<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 9, 1999
REGISTRATION NO. 333-70727
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
VERIO INC.
(Exact name of Registrant as specified in its charter)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 7375 84-1339720
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer Identification
of incorporation or Classification Code Number) Number)
organization)
</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)
---------------------
Copies to:
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GAVIN B. GROVER, ESQ. CARLA HAMRE DONELSON, ESQ.
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. [ ] ______________
---------------------
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 APRIL 9, 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
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S EXCHANGE OFFER
We 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 we will not be required to register your old
notes under the Securities Act.
S VERIO
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 our unsecured unsubordinated liabilities;
(2) senior to all our unsecured subordinated liabilities;
(3) junior to all our secured liabilities and liabilities of our
subsidiaries.
INVESTMENT IN THE NOTES TO BE ISSUED IN THE EXCHANGE OFFER INVOLVES RISKS.
SEE THE RISK FACTORS SECTION BEGINNING ON PAGE 12.
THIS PROSPECTUS AND THE ACCOMPANYING LETTER OF TRANSMITTAL ARE FIRST BEING
MAILED TO HOLDERS OF OUTSTANDING NOTES ON OR ABOUT , 1999.
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................................................ 12
The Exchange Offer.......................................... 26
Use of Proceeds............................................. 33
Dividend Policy............................................. 33
Capitalization.............................................. 34
Selected Consolidated Financial Data........................ 35
Management's Discussion and Analysis of Financial
Information and Results of Operations..................... 37
Business.................................................... 48
Management.................................................. 66
Certain Related Party Transactions.......................... 82
Principal Stockholders...................................... 84
Description of the Notes.................................... 87
Book-Entry; Delivery and Form............................... 115
Material Federal Income Tax Considerations.................. 116
Plan of Distribution........................................ 119
Legal Matters............................................... 120
Experts..................................................... 121
Index to Financial Statements............................... F-1
</TABLE>
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PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. It may not
contain all of the information that may be important to you. For a more complete
understanding of the exchange offer, we encourage you to read the entire
prospectus and the documents we have referred you to.
THE COMPANY
OVERVIEW OF OUR BUSINESS
Verio is a leading provider of comprehensive Internet services with an
emphasis on serving the small and medium sized business market. We provide our
customers with the telecommunications circuits that permit them to make
connections to and transmissions over the Internet. We also "host" their Web
sites through use of a Verio supplied server to store and run the customer's Web
site software, allowing them to make information concerning their business,
operations, products and services available broadly over the Internet to other
Internet users. Finally, we offer an expanding package of enhanced Internet
tools such as electronic commerce -- enabling our customers to conduct
transactions with their customers and vendors over the Internet -- and virtual
private networks -- permitting our customers to engage in private communications
with their employees, vendors, customers and suppliers, with whom secure
Internet communication capabilities are important.
Since our incorporation in March 1996, Verio has grown very rapidly,
establishing a global presence through the acquisition, integration and organic
growth of over 45 local, regional, national and international providers of
Internet connectivity, Web hosting and other enhanced Internet services.
Currently, Verio provides locally based sales and engineering support for our
Internet services in 41 of the top 50 metropolitan statistical areas in the U.S.
and we provide Web hosting services to customers in over 170 countries. Through
the acquisition of iServer, TABNet and Hiway, Verio has established itself as
the largest Web hosting company in the world based on the number of domain names
(such as yourcompany.com) that we host. As of December 31, 1998, including all
acquisitions Verio had completed as of that date, we served over 160,000
customer accounts, including over 80,000 hosted Web sites, and we had combined
pro forma revenues for the three-month period ending on that date of
approximately $39.9 million, and approximately $149.3 million for 1998. The
acquisition of Hiway, which we completed in January 1999, increased our total
customer accounts to over 260,000, the number of Web sites hosted to over
180,000, and our combined pro forma revenues for the fourth quarter of 1998 to
approximately $50.4 million, and approximately $190.1 million for that year.
