting and domain name registration
services to customers primarily in the United States.
Effective July 7, 1998, Verio Inc. acquired 100% of the outstanding common
stock of the Company.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenue and expenses during the
reporting period. Actual results may differ from those estimates.
RESTRICTED CASH
Restricted cash represents the retained portion of customer payments by the
Company's credit card merchant bank processors and is restricted for a period of
approximately six months after each payment transaction.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are recorded at cost, less accumulated
depreciation. Depreciation is recorded over the estimated useful lives of the
assets ranging from 3 to 5 years using the straight-line method. Leasehold
improvements are amortized over the shorter of the lease term or the estimated
useful life of the asset. Costs for normal repairs and maintenance are expensed
as incurred.
LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of (Statement No. 121). Statement No. 121 requires impairment losses to be
recognized on long-lived assets used in operations, including goodwill, when
indications of impairment are present and the undiscounted future cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. If such assets are impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds their fair
value. Assets to be disposed of are reported at the lower of the carrying amount
or fair value, less costs to sell.
REVENUE RECOGNITION
Web hosting and domain name registration revenue is recognized as the
services are provided. Set-up fees are recognized when installation is
completed. The Company records deferred revenue for accounts billed and/or
collected in advance.
INCOME TAXES
No provision for income taxes has been included in the accompanying
financial statements for the nine months ended June 30, 1998 due to the
Company's status as a limited liability corporation and subchapter S
Corporation. Accordingly, net losses for the period were included in the
respective individual tax returns of the members and stockholders.
F-181
<PAGE> 301
NTX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STOCK-BASED COMPENSATION
The Company accounts for its stock-based employee compensation using the
intrinsic value based method prescribed by Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations
(APB 25). The Company has no options outstanding at June 30, 1998, and no formal
stock option plan in place. The Company will provide the pro forma disclosures
of net loss as if the fair value based method of accounting for the stock-based
compensation, as prescribed by Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation (SFAS 123), had been applied, in
the future as applicable.
CONCENTRATION OF CREDIT RISK AND FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments whether or not recognized for
financial statement purposes. Management estimates that the fair values of all
financial instruments as of June 30, 1998 approximate their carrying amounts
based on their terms and interest rates. The use of different market assumptions
and/or estimation methodologies may have a significant effect on the estimated
fair values.
(2) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consisted of the following at June 30,
1998:
<TABLE>
<S> <C>
Internet and computer equipment............................. $ 668,307
Furniture and leasehold improvements........................ 52,396
---------
720,703
Less accumulated depreciation............................. (194,761)
---------
$ 525,942
=========
</TABLE>
(3) STOCKHOLDERS' DEFICIT
During the nine months ended June 30, 1998, the Company granted rights to
acquire a specific percentage ownership in the Company to four employees as
compensation. The Company recorded stock-based compensation expense of
$3,640,000 which, in the opinion of the Company's Board of Directors,
represented fair value at the date of grant based on the per share price paid by
Verio Inc. in the acquisition of the Company's common stock.
(4) COMMITMENTS
The Company leases its facilities under long-term operating leases expiring
at various dates through 2003. Future minimum lease payments consist of the
following at June 30, 1998:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30:
--------------------
<S> <C>
1999...................................................... $120,148
2000...................................................... 70,188
2001...................................................... 23,610
2002...................................................... 22,920
2003...................................................... 19,100
--------
Total minimum lease payments...................... $255,966
========
</TABLE>
Rent expense totaled $78,688 for the nine months ended June 30, 1998.
F-182
<PAGE> 302
NTX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has entered into marketing agreements for internet search
engines and an agreement which provides for internet access. Future payments
under these noncancelable agreements as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30:
--------------------
<S> <C>
1999...................................................... $4,672,300
2000...................................................... 1,438,500
</TABLE>
F-183
<PAGE> 303
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Best Internet Communications, Inc.
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, stockholders' equity, and cash flows present fairly, in all
material respects, the financial position of Best Internet Communications, Inc.
and its subsidiaries at December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits and the report of other auditors provide a reasonable
basis for the opinion expressed above. We did not audit the financial statements
of Hiway Technologies, Inc. (Hiway Florida) for 1995 and 1996, which statements
reflect total assets of $2,150,000 at December 31, 1996 and revenues of
$2,700,000 and $10,400,000, respectively, for the years ended 1995 and 1996.
Those statements were audited by other auditors whose unqualified reports have
been furnished to us and our opinion, insofar as it relates to amounts included
for Hiway Florida for such periods, is based solely on the report of the other
auditors.
PricewaterhouseCoopers LLP
San Jose, California
May 27, 1998
F-184
<PAGE> 304
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of Hiway Technologies, Inc. Boca Raton, Florida
We have audited the accompanying balance sheet of Hiway Technologies, Inc.
as of December 31, 1996 and the related statements of income, retained earnings
and cash flows for the period from April 6, 1995 (date of inception) to December
31, 1995 and the year ended December 31, 1996. These financial statements are
the responsibility of Hiway Technologies, Inc.'s management. Our responsibility
is to express an opinion on the financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hiway Technologies, Inc. as
of December 31, 1996, and the results of its operations and its cash flows for
the period from April 6, 1995 (date of inception) to December 31, 1995 and for
the year ended December 31, 1996, in conformity with generally accepted
accounting principles.
De Meo, Young, McGrath & Company,
P.A.
September 17, 1997
Fort Lauderdale, Florida
F-185
<PAGE> 305
BEST INTERNET COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1996 1997 1998
------ ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................... $1,588 $ 5,672 $ 3,569
Accounts receivable, net of allowance for doubtful accounts
of $373, $1,072 and $1,063, respectively.................. 1,380 2,550 3,669
Note receivable............................................. -- 160 --
Inventory -- equipment held for resale...................... 71 35 14
Prepaid expenses and other current assets................... 237 297 565
Deferred taxes.............................................. -- 342 660
------ ------- -------
Total current assets.............................. 3,276 9,056 8,477
Property and equipment, net................................. 4,813 8,706 15,351
Deposits and other.......................................... 68 196 1,354
Investments................................................. -- 344 464
Intangible assets, net of accumulated amortization of $101,
$318 and $458, respectively............................... 1,382 1,165 1,031
------ ------- -------
Total assets...................................... $9,539 $19,467 $26,677
====== ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $1,165 $ 1,234 $ 2,353
Accrued payroll and related liabilities..................... 265 458 1,137
Other accrued liabilities................................... 201 141 490
Deferred revenue............................................ 981 2,578 4,205
Current portion of notes payable............................ 140 225 91
Current portion of capital lease obligations................ 135 251 291
------ ------- -------
Total current liabilities......................... 2,887 4,887 8,567
Deferred rent............................................... 105 119 564
Deferred taxes.............................................. -- 307 354
Notes payable, less current portion......................... 541 4,944 4,904
Capital lease obligations, less current portion............. 237 253 232
Convertible note payable.................................... 800 -- --
------ ------- -------
Total liabilities................................. 4,570 10,510 14,621
------ ------- -------
Commitments (Note 8)
SHAREHOLDERS' EQUITY:
Preferred stock, convertible and redeemable, $0.001 par
value per share: Authorized: 10,000,000 shares;
Series B: Authorized: 4,000,000 shares; Issued and
outstanding: 2,822,000, 3,462,000 and no shares,
respectively.............................................. 3,441 4,229 --
Liquidation preference: $3,528, $4,328 and $0, respectively
Common stock, $0.001 par value per share: Authorized:
60,000,000 shares; Issued and outstanding: 27,776,620,
31,120,237 and 35,886,113 shares, respectively............ 14 16 36
Additional paid-in capital.................................. 1,598 4,224 9,528
Notes receivable from shareholders.......................... -- (889) (1,358)
Retained earnings (accumulated deficit)..................... (84) 1,377 3,850
------ ------- -------
Total shareholders' equity........................ 4,969 8,957 12,056
------ ------- -------
Total liabilities and shareholders' equity........ $9,539 $19,467 $26,677
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-186
<PAGE> 306
BEST INTERNET COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------------------
1995 1996 1997 1997 1998
------ ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.................................. $2,011 $12,217 $26,185 $18,453 $29,073
------ ------- ------- ------- -------
Operating costs and expenses:
Cost of revenues........................ 231 3,233 7,213 5,132 8,112
Sales and marketing..................... 154 2,555 3,589 2,280 4,878
Product development and systems
engineering.......................... 97 1,005 2,112 1,419 2,114
General and administrative.............. 2,068 4,641 8,400 5,632 11,372
------ ------- ------- ------- -------
Total operating costs and
expenses...................... 2,550 11,434 21,314 14,463 26,476
------ ------- ------- ------- -------
Income (loss) from operations............. (539) 783 4,871 3,990 2,597
Other income (expense).................... (7) -- 67 54 269
Interest expense, net..................... (4) (190) (142) (69) (294)
------ ------- ------- ------- -------
Income (loss) before provision for income
taxes................................... (550) 593 4,796 3,975 2,572
Provision for income taxes................ 1 1 361 301 99
------ ------- ------- ------- -------
Net income (loss)......................... $ (551) $ 592 $ 4,435 $ 3,674 $ 2,473
====== ======= ======= ======= =======
Basic net income (loss) per share......... $(0.03) $ 0.02 $ 0.15 $ 0.12 $ 0.07
====== ======= ======= ======= =======
Diluted net income (loss) per share....... $(0.03) $ 0.02 $ 0.13 $ 0.11 $ 0.07
====== ======= ======= ======= =======
Pro forma net income data (unaudited)
(Note 18):
Income (loss) before provision for
income taxes......................... $ (550) $ 593 $ 4,796 $ 3,975 $ 2,572
Pro forma provision for income taxes.... 1 33 1,925 1,596 843
------ ------- ------- ------- -------
Pro forma net income (loss)............... $ (551) $ 560 $ 2,871 $ 2,379 $ 1,729
====== ======= ======= ======= =======
Pro forma basic net income (loss) per
share................................... $(0.03) $ 0.02 $ 0.10 $ 0.08 $ 0.05
====== ======= ======= ======= =======
Pro forma diluted net income (loss) per
share................................... $(0.03) $ 0.02 $ 0.08 $ 0.07 $ 0.05
====== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-187
<PAGE> 307
BEST INTERNET COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 AND NINE MONTHS ENDED SEPTEMBER 30,
1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES B NOTES RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE EARNINGS TOTAL
-------------------- ------------------- PAID-IN FROM (ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL SHAREHOLDERS DEFICIT) EQUITY
---------- ------- ---------- ------ ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1,
1995.................... -- $ -- -- $-- $ -- $ -- $ -- $ --
Issuance of common stock
for cash, net of
issuance costs of $7.... -- -- 22,622,141 22 990 -- -- 1,012
Issuance of common stock
for services rendered... -- -- 510,000 1 25 -- -- 26
Net loss.................. -- -- -- -- -- -- (551) (551)
---------- ------- ---------- --- ------ ------- ------- -------
BALANCES, DECEMBER 31,
1995.................... -- -- 23,132,141 23 1,015 -- (551) 487
Issuance of common stock
and exercise of stock
options for cash, net of
issuance costs of $3.... -- -- 4,509,479 5 430 -- -- 435
Issuance of common stock
for acquisitions........ -- -- 135,000 -- 67 -- -- 67
Issuance of warrants...... -- -- -- -- 72 -- -- 72
Issuance of preferred
stock for cash, net of
issuance costs
of $86.................. 2,822,000 3,441 -- -- -- -- -- 3,441
Net income................ -- -- -- -- -- -- 592 592
Distributions by Hiway
Florida (a Subchapter S
corporation)............ -- -- -- -- -- -- (125) (125)
---------- ------- ---------- --- ------ ------- ------- -------
BALANCES, DECEMBER 31,
1996.................... 2,822,000 3,441 27,776,620 28 1,584 -- (84) 4,969
Issuance of common stock
and exercise of stock
options for
cash.................... -- -- 2,279,503 2 544 -- -- 546
Issuance of common stock
and exercise of stock
options for
notes................... -- -- 1,084,114 1 608 (609) -- --
Repurchase of common
stock................... -- -- (20,000) -- (40) -- -- (40)
Issuance of warrants for
note.................... -- -- -- -- 280 (280) -- --
Issuance of warrant....... -- -- -- -- 1,233 -- -- 1,233
Issuance of preferred
stock for cash, net of
issuance costs
of $12.................. 640,000 788 -- -- -- -- -- 788
Net income................ -- -- -- -- -- -- 4,435 4,435
Distributions by Hiway
Florida (a Subchapter S
corporation)............ -- -- -- -- -- -- (2,974) (2,974)
---------- ------- ---------- --- ------ ------- ------- -------
BALANCES, DECEMBER 31,
1997.................... 3,462,000 4,229 31,120,237 31 4,209 (889) 1,377 8,957
Exercise of stock options
for cash................ -- -- 683,161 1 445 -- -- 446
Exercise of stock options
for
notes................... -- -- 620,715 1 468 (469) -- --
Conversion of preferred
stock................... (3,462,000) (4,229) 3,462,000 3 4,226 -- -- --
Contribution from
shareholders............ -- -- -- -- 180 -- -- 180
Net income................ -- -- -- -- -- -- 2,473 2,473
---------- ------- ---------- --- ------ ------- ------- -------
BALANCES, SEPTEMBER 30,
1998
(unaudited)............. -- $ -- 35,886,113 $36 $9,528 $(1,358) $ 3,850 $12,056
========== ======= ========== === ====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-188
<PAGE> 308
BEST INTERNET COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -------------------------
1995 1996 1997 1997 1998
------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $ (551) $ 592 $ 4,435 $ 3,674 $ 2,473
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................. 87 608 1,371 916 1,962
Amortization of intangibles.................... -- 101 217 146 134
Services rendered in exchange for common
stock........................................ 26 -- -- -- --
Provision for doubtful accounts................ 8 365 699 423 (9)
Loss (gain) on sale and trade-in of property
and equipment................................ -- 39 2 (2) (134)
Equity in earnings of foreign resellers........ -- -- -- -- (13)
Amortization of discount on convertible debt... -- 72 -- -- 224
Deferred taxes................................. -- -- (35) -- (443)
Changes in operating assets and liabilities:
Accounts receivable.......................... (92) (1,660) (1,869) (1,215) (1,110)
Inventory.................................... (30) (41) 36 32 21
Prepaid expenses and other current assets.... (4) (233) (60) 81 (268)
Deposits..................................... (34) (15) (128) (96) (1,158)
Accounts payable............................. 360 804 69 (2) 1,119
Accrued liabilities.......................... 150 316 133 225 1,199
Deferred revenue............................. 115 866 1,597 1,193 1,627
Deferred rent................................ 57 48 14 10 445
------- ------- ------- ------- -------
Net cash provided by operating
activities............................ 92 1,862 6,481 5,385 6,069
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment..... -- 47 7 -- 2
Purchases of property and equipment.............. (1,047) (3,491) (4,955) (3,417) (8,277)
Repayment (issuance) of note receivable.......... -- -- (160) (160) 160
Purchase of investments.......................... -- -- (344) (120) (158)
Acquisitions..................................... -- (1,312) -- -- --
------- ------- ------- ------- -------
Net cash used in investing activities... (1,047) (4,756) (5,452) (3,697) (8,273)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock........... 1,012 422 500 500 --
Proceeds from exercise of stock options.......... -- 13 46 22 446
Proceeds from issuance of preferred stock........ -- 3,441 788 788 --
Repurchase of common stock....................... -- -- (40) -- --
Proceeds from (repayment of) convertible notes... -- 800 (800) (590) --
Proceeds from notes payable...................... -- 43 5,912 -- --
Principal payments on notes payable.............. -- (79) (190) (127) (346)
Proceeds from shareholder loans.................. 9 -- 105 105 --
Repayment of shareholder loans................... (8) (21) (105) -- --
Loans to shareholder............................. -- -- -- (250) --
Principal payment on capital lease obligations... (3) (67) (187) (126) (179)
Distributions to shareholders.................... -- (125) (2,974) (1,219) --
Contribution from shareholders................... -- -- -- -- 180
------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities............................ 1,010 4,427 3,055 (897) 101
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents.................................... 55 1,533 4,084 791 (2,103)
Cash and cash equivalents, beginning of period... -- 55 1,588 1,588 5,672
------- ------- ------- ------- -------
Cash and cash equivalents, end of period......... $ 55 $ 1,588 $ 5,672 $ 2,379 $ 3,569
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-189
<PAGE> 309
BEST INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30,
1997 AND 1998 IS UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
1. COMPANY BACKGROUND
Best Internet Communications, Inc. (the Company), was incorporated in
California on September 21, 1994. Activity from September 21, 1994 (date of
inception) to December 31, 1994 resulted in revenues of $20 and a net loss of
$46, which have been included in the results for the year ended December 31,
1995. On May 27, 1998, the Company merged with Hiway Technologies, Inc. (Hiway
Florida), a company based in Florida. Hiway Florida was formed on April 6, 1995
and operated as a Subchapter S corporation.
The Company is a leading global provider of Web hosting and related
enhanced Internet services to small and medium sized businesses. The Company
focuses on delivering high-quality, reliable and flexible services that are
backed by 24 X 7 customer support.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
The Company has minority investments in certain of its foreign resellers.
The activities of these entities are not significant.
Management Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents:
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. These instruments are
stated at cost, which approximates fair value.
Fair Value of Financial Instruments:
Carrying amounts of certain financial instruments held by the Company
including cash and cash equivalents, accounts receivable, accounts payable and
other accrued liabilities approximate fair value due to their short maturities.
Based on borrowing rates currently available to the Company for loans with
similar terms, the carrying value of the notes payable and capital lease
obligations approximates fair value.
Inventory:
Inventory is stated at the lower of cost (determined on a first-in,
first-out basis) or market, and consists primarily of third party equipment for
resale.
Property and Equipment:
Property and equipment is stated at cost and is depreciated on a straight
line basis over their estimated useful lives of five to seven years. Leasehold
improvements are amortized over the length of the lease or
F-190
<PAGE> 310
BEST INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimated useful life, whichever is less. Major additions and betterments are
capitalized, while replacements, maintenance, and repairs that do not improve or
extend the life of the assets are charged to expense. In the period assets are
retired or otherwise disposed of, the costs and related accumulated depreciation
and amortization are removed from the accounts, and any gain or loss on disposal
is included in results of operations.
Intangible Assets:
Intangible assets consist of goodwill which arose from the acquisition of
two Internet service providers in 1996 (see Note 4) and is being amortized on a
straight-line basis over seven years. The Company reviews the carrying value of
goodwill for impairment whenever events or changes in circumstance indicate that
the carrying amount may not be recoverable.
Revenue Recognition:
Revenues consist primarily of Web hosting and Internet service fees, set-up
fees and equipment sales. The Company generally sells its Web hosting services
for contractual periods ranging from one to three months. Revenues from these
services are recognized ratably over the contractual period. The fee charged for
domain name reservations is recognized over the two year name reservation period
and any unrecognized portion of the revenue is booked upon any termination of
the reservation. Internet service fees consist of fixed monthly amounts that are
recognized as the service is provided. Payments received in advance of providing
services are deferred until the period such services are provided. Set-up fees
and equipment sales are recognized when the set-up services are performed. The
Company offers a 30-day money-back guarantee for Web hosting services. Refunds
made by the Company have been insignificant.
Advertising:
The Company charges advertising costs to expense as they are incurred.
Advertising expense for the years ended December 31, 1995, 1996 and 1997 was
$113, $988 and $1,353, respectively.
Product Development:
Product development expenses are charged to operations as incurred.
Income Taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes." Under SFAS 109, deferred tax assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to affect taxable income. Valuation
allowances are established when, in management's estimate, there is uncertainty
over the recovery of deferred tax assets. The provision for income tax is
comprised of taxes payable for the current period, plus the net change in
deferred tax amounts during the period.
Income taxes are recognized in these consolidated financial statements for
the operations of the Company which was a C Corporation during all periods
presented. Because Hiway Florida was a Subchapter S corporation during all
periods presented, the income taxes for Hiway Florida's operations were the
responsibility of that company's stockholders. Pro forma income tax expenses, as
though both the Company and Hiway Florida reported on a combined basis as a C
corporation is disclosed in Note 18.
F-191
<PAGE> 311
BEST INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unaudited Interim Financial Information:
The accompanying interim balance sheet as of September 30, 1998 and the
statements of operations and cash flows for the nine months ended September 30,
1997 and 1998 together with the related notes are unaudited but include all
adjustments, consisting of only normal recurring adjustments, which the Company
considers necessary to present fairly, in all material respects, the financial
position, as of September 30, 1998 and the results of operations and cash flows
for the nine months ended September 30, 1997 and 1998. Results for the nine
months ended September 30, 1997 and 1998 are not necessarily indicative of
results for an entire year.
Recent Accounting Pronouncements:
In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information," which is
effective for the year ending December 31, 1998.
In March 1998, the AICPA issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The Company is reviewing the impact of SOP 98-1, which will be
effective for the year ending December 31, 1999.
3. BUSINESS RISKS AND CREDIT CONCENTRATION
The Company operates in the intensely competitive Internet industry which
is characterized by rapid technological change, short product life cycles, and
heightened competition. Significant technological changes in the industry could
affect operating results adversely.
Financial instruments that potentially subject the Company to
concentrations of credit risk comprise principally cash and cash equivalents,
trade accounts receivable, and other receivables and deposits. As of December
31, 1997, the Company's cash and cash equivalents are deposited with numerous
domestic financial institutions. With respect to accounts receivable, the
Company's customer base is dispersed across many different geographic areas. The
Company monitors customers' payment history and establishes reserves for bad
debt as warranted. In addition to individual customers, the Company also
provides Web hosting services to resellers who in turn provide services to their
own customers.
4. MERGERS AND ACQUISITIONS
Merger with Hiway Florida:
On May 27, 1998, the Company merged with Hiway Florida, a provider of Web
hosting services. Under the terms of the merger agreement, each share of Hiway
Florida common stock was exchanged for 4.1374 shares of the Company's common
stock. The Company issued approximately 21.8 million shares of common stock in
exchange for all the outstanding shares of Hiway Florida. The Company also
assumed and exchanged all options and warrants to purchase Hiway Florida stock
for options and warrants to purchase approximately 3 million shares of the
Company's common stock. The transaction was accounted for as a pooling of
interest and accordingly the Company's financial statements have been restated
to include the results of Hiway Florida for all periods presented.
F-192
<PAGE> 312
BEST INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Separate and combined results of operations for the periods prior to the
merger are as follows:
<TABLE>
<CAPTION>
NINE
MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------- SEPTEMBER 30,
1995 1996 1997 1998
------ ------- ------- -------------
<S> <C> <C> <C> <C>
Revenues:
Best...................................... $1,965 $ 9,517 $15,785 $14,312
Hiway Florida............................. 46 2,700 10,400 14,761
------ ------- ------- -------
Combined.................................. $2,011 $12,217 $26,185 $29,073
====== ======= ======= =======
Net income (loss) -- historical:
Best...................................... $ (566) $ (474) $ 1,662 $ 320
Hiway Florida............................. 15 1,138 2,773 2,153
------ ------- ------- -------
Combined.................................. $ (551) $ 664 $ 4,435 $ 2,473
====== ======= ======= =======
</TABLE>
Other Acquisitions:
In July 1996, the Company acquired certain assets and the ongoing
operations of two Internet service providers for a total of $2,076. The
aggregate purchase price comprised $1,312 in cash, $697 in notes payable to
sellers, and 135,000 shares of common stock valued at $67. The purchase price
was allocated to the net tangible assets acquired ($593) and to goodwill
($1,483). The value of the common stock was determined by the Board of
Directors.
5. NOTE RECEIVABLE
The note receivable is due from one of the Company's partners in a foreign
reseller. The note is uncollateralized, bears interest at the rate of 12% and is
due on demand.
6. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1996 1997 1998
------ ------ -------------
<S> <C> <C> <C>
Network, computer equipment and software............... $4,661 $8,841 $12,860
Furniture and fixtures................................. 124 471 841
Leasehold improvements................................. 566 1,199 5,317
Other.................................................. 148 252 127
------ ------ -------
5,499 10,763 19,145
Less accumulated depreciation and amortization......... 686 2,057 3,794
------ ------ -------
$4,813 $8,706 $15,351
====== ====== =======
</TABLE>
Included in network and computer equipment are $490, $776 and $799 of
equipment acquired under capital leases at December 31, 1996 and 1997 and
September 30, 1998, respectively. Accumulated amortization related to such
capital leases was $40, $158 and $325 at December 31, 1996 and 1997 and
September 30, 1998, respectively. Network and computer equipment also includes
$1,064 and $328 of equipment not yet placed in service at December 31, 1997 and
September 30, 1998, respectively.
F-193
<PAGE> 313
BEST INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. CAPITAL LEASE OBLIGATIONS
The Company leases network equipment under several capital leases. The
agreements require the Company to maintain liability and property insurance.
Capital leases at December 31, 1997 expire at various dates through September
2000 and bear interest ranging from 5.8% to 18.5%. Future minimum lease payments
as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $284
1999........................................................ 209
2000........................................................ 58
----
551
Less amount representing interest........................... 47
----
Present value of minimum lease payments..................... 504
Less current portion........................................ 251
----
$253
====
</TABLE>
8. COMMITMENTS
The Company rents office facilities and equipment under several operating
leases which expire at various times through May 2005. Rent expense charged to
operations was $155, $345 and $670 for the years ended December 31, 1995, 1996,
and 1997, respectively.
Future minimum lease payments under noncancelable operating leases as of
December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 786
1999........................................................ 861
2000........................................................ 1,148
2001........................................................ 1,140
2002........................................................ 977
Thereafter.................................................. 1,818
------
Total commitments................................. $6,730
======
</TABLE>
9. NOTES PAYABLE
Notes payable comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
---- ------
<S> <C> <C>
Seller notes................................................ $649 $ 475
Bank notes.................................................. 32 927
Senior unsecured notes...................................... -- 3,767
---- ------
681 5,169
Less current portion........................................ 140 225
---- ------
$541 $4,944
==== ======
</TABLE>
The seller notes bear interest at 8% per annum and are repayable in monthly
equal installments through July 2001. These notes resulted from the acquisitions
made in 1996 (see Note 4).
F-194
<PAGE> 314
BEST INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The bank notes bear interest at 9.75% to 10% per annum and are repayable in
equal monthly installments through October 2001. The bank notes are
collateralized by the Company's assets and require the Company to comply with
certain covenants including a minimum quick ratio, a minimum tangible net worth,
a maximum ratio of total liabilities to tangible net worth, a minimum monthly
subscriber additions to disconnections ratio, and minimum cash requirements. The
Company also has an unused line of credit with this bank in the amount of $500.
The line of credit bears interest at 1% above the bank's prime rate, and
advances are limited to 75% of eligible accounts receivable.
On December 19, 1997, the Company issued $5,000 of 5% Senior Unsecured
Notes (the Notes) with detachable warrants to purchase 1,654,962 shares of
common stock. The warrants can be exercised for $3.02 per share, at any time
after December 19, 1997. The Notes are uncollateralized and bear interest at 5%
from December 19, 1997 until January 1, 2000 and then bear interest at 9%
through maturity on December 31, 2002. Quarterly payments of interest only are
due beginning March 31, 1998 with the outstanding principal balance due on
December 31, 2002. The notes may be prepaid at the option of the Company,
subject to certain conditions, at a premium of ten percent.
In connection with the issuance of the Notes and warrants, the Company
attributed a portion of the proceeds to the warrants, which has been recorded as
additional paid in capital and as a reduction to the face amount of the Notes,
thereby increasing effective interest to 13.895% and increasing interest expense
for the year ended December 31, 1997 to $42. The value of the warrants was
determined by discounting the debt using an assumed interest rate of 12%.
Future payments of the notes payable as of December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998........................................................ $ 225
1999........................................................ 437
2000........................................................ 448
2001........................................................ 292
2002........................................................ 3,767
------
$5,169
======
</TABLE>
10. CONVERTIBLE NOTE
In January 1996, the Company issued two convertible notes in the amounts of
$200,000 and $800,000. In connection with the $200,000 note, the Company issued
a warrant to purchase 100,000 shares of common stock at $0.50 per share to the
noteholder. In connection with the $800,000 note, the Company issued warrants to
purchase 266,667 and 133,333 shares of common stock at $0.50 per share to the
noteholder and the guarantor of the note, respectively.
In July 1996, the Company repaid the $200,000 convertible note. The
$800,000 convertible note was repaid in March 1997 and the warrant issued to the
noteholder to purchase 266,667 shares of common stock was replaced by a warrant
to purchase 200,000 shares of common stock at $0.50 per share. In addition, the
warrant held by the guarantor of the note was canceled.
The Company recorded the fair value of the warrants as a discount against
the related convertible notes with a corresponding amount credited to additional
paid-in capital. Amortization of the debt discount totalled $72 in 1996 and was
insignificant in 1997.
11. NOTES RECEIVABLE FROM SHAREHOLDERS
Notes receivable from shareholders comprise loans made to shareholders in
connection with the exercise of options for the Company's common stock or to
purchase the Company's common stock. The loans are with full recourse and bear
interest at rates from 2% above prime to 8.5%. The loans are due between 1998 to
2000.
F-195
<PAGE> 315
BEST INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also issued a warrant to purchase 1,160,166 shares of common
stock at $2.78 per share to a shareholder, as an incentive to the shareholder to
become Chairman of the Board of Directors, in return for a promissory note in
the amount of $280. The note bears interest at prime and is due in 2000. There
was no compensation element relating to the warrant since the exercise price was
in excess of the fair market value of the Company's common stock at the date of
issuance, as determined by other equity transactions and an independent
valuation.
12. SHAREHOLDERS' EQUITY
Preferred Stock
In connection with the issuance of convertible promissory notes in 1996,
the Board of Directors designated 500,000 shares of the Serial preferred stock
as Series A preferred stock. As at December 31, 1997, the convertible promissory
notes had been repaid by the Company and there were no conversions into the
Series A preferred stock.
In 1996, the Board of Directors designated 4,000,000 shares of the Serial
preferred stock as Series B preferred stock. These shares were issued and sold
by the Company in July 1996 and March 1997 to independent third party investors.
Effective May 27, 1998, all of the outstanding shares of Series B preferred
stock were converted into 3,462,000 shares of common stock.
Warrants
In 1996 and 1997, the Company issued warrants to purchase common stock to
investors and lenders. At December 31, 1997 such warrants were as follows:
<TABLE>
<CAPTION>
SHARES OF EXERCISE EXPIRATION
COMMON STOCK PRICE DATE PURPOSE OF WARRANT
- ------------ -------- ---------- ------------------
<C> <C> <C> <S>
100,000 $0.50 January 2001 Issued in connection with $200 convertible note
200,000 $0.50 January 2001 Issued in connection with $800 convertible note
1,160,166 $2.78 December 2000 Issued to stockholder in return for $280 promissory note
1,654,952 $3.02 December 2002 Issued in connection with $5,000 senior unsecured notes
</TABLE>
13. STOCK OPTION PLANS
Under the Company's 1996 Stock Option Plan, as amended, (the Plan) the
Company could issue incentive options to employees at prices not lower than fair
market value at the date of grant, as determined by the Board of Directors.
Supplemental stock options (options that do not qualify as incentive stock
option) could be granted to employees, directors and consultants, at prices not
lower than 85% of fair market value at the date of grant, as determined by the
Board of Directors. The Board also had the authority to set the term of the
options (no longer than ten years from date of grant). Options granted generally
vest over three to four years. Unexercised options expire at least 30 days after
termination of employment with the Company.
In April 1998, the Board of Directors and the shareholders approved the
adoption of a 1998 Equity Incentive Plan (the 1998 Plan) which serves as the
successor of the 1996 Stock Option Plan. As amended through July 1998, the
Company has reserved, subject to shareholder approval, a total of 4,000,000
shares of common stock. In June 1998, the Board also adopted the 1998 Directors
Stock Option Plan and reserved a total of 600,000 shares of common stock for
issuance thereunder. The amended and restated 1998 Plan and the 1998 Directors
Stock Option Plan are subject to the shareholders' approval.
F-196
<PAGE> 316
BEST INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity under the Plans is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
--------------------------------------------------------------------
SHARES NUMBER WEIGHTED
AVAILABLE OF EXERCISE AGGREGATE AVERAGE
FOR GRANT SHARES PRICE PRICE EXERCISE PRICE
---------- ---------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
Options reserved at Plan
inception.................... 4,000,000 --
Options granted................ (1,156,500) 1,156,500 $ 0.05-$0.50 $ 149,564 $ 0.13
---------- ---------- ------------ ---------- ------
Balances, December 31, 1995.... 2,843,500 1,156,500 149,564 $ 0.13
Options granted................ (2,721,500) 2,721,500 $ 0.50-$0.75 1,549,955 $ 0.57
Options exercised.............. -- (178,944) $ 0.05-$0.50 (20,012) $ 0.11
Options canceled............... 592,832 (592,832) $ 0.10-$0.50 (214,015) $ 0.36
---------- ---------- ------------ ---------- ------
Balances, December 31, 1996.... 714,832 3,106,224 1,465,492 $ 0.47
Options granted................ (1,508,156) 1,508,156 $ 0.36-$3.00 1,459,085 $ 0.97
Options exercised.............. -- (1,079,986) $ 0.05-$1.25 (444,347) $ 0.41
Options canceled............... 1,419,330 (1,419,350) $ 0.50-$1.25 (727,566) $ 0.51
---------- ---------- ------------ ---------- ------
Balances, December 31, 1997.... 626,006 2,115,044 1,752,664 $ 0.83
Options reserved under new
Plan......................... 4,000,000 --
Cancellation of shares
available for grant under old
Plan......................... (578,506) --
Options granted................ (851,150) 851,150 $ 3.00-$6.00 4,936,663 $ 5.80
Options exercised.............. -- (1,303,862) $ 0.25-$3.00 (908,636) $ 0.70
Options canceled............... -- (230,321) $ 0.50-$6.00 (811,887) $ 3.53
---------- ---------- ------------ ---------- ------
Balances, June 30, 1998........ 3,196,350 1,432,011 $4,968,804 $ 3.47
========== ========== ========== ======
</TABLE>
The following table summarizes information with respect to stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS CURRENTLY
-------------------------------------------------- EXERCISABLE
WEIGHTED ----------------------------
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------- ----------- ---------------- ----------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.10........................ 140,000 7.07 $0.10 140,000 $0.10
$0.25........................ 46,000 7.50 $0.25 46,000 $0.25
$0.36........................ 206,865 9.45 $0.36 68,958 $0.36
$0.50........................ 240,116 8.62 $0.50 81,200 $0.50
$0.75........................ 1,054,318 9.04 $0.75 212,034 $0.75
$1.25........................ 108,750 9.47 $1.25 10,680 $1.25
$1.75........................ 172,495 9.84 $1.75 1,980 $1.75
$2.00........................ 128,000 9.84 $2.00 -- --
$3.00........................ 18,500 9.92 $3.00 -- --
--------- ------- -----
2,115,044 560,852 $0.48
========= ======= =====
</TABLE>
F-197
<PAGE> 317
BEST INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following information concerning the Company's stock option plan is
provided in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company accounts for the plan in accordance with APB No. 25
and related Interpretations.
The fair value of each option grant has been estimated on the date of grant
using the minimum value method with the following assumptions:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Risk-free interest rates.................................... 6.55% 6.25%
Expected volatility......................................... 0% 0%
Expected life............................................... 5 years 5 years
Dividends................................................... None None
</TABLE>
The weighted average fair value of the options granted in 1996 and 1997 was
$0.42 and $0.77, respectively.
The following pro forma net income (loss) information has been prepared as
if the Company had followed the provisions of SFAS No. 123:
<TABLE>
<CAPTION>
1996 1997
---- ------
<S> <C> <C>
Net income:
As reported (pro forma)................................... $560 $2,871
Pro forma................................................. $494 $2,600
</TABLE>
These pro forma amounts may not be representative of the effects on
reported net income (loss) for future years as options vest over several years
and additional awards are generally made each year.