Approximately half of our current revenue is derived from our Web hosting and
other enhanced services. With our large existing customer base and strong,
balanced position in both the Internet access and Web hosting service platforms,
we believe that we will be able to derive increasing revenue from these
customers and facilitate our goal of attaining profitability, by continuing to
offer them higher functionality Web sites, an expanding array of value-added
services, and the additional access bandwidth that is necessary to support these
services.
We are continuing to integrate the operations we have acquired onto our
national network and common administrative support services in order to capture
economies of scale, derive operational efficiency and control, and improve the
quality, consistency and scalability of our services. Verio supports and manages
its operations with highly reliable and scalable national infrastructure and
systems, including a "Tier One" national network and proprietary Web site
hosting technologies and tools that differentiate our Web hosting services from
other providers. We have developed back-office support services built on high
quality systems for network monitoring and management, billing, customer service
and financial reporting and accounting. The integration of the operations we
have acquired involves:
- Redesigning acquired local networks with overlapping or non-redundant
circuits.
- Connecting those local telecommunication networks to our national
telecommunications network and eliminating unnecessary national network
capacity we acquire.
- Centralizing management functions.
3
<PAGE> 5
- Standardizing and centralizing back-office functions such as billing and
accounting.
- Converting the brand names of the acquired operations to the Verio brand.
Our significant scale in both Internet access and Web hosting allows us to
provide robust, high-quality, and scalable service platforms which we can
continually expand and enhance in order to provide a complete and evolving range
of business Internet solutions. We intend to further enhance the value of these
platforms by developing, both internally and through strategic vendor
relationships, a further array of value-added, higher margin product and service
offerings to continue to address our ever changing customer demands.
Verio has also established a global sales and marketing engine that is
driven by:
- Direct sales through over 200 sales professionals.
- Over 4,000 resellers in the U.S. and over 170 other countries.
- Preferential marketing agreements with leading Internet on-line
companies.
- Private label and co-branded distribution relationships with major
telecommunications companies.
- In-house and outsourced telemarketing operations.
RECENT DEVELOPMENTS
On January 5, 1999, we completed the acquisition of Best Internet
Communications, Inc., doing business as Hiway Technologies, Inc., pursuant to a
merger agreement, dated as of November 17, 1998. Upon completion of the
acquisition of Hiway, we issued approximately 3.14 million shares of our common
stock and paid approximately $176 million, to the former shareholders of Hiway.
In addition, we reserved approximately 1.77 million additional shares of our
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 our 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.
Recently, we have undertaken significant marketing efforts to build Verio's
national brand name recognition. We have commenced a joint marketing effort with
NorthPoint Communications to market digital subscriber line services in 21
cities nationwide.
On March 4, 1999, we entered into a strategic agreement with America
Online, Inc. ("AOL"), under which, for a three year period, Verio has acquired
exclusive rights to market its Web hosting and business-focused electronic
commerce services on AOL's four key on-line media properties in the US: AOL,
CompuServe, AOL.com and AOL's Digital City. The agreement also provides for the
transition of nearly 7,000 AOL PrimeHost and CompuServe BusinessWeb customers to
Verio for continued Web hosting service. AOL will receive guaranteed payments
totaling a minimum of $42.5 million from us, and also is entitled to participate
in future revenue sharing when the revenues we derive from this relationship
exceed certain levels. Verio will receive significant online advertising and
promotion of a co-branded Verio and AOL Web site that will offer a broad range
of Verio Web hosting products and electronic commerce solutions.
4
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THE EXCHANGE OFFER
Old Notes.................. 11 1/4% Senior Notes due 2008, Series A, which were
issued in November 1998.
New Notes.................. 11 1/4% Senior Notes due 2008, Series B, which we
are offering hereby. The old notes and the new
notes are referred to collectively as the notes.
The Exchange Offer......... We are offering to exchange $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 our obligations
contained in the registration rights agreement we
entered into with the initial purchasers of the old
notes in connection with the issuance of the old
notes. 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 we extend the exchange offer, in
which case the term "expiration date" means the
latest date and time to which the exchange offer 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 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 accompanying 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 (1) your
old notes are not immediately available or (2) 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."
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<PAGE> 7
Acceptance of Old Notes and
Delivery of New Notes.... After the registration statement becomes effective
and the exchange offer is completed, we 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 in the exchange offer.