14. MERGER COSTS
General and administrative expense for the nine months ended September 30,
1998 includes approximately $1.2 million in costs related to the merger with
Hiway Florida and the sale of the Company to Verio. The Company expenses such
costs as they are incurred.
15. INCOME TAXES
The Company's provision for income taxes for the year ended December 31,
1997 is as follows:
<TABLE>
<S> <C>
Current provision:
Federal................................................... $(314)
State..................................................... (81)
-----
(395)
-----
Deferred benefit:
Federal................................................... 33
State..................................................... 1
-----
34
-----
Provision for income taxes.................................. $(361)
=====
</TABLE>
The Company recorded a $1 tax provision for both years ended December 31,
1995 and 1996 for minimum state income tax. No other income taxes were payable
since the Company incurred losses during these periods and Hiway Florida
operated as a Subchapter S corporation (see Note 17 for pro forma provision for
income tax).
F-198
<PAGE> 318
BEST INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. Since the Company underwent a change in ownership during
1996 as defined in the Internal Revenue Code, the net operating loss
carryforwards of $995 and $940 at December 31, 1996 for Federal and California
purposes, respectively, could not be fully utilized in 1997. At December 31,
1997 the Company had net operating loss carryforwards of approximately $49 and
$47 for Federal and California purposes, respectively. These carryforwards
expire in 2003 through 2012 if not utilized beforehand.
The Company's deferred income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
----- -----
<S> <C> <C>
Deferred tax assets (current):
Net operating losses...................................... $ 426 $ 21
Allowance for doubtful accounts........................... 144 208
Deferred rent............................................. 45 51
Accrued liabilities....................................... 33 35
Other..................................................... 1 28
Deferred tax assets (non-current):
Amortization.............................................. 30 72
----- -----
Deferred tax assets....................................... 679 415
Deferred tax liabilities (non-current):
Depreciation.............................................. (239) (380)
Other..................................................... (30) --
----- -----
Deferred tax liabilities.................................... (269) (380)
Valuation allowance......................................... (410) --
----- -----
Net deferred tax asset............................ $ -- $ 35
===== =====
</TABLE>
The deferred tax valuation allowance decreased by $410 in 1997 as
management determined that the net deferred tax asset as of December 31, 1997
was more likely to be realized than not.
The following schedule reconciles the differences between the federal
income tax rate and the effective income tax rate for the year ended December
31, 1997:
<TABLE>
<S> <C>
Statutory rate.............................................. 34.0%
State taxes, net............................................ 1.1
Change in valuation allowance............................... (8.5)
Effect of income not subject to income taxes due to Hiway
Florida's Subchapter S status............................. (19.7)
Other....................................................... 0.6
-----
Effective tax rate.......................................... 7.5%
=====
</TABLE>
16. EMPLOYEE BENEFIT PLAN
In September 1995, the Company adopted a 401(k) Plan which qualifies under
Section 401(k) of the Internal Revenue Code of 1986. The Plan provides
retirement benefits through tax deferred salary deductions for all eligible
employees meeting certain age and service requirements. The Company may make
discretionary matching contributions on behalf of employees. All employee
contributions are 100% vested.
F-199
<PAGE> 319
BEST INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company did not make any contribution to the Plan during the years ended
December 31, 1995, 1996 or 1997.
17. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
----- ----- -------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Taxes paid................................................ $ 1 $ 56 $ 283
Interest paid............................................. 4 103 122
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITY:
Note payable issued for rent deposit...................... 18 406 --
Equipment purchased under capital lease................... 36 490 286
Common stock issued in acquisitions....................... -- 67 --
Note issued in acquisitions............................... -- 697 --
Shareholders contributions of equipment in exchange for
shareholder loans payable.............................. 21 -- --
Allowances on trade in of equipment....................... -- 34 --
Exercise of stock options for notes....................... -- -- 409
Issuance of common stock for note......................... -- -- 200
Issuance of warrant for note.............................. -- -- 280
Issuance of warrant....................................... -- 72 1,233
</TABLE>
18. UNAUDITED PRO FORMA DATA
The statement of operations includes a pro forma provision for income taxes
to reflect income tax expense as if both entities in the merged company, the
Company and Hiway Florida (which operated as a Subchapter S corporation), had
been a C corporation on a combined basis for all periods presented. The
components of the pro forma provision for income taxes consisted of:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -------------
1995 1996 1997 1997 1998
----- ----- ------- ------ ----
<S> <C> <C> <C> <C> <C>
Current provision:
Federal...................................... $-- $ 79 $1,636 $1,380 $641
State........................................ 1 22 428 321 204
--- ---- ------ ------ ----
1 101 2,064 1,701 845
--- ---- ------ ------ ----
Deferred provision (benefit):
Federal...................................... -- (58) (138) (104) 15
State........................................ -- (10) (1) (1) (17)
--- ---- ------ ------ ----
-- (68) (139) (105) (2)
--- ---- ------ ------ ----
Pro forma provision for income taxes........... $ 1 $ 33 $1,925 $1,596 $843
=== ==== ====== ====== ====
</TABLE>
F-200
<PAGE> 320
BEST INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. EARNINGS PER SHARE (EPS) DISCLOSURES
In accordance with the requirements of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," a reconciliation of the numerator and
denominator of basic and diluted EPS is provided as follows.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- --------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Numerator-Basic EPS
Historical net income
(loss)..................... $ (551) $ 592 $ 4,435 $ 3,674 $ 2,473
=========== =========== =========== =========== ===========
Pro forma net income (loss)
(unaudited)................ $ (551) $ 560 $ 2,871 $ 2,379 $ 1,729
=========== =========== =========== =========== ===========
Denominator-Basic EPS
Weighted average common
stock outstanding....... 16,871,100 25,877,800 30,020,460 29,844,420 33,470,450
=========== =========== =========== =========== ===========
Basic earnings (loss) per
share -- Historical........ $ (0.03) $ 0.02 $ 0.15 $ 0.12 $ 0.07
=========== =========== =========== =========== ===========
-- Pro forma......... $ (0.03) $ 0.02 $ 0.10 $ 0.08 $ 0.05
=========== =========== =========== =========== ===========
Numerator -- Diluted EPS
Historical net income
(loss)..................... $ (551) $ 592 $ 4,435 $ 3,674 $ 2,473
Interest on convertible
debt (net of related tax
effect)................. -- 28 6 -- --
----------- ----------- ----------- ----------- -----------
Historical net income
(loss)..................... $ (551) $ 620 $ 4,441 $ 3,674 $ 2,473
=========== =========== =========== =========== ===========
Pro forma net income (loss)
(unaudited)............. $ (551) $ 560 $ 2,871 $ 2,379 $ 1,729
Interest on convertible
debt (net of related tax
effect)................. -- 28 6 -- --
----------- ----------- ----------- ----------- -----------
Pro forma net income (loss)
(unaudited)................ $ (551) $ 588 $ 2,877 $ 2,379 $ 1,729
=========== =========== =========== =========== ===========
Denominator-Diluted EPS
Denominator -- Basic EPS..... 16,871,100 25,877,800 30,020,460 29,844,420 33,470,450
Effect of Dilutive
Securities:
Common stock options....... -- 885,680 1,419,380 1,378,340 755,700
Warrants................... -- 68,460 142,100 137,620 834,770
Convertible preferred
stock................... -- 1,293,420 3,212,000 3,139,780 1,731,000
Convertible debt........... -- 383,340 83,340 -- --
----------- ----------- ----------- ----------- -----------
16,871,100 28,508,700 34,877,280 34,500,160 36,791,920
=========== =========== =========== =========== ===========
Diluted earnings (loss) per
share -- Historical........ $ (0.03) $ 0.02 $ 0.13 $ 0.11 $ 0.07
=========== =========== =========== =========== ===========
-- Pro forma......... $ (0.03) $ 0.02 $ 0.08 $ 0.07 $ 0.05
=========== =========== =========== =========== ===========
</TABLE>
For the years ended December 31, 1995, stock options, preferred stock,
convertible debt and warrants and in 1996 and 1997, convertible debt and certain
warrants were excluded from the determination of the diluted EPS since their
effect would have been antidilutive.
F-201
<PAGE> 321
BEST INTERNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. SEGMENT REPORTING
The Company operates in one industry segment.
The distribution of revenues by geographic area was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
North America............................................ $2,011 $11,052 $22,507
Europe................................................... -- 593 2,194
Rest of the world........................................ -- 572 1,484
------ ------- -------
$2,011 $12,217 $26,185
====== ======= =======
</TABLE>
21. SUBSEQUENT EVENTS (UNAUDITED)
In June 1998, the Board of Directors authorized management of the Company
to file a Registration Statement with the Securities and Exchange Commission
relating to a public offering of the Company's common stock.
In July 1998, the Board of Directors approved the sale of the Company to
Verio, a leading provider of Internet services. As a result of this transaction,
the Company suspended its public offering of common stock and the Company
anticipates formally withdrawing the offering in December 1998. Accordingly, the
Company will expense approximately $1 million of deferred costs relating to the
public offering in the fiscal quarter ending December 31, 1998.
F-202
<PAGE> 322
- ------------------------------------------------------
- ------------------------------------------------------
YOU SHOULD DIRECT ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND
OTHER RELATED DOCUMENTS TO THE EXCHANGE AGENT. YOU SHOULD DIRECT ALL QUESTIONS
AND REQUESTS FOR ASSISTANCE AND REQUEST FOR ADDITIONAL COPIES OF THIS
PROSPECTUS, THE LETTER OF TRANSMITTAL AND OTHER RELATED DOCUMENTS TO THE
EXCHANGE AGENT.
The Exchange Agent for this Exchange Offer is:
U.S. BANK TRUST NATIONAL ASSOCIATION
180 East Fifth Street
St. Paul, MN 55101
Attn: Specialized Finance Department
Facsimile Transmissions
(Eligible Institutions Only)
(612) 244-1537
To confirm by telephone
or for information call:
(612) 244-1197
By mail
U.S. BANK TRUST NATIONAL ASSOCIATION
180 East Fifth Street
St. Paul, MN 55101
Attn: Specialized Finance Department
(YOU SHOULD PROMPTLY SEND ORIGINALS OF ALL DOCUMENTS SUBMITTED BY FACSIMILE BY
HAND, OVERNIGHT COURIER, OR REGISTERED OR CERTIFIED MAIL.)
---------------------
VERIO HAS NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE ANY
INFORMATION OR REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST NOT
RELY ON ANY UNAUTHORIZED INFORMATION. THIS PROSPECTUS DOES NOT OFFER TO SELL OR
SOLICIT AN OFFER TO BUY, IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT
IS UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS OR ANY SALE DOES NOT, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN VERIO'S
AFFAIRS SINCE THE DATE AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS.
---------------------
UNTIL , 1999 (180 DAYS AFTER THE COMMENCEMENT OF THIS EXCHANGE
OFFER), ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT
PARTICIPATING IN THIS EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
OFFER TO EXCHANGE ALL
OUTSTANDING
11 1/4% SENIOR NOTES
DUE 2008
FOR
11 1/4% SENIOR NOTES
DUE 2008
LOGO
---------------------
PROSPECTUS
---------------------
Dated , 1999
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 323
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to Section 145 of the General Corporation Law of the
State of Delaware (the "DGCL"), which provides for indemnification of directors,
officers and other employees in certain circumstances, and to Section 102(b)(7)
of the DGCL, which provides for the elimination or limitation of the personal
liability for monetary damages of directors under certain circumstances. Article
Eight of the Certificate of Incorporation of the Registrant eliminates the
personal liability for monetary damages of directors under certain circumstances
and provides indemnification to directors and officers of the Registrant to the
fullest extent permitted by the DGCL. Among other things, these provisions
provide indemnification for officers and directors against liabilities for
judgments in and settlements of lawsuits and other proceedings and for the
advance and payment of fees and expenses reasonably incurred by the director or
officer in defense of any such lawsuit or proceeding.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.1** -- Restated Certificate of Incorporation of the Registrant,
as amended.
3.2** -- Certificate of Amendment of Certificate of Incorporation
of the Registrant.
3.3** -- Certificate of Designation Establishing Series D
Preferred Stock of the Registrant.
3.4** -- Bylaws of the Registrant.
4.1*** -- Form of Old 1997 Note.
4.2*** -- Form of New 1997 Note.
4.3*** -- Escrow Agreement, dated as of June 24, 1997, among First
Trust National Association (as escrow agent and trustee)
and the Registrant.
4.4** -- 1997 Indenture (See Exhibit 10.1).
4.5** -- 1997 Notes Registration Rights Agreement (See Exhibit
10.4).
4.6*** -- Purchase Agreement, dated as of June 17, 1997, by and
among Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner
& Smith Incorporated, and Lazard Freres & Co. LLC
(collectively, the "Initial 1997 Notes Purchasers"), and
the Registrant.
4.7*** -- Form of Old March 1998 Note.
4.8*** -- Form of New March 1998 Note.
4.9** -- 1998 Indenture (See Exhibit 10.23).
4.10** -- 1998 Notes Registration Rights Agreement (See Exhibit
10.24).
4.11*** -- Purchase Agreement, dated as of March 19, 1998, by and
among Salomon Brothers Inc, Lazard Freres & Co. LLC,
Chase Securities, Inc., and BancBoston Securities Inc.
(collectively, the "Initial March 1998 Notes
Purchasers"), and the Registrant.
4.12 -- Form of Old Note
4.13 -- Form of New Note
4.14++ -- Indenture (See Exhibit 10.34)
4.15++ -- Registration Rights Agreement (See Exhibit 10.35)
4.16++ -- Purchase Agreement, dated as of November 20, 1998, by and
among Salomon Smith Barney Inc., Credit Suisse First
Boston Corporation, Donaldson, Lufkin & Jenrette
Securities Corporation and First Union Capital Markets
(collectively, the "Initial November 1998 Notes
Purchasers"), and the Registrant.
5.1 -- Opinion of Morrison & Foerster LLP.
</TABLE>
II-1
<PAGE> 324
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.1** -- Indenture, dated as of June 24, 1997, by and among the
Registrant and First Trust National Association (as
trustee).
10.2** -- Warrant Agreement, dated as of June 24, 1997, by and
between First Trust National Association and the
Registrant.
10.3** -- Common Stock Registration Rights Agreement, dated as of
June 17, 1997, by and among the Registrant, Brooks Fiber
Properties, Inc., Norwest Equity Partners V, Providence
Equity Partners, Centennial Fund V, L.P., Centennial Fund
IV, L.P. (as investors), and the Initial Purchasers.
10.4** -- Registration Rights Agreement, dated as of June 17, 1997,
by and among the Registrant and the Initial Purchasers.
10.5** -- Lease Agreement, dated as of June 20, 1997, by and
between the Registrant and Highland Park Ventures, LLC,
with respect to the property in Englewood, Colorado,
including the First Amendment to Lease Agreement, dated
as of December 16, 1997.
10.6** -- Lease Agreement, dated as of May 24, 1997, by and between
the Registrant and IM Joint Venture, with respect to the
property in Dallas, Texas, as amended.
10.7** -- Form of Indemnification Agreement between the Registrant
and each of its officers and directors.
10.8** -- Amended and Restated Stockholders Agreement, dated as of
May 20, 1997, by and between the Registrant, the Series A
Purchasers, the Series B Purchasers, the Series C
Purchasers and members of the Registrant's management.
10.9** -- The Registrant's 1996 Stock Option Plan, as amended.
10.10** -- The Registrant's 1997 California Stock Option Plan, as
amended.
10.11** -- The Registrant's 1998 Employee Stock Purchase Plan, as
amended.
10.12** -- The Registrant's 1998 Stock Incentive Plan, as amended.
10.13** -- Form of Compensation Protection Agreement between the
Registrant and each of its officers.
10.14** -- Master Service Agreement, dated as of August 23, 1996, by
and between the Registrant and MFS Datanet, Inc.
10.15** -- Agreement for Terminal Facility Collocation Space, dated
August 8, 1996, by and between MFS Telecom, Inc. and the
Registrant.
10.16** -- Bilateral Peering Agreement, dated May 19, 1997, between
AT&T Corp. and the Registrant.
10.17** -- Master Lease Agreement, dated November 17, 1997, by and
between Insight Investments Corp. and the Registrant.
10.18** -- Master Lease Agreement, dated October 27, 1997, by and
between Cisco Capital Systems Corporation and the
Registrant.
10.19**+ -- Lateral Exchange Networks Interconnection Agreement,
dated as of February 3, 1997, by and between the
Registrant and Sprint Communications Company L.P.
("Sprint").
10.20**+ -- Cover Agreement, dated September 30, 1996, by and between
the Registrant and Sprint.
10.21**+ -- Amendment One to Cover Agreement, dated November 7, 1996,
by and between the Registrant and Sprint.
10.22**+ -- Amendment Two to Cover Agreement, dated March 2, 1998, by
and between the Registrant and Sprint.
10.23** -- Indenture, dated as of March 25, 1998, by and among the
Registrant and First Trust National Association (as
trustee).
10.24** -- Registration Rights Agreement, dated as of March 25,
1998, by and among the Registrant, and the Initial 1998
Notes Purchasers.
</TABLE>
II-2
<PAGE> 325
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.25**+ -- Capacity and Services Agreement, dated as of March 31,
1998, by and among the Registrant and Qwest
Communications Corporation.
10.26** -- Credit Agreement, dated as of April 6, 1998, by and among
the Registrant, The Chase Manhattan Bank (as
administrative agent) and Fleet National Bank (as
documentation agent).
10.27** -- Stock Purchase and Master Strategic Relationship
Agreement, dated as of April 7, 1998, by and among the
Registrant and Nippon Telegraph and Telephone Corporation
("NTT"), a Japanese corporation.
10.28**+ -- Investment Agreement, dated as of April 7, 1998, by and
among the Registrant and NTT.
10.29**+ -- Outside Service Provider Agreement, dated as of April 7,
1998, by and among the Registrant and NTT America, Inc.
10.30**+ -- Master Services Agreement, dated as of June 13, 1997, by
and between the Registrant and MCI Telecommunications
Corporation ("MCI").
10.31**+ -- MCI Domestic (US) Public Interconnection Agreement dated
as of June 12, 1997, by and between the Registrant and
MCI, as amended.
10.32** -- The Registrant's 1998 Non-Employee Director Stock
Incentive Plan.
10.33*+ -- Interconnection Agreement, effective as of April 1, 1998
by and between the Registrant and UUNET Technologies,
Inc.
10.34++ -- Indenture, dated as of November 25, 1998, by and among
the Registrant and U.S. Bank Trust National Association
(as trustee).
10.35++ -- Registration Rights Agreement, dated as of November 25,
1998, by and among the Registrant and the Initial
November 1998 Notes Purchasers.
11.1 -- Not applicable.
21.1** -- List of Subsidiaries of the Registrant.
23.1 -- Consent of KPMG LLP (Denver).
23.2 -- Consent of KPMG LLP (Seattle).
23.3 -- Consent of PricewaterhouseCoopers LLP.
23.4 -- Consent of DeMeo, Young, McGrath & Company, P.A.
23.5 -- Consent of Morrison & Foerster LLP (contained in Exhibit
5.1).
24.1 -- Power of Attorney (see page II-6).
25.1 -- Form of T-1 Statement of Eligibility and Qualification
under the Trust Indenture Act of 1939 of First Trust
National Association.
27.1* -- Financial Data Schedule.
99.1 -- Form of Letter of Transmittal with respect to the
Exchange Offer.
99.2 -- Form of Notice of Guaranteed Delivery.
</TABLE>
- ---------------
* Incorporated by reference from the Registrant's quarterly report on Form
10-Q filed with the Commission on August 13, 1998.
** Incorporated by reference from the Registration Statement on Form S-1 of
the Registrant (Registration No. 333-47099) filed with the Commission on
February 27, 1998, as amended.
*** Incorporated by reference from the Registration Statement on Form S-4 of
the Registrant (Registration No. 333-47497) filed with the Commission on
March 6, 1998, as amended.
+ Document for which confidential treatment has been requested.
++ Incorporated by reference from the Registration Statement on Form S-4 of
the Registrant (Registration No. 333-67715) filed with the Commission on
November 23, 1998, as amended.
II-3
<PAGE> 326
FINANCIAL STATEMENTS AND SCHEDULE:
Financial Statements:
Financial Statements filed as a part of this Registration Statement are
listed in the Index to Financial Statements on page F-1.
Financial Statement Schedules:
<TABLE>
<CAPTION>
SCHEDULE NO. DESCRIPTION
------------ -----------
<C> <S>
II Valuation and Qualifying Accounts
</TABLE>
ITEM 22. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions described in
Item 20 above, or otherwise, the Registrant has been advised that in the opinion
of the Commission such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(2) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
(d) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
(e) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered
II-4
<PAGE> 327
(if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration
Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or
any material change to such information in this Registration Statement.
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-5
<PAGE> 328
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement on Form S-4 to be signed on its
behalf by the undersigned, thereunto duly authorized, in Englewood, Colorado, on
January 15, 1999.
VERIO INC.
By: /s/ JUSTIN L. JASCHKE
------------------------------------
Justin L. Jaschke
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Justin L. Jaschke, Peter B. Fritzinger and Carla
Hamre Donelson, and each of them, each with full power to act without the other,
his true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for such person and in his name, place and
stead, in any and all capacities, to sign any or all further amendments or
supplements (including post-effective amendments filed pursuant to Rule 462(b)
of the Securities Act of 1993) to this Form S-4 Registration Statement and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto each of
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully as to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that each of said attorneys-in-fact
and agents, or his substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ STEVEN C. HALSTEDT Chairman of the Board January 15, 1999
- -----------------------------------------------------
Steven C. Halstedt
/s/ JUSTIN L. JASCHKE Chief Executive Officer and January 15, 1999
- ----------------------------------------------------- Director
Justin L. Jaschke
/s/ HERBERT R. HRIBAR President and Chief Operating January 15, 1999
- ----------------------------------------------------- Officer
Herbert R. Hribar
/s/ JAMES C. ALLEN Director January 15, 1999
- -----------------------------------------------------
James C. Allen
/s/ TRYGVE E. MYHREN Director January 15, 1999
- -----------------------------------------------------
Trygve E. Myhren
/s/ PAUL J. SALEM Director January 15, 1999
- -----------------------------------------------------
Paul J. Salem
/s/ STEVEN W. SCHOVEE Director January 15, 1999
- -----------------------------------------------------
Steven W. Schovee
/s/ GEORGE J. STILL, JR. Director January 15, 1999
- -----------------------------------------------------
George J. Still, Jr.
/s/ YUKIMASA ITO Director January 15, 1999
- -----------------------------------------------------
Yukimasa Ito
/s/ ARTHUR L. CAHOON Director January 15, 1999
- -----------------------------------------------------
Arthur L. Cahoon
/s/ PETER B. FRITZINGER Chief Financial Officer January 15, 1999
- ----------------------------------------------------- (Principal Accounting
Peter B. Fritzinger Officer)
</TABLE>
II-6
<PAGE> 329
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
Under date of February 25, 1998, we reported on the consolidated balance
sheets of Verio Inc. and subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for the period from inception (March 1, 1996) to December 31, 1996 and the
year ended December 31, 1997, which are included in the Prospectus. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule in the registration statement. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Denver, Colorado
February 25, 1998
S-1
<PAGE> 330
SCHEDULE II
VERIO INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Period from Inception (March 1, 1996) to
December 31, 1996:
Allowance for doubtful Accounts............. $ -- 117 -- 117
Year ended December 31, 1997:
Allowance for doubtful Accounts............. $ 117 1,116 -- 1,233
</TABLE>
S-2
<PAGE> 331
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.1** -- Restated Certificate of Incorporation of the Registrant,
as amended.
3.2** -- Certificate of Amendment of Certificate of Incorporation
of the Registrant.
3.3** -- Certificate of Designation Establishing Series D
Preferred Stock of the Registrant.
3.4** -- Bylaws of the Registrant.
4.1*** -- Form of Old 1997 Note.
4.2*** -- Form of New 1997 Note.
4.3*** -- Escrow Agreement, dated as of June 24, 1997, among First
Trust National Association (as escrow agent and trustee)
and the Registrant.
4.4** -- 1997 Indenture (See Exhibit 10.1).
4.5** -- 1997 Notes Registration Rights Agreement (See Exhibit
10.4).
4.6*** -- Purchase Agreement, dated as of June 17, 1997, by and
among Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner
& Smith Incorporated, and Lazard Freres & Co. LLC
(collectively, the "Initial 1997 Notes Purchasers"), and
the Registrant.
4.7*** -- Form of Old March 1998 Note.
4.8*** -- Form of New March 1998 Note.
4.9** -- 1998 Indenture (See Exhibit 10.23).
4.10** -- 1998 Notes Registration Rights Agreement (See Exhibit
10.24).
4.11*** -- Purchase Agreement, dated as of March 19, 1998, by and
among Salomon Brothers Inc, Lazard Freres & Co. LLC,
Chase Securities, Inc., and BancBoston Securities Inc.
(collectively, the "Initial March 1998 Notes
Purchasers"), and the Registrant.
4.12 -- Form of Old Note
4.13 -- Form of New Note
4.14++ -- Indenture (See Exhibit 10.34)
4.15++ -- Registration Rights Agreement (See Exhibit 10.35)
4.16++ -- Purchase Agreement, dated as of November 20, 1998, by and
among Salomon Smith Barney Inc., Credit Suisse First
Boston Corporation, Donaldson, Lufkin & Jenrette
Securities Corporation and First Union Capital Markets
(collectively, the "Initial November 1998 Notes
Purchasers"), and the Registrant.
5.1 -- Opinion of Morrison & Foerster LLP.
10.1** -- Indenture, dated as of June 24, 1997, by and among the
Registrant and First Trust National Association (as
trustee).
10.2** -- Warrant Agreement, dated as of June 24, 1997, by and
between First Trust National Association and the
Registrant.
10.3** -- Common Stock Registration Rights Agreement, dated as of
June 17, 1997, by and among the Registrant, Brooks Fiber
Properties, Inc., Norwest Equity Partners V, Providence
Equity Partners, Centennial Fund V, L.P., Centennial Fund
IV, L.P. (as investors), and the Initial Purchasers.
10.4** -- Registration Rights Agreement, dated as of June 17, 1997,
by and among the Registrant and the Initial Purchasers.
10.5** -- Lease Agreement, dated as of June 20, 1997, by and
between the Registrant and Highland Park Ventures, LLC,
with respect to the property in Englewood, Colorado,
including the First Amendment to Lease Agreement, dated
as of December 16, 1997.
10.6** -- Lease Agreement, dated as of May 24, 1997, by and between
the Registrant and IM Joint Venture, with respect to the
property in Dallas, Texas, as amended.
</TABLE>
<PAGE> 332
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.7** -- Form of Indemnification Agreement between the Registrant
and each of its officers and directors.
10.8** -- Amended and Restated Stockholders Agreement, dated as of
May 20, 1997, by and between the Registrant, the Series A
Purchasers, the Series B Purchasers, the Series C
Purchasers and members of the Registrant's management.
10.9** -- The Registrant's 1996 Stock Option Plan, as amended.
10.10** -- The Registrant's 1997 California Stock Option Plan, as
amended.
10.11** -- The Registrant's 1998 Employee Stock Purchase Plan, as
amended.
10.12** -- The Registrant's 1998 Stock Incentive Plan, as amended.
10.13** -- Form of Compensation Protection Agreement between the
Registrant and each of its officers.
10.14** -- Master Service Agreement, dated as of August 23, 1996, by
and between the Registrant and MFS Datanet, Inc.
10.15** -- Agreement for Terminal Facility Collocation Space, dated
August 8, 1996, by and between MFS Telecom, Inc. and the
Registrant.
10.16** -- Bilateral Peering Agreement, dated May 19, 1997, between
AT&T Corp. and the Registrant.
10.17** -- Master Lease Agreement, dated November 17, 1997, by and
between Insight Investments Corp. and the Registrant.
10.18** -- Master Lease Agreement, dated October 27, 1997, by and
between Cisco Capital Systems Corporation and the
Registrant.
10.19**+ -- Lateral Exchange Networks Interconnection Agreement,
dated as of February 3, 1997, by and between the
Registrant and Sprint Communications Company L.P.
("Sprint").
10.20**+ -- Cover Agreement, dated September 30, 1996, by and between
the Registrant and Sprint.
10.21**+ -- Amendment One to Cover Agreement, dated November 7, 1996,
by and between the Registrant and Sprint.
10.22**+ -- Amendment Two to Cover Agreement, dated March 2, 1998, by
and between the Registrant and Sprint.
10.23** -- Indenture, dated as of March 25, 1998, by and among the
Registrant and First Trust National Association (as
trustee).
10.24** -- Registration Rights Agreement, dated as of March 25,
1998, by and among the Registrant, and the Initial 1998
Notes Purchasers.
10.25**+ -- Capacity and Services Agreement, dated as of March 31,
1998, by and among the Registrant and Qwest
Communications Corporation.
10.26** -- Credit Agreement, dated as of April 6, 1998, by and among
the Registrant, The Chase Manhattan Bank (as
administrative agent) and Fleet National Bank (as
documentation agent).
10.27** -- Stock Purchase and Master Strategic Relationship
Agreement, dated as of April 7, 1998, by and among the
Registrant and Nippon Telegraph and Telephone Corporation
("NTT"), a Japanese corporation.
10.28**+ -- Investment Agreement, dated as of April 7, 1998, by and
among the Registrant and NTT.
10.29**+ -- Outside Service Provider Agreement, dated as of April 7,
1998, by and among the Registrant and NTT America, Inc.
10.30**+ -- Master Services Agreement, dated as of June 13, 1997, by
and between the Registrant and MCI Telecommunications
Corporation ("MCI").
10.31**+ -- MCI Domestic (US) Public Interconnection Agreement dated
as of June 12, 1997, by and between the Registrant and
MCI, as amended.
</TABLE>
<PAGE> 333
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.32** -- The Registrant's 1998 Non-Employee Director Stock
Incentive Plan.
10.33*+ -- Interconnection Agreement, effective as of April 1, 1998
by and between the Registrant and UUNET Technologies,
Inc.
10.34++ -- Indenture, dated as of November 25, 1998, by and among
the Registrant and U.S. Bank Trust National Association
(as trustee).
10.35++ -- Registration Rights Agreement, dated as of November 25,
1998, by and among the Registrant and the Initial
November 1998 Notes Purchasers.
11.1 -- Not applicable.
21.1** -- List of Subsidiaries of the Registrant.
23.1 -- Consent of KPMG LLP (Denver).
23.2 -- Consent of KPMG LLP (Seattle).
23.3 -- Consent of PricewaterhouseCoopers LLP.
23.4 -- Consent of DeMeo, Young, McGrath & Company, P.A.
23.5 -- Consent of Morrison & Foerster LLP (contained in Exhibit
5.1).
24.1 -- Power of Attorney (see page II-6).
25.1 -- Form of T-1 Statement of Eligibility and Qualification
under the Trust Indenture Act of 1939 of First Trust
National Association.
27.1* -- Financial Data Schedule.
99.1 -- Form of Letter of Transmittal with respect to the
Exchange Offer.
99.2 -- Form of Notice of Guaranteed Delivery.
</TABLE>
- ---------------
* Incorporated by reference from the Registrant's quarterly report on Form
10-Q filed with the Commission on August 13, 1998.
** Incorporated by reference from the Registration Statement on Form S-1 of
the Registrant (Registration No. 333-47099) filed with the Commission on
February 27, 1998, as amended.
*** Incorporated by reference from the Registration Statement on Form S-4 of
the Registrant (Registration No. 333-47497) filed with the Commission on
March 6, 1998, as amended.
+ Document for which confidential treatment has been requested.
++ Incorporated by reference from the Registration Statement on Form S-4 of
the Registrant (Registration No. 333-67715) filed with the Commission on
November 23, 1998, as amended.
<PAGE> 1
EXHIBIT 4.12
------------
[FORM OF NOTE]
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR
OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION
HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE
TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1)
REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE
144A UNDER THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED
INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES
ACT) (AN "ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING
THIS SECURITY IN AN "OFFSHORE TRANSACTION" PURSUANT TO RULE 903 OR 904 OF
REGULATION S, (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO
YEARS (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144 UNDER THE
SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE
ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST
DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS
SECURITY OR ANY PREDECESSOR OF THIS SECURITY AND (Y) SUCH LATER DATE, IF ANY, AS
MAY BE REQUIRED BY APPLICABLE LAWS (THE "RESALE RESTRICTION TERMINATION DATE"),
OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY OR ANY
SUBSIDIARY THEREOF, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN
DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES
ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY
BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A
QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING
MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S.
PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S
UNDER THE SECURITIES ACT, PURSUANT TO RULE 904 OF
A-1-1
<PAGE> 2
REGULATION S, (E) TO AN ACCREDITED INVESTOR THAT IS ACQUIRING THE SECURITIES FOR
ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN ACCREDITED INVESTOR, FOR
INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION
WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT (AND IF ACQUIRING THE
SECURITIES FROM SUCH AN ACCREDITED INVESTOR, IS ACQUIRING SECURITIES HAVING AN
AGGREGATE PRINCIPAL AMOUNT OF NOT LESS THAN $250,000), OR (F) PURSUANT TO
ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS
TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND; PROVIDED THAT
THE COMPANY, THE TRUSTEE, THE TRANSFER AGENT AND THE REGISTRAR SHALL HAVE THE
RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (I) PURSUANT TO CLAUSE (D), (E)
OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR
OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (II) IN EACH OF THE
FOREGOING CASES, TO REQUIRE THAT A CERTIFICATION OF TRANSFER IN THE FORM
APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE
TRANSFEROR TO THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE
HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS
"OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE RESPECTIVE
MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
A-1-2
<PAGE> 3
VERIO INC.
-----------------
11-1/4% SENIOR NOTES DUE 2008, SERIES A
CUSIP No. __________
No. ___________ $[ ]
VERIO INC., a corporation incorporated under the laws of the
State of Delaware (herein called the "Company," which term includes any
successor corporation under this Indenture hereinafter referred to), for value
received, hereby promises to pay to _______________ or registered assigns, the
principal sum of _______________ Dollars on December 1, 2008, at the office or
agency of the Company referred to below, and to pay interest thereon on June 1
and December 1 (each, an "Interest Payment Date"), of each year, commencing on
June 1, 1999, accruing from the Issue Date or from the most recent Interest
Payment Date to which interest has been paid or duly provided for, at the rate
of 11-1/4% per annum, until the principal hereof is paid or duly provided for.
Interest shall be computed on the basis of a 360-day year of twelve 30-day
months.
The interest so payable, and punctually paid or duly provided
for, on any Interest Payment Date will, as provided in the Indenture referred to
on the reverse hereof, be paid to the person in whose name this Note (or one or
more Predecessor Notes) is registered at the close of business on May 15 and
November 15 (each, a "Regular Record Date"), whether or not a Business Day, as
the case may be, next preceding such Interest Payment Date. Any such interest
not so punctually paid, or duly provided for, and interest on such defaulted
interest at the then applicable interest rate borne by the Notes, to the extent
lawful, shall forthwith cease to be payable to the Holder on such Regular Record
Date, and may be paid to the person in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on a Special Record
Date for the payment of such defaulted interest to be fixed by the Trustee,
notice of which shall be given to
A-1-3
<PAGE> 4
Holders of Notes not less than 10 days prior to such Special Record Date, or may
be paid at any time in any other lawful manner not inconsistent with the
requirements of any securities exchange on which the Notes may be listed, and
upon such notice as may be required by such exchange, all as more fully provided
in such Indenture.