See "The Exchange Offer -- Acceptance of Old Notes
for Exchange; Delivery of New Notes."
Material Federal Income Tax
Considerations........... With respect to the exchange of old notes for new
notes:
- the exchange should not constitute a taxable
exchange for U.S. federal income tax purposes;
- you should not recognize gain or loss upon
receipt of the new notes; and
- you must include interest on the new notes in
gross income to the same extent as the old notes.
Use of Proceeds............ We will receive no proceeds from the exchange
offer. Net proceeds from the sale of the old notes
were approximately $389.0 million. As of February
28, 1999, we had used the net proceeds as follows:
- Acquisitions and long-term
investments $184.0 47%
- General working capital $ 47.1 12%
- Cash, securities, and short-term
investments $157.9 41%
See "Use of Proceeds."
Fees and Expenses.......... We will bear all expenses for the completion of the
exchange offer and compliance with the registration
rights agreement. The expenses of the exchange
offer are estimated to be approximately $450,000.
We also will pay certain transfer taxes to the
extent 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....... Based on an interpretation by the Securities and
Exchange Commission set forth in no-action letters
issued to third parties, we believe that you may
resell or otherwise transfer new notes issued
pursuant to the exchange offer in exchange for old
notes. However, there are exceptions to this
general statement. You may not freely transfer the
new notes if:
- you are an "affiliate" of Verio within the
meaning of Rule 405 under the Securities Act of
1933,
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<PAGE> 8
- you are a broker-dealer who acquired the old
notes directly from us without compliance with
the registration and prospectus delivery
provisions of the Securities Act,
- you did not acquire the new notes in the ordinary
course of your business, or
- you have engaged in, intend to engage in, or have
an arrangement or understanding with any person
to participate in the distribution of the new
notes.
Any holder subject to any of the exceptions above
and each participating broker-dealer that receives
new notes for its own account in the exchange offer
in exchange for old notes that were acquired as a
result of market-making, must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with the resale
of the new notes.
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. We
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.
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<PAGE> 9
DESCRIPTION OF NEW NOTES
The form and terms of the new notes and the old notes will be identical,
except that:
(1) the new notes have been registered under the Securities Act and,
therefore, will not bear legends restricting their transfer; and
(2) the holders of the new notes will not be entitled to further
registration rights under the registration rights agreement.
The new notes will evidence the same debt as the old notes and will be
entitled to the benefits of the indenture under which the old notes were issued.
The exchange offer will be considered completed once we deliver to the
exchange agent new notes in the same aggregate principal amount as the aggregate
principal amount of old notes that are validly tendered 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 our
existing and future unsecured and unsubordinated
debt including the 1997 Notes and the March 1998
Notes (each as defined) and senior to all our
existing and future subordinated debt. The old
notes and the new notes will be junior to all our
secured debt to the extent of the value of the
assets securing such debt and structurally
subordinated to indebtedness of our subsidiaries.
If our December 31, 1998 balance sheet were
restated to give effect to the acquisition of
Hiway, we would have had:
- approximately $16.1 million of secured
indebtedness outstanding to which holders of the
notes would be effectively subordinated in right
of payment; and
- approximately $15.8 million of subsidiary
indebtedness to which holders of notes would be
structurally subordinated; $10.8 million of which
is included in the secured long-term figure
above.
See "Description of the Notes -- General."
Sinking Fund............... None.
Optional Redemption........ On or after December 1, 2003, we 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, we 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, we 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, we
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would be required to repay any funds drawn under a
bank facility in the event of a change of control.
See "Risk Factors -- We may not have the ability to
raise the funds necessary to finance the change of
control offer which may be required by the
indenture" and "Description of the Notes -- Certain
Covenants -- Change of Control."
Certain Covenants.......... The indenture governing the new notes will, among
other things, restrict our ability to:
- borrow money;
- make restricted payments;
- permit liens to exist;
- change our 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 our obligation under
the registration rights agreement. We will have no
further obligations to register any of the old
notes not tendered once the exchange offer is
completed. See "Risk Factors -- There may be
adverse consequences if you fail to exchange your
old notes."