Payment of the principal of, premium, if any, and interest on
this Note will be made at the office or agency of the Company maintained for
that purpose in the Borough of Manhattan in The City of New York, State of New
York, or at such other office or agency of the Company as may be maintained for
such purpose, in such coin or currency of the United States of America as at the
time of payment is legal tender for payment of public and private debts;
provided, however, that payment of interest may be made at the option of the
Company by check mailed to the address of the person entitled thereto as such
address shall appear on the Note Register.
Reference is hereby made to the further provisions of this
Note set forth on the reverse hereof.
Unless the certificate of authentication hereon has been duly
executed by the Trustee referred to on the reverse hereof by manual signature,
this Note shall not be entitled to any benefit under the Indenture, or be valid
or obligatory for any purpose.
[Remainder of Page Intentionally Left Blank]
A-1-4
<PAGE> 5
IN WITNESS WHEREOF, the Company has caused this instrument to
be duly executed.
Dated: VERIO INC.
By:
-----------------------------------
Name:
Title:
By:
-----------------------------------
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 11-1/4% Senior Notes Due 2008, Series A,
referred to in the within-mentioned Indenture.
U.S. BANK TRUST NATIONAL
ASSOCIATION, as Trustee
By:
------------------------------------
Authorized Signatory
A-1-5
<PAGE> 6
[REVERSE OF NOTE]
1. Indenture. This Note is one of a duly authorized issue of
Notes of the Company designated as its 11-1/4% Senior Notes Due 2008, Series A
(herein called the "Initial Notes"). The Notes are limited (except as otherwise
provided in the Indenture referred to below) in aggregate principal amount to
$400,000,000, which may be issued under an indenture (herein called the
"Indenture") dated as of November 25, 1998, by and between the Company and U.S.
Bank Trust National Association, as trustee (herein called the "Trustee," which
term includes any successor Trustee under the Indenture), to which Indenture and
all indentures supplemental thereto reference is hereby made for a statement of
the respective rights, limitations of rights, duties, obligations and immunities
thereunder of the Company, the Trustee and the Holders of the Notes, and of the
terms upon which the Notes are, and are to be, authenticated and delivered. The
Notes include the Initial Notes, the Private Exchange Notes and the Unrestricted
Notes (including the Exchange Notes referred to below), issued in exchange for
the Initial Notes pursuant to the Registration Rights Agreement. The Initial
Notes and the Unrestricted Notes are treated as a single class of securities
under the Indenture.
All capitalized terms used in this Note which are defined in
the Indenture and not otherwise defined herein shall have the meanings assigned
to them in the Indenture.
The terms of the Notes include those stated in the Indenture
and those made part of the Indenture by reference to the Trust Indenture Act of
1939 (15 U.S.C. Sections 77aaa-77bbbb) (the "TIA"), as in effect on the date of
the Indenture. Notwithstanding anything to the contrary herein, the Notes are
subject to all such terms, and Holders of Notes are referred to the Indenture
and the TIA for a statement of such terms.
No reference herein to the Indenture and no provisions of this
Note or of the Indenture shall alter or impair the obligation of the Company,
which is absolute and unconditional, to pay the principal of, premium, if any,
and
A-1-6
<PAGE> 7
interest on this Note at the times, place, and rate, and in the coin or
currency, herein prescribed.
2. Registration Rights. Pursuant to the Registration Rights
Agreement by and among the Company and the Initial Purchasers, the Company will
be obligated to consummate an exchange offer pursuant to which the Holder of
this Note shall have the right to exchange this Note for 11-1/4% Senior Notes
Due 2008, Series B, of the Company (herein called the "Exchange Notes"), which
have been registered under the Securities Act, in like principal amount and
having identical terms as the Notes (other than as set forth in this paragraph).
The Holders of Notes shall be entitled to receive certain additional interest
payments in the event such exchange offer is not consummated and upon certain
other conditions, all pursuant to and in accordance with the terms of the
Registration Rights Agreement.
3. Redemption. The Notes will be redeemable, at the option of
the Company, in whole or in part, on or after December 1, 2003 upon not less
than 30 nor more than 60 days' written notice at the redemption prices
(expressed as percentages of principal amount) set forth below, plus accrued and
unpaid interest thereon, if any, to the applicable redemption date, if redeemed
during the twelve-month period beginning on December 1, of each of the years
indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2003.................................... 105.625%
2004.................................... 103.750%
2005.................................... 101.875%
2006.................................... 100.000%
</TABLE>
Notwithstanding the foregoing, in the event that after the
Issue Date and prior to December 1, 2001 the Company issues, in one or more
transactions, Capital Stock (other than Disqualified Stock) of the Company to
one or more Strategic Equity Investors or in any Public Equity Offering for
aggregate gross cash proceeds of $50.0 million or more (an "Equity Sale"), the
Company may redeem, at its option, up to a maximum of 35% of the initially
Outstanding aggregate principal amount of Notes from the net proceeds thereof at
a redemption price equal to 111.250% of the principal amount of
A-1-7
<PAGE> 8
the Notes, together with accrued and unpaid interest to the date of redemption;
provided that not less than $260 million aggregate principal amount of Notes is
Outstanding following such redemption. Any such redemption may only be effected
once and must be effected upon not less than 30 nor more than 60 days' notice
given within 180 days after such Equity Sale.
4. Offers to Purchase. Sections 10.10 and 10.15 of the
Indenture provide that upon the occurrence of a Change of Control and following
certain Asset Sales, and subject to certain conditions and limitations contained
therein, the Company shall make an offer to purchase all or a portion of the
Notes in accordance with the procedures set forth in the Indenture.
5. Defaults and Remedies. If an Event of Default occurs and is
continuing, the principal of all of the Outstanding Notes, plus all accrued and
unpaid interest, if any, to and including the date the Notes are paid, may be
declared due and payable in the manner and with the effect provided in this
Indenture.
6. Defeasance. The Indenture contains provisions (which
provisions apply to this Note) for defeasance at any time of (a) the entire
indebtedness of the Company on this Note and (b) certain restrictive covenants
and related Defaults and Events of Default, in each case upon compliance by the
Company with certain conditions set forth therein.
7. Amendments and Waivers. The Indenture permits, with certain
exceptions as provided therein, the amendment thereof and the modification of
the rights and obligations of the Company and the rights of the Holders under
the Indenture at any time by the Company and the Trustee with the consent of the
Holders of not less than a majority in aggregate principal amount of the Notes
at the time Outstanding. The Indenture also contains provisions permitting the
Holders of specified percentages in aggregate principal amount of the Notes at
the time Outstanding, on behalf of the Holders of all the Notes, to waive
compliance by the Company with certain provisions of the Indenture and certain
past Defaults under the Indenture and this Note and their consequences. Any such
consent or waiver by or on behalf of the Holder of this Note shall be
A-1-8
<PAGE> 9
conclusive and binding upon such Holder and upon all future Holders of this Note
and of any Note issued upon the registration of transfer hereof or in exchange
herefor or in lieu hereof whether or not notation of such consent or waiver is
made upon this Note.
8. Denominations, Transfer and Exchange. The Notes are
issuable only in registered form without coupons in denominations of $1,000 and
any integral multiple thereof. As provided in the Indenture and subject to
certain limitations therein set forth, the Notes are exchangeable for a like
aggregate principal amount of Notes of a different authorized denomination, as
requested by the Holder surrendering the same.
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this Note is registrable on the
Note Register of the Company, upon surrender of this Note for registration of
transfer at the office or agency of the Company maintained for such purpose in
the Borough of Manhattan in The City of New York, State of New York, or at such
other office or agency of the Company as may be maintained for such purpose,
duly endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Registrar duly executed by, the Holder
hereof or his attorney duly authorized in writing, and thereupon one or more new
Notes, of authorized denominations and for the same aggregate principal amount,
will be issued to the designated transferee or transferees.
No service charge shall be made for any registration of
transfer or exchange or redemption of Notes, but the Company may require payment
of a sum sufficient to cover any tax or other governmental charge payable in
connection therewith.
9. Persons Deemed Owners. Prior to and at the time of due
presentment of this Note for registration of transfer, the Company, the Trustee
and any agent of the Company or the Trustee may treat the person in whose name
this Note is registered as the owner hereof for all purposes, whether or not
this Note shall be overdue, and neither the
A-1-9
<PAGE> 10
Company, the Trustee nor any agent shall be affected by notice to the contrary.
10. GOVERNING LAW. THE INDENTURE, THIS NOTE AND ANY GUARANTEE
SET FORTH BELOW SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS
OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF
LAW.
The Company will furnish to any Holder of a Note upon written
request and without charge a copy of the Indenture. Requests may be made to:
Verio Inc., 8005 South Chester Street, Suite 200, Englewood, Colorado 80112.
A-1-10
<PAGE> 11
ASSIGNMENT FORM
If you the holder want to assign this Note, fill in the form below and have your
signature guaranteed:
I or we assign and transfer this Note to
- ------------------------------------------------------------------------------
(Insert assignee's social security or tax ID number)
-------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code) and irrevocably appoint
- ------------------------------------------------------------------------------
agent to transfer this Note on the books of the Company. The agent may
substitute another to act for such agent.
In connection with any transfer of this Note occurring prior
to the date which is the earlier of (i) the date of the declaration by the SEC
of the effectiveness of a registration statement under the Securities Act of
1933, as amended (the "Securities Act"), covering resales of this Note (which
effectiveness shall not have been suspended or terminated at the date of the
transfer) and (ii) the date two years (or such shorter period of time as
permitted by Rule 144 under the Securities Act or any successor provision
thereunder) after the later of the original issuance date appearing on the face
of this Note (or any Predecessor Note) or the last date on which the Company or
any Affiliate of the Company was the owner of this Note (or any Predecessor
Note), the undersigned confirms that it has not utilized any general
solicitation or general advertising in connection with the transfer and that:
[Check One]
A-1-11
<PAGE> 12
[ ] (a) this Note is being transferred in compliance with the
exemption from registration under the Securities Act provided
by Rule 144A thereunder.
or
[ ] (b) this Note is being transferred other than in accordance
with (a) above and documents, including (i) a transferee
certificate substantially in the form of Exhibit C to the
Indenture in the case of a transfer to non-QIB Accredited
Investors or (ii) a transferor certificate substantially in
the form of Exhibit D to the Indenture in the case of a
transfer pursuant to Regulation S, are being furnished which
comply with the conditions of transfer set forth in this Note
and the Indenture.
If none of the foregoing boxes is checked and, in the case of (b) above, if the
appropriate document is not attached or otherwise furnished to the Trustee, the
Trustee or Registrar shall not be obligated to register this Note in the name of
any person other than the Holder hereof unless and until the conditions to any
such transfer of registration set forth herein and in Section 3.17 of the
Indenture shall have been satisfied.
- ------------------------------------------------------------------------------
Date: Your signature:
------------------ ------------------------
(Sign exactly as your name
appears on the other side
of this Note)
By:
--------------------------------
NOTICE: To be executed
by an executive officer
Signature Guarantee:
-------------------------------------
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED
The undersigned represents and warrants that it is purchasing
this Note for its own account or an account with respect to which it exercises
sole investment discretion and
A-1-12
<PAGE> 13
that it and any such account is a "qualified institutional buyer" within the
meaning of Rule 144A under the Securities Act and is aware that the sale to it
is being made in reliance on Rule 144A and acknowledges that it has received
such information regarding the Company as the undersigned has requested pursuant
to Rule 144A (including the information specified in Rule 144A(d)(4)) or has
determined not to request such information and that it is aware that the
transferor is relying upon the undersigned's foregoing representations in order
to claim the exemption from registration provided by Rule 144A.
Dated:
-------------------- ------------------------------------
NOTICE: To be executed by
an executive officer
A-1-13
<PAGE> 14
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company
pursuant to Section 10.10 or 10.15 of the Indenture, check the appropriate box:
Section 10.10 [ ] Section 10.15 [ ]
If you wish to have a portion of this Note purchased by the
Company pursuant to Section 10.10 or 10.15 of the Indenture, state the amount:
$
-------------
Date: Your signature:
------------------- -----------------------------------
(Sign exactly as your name
appears on the other side of
this Note)
By:
-----------------------------------
NOTICE: To be executed
by an executive officer
Signature Guarantee:
----------------------
A-1-14
<PAGE> 1
Exhibit 4.13
VERIO INC.
-----------------
11-1/4% SENIOR NOTES DUE 2008, SERIES B
CUSIP No. __________
No. ___________ $
VERIO INC., a corporation incorporated under the laws of the State of
Delaware (herein called the "Company," which term includes any successor
corporation under this Indenture hereinafter referred to), for value received,
hereby promises to pay to _______________ or registered assigns, the principal
sum of _______________ Dollars on December 1, 2008, at the office or agency of
the Company referred to below, and to pay interest thereon on June 1 and
December 1, (each, an "Interest Payment Date"), of each year, commencing on June
1, 1999, accruing from the Issue Date or from the most recent Interest Payment
Date to which interest has been paid or duly provided for, at the rate of
11-1/4% per annum, until the principal hereof is paid or duly provided for.
Interest shall be computed on the basis of a 360-day year of twelve 30-day
months.
The interest so payable, and punctually paid or duly provided for, on
any Interest Payment Date will, as provided in the Indenture referred to on the
reverse hereof, be paid to the person in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on May 15 and November
15 (each, a "Regular Record Date"), whether or not a Business Day, as the case
may be, next preceding such Interest Payment Date. Any such interest not so
punctually paid, or duly provided for, and interest on such defaulted interest
at the then applicable interest rate borne by the Notes, to the extent lawful,
shall forthwith cease to be payable to the Holder on such Regular Record Date,
and may be paid to the person in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on a Special Record
Date for the payment of such defaulted interest to be fixed by the Trustee,
notice of which shall be given to
A-2-1
<PAGE> 2
Holders of Notes not less than 10 days prior to such Special Record Date, or may
be paid at any time in any other lawful manner not inconsistent with the
requirements of any securities exchange on which the Notes may be listed, and
upon such notice as may be required by such exchange, all as more fully provided
in such Indenture.
Payment of the principal of, premium, if any, and interest on this Note
will be made at the office or agency of the Company maintained for that purpose
in the Borough of Manhattan in The City of New York, State of New York, or at
such other office or agency of the Company as may be maintained for such
purpose, in such coin or currency of the United States of America as at the time
of payment is legal tender for payment of public and private debts; provided,
however, that payment of interest may be made at the option of the Company by
check mailed to the address of the person entitled thereto as such address shall
appear on the Note Register.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof.
Unless the certificate of authentication hereon has been duly executed
by the Trustee referred to on the reverse hereof by manual signature, this Note
shall not be entitled to any benefit under the Indenture, or be valid or
obligatory for any purpose.
[Remainder of Page Intentionally Left Blank]
A-2-2
<PAGE> 3
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.
Dated: VERIO INC.
By:
--------------------------------------
Name:
Title:
By:
--------------------------------------
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 11-1/4% Senior Notes Due 2008, Series B, referred to
in the within-mentioned Indenture.
U.S. BANK TRUST NATIONAL ASSOCIATION,
as Trustee
By:
--------------------------------------
Authorized Signatory
A-2-3
<PAGE> 4
[REVERSE OF NOTE]
1. Indenture. This Note is one of a duly authorized issue of Notes of
the Company designated as its 11-1/4% Senior Notes Due 2008, Series B (herein
called the "Initial Notes"). The Notes are limited (except as otherwise provided
in the Indenture referred to below) in aggregate principal amount to
$400,000,000, which may be issued under an indenture (herein called the
"Indenture") dated as of November 25, 1998, by and between the Company and U.S.
Bank Trust National Association, as trustee (herein called the "Trustee," which
term includes any successor Trustee under the Indenture), to which Indenture and
all indentures supplemental thereto reference is hereby made for a statement of
the respective rights, limitations of rights, duties, obligations and immunities
thereunder of the Company, the Trustee and the Holders of the Notes, and of the
terms upon which the Notes are, and are to be, authenticated and delivered. The
Notes include the Initial Notes, the Private Exchange Notes and the Unrestricted
Notes (including the Exchange Notes referred to below), issued in exchange for
the Initial Notes pursuant to the Registration Rights Agreement. The Initial
Notes and the Unrestricted Notes are treated as a single class of securities
under the Indenture.
All capitalized terms used in this Note which are defined in the
Indenture and not otherwise defined herein shall have the meanings assigned to
them in the Indenture.
The terms of the Notes include those stated in the Indenture and those
made part of the Indenture by reference to the Trust Indenture Act of 1939 (15
U.S.C. Sections 77aaa-77bbbb) (the "TIA"), as in effect on the date of the
Indenture. Notwithstanding anything to the contrary herein, the Notes are
subject to all such terms, and Holders of Notes are referred to the Indenture
and the TIA for a statement of such terms.
No reference herein to the Indenture and no provisions of this Note or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, premium, if any, and
interest on this Note at the times, place, and rate, and in the coin or
currency, herein prescribed.
A-2-4
<PAGE> 5
2. Redemption. The Notes will be redeemable, at the option of the
Company, in whole or in part, on or after [ ], 2003 upon not less than 30
nor more than 60 days' written notice at the redemption prices (expressed as
percentages of principal amount) set forth below, plus accrued and unpaid
interest thereon, if any, to the applicable redemption date, if redeemed during
the twelve-month period beginning on December 1 of each of the years indicated
below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2003.................................... 105.625%
2004.................................... 103.750%
2005.................................... 101.875%
2006.................................... 100.000%
</TABLE>
Notwithstanding the foregoing, in the event that after the Issue Date
and prior to December 1, 2001 the Company issues, in one or more transactions,
Capital Stock (other than Disqualified Stock) of the Company to one or more
Strategic Equity Investors or in any Public Equity Offering for aggregate gross
cash proceeds of $50.0 million or more (an "Equity Sale"), the Company may
redeem, at its option, up to a maximum of 35% of the initially Outstanding
aggregate principal amount of Notes from the net proceeds thereof at a
redemption price equal to 111.250% of the principal amount of the Notes,
together with accrued and unpaid interest to the date of redemption; provided
that not less than $260 million aggregate principal amount of Notes is
Outstanding following such redemption. Any such redemption may only be effected
once and must be effected upon not less than 30 nor more than 60 days' notice
given within 180 days after such Equity Sale.
3. Offers to Purchase. Sections 10.10 and 10.15 of the Indenture
provide that upon the occurrence of a Change of Control and following certain
Asset Sales, and subject to certain conditions and limitations contained
therein, the Company shall make an offer to purchase all or a portion of the
Notes in accordance with the procedures set forth in the Indenture.
4. Defaults and Remedies. If an Event of Default occurs and is
continuing, the principal of all of the Outstanding Notes, plus all accrued and
unpaid interest, if any, to and including the date the Notes are paid, may be
declared due and payable in the manner and with the effect provided in this
Indenture.
A-2-5
<PAGE> 6
5. Defeasance. The Indenture contains provisions (which provisions
apply to this Note) for defeasance at any time of (a) the entire indebtedness of
the Company on this Note and (b) certain restrictive covenants and related
Defaults and Events of Default, in each case upon compliance by the Company with
certain conditions set forth therein.
6. Amendments and Waivers. The Indenture permits, with certain
exceptions as provided therein, the amendment thereof and the modification of
the rights and obligations of the Company and the rights of the Holders under
the Indenture at any time by the Company and the Trustee with the consent of the
Holders of not less than a majority in aggregate principal amount of the Notes
at the time Outstanding. The Indenture also contains provisions permitting the
Holders of specified percentages in aggregate principal amount of the Notes at
the time Outstanding, on behalf of the Holders of all the Notes, to waive
compliance by the Company with certain provisions of the Indenture and certain
past Defaults under the Indenture and this Note and their consequences. Any such
consent or waiver by or on behalf of the Holder of this Note shall be conclusive
and binding upon such Holder and upon all future Holders of this Note and of any
Note issued upon the registration of transfer hereof or in exchange herefor or
in lieu hereof whether or not notation of such consent or waiver is made upon
this Note.
7. Denominations, Transfer and Exchange. The Notes are issuable only in
registered form without coupons in denominations of $1,000 and any integral
multiple thereof. As provided in this Indenture and subject to certain
limitations therein set forth, the Notes are exchangeable for a like aggregate
principal amount of Notes of a different authorized denomination, as requested
by the Holder surrendering the same.
As provided in the Indenture and subject to certain limitations therein
set forth, the transfer of this Note is registrable on the Note Register of the
Company, upon surrender of this Note for registration of transfer at the office
or agency of the Company maintained for such purpose in the Borough of Manhattan
in The City of New York, State of New York, or at such other office or agency of
the Company as may be maintained for such purpose, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Registrar duly executed
A-2-6
<PAGE> 7
by, the Holder hereof or his attorney duly authorized in writing, and thereupon
one or more new Notes, of authorized denominations and for the same aggregate
principal amount, will be issued to the designated transferee or transferees.
No service charge shall be made for any registration of transfer or
exchange or redemption of Notes, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith.
8. Persons Deemed Owners. Prior to and at the time of due presentment
of this Note for registration of transfer, the Company, the Trustee and any
agent of the Company or the Trustee may treat the person in whose name this Note
is registered as the owner hereof for all purposes, whether or not this Note
shall be overdue, and neither the Company, the Trustee nor any agent shall be
affected by notice to the contrary.
9. GOVERNING LAW. THE INDENTURE, THIS NOTE AND ANY GUARANTEE SET FORTH
BELOW SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
The Company will furnish to any Holder of a Note upon written request
and without charge a copy of this Indenture. Requests may be made to: Verio
Inc., 8005 South Chester Street, Suite 200, Englewood, Colorado 80112.
A-2-7
<PAGE> 8
ASSIGNMENT FORM
If you the holder want to assign this Note, fill in the form below and have your
signature guaranteed:
I or we assign and transfer this Note to
- --------------------------------------------------------------------------------
(Insert assignee's social security or tax ID number)
----------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code) and irrevocably appoint
- --------------------------------------------------------------------------------
agent to transfer this Note on the books of the Company. The agent may
substitute another to act for such agent.
Date: Your signature:
------------------------- --------------------------
(Sign exactly as your name
appears on the other side
of this Note)
By:
-----------------------
NOTICE: To be executed
by an executive officer
Signature Guarantee:
------------------------------------
A-2-8
<PAGE> 9
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company pursuant to
Section 10.10 or 10.15 of this Indenture, check the appropriate box:
Section 10.10 [ ] Section 10.15 [ ]
If you wish to have a portion of this Note purchased by the Company
pursuant to Section 10.10 or 10.15 of this Indenture, state the amount:
$
--------------------
Date: Your signature:
------------------------- --------------------------
(Sign exactly as your name
appears on the other side
of this Note)
By:
-----------------------
NOTICE: To be executed
by an executive officer
Signature Guarantee:
------------------------------------
A-2-9
<PAGE> 1
Exhibit 5.1
_______ __, 1999
Verio Inc.
8005 South Chester Street
Suite 200
Englewood, CO 80112
Re: 11 1/4% Senior Notes due 2008;
Registration Statement on Form S-4
Ladies and Gentlemen:
We have acted as counsel for Verio Inc., a Delaware corporation (the
"Company"), in connection with the Registration Statement (the "Registration
Statement") on Form S-4 under the Securities Act of 1933, as amended, for the
registration and issuance of an aggregate of $400,000,000 principal amount of
11 1/4% Senior Notes due 2008 (the "New Notes") by the Company, in connection
with the exchange offer (the "Exchange Offer") of an aggregate of $400,000,000
principal amount of 11 1/4% Senior Notes due 2008 (the "Old Notes") for the New
Notes. The Old Notes have been, and the New Notes will be, issued pursuant to
the terms and conditions of, and in the form set forth in, an indenture, dated
as of November 25, 1998 (the "Indenture") between the Company and U.S. Bank
Trust National Association, as trustee (the "Trustee"). The form of the
Indenture has been filed as an exhibit to the Registration Statement.
We have examined originals or copies of the Indenture and the New Notes. In
addition, we have examined such records, documents, certificates of public
officials and of the Company, made such inquiries of officials of the Company,
and considered such questions of law as we have deemed necessary for the purpose
of rendering the opinions set forth herein.
We have assumed the genuineness of all signatures, the authenticity of all
New Notes submitted to us as originals and the conformity with originals of all
items submitted to us as copies. We have also assumed that each party to the
Indenture and the New Notes, other than the Company, has the power and authority
to execute and deliver, and to perform and observe the provisions of, the
Indenture and the New Notes, and has duly authorized, executed and delivered the
Indenture and the New Notes, that
<PAGE> 2
Verio Inc.
____ __,199
Page Two
the Indenture constitutes the legal, valid and binding obligations of the
Trustee, and that the New Notes have been duly authenticated by the Trustee and
will be duly qualified under the Trust Indenture Act of 1939, as amended. We
have also assumed compliance with all applicable state securities and "Blue Sky"
laws.
The opinions hereinafter expressed are subject to the following further
qualifications and exceptions:
(i) The effect of bankruptcy, insolvency, reorganization, arrangement,
moratorium or other similar laws relating to or affecting the rights of
creditors generally, including, without limitation, laws relating to fraudulent
transfers or conveyances, preferences and equitable subordination;
(ii) Limitations imposed by general principles of equity upon the
availability of equitable remedies or the enforcement of provisions of the New
Notes and the Indenture; and the effect of judicial decisions which have held
that certain provisions are unenforceable where their enforcement would violate
the implied covenants of good faith and fair dealing, or would be commercially
unreasonable, or where their breach is not material;
(iii) We express no opinion as to the effect on the opinions expressed
herein of (a) the compliance or non-compliance of any party to the Indenture or
the New Notes (other than the Company) with any laws or regulations applicable
to it, or (b) the legal or regulatory status or the nature of the business of
any such party;
(iv) The effect of judicial decisions which may permit the introduction of
extrinsic evidence to supplement the terms of the Indenture or the New Notes or
to aid in the interpretation of the Indenture or the New Notes;
(v) We express no opinion as to the enforceability of provisions of the
Indenture or the New Notes imposing, or which are construed as effectively
imposing, penalties;
(vi) We express no opinion as to the enforceability of provisions of the
Indenture or the New Notes which purport to establish evidentiary standards or
to make determinations conclusive; and
(vii) We express no opinion as to the enforceability of any choice of law
provisions contained in the Indenture or the New Notes or the enforceability of
any provisions which purport to establish a particular court as the forum for
adjudication of any controversy relating to the Indenture or the New Notes or
which purport to cause any party to waive or alter any right to a trial by jury
or which waive objection to jurisdiction.
<PAGE> 3
Verio Inc.
____ __,199
Page Three
Based upon and subject to the foregoing, we are of the opinion that the New
Notes, upon valid tender of the Old Notes to the Trustee, as exchange agent for
the Exchange Offer, and issuance of the New Notes in exchange for such tendered
Old Notes in accordance with the terms of the Registration Statement, will be
legally issued and will constitute binding obligations of the Company
enforceable against the Company in accordance with their terms.
We express no opinion as to matters governed by laws of any jurisdiction
other than the following as in effect on the date hereof: the substantive laws
of the State of New York (without reference to its choice of law rules), the
general corporation laws of the State of Delaware, and the federal laws of the
United States of America.
We hereby consent to the use of this opinion in connection with the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" therein.
Very truly yours,
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Verio Inc.:
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" in the Prospectus.
/s/ KPMG LLP
------------------------------
KPMG LLP
Denver, Colorado
January 14, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
NorthWestNet, Inc.:
We consent to the use of our report relating to the financial statements of
NorthWestNet, Inc. as of June 30, 1996 and for the six months ended June 30,
1996 and the eight months ended February 28, 1997, and the financial statements
of NorthWest Academic Computing Consortium, Inc. as of June 30, 1995 and for the
year ended June 30, 1995 and the six months ended December 31, 1995, included
herein and to the reference to our firm under the heading "Experts" in the
Prospectus.
/s/ KPMG LLP
-------------------------
KPMG LLP
Seattle, Washington
January 14, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4, as
filed by Verio Inc., of our report dated May 27, 1998 on our audits of the
consolidated financial statements of Best Inernet Communications, Inc. included
in this Form S-4. We also consent to the reference to our firm under the caption
"Experts."
/s/ PRICEWATERHOUSECOOPERS LLP
--------------------------------
PricewaterhouseCoopers LLP
January 15, 1999
San Jose, California
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the Form S-4 Registration Statement Under the
Securities Act of 1933 for Verio Inc. (which is dated January 15, 1999 and
which is expected to be filed with the Securities and Exchange Commission on
January 15, 1999) of our report dated September 17, 1997 on our audits of the
financial statements of Hiway Technologies, Inc. as of December 31, 1996 and
for the period from April 6, 1995 (date of inception) to December 31, 1995 and
the year ended December 31, 1996. We also consent to the reference to us under
the heading "Experts" in such Form S-4.
/s/ DE MEO, YOUNG, McGRATH & COMPANY, P.A.
--------------------------------------------
De Meo, Young, McGrath & Company, P.A.
January 15, 1999
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM T-1
Statement of Eligibility Under the
Trust Indenture Act of 1939 of a Corporation
Designated to Act as Trustee
U.S. BANK TRUST NATIONAL ASSOCIATION
(Exact name of Trustee as specified in its charter)
United States 41-0257700
(State of Incorporation) (I.R.S. Employer
Identification No.)
U.S. Bank Trust Center
180 East Fifth Street
St. Paul, Minnesota 55101
(Address of Principal Executive Offices) (Zip Code)
VERIO INC.
(Exact name of Registrant as specified in its charter)
Delaware 84-1339720
(State of Incorporation) (I.R.S. Employer
Identification No.)
8005 South Chester Street, Suite 200
Englewood, Colorado 80112
(Address of Principal Executive Offices) (Zip Code)
11 1/4% SENIOR NOTES DUE 2008
(Title of the Indenture Securities)
<PAGE> 2
GENERAL
1. General Information Furnish the following information as to the
Trustee.
(a) Name and address of each examining or supervising authority to
which it is subject.
Comptroller of the Currency
Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Yes
2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS If the obligor or any
underwriter for the obligor is an affiliate of the Trustee, describe each
such affiliation.
None
See Note following Item 16.
Items 3-15 are not applicable because to the best of the Trustee's
knowledge the obligor is not in default under any Indenture for which the
Trustee acts as Trustee.
16. LIST OF EXHIBITS List below all exhibits filed as a part of this
statement of eligibility and qualification.
1. Copy of Articles of Association.*
2. Copy of Certificate of Authority to Commence Business.*
3. Authorization of the Trustee to exercise corporate trust powers
(included in Exhibits 1 and 2; no separate instrument).*
4. Copy of existing By-Laws.*
5. Copy of each Indenture referred to in Item 4. N/A.
6. The consents of the Trustee required by Section 321(b) of the act.
7. Copy of the latest report of condition of the Trustee published
pursuant to law or the requirements of its supervising or
examining authority is incorporated by reference to Registration
Number 333-53211.
* Incorporated by reference to Registration Number 22-27000.
<PAGE> 3
NOTE
The answers to this statement insofar as such answers relate to what
persons have been underwriters for any securities of the obligors within three
years prior to the date of filing this statement, or what persons are owners of
10% or more of the voting securities of the obligors, or affiliates, are based
upon information furnished to the Trustee by the obligors. While the Trustee has
no reason to doubt the accuracy of any such information, it cannot accept any
responsibility therefor.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
Trustee, U.S. Bank Trust National Association, an Association organized and
existing under the laws of the United States, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, and its seal to be hereunto affixed and attested, all
in the City of Saint Paul and State of Minnesota on the 14th day of January,
1999.
U.S. BANK TRUST NATIONAL ASSOCIATION
/s/ Richard H. Prokosch
--------------------------------
Richard H. Prokosch
Assistant Vice President
/s/ Judith M. Zuzek
- -----------------------------
Judith M. Zuzek
Assistant Secretary
<PAGE> 4
EXHIBIT 6
CONSENT
In accordance with Section 321(b) of the Trust Indenture Act of 1939,
the undersigned, U.S. BANK TRUST NATIONAL ASSOCIATION hereby consents that
reports of examination of the undersigned by Federal, State, Territorial or
District authorities may be furnished by such authorities to the Securities and
Exchange Commission upon its request therefor.
Dated: January 14, 1999
U.S. BANK TRUST NATIONAL ASSOCIATION
/s/ Richard H. Prokosch
-------------------------------------
Richard H. Prokosch
Assistant Vice President
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
VERIO INC.
OFFER TO EXCHANGE ALL OUTSTANDING
11 1/4% SENIOR NOTES DUE 2008
FOR
11 1/4% SENIOR NOTES DUE 2008
PURSUANT TO THE PROSPECTUS DATED , 1999
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
,
1999, UNLESS THE EXCHANGE OFFER IS EXTENDED (THE "EXPIRATION DATE").
TO: U.S. BANK TRUST NATIONAL ASSOCIATION, EXCHANGE AGENT
<TABLE>
<S> <C>
By Mail: By Hand or Overnight Courier:
U.S. Bank Trust National Association U.S. Bank Trust National Association
180 East Fifth Street 180 East Fifth Street
St. Paul, MN 55101 St. Paul, MN 55101
Attn: Specialized Finance Department Attn: Specialized Finance Department
</TABLE>
By Facsimile (For Eligible Institutions Only):
(612) 244-1537
Confirm by Telephone:
(612) 244-1197
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION VIA
FACSIMILE, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF
TRANSMITTAL IS COMPLETED.
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE NEW NOTES FOR THEIR OLD NOTES
PURSUANT TO THE EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW) THEIR OLD
NOTES TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE.
By execution hereof, the undersigned acknowledges receipt of the Prospectus
dated , 1999 (the "Prospectus"), of Verio Inc., a Delaware
corporation (the "Company"), and this Letter of Transmittal and the instructions
hereto (the "Letter of Transmittal"), which together constitute the offer to
exchange (the "Exchange Offer") an aggregate principal amount of up to
$400,000,000 11 1/4% Senior Notes Due 2008 (the "New Notes") for an equal
principal amount of the outstanding 11 1/4% Senior Notes Due 2008 (the "Old
Notes" and, together with the New Notes, the "Notes").
The Company reserves the right, at any time or from time to time, to extend
the Exchange Offer in its sole discretion, in which event the term "Expiration
Date" shall mean the latest time and date to which the Exchange Offer is
extended. The Company shall notify the holders of the Old Notes ("Holders") of
any such extension by means of a press release or other public announcement
prior to 9:00 a.m., New York City time, on the next business day after the
previously scheduled Expiration Date.
This Letter of Transmittal is to be used: (i) by all Holders who are not
members of the Automated Tender Offering Program ("ATOP") at the Depository
Trust Company ("DTC"); (ii) by Holders who are ATOP members but choose not to
use ATOP; or (iii) if the Old Notes are to be tendered in accordance with the
guaranteed delivery procedures set forth in "The Exchange Offer -- Guaranteed
Delivery Procedures" section of the Prospectus. See Instruction 1. Delivery of
this Letter of Transmittal to DTC does not constitute delivery to the Exchange
Agent.
<PAGE> 2
All capitalized terms used herein and not defined herein shall have the
respective meanings given to them in the Prospectus.
HOLDERS WHO WISH TO ACCEPT THE TERMS OF THE EXCHANGE OFFER AND TENDER THEIR
OLD NOTES MUST COMPLETE THIS LETTER OF TRANSMITTAL IN ITS ENTIRETY.
List below the Old Notes to which this Letter of Transmittal relates. If
the space provided below is inadequate, list the certificate numbers and
principal amounts on a separately executed schedule and affix the schedule to
this Letter of Transmittal.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES
- -----------------------------------------------------------------------------------------------------------------
AGGREGATE PRINCIPAL AMOUNT OF
NAME(S) AND ADDRESS(ES) OF HOLDER(S) CERTIFICATE OLD NOTES TENDERED
(PLEASE FILL IN, IF BLANK) NUMBER(S)* (IF LESS THAN ALL)**
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Total Principal Amount of Old Notes Tendered
- -----------------------------------------------------------------------------------------------------------------
* Need not be completed by holders tendering Old Notes by book-entry transfer.
** Need not be completed by holders who wish to tender with respect to all Old Notes listed. See Instruction 2.
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY DTC TO THE EXCHANGE
AGENT'S ACCOUNT AT DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:
---------------------------------------------------------------------------
DTC Book-Entry Account No.:
---------------------------------------------------------------------------
Transaction Code No.
---------------------------------------------------------------------------
If holders desire to tender Old Notes pursuant to the Exchange Offer and
(i) certificates representing such Old Notes are not lost but are not
immediately available, (ii) time will not permit this Letter of Transmittal,
certificates representing such Old Notes or other required documents to reach
the Exchange Agent prior to the Expiration Date or (iii) the procedures for
book-entry transfer cannot be completed prior to the Expiration Date, such
holders may effect a tender of such Old Notes in accordance with the guaranteed
delivery procedures set forth in the Prospectus under "The Exchange
Offer -- Guaranteed Delivery Procedures."
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT AND
COMPLETE THE FOLLOWING:
Name of Holder of Old Notes:
---------------------------------------------------------------------------
Window Ticket No. (if any):
---------------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
---------------------------------------------------------------------------
Name of Eligible Institution that Guaranteed Delivery:
------------------------------------------------------------------
If delivered by Book-Entry Transfer:
Name of Tendering Institution:
---------------------------------------------------------------------------
DTC Book-Entry Account No.:
---------------------------------------------------------------------------
Transaction Code No.:
---------------------------------------------------------------------------
<PAGE> 3
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER WHO HOLDS OLD NOTES ACQUIRED FOR YOUR
OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES AND
WISH TO RECEIVE COPIES OF THE PROSPECTUS AND COPIES OF ANY AMENDMENTS OR
SUPPLEMENTS THERETO FOR USE IN CONNECTION WITH RESALES OF NEW NOTES
RECEIVED FOR YOUR OWN ACCOUNT IN EXCHANGE FOR SUCH OLD NOTES.
Name:
------------------------------------------------------------------------
Address:
------------------------------------------------------------------------
Aggregate Principal Amount of Old Notes so held: $
------------------------------------------------------------------------
LADIES AND GENTLEMEN:
The undersigned hereby tenders to the Company the aggregate principal
amount of Old Notes indicated in this Letter of Transmittal, upon the terms and
subject to the conditions of the Exchange Offer. Subject to, and effective upon,
the acceptance for exchange of the Old Notes tendered hereby, the undersigned
hereby sells, assigns and transfers to, or upon the order of, the Company all
right, title and interest in and to such Old Notes as are being tendered hereby
and hereby irrevocably constitutes and appoints the Exchange Agent as
attorney-in-fact of the undersigned with respect to such Old Notes, with full
power of substitution (such power of attorney being an irrevocable power coupled
with an interest), to: (a) deliver such Old Notes in registered certificated
form, or transfer ownership of such Old Notes through book-entry transfer at the
Book-Entry Transfer Facility, to or upon the order of the Company, upon receipt
by the Exchange Agent, as the undersigned's agent, of the same aggregate
principal amount of New Notes; and (b) receive, for the account of the Company,
all benefits and otherwise exercise, for the account of the Company, all rights
of beneficial ownership of the Old Notes tendered hereby in accordance with the
terms of the Exchange Offer.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Old Notes
tendered hereby and that the Company will acquire good, marketable and
unencumbered title thereto, free and clear of all security interests, liens,
restrictions, charges, encumbrances, conditional sale agreements or other
obligations relating to their sale or transfer, and not subject to any adverse
claim when the same are accepted by the Company. The undersigned hereby further
represents that any New Notes acquired in exchange for Old Notes tendered hereby
will have been acquired in the ordinary course of business of the person
receiving such New Notes, whether or not such person is the undersigned, that
neither the holder of such Old Notes nor any such other person is engaged in, or
intends to engage in, a distribution of such New Notes, or has an arrangement or
understanding with any person to participate in the distribution of such New
Notes, and that neither the holder of such Old Notes nor any such other person
is an "affiliate," as defined in Rule 405 under the Securities Act of 1933, as
amended (the "Securities Act"), of the Company. The undersigned has read and
agrees to all of the terms of the Exchange Offer.
The undersigned also acknowledges that the Company is making the Exchange
Offer in reliance on the position of the staff of the Securities and Exchange
Commission (the "Commission"), as set forth in certain interpretive letters
issued to third parties in other transactions. Based on the Commission
interpretations, the Company believes that the New Notes issued in exchange for
the Old Notes pursuant to the Exchange Offer may be offered for resale, resold
and otherwise transferred by holders thereof (other than a broker-dealer who
purchased Old Notes directly from the Company for resale pursuant to Rule 144A
under the Securities Act or any other available exemption under the Securities
Act or any such holder that is an "affiliate" of the Company within the meaning
of Rule 405 under the provisions of the Securities Act) without further
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such holders' business and such holders are not engaged in, and do not intend
to engage in, a distribution of such New Notes and have no arrangement with any
person to participate in the distribution of such New Notes. However, the
Company does not intend to request the Commission to consider, and the
Commission has not considered, the Exchange Offer in the context of an
interpretive letter, and there can be no assurance that the staff of the
Commission would make a similar determination with respect to the Exchange Offer
as in other circumstances.
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of New
Notes and has no arrangement or understanding to participate in a distribution
of New Notes. If any holder is an affiliate of the Company, is engaged in or
intends to engage in or has any arrangement or understanding with respect to the
distribution of the New Notes to be acquired pursuant to the Exchange Offer,
such holder (i) could not rely on the applicable interpretations of the staff of
the Commission and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. If the undersigned is a broker-dealer that will receive New Notes
for its own account in exchange for Old Notes acquired as a result of
market-making or other trading activities (a "Participating Broker-Dealer"), it
represents that the Old Notes to be exchanged for the New Notes were acquired by
it as a result of market-making or other trading activities and acknowledges
that it will deliver a prospectus in connection with any resale of such New
Notes; however, by so
<PAGE> 4
acknowledging and by delivering a prospectus, such Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
The Company has agreed that, subject to the provisions of the Registration
Rights Agreement, the Prospectus, as it may be amended or supplemented from time
to time, may be used by a Participating Broker-Dealer in connection with resales
of New Notes received in exchange for Old Notes which were acquired by such
Participating Broker-Dealer for its own account as a result of market-making or
other trading activities, for a period ending 180 days after the Expiration
Date, or, if earlier, when all such New Notes have been disposed of by such
Participating Broker-Dealer. In that regard, each Participating Broker-Dealer by
tendering such Old Notes and executing this Letter of Transmittal, agrees that,
upon receipt of notice from the Company of the occurrence of any event or the
discovery of any fact which makes any statement contained or incorporated by
reference in the Prospectus untrue in any material respect or which causes the
Prospectus to omit to state a material fact necessary in order to make the
statements contained or incorporated by reference therein, in light of the
circumstances under which they were made, not misleading, such Participating
Broker-Dealer will suspend the sale of New Notes pursuant to the Prospectus
until the Company has amended or supplemented the Prospectus to correct such
misstatement or omission and has furnished copies of the amended or supplemented
Prospectus to the Participating Broker-Dealer or the Company has given notice
that the sale of the New Notes may be resumed, as the case may be. If the
Company gives such notice to suspend the sale of the New Notes, it shall extend
the 180-day period referred to above during which Participating Broker-Dealers
are entitled to use the Prospectus in connection with the resale of New Notes by
the number of days during the period from and including the date of the giving
of such notice to and including the date when Participating Broker-Dealers shall
have received copies of the supplemented or amended Prospectus necessary to
permit resales of the New Notes or to and including the date on which the
Company has given notice that the sale of New Notes may be resumed, as the case
may be.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Old Notes tendered hereby. All authority
conferred or agreed to be conferred in this Letter of Transmittal and every
obligation of the undersigned hereunder shall be binding upon the successors,
assigns, heirs, executors, administrators, trustees in bankruptcy and legal
representatives of the undersigned and shall not be affected by, and shall
survive, the death or incapacity of the undersigned. This tender may be
withdrawn only in accordance with the procedures set forth in "The Exchange
Offer -- Withdrawal Rights" section of the Prospectus.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, please deliver the New Notes (and, if applicable,
substitute certificates representing Old Notes for any Old Notes not exchanged)
in the name of the undersigned or, in the case of a book-entry delivery of Old
Notes, please credit the account indicated above maintained at the Book-Entry
Transfer Facility. Similarly, unless otherwise indicated under the box entitled
"Special Delivery Instructions" below, please send the New Notes (and, if
applicable, substitute certificates representing Old Notes for any Old Notes not
exchanged) to the undersigned at the address shown above in the box entitled
"Description of Old Notes."
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
Unless otherwise indicated in the box entitled "Special Issuance
Instruction" or in the box entitled "Special Delivery Instructions" in this
Letter of Transmittal, certificates for New Notes delivered in exchange for
tendered Old Notes, and any Old Notes delivered herewith but not exchanged, will
be registered in the name of the undersigned and will be delivered to the
undersigned at the address shown below the signature of the undersigned. If a
New Note is to be mailed to someone other than the person(s) signing this Letter
of Transmittal or to person(s) signing this Letter of Transmittal at an address
different than the address shown on this Letter of Transmittal, the appropriate
boxes of this Letter of Transmittal should be completed. If Old Notes are
surrendered by Holder(s) that have completed either the box entitled "Special
Issuance Instruction" or the box entitled "Special Issuance Instruction" or the
box entitled "Special Delivery Instructions" in this Letter of Transmittal,
signature(s) on this Letter of Transmittal must be guaranteed by an Eligible
Institution (defined in Instruction 3).
<PAGE> 5
To be completed ONLY if the New Notes issued in consideration of Old Notes
exchanged, or certificates for Old Notes in a principal amount not surrendered
for exchange, are to be mailed to someone other than the undersigned or to the
undersigned at an address other than that below.
<TABLE>
- ------------------------------------------------------------ --------------------------------------------------------
<S> <C>
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
Issue and mail check to: Deliver New Notes to:
Name: Name:
----------------------------------------------- -----------------------------------------------
(Please Print: First, Middle & Last Name) (Please Print: First, Middle & Last Name)
Address: Address:
-------------------------------------------- ---------------------------------------------
(Number and Street) (Number and Street)
-------------------------------------------- ---------------------------------------------
(City, State and Zip Code) (City, State and Zip Code)
--------------------------------------------
(Tax Identification or Social Security No.)
- ------------------------------------------------------------ --------------------------------------------------------
</TABLE>
<PAGE> 6
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES"
ABOVE AND SIGNING THIS LETTER OF TRANSMITTAL, WILL BE DEEMED TO HAVE TENDERED
THE OLD NOTES AS SET FORTH IN SUCH BOX ABOVE.
IMPORTANT: THIS LETTER OF TRANSMITTAL OR, IF APPLICABLE, A FACSIMILE HEREOF
(TOGETHER WITH THE OLD NOTES OR A BOOK-ENTRY CONFIRMATION AND ALL OTHER REQUIRED
DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY THE EXCHANGE
AGENT PRIOR TO 5:00 PM., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
- --------------------------------------------------------------------------------
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS OF
OLD NOTES REGARDLESS OF WHETHER OLD NOTES ARE
BEING PHYSICALLY DELIVERED HEREWITH)
<TABLE>
<S> <C>
X Date:
------------------------------------------------------ --------------------------------------------------
X Date:
------------------------------------------------------ --------------------------------------------------
Signature of Owner
</TABLE>
If a holder is tendering any Old Notes, this Letter of Transmittal
must be signed by the holder(s) of Old Notes exactly as the name(s) of the
holder(s) appear(s) on the certificate(s) for the Old Notes or by any
person(s) authorized to become (a) holder(s) by endorsements and documents
transmitted herewith. If signature is by a trustee, executor administrator,
guardian, officer or other person acting in a fiduciary or representative
capacity, such person must provide the following information:
<TABLE>
<S> <C>
Name(s): Address:
------------------------------------------------ --------------------------------------------------------
(Please Print) (Include Zip Code)
Capacity: Telephone Number:
------------------------------------------------ ---------------------------------------
(Include Area Code)
</TABLE>
SIGNATURE GUARANTEE
(SEE INSTRUCTION 3 HEREIN)
CERTAIN SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION
Signature(s) Guaranteed by:
-------------------------------------------------
(Authorized Signature)
----------------------------------------------------------------------------
(Title of Officer Signing this Guarantee)
----------------------------------------------------------------------------
(Name of Eligible Institution Guaranteeing Signatures -- Please Print)
----------------------------------------------------------------------------
(Address and Telephone Number of Eligible Institution Guaranteeing
Signatures)
Date:
--------------------------------
- -------------------------------------------------------------------------------
<PAGE> 7
<TABLE>
<C> <S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
PLEASE COMPLETE SUBSTITUTE FORM W-9
- --------------------------------------------------------------------------------------------------------------------------
PAYER'S NAME: STATE STREET BANK AND TRUST COMPANY
- --------------------------------------------------------------------------------------------------------------------------
Social security number
PART 1 -- PLEASE PROVIDE YOUR TIN IN THE BOX AT
SUBSTITUTE RIGHT AND CERTIFY BY SIGNING AND DATING BELOW OR --------------------------------------
FORM W-9 Employer Identification Number
------------------------------------------------------------------------------------------------
PART 2 -- CERTIFICATES -- Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting
for a number to be issued for me), and
DEPARTMENT OF THE (2) I am not subject to backup withholding because (a) I am exempt from backup withholding, or
TREASURY (b) I have not been notified by the Internal Revenue Service (the "IRS") that I am subject to
INTERNAL REVENUE backup (TIN) withholding as a result of a failure to report all interest or dividends, or (c)
SERVICE the IRS has notified me that I am no longer subject to backup withholding.
CERTIFICATION INSTRUCTIONS -- You must cross out item (2) above if you have been notified by
PAYER'S REQUEST the IRS that you are currently subject to backup withholding because of underreporting interest
FOR TAXPAYER or dividends on your tax return. However, if after being notified by the IRS that you were
subject to backup withholding you received another notification from the IRS that you are no
longer subject to backup withholding, do not cross out item (2).
------------------------------------------------------------------------------------------------
IDENTIFICATION PART 3 --
NUMBER SIGNATURE _______________________________________ DATE _______________ Awaiting TIN [ ]
("TIN")
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENT (IF ANY) MADE TO YOU WITH RESPECT TO OLD NOTES
TENDERED IN CONNECTION WITH THE EXCHANGE OFFER. YOU MUST COMPLETE THE
FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF SUBSTITUTE FORM
W-9
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (a) I have mailed or
delivered an application to receive a taxpayer identification number to
the appropriate Internal Revenue Service Center or Social Security
Administration Office, or (b) I intend to mail or deliver an application
in the near future, I understand that because I have not provided a
taxpayer identification number, 31% of all reportable payments made to me
thereafter will be withheld until I provide a number. If I provide a
properly certified taxpayer identification number within 60 days, you will
refund the tax if I so request.
SIGNATURE ____________________ DATE __________
- --------------------------------------------------------------------------------
<PAGE> 8
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER OF VERIO INC. TO
EXCHANGE ITS 11 1/4% SENIOR NOTES DUE 2008 FOR 11 1/4% SENIOR NOTES DUE 2008.
1. DELIVERY OF THIS LETTER AND OLD NOTES; GUARANTEED DELIVERY PROCEDURES.
This Letter of Transmittal is to be used: (i) by all Holders who are not
ATOP members, (ii) by Holders who are ATOP members but choose not to use ATOP or
(iii) if the Old Notes are to be tendered in accordance with the guaranteed
delivery procedures set forth in the Prospectus under "The Exchange
Offer -- Guaranteed Delivery Procedures." To validly tender Old Notes, a Holder
must physically deliver a properly completed and duly executed Letter of
Transmittal (or facsimile thereof) with any required signature guarantees and
all other required documents to the Exchange Agent at its address set forth on
the cover of this Letter of Transmittal prior to the Expiration Date (as defined
below) or the Holder must properly complete and duly execute an ATOP ticket in
accordance with DTC procedures. Otherwise, the Holder must comply with the
guaranteed delivery procedures set forth in the next paragraph. Notwithstanding
anything to the contrary in the Registration Rights Agreement, the term
"Expiration Date" means 5:00 p.m., New York City time, on , 1999 (or
such later date to which the Company may, in its sole discretion, extend the
Exchange Offer). If the Exchange Offer is extended, the term "Expiration Date"
shall mean the latest time and date to which the Exchange Offer is extended. The
Company expressly reserves the right, at any time or from time to time, to
extend the period of time during which the Exchange Offer is open by giving oral
(confirmed in writing) or written notice of such extension to the Exchange Agent
and by making a public announcement of such extension prior to 9:00 a.m., New
York City time, on the next business day after the previously scheduled
Expiration Date.
Holders whose certificates for Old Notes are not immediately available or
who cannot deliver their certificates for Old Notes and all other required
documents to the Exchange Agent on or prior to the Expiration Date, or who
cannot complete the procedure for book-entry transfer on a timely basis, may
tender their Old Notes pursuant to the guaranteed delivery procedures set forth
in "The Exchange Offer -- Guaranteed Delivery Procedures" section of the
Prospectus. Pursuant to such procedures: (i) such tender must be made by or
through an Eligible Institution, (ii) on or prior to the Expiration Date, the
Exchange Agent must have received from the holder and the Eligible Institution a
properly completed and duly executed Notice of Guaranteed Delivery (by facsimile
transmission, mail or hand delivery) setting forth the name and address of the
holder of Old Notes, the certificate number or numbers of the tendered Old
Notes, and the principal amount of tendered Old Notes, stating that the tender
is being made thereby and guaranteeing that, within five New York Stock Exchange
trading days after the Expiration Date, the certificates for the tendered Old
Notes, or a Book-Entry Confirmation of such Old Notes, a duly executed Letter of
Transmittal and any other required documents will be deposited by the Eligible
Institution with the Exchange Agent, and (iii) such properly completed and
executed documents required by the Letter of Transmittal, as well as the
certificates for the tendered Old Notes in proper form for transfer (or
Book-Entry Confirmation of such Old Notes into the Exchange Agent's account at
DTC) must be received by the Exchange Agent within five New York Stock Exchange
trading days after the Expiration Date. Any holder who wishes to tender Old
Notes pursuant to the guaranteed delivery procedures described above must ensure
that the Exchange Agent receives the Notice of Guaranteed Delivery and Letter of
Transmittal relating to such Old Notes prior to 5:00 p.m., New York City time,
on the Expiration Date for the Exchange offer with respect to such Old Notes.
THE METHOD OF DELIVERY OF THIS LETTER, THE OLD NOTES AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE ELECTION AND RISK OF THE TENDERING HOLDERS, BUT THE DELIVERY
WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED OR CONFIRMED BY THE EXCHANGE
AGENT. IF OLD NOTES ARE SENT BY MAIL, IT IS SUGGESTED THAT THE MAILING BE MADE
SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT DELIVERY TO THE
EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
See "The Exchange Offer" section of the Prospectus.
DO NOT SENT THIS LETTER OF TRANSMITTAL OR ANY OLD NOTES TO THE COMPANY.
2. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS OF OLD NOTES WHO TENDER BY
BOOK-ENTRY TRANSFER).
If less than the entire principal amount of any submitted Old Note is to be
tendered, the tendering holder(s) should fill in the aggregate principal amount
to be tendered in the box above entitled "Description of Old Notes -- Aggregate
Principal Amount of Old Notes Tendered." A reissued certificate representing the
balance of non-tendered principal of any submitted Old Notes will be sent to
such tendering holder, unless otherwise provided in the appropriate box of this
Letter of Transmittal, promptly after the Expiration Date. THE ENTIRE PRINCIPAL
AMOUNT OF ANY OLD NOTES DELIVERED TO THE EXCHANGE AGENT WILL BE DEEMED TO HAVE
BEEN TENDERED UNLESS OTHERWISE INDICATED.
<PAGE> 9
3. SIGNATURES ON THIS LETTER; ASSIGNMENTS AND ENDORSEMENT; GUARANTEE OF
SIGNATURES.
If this Letter of Transmittal is signed by the registered holder of the Old
Notes tendered hereby, the signature must correspond exactly with the name as
written on the face of the Old Notes without any change whatsoever.
If any tendered Old Notes are owned or record by two or more joint owners,
all such owners must sign this letter of Transmittal.
If any tendered Old Notes are registered in different names on several Old
Notes, it will be necessary to complete, sign and submit as many separate copies
of this Letter of Transmittal as there are different registrations of Old Notes.
When this Letter of Transmittal is signed by the registered holder(s) of
the Old Notes specified herein and tendered hereby, no endorsements of the
submitted Old Notes or separate instruments of assignment are required. If,
however, the New Notes are to be issued, or any untendered Old Notes are to be
reissued, to a person other than the registered holder(s), then endorsements of
any Old Notes transmitted hereby or separate instruments of assignment are
required. Signatures on such Old Notes must be guaranteed by an Eligible
Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of any Old Notes specified herein, such Old Notes must be
endorsed or accompanied by appropriate instruments of assignment, in either case
signed exactly as the name of the registered holder appears on the Old Notes and
the signatures of such Old Notes must be guaranteed by an Eligible Institution.
If this Letter of Transmittal or any Old Notes or instruments of assignment
are signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
Endorsements on Old Notes or signatures on instruments of assignment
required by this Instruction 3 must be guaranteed by a firm which is a member of
a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc., by a commercial bank or trust company
having an office or correspondent in the United States or by an "eligible
guarantor" institution within the meaning of Rule 17Ad-15 under the Securities
Exchange Act of 1934 (the "Eligible Institution").
Signatures of this Letter of Transmittal need not be guaranteed by a
Eligible Institution, provided the Old Notes are tendered: (i) by a registered
holder of Old Notes (which term, for purposes of the Exchange Offer, includes
any participant in the Book-Entry Transfer Facility system whose name appears on
a security position listing as the holder of such Old Notes) who has not
completed the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on this Letter of Transmittal, or (ii) for the account of an
Eligible Institution.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS.
Tendering holders of Old Notes should indicated in the applicable box the
name and address to which new Notes issued pursuant to the Exchange Offer and/or
substitute certificates evidencing Old Notes not exchanged are to be issued or
sent, if different from the name or address of the person signing this Letter of
Transmittal. In the case of Issuance in a different name, the Employer
Identification of Social Security Number of the person named must also be
indicated. A holder of Old Notes tendering Old Notes by book-entry transfer may
request that New Notes and Old Notes not exchanged be credited to such account
maintained at the Book-Entry Transfer Facility as such holder of Old Notes may
designate hereon. If no such instructions are given, such New Notes and Old
Notes not exchanged will be returned to the name or address of the person
signing this Letter of Transmittal or credited to the account listed beneath the
box entitled "Description of Old Notes," as the case may be.
5. TAX IDENTIFICATION NUMBER.
Federal income tax law generally requires that a tendering holder whose Old
Notes are accepted for exchange must provide the Company (as payor) with such
Holder's correct Taxpayer Identification Number ("TIN") on Substitute Form W-9
above, which, in the case of a tendering holder who is an individual, is his or
her Social Security Number. If the Company is not provided with the Current TIN
or an adequate basis for an exemption, such tendering holder may be subject to a
$50 penalty imposed by the Internal Revenue Service. In addition, delivery of
New Notes to such tendering holder may be subject to backup withholding in an
amount equal to 31% of all reportable payments made after the exchange. If
withholding results in an overpayment of taxes, a refund may be obtained.
Exempt holders of Old Notes (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. See the enclosed Guidelines of Certification of Taxpayer
Identification Number on Substitute Form W-9 (the "W-9 Guidelines") for
additional instructions.
To prevent backup withholding, each tendering holder of Old Notes must
provide its correct TIN by completing the "Substitute Form W-9" set forth above,
certifying that the TIN provided is correct (or that such holder is awaiting a
<PAGE> 10
TIN) and that (i) the holder is exempt from backup withholding, (ii) the holder
has not been notified by the Internal Revenue Service that such holder is
subject to a backup withholding as a result of a failure to report all interest
or dividends or (iii) the Internal Revenue Service has notified the holder that
such holder is no longer subject to backup withholding. If the tendering holder
of Old Notes is a nonresident alien or foreign entity not subject to backup
withholding, such holder must give the Company a completed Form W-8, Notice of
Foreign Status. These forms may be obtained from the Exchange Agent. If the Old
Notes are in more than one name or are not in the name of the actual owner, such
holder should consult the W-9 Guidelines for Instructions on applying for a TIN,
check the box in Part 3 of the Substitute Form W-9 and write "applied for" in
lieu of its TIN. Note: checking this box and writing "applied for" on the form
means that such holder has already applied for a TIN or that such holder intends
to apply for one in the near future. If such holder does not provide its TIN to
the Company within 60 days, backup withholding will begin and continue until
such holder furnishes its TIN to the Company.
6. TRANSFER TAXES.
The Company will pay all transfer taxes, if any, applicable to the transfer
of Old Notes to it or its order pursuant to the Exchange Offer. If, however, New
Notes and/or substitute Old Notes not exchanges are to be delivered to, or are
to be registered or issued in the name of, any person other than the registered
holder of the Old Notes tendered hereby, or if tendered Old notes are registered
in the name of any person other than the person signing this Letter of
Transmittal, or if a transfer tax is imposed for any reason other than the
transfer of Old Notes to the Issuer or its order pursuant to the Exchange Offer,
the amount of any such transfer taxes (whether imposed on the registered holder
or any other person) will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted
herewith, the amount of such transfer taxes will be billed directly to such
tendering holder.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT IS NOT NECESSARY FOR TRANSFER TAX
STAMPS TO BE AFFIXED TO THE OLD NOTES SPECIFIED IN THIS LETTER OF TRANSMITTAL.
7. DETERMINATION OF VALIDITY/WAIVER OF CONDITIONS.
The Company will determine, in its sole discretion, all questions as to the
form of documents, validity, eligibility (including time of receipt) and
acceptance for exchange of any tender of Old Notes, which determination shall be
final and binding on all parties. The Company reserves the absolute right to
reject any and all tenders determined by it not to be in proper form or the
acceptance of which, or exchange for which, may, in the view of counsel to the
Company, be unlawful. The Company also reserves the absolute right, subject to
applicable law, to waive any of the conditions of the Exchange Offer set forth
in the Prospectus under the caption "The Exchange Offer" or any conditions or
irregularity in any tender of Old Notes of any particular holder whether or not
similar conditions or irregularities are waived in the case of other holders.
The Company's interpretation of the terms and conditions of the Exchange
Offer (including this Letter of Transmittal and the instructions hereto) will be
final and binding. No tender or Old Notes will be deemed to have been validly
made until all irregularities with respect to such tender have been cured or
waived. Although the Company intends to notify holders of defects or
irregularities with respect to tenders of Old Notes, neither the Company, any
employees, agents, affiliates or assigns of the Company, the Exchange Agent, nor
any other person shall be under any duty to give notification of any
irregularities in tenders or incur any liability for failure to give such
notification.
8. NO CONDITIONAL TENDERS.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders of Old Notes, by execution of this Letter of
Transmittal, shall waive any right to receive notice of the acceptance of their
Old Notes for exchange.
Neither the Company, the Exchange Agent nor any other person is obligated
to give notice of any defect or irregularity with respect to any tender of Old
Notes nor shall any of them incur any liability for failure to give any such
notice.
9. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES.
Any holder whose Old Notes have been mutilated, lost, stolen or destroyed
should contact the Exchange Agent at the address indicated above for further
instructions.
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering, as well as requests for
additional copies of the Prospectus and this Letter of Transmittal, may be
directed to the Exchange Agent, at the address and telephone number indicated
above.
<PAGE> 1
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY FOR
VERIO INC.
WITH RESPECT TO
11 1/4% SENIOR NOTES DUE 2008
---------------------
PURSUANT TO THE PROSPECTUS DATED , 1999
---------------------
This form or one substantially equivalent hereto must be used by a holder
of the 11 1/4% Senior Notes Due 2008 (the "Old Notes") of Verio Inc., a Delaware
corporation (the "Company") to accept the Company's Exchange Offer made pursuant
to the Prospectus, dated , 1999 (the "Prospectus"), and the related
Letter of Transmittal (the "Letter of Transmittal") if certificates for the Old
Notes are not immediately available or if the procedure for book-entry transfer
cannot be completed on a timely basis or time will not permit all required
documents to reach U.S. Bank Trust National Association (the "Exchange Agent")
prior to 5:00 P.M., New York City time, on the Expiration Date of the Exchange
Offer. This Notice of Guaranteed Delivery may be delivered or transmitted by
facsimile transmission, mail or hand delivery to the Exchange Agent as set forth
below. In addition, in order to utilize the guaranteed delivery procedure to
tender Old Notes pursuant to the Exchange Offer, a completed, signed and dated
Letter of Transmittal (or facsimile thereof) must also be received by the
Exchange Agent prior to 5:00 P.M., New York City time, on the Expiration Date.
Capitalized terms not defined herein have the respective meanings given to them
in the Prospectus or the Letter of Transmittal.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1999,
UNLESS THE EXCHANGE OFFER IS EXTENDED (THE "EXPIRATION DATE").
TO: U.S. BANK TRUST NATIONAL ASSOCIATION
<TABLE>
<S> <C>
By Mail: By Hand or Overnight Courier:
U.S. Bank Trust National Association U.S. Bank Trust National Association
180 East Fifth Street 180 East Fifth Street
St. Paul, MN 55101 St. Paul, MN 55101
Attn: Specialized Finance Department Attn: Specialized Finance Department
</TABLE>
By Facsimile (For Eligible Institutions Only):
(612) 244-1537
Confirm by Telephone
(612) 244-1197
<PAGE> 2
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION VIA FACSIMILE,
OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
This form is not to be used to guarantee signatures. If a signature on a
Letter of Transmittal is required to be guaranteed by an "Eligible Institution"
under the instructions thereto, such signature guarantee must appear in the
applicable space provided in the signature box on the Letter of Transmittal.
Ladies and Gentlemen:
The undersigned hereby tender(s) to the Company upon the terms and
conditions set forth in the Prospectus and the related Letter of Transmittal,
receipt of which is hereby acknowledged, the aggregate principal amount of Old
Notes set forth below pursuant to the guaranteed delivery procedures set forth
in the Prospectus and the Letter of Transmittal.
The undersigned hereby tenders the Old Notes listed below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
AGGREGATE PRINCIPAL AMOUNT OF
NAME(S) AND ADDRESS(ES) OF HOLDER(S) CERTIFICATE* OLD NOTES TENDERED
(PLEASE FILL IN, IF BLANK) NUMBER(S) (IF LESS THAN ALL)**
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
------------------------------------------
------------------------------------------
------------------------------------------
------------------------------------------
------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Total Principal Amount of Old Notes Tendered
- ---------------------------------------------------------------------------------------------------------
* Need not be completed by holders tendering Old Notes by book-entry transfer.
** Need not be completed by holders who wish to tender with respect to all Old Notes listed.
- ---------------------------------------------------------------------------------------------------------
</TABLE>
If Old Notes will be delivered by book-entry transfer to The Depository
Trust Company, provide account number. Account Number:
PLEASE SIGN HERE
<TABLE>
<S> <C>
X Date:
------------------------------------------------ -----------------------------------------------
X Date:
------------------------------------------------ -----------------------------------------------
SIGNATURE(S) OF OWNER OR AUTHORIZED SIGNATORY
</TABLE>
This Notice of Guaranteed Delivery must be signed by the holder(s) of Old
Notes exactly as the name(s) of the holder(s) appear(s) on the certificate(s)
for the Old Notes or by any person(s) authorized to become (a) holder(s) by
endorsements and documents transmitted herewith. If signature is by a trustee,
executor, administrator, guardian, officer or other person acting in a fiduciary
or representative capacity, such person must provide the following information.
<TABLE>
<S> <C>
Name(s): Address:
------------------------------------------ --------------------------------------------
(Please Print) (Include Zip Code)
Capacity: Telephone Number:
------------------------------------------ -----------------------------------
(Include Area Code)
</TABLE>
THE ACCOMPANYING GUARANTEE MUST BE COMPLETED.
<PAGE> 3
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm that is a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office correspondent in the United
States or any "eligible guarantor institution" within the meaning of Rule
17Ad-15 of the Securities Exchange Act of 1934, as amended, hereby (a)
represents that each holder of Old Notes on whose behalf this tender is being
made "own(s)" the Old Notes covered hereby within the meaning of Rule 14e-4
under the Securities Exchange Act of 1934, as amended, (b) represents that such
tender of Old Notes complies with Rule 14e-4, and (c) guarantees to deliver to
the Exchange Agent, at its address set forth above, the Old Notes described
above, in proper form for transfer (or confirmation of the book-entry transfer
of such Old Notes into the Exchange Agent's account at The Depositary Trust
Company, pursuant to the procedure for book-entry transfer set forth in the
Prospectus), together with a properly completed and duly executed Letter of
Transmittal (or facsimile thereof), with any required signature guarantees, and
any other documents required by the Letter of Transmittal by 5:00 p.m., New York
City time, within five New York Stock Exchange trading days following the
Expiration Date.
The undersigned acknowledges that it must deliver the Letter of Transmittal
and Old Notes tendered hereby to the Exchange Agent within the time period set
forth above and that failure to do so could result in financial loss to the
undersigned.
Name of Firm:
-------------------------------------------------------------------
By:
-----------------------------------------------------------------------------
(Authorized Signature)
Name:
---------------------------------------------------------------------------
Title:
--------------------------------------------------------------------------
Address:
------------------------------------------------------------------------
Telephone Number:
---------------------------------------------------------------
(Include Area Code)
Date:
---------------------------------------------------------------------------
DO NOT SEND OLD NOTES WITH THIS FORM, ACTUAL SURRENDER OF OLD NOTES MUST BE
MADE PURSUANT TO, AND BE ACCOMPANIED BY, AN EXECUTED LETTER OF TRANSMITTAL.
<PAGE> 4
INSTRUCTIONS
1. DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY.
A properly completed and duly executed copy of this Notice of Guaranteed
Delivery and any other documents required by this Notice of Guaranteed Delivery
must be received by the Exchange Agent at its address set forth herein prior to
the Expiration Date. The method of delivery of this Notice of Guaranteed
Delivery and any other required documents to the Exchange Agent is at the
election and sole risk of the holder, and the delivery will be deemed made only
when actually received by the Exchange Agent. If delivery is by mail, registered
mail with return receipt requested, properly insured, is recommended. As an
alternative to delivery by mail, the holders may wish to consider using an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery.
2. SIGNATURES ON THIS NOTICE OF GUARANTEED DELIVERY.
If this Notice of Guaranteed Delivery is signed by the registered holder(s)
of the Notes referred to herein, the signature must correspond with the name(s)
written on the face of the Notes without alteration, enlargement, or any change
whatsoever. If this Notice of Guaranteed Delivery is signed by a participant of
the Book-Entry Transfer Facility whose name appears on a security position
listing as the owner of the Notes, the signature must correspond with the name
shown on the security position listing as the owner of the Notes.
If this Notice of Guaranteed Delivery is signed by a person other than the
registered holder(s) of any Notes listed or a participant of the Book-Entry
Transfer Facility, this Notice of Guaranteed Delivery must be accompanied by
appropriate bond powers, signed as the name of the registered holder(s) appears
on the Notes or signed as the name of the participant shown on the Book-Entry
Transfer Facility's security position listing.
If this Notice of Guaranteed Delivery is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation, or other
person acting in a fiduciary or representative capacity, such person should so
indicate when signing and submit with the Letter of Transmittal evidence
satisfactory to the Company of such person's authority to so act.
3. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions and requests for assistance and requests for additional copies of
the Prospectus may be directed to the Exchange Agent at the address specified in
the Prospectus. Holders may also contact their broker, dealer, commercial bank,
trust company, or other nominee for assistance concerning the Exchange Offer.