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SUMMARY CONSOLIDATED FINANCIAL DATA
(Amounts in Thousands, Except Share Data)
The summary historical consolidated financial data as of December 31, 1998,
and for the period from inception (March 1, 1996) to December 31, 1996 and the
years ended December 31, 1997 and 1998 have been derived from our audited
Consolidated Financial Statements included elsewhere in this prospectus.
The information contained below should be read in conjunction with the
"Selected Consolidated Financial and Operating Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
Consolidated Financial Statements and the notes thereto included elsewhere in
this prospectus. Results of operations for the period from inception to December
31, 1996 and the year ended December 31, 1997 and 1998 are not necessarily
indicative of results of operations for future periods. Our development and
expansion activities, including acquisitions, during the periods shown below may
significantly affect the comparability of this data from one period to another.
The unaudited pro forma balance sheet and statement of operations give
effect to the Hiway acquisition as if it had occurred on December 31, 1998 for
balance sheet purposes and on January 1, 1998 for statement of operations data
purposes.
We define EBITDA as earnings (loss) from operations before interest, taxes,
depreciation, amortization and provision for loss on write-offs of investments
in Internet service providers and fixed assets and includes non-cash stock
option compensation and severance costs. The primary measure of operating
performance is net earnings (loss) and not EBITDA. Although EBITDA is a measure
commonly used in our industry, it should not be considered 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, our definition of
EBITDA may not be comparable to other similarly titled measures of other
companies.
For purposes of presenting capital expenditures, we have excluded equipment
and leasehold improvements acquired in our business acquisitions.
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD FROM DECEMBER 31, 1998
INCEPTION -------------------------
(MARCH 1, 1996) TO YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997 HISTORICAL PRO FORMA
------------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue............................................. $ 2,365 $ 35,692 $ 120,653 $ 190,058
Total costs and expenses.................................. 8,645 75,981 211,671 318,520
------- ---------- ----------- -----------
Loss from operations...................................... $(6,280) $ (40,289) $ (91,018) $ (128,462)
======= ========== =========== ===========
Interest expense and other................................ $ (115) $ (11,826) $ (35,946) $ (37,432)
======= ========== =========== ===========
Loss before extraordinary item............................ $(5,122) $ (46,069) $ (111,854) $ (150,672)
======= ========== =========== ===========
Net loss attributable to common stockholders.............. $(5,145) $ (46,329) $ (122,042)
======= ========== ===========
Loss per common share -- basic and diluted:
Loss per common share before extraordinary item......... $ (5.29) $ (40.47) $ (5.24) $ (5.74)
======= ========== =========== ===========
Loss per common share................................... $ (5.29) $ (40.47) $ (5.71)
======= ========== ===========
Weighted average common shares outstanding -- basic and
diluted................................................. 971,748 1,144,685 21,376,322 26,263,322
OTHER DATA:
EBITDA.................................................... $(5,611) $ (29,665) $ (51,292) $ (52,773)
Capital expenditures...................................... 3,430 14,547 23,058
CASH FLOWS INFORMATION:
Net cash used by operating activities..................... (2,326) (35,323) (64,239)
Net cash used by investing activities..................... (9,123) (130,254) (284,891)
Net cash provided by financing activities................. 77,916 161,772 719,892
</TABLE>
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1997 1997 1997 1997 1998 1998
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QUARTERLY STATEMENT OF
OPERATIONS DATA:
Total revenue............. $ 4,414 $ 8,249 $ 9,624 $ 13,405 $ 21,198 $ 28,541
Total costs and
expenses................ 10,006 17,103 20,365 28,507 35,916 49,868
------- ------- -------- -------- -------- --------
Loss from operations...... $(5,592) $(8,854) $(10,741) $(15,102) $(14,718) $(21,327)
======= ======= ======== ======== ======== ========
Net loss attributable to
common stockholders..... $(4,677) $(9,274) $(13,250) $(19,128) $(28,383) $(26,316)
======= ======= ======== ======== ======== ========
<CAPTION>
THREE MONTHS ENDED
----------------------------
SEPTEMBER 30, DECEMBER 31,
1998 1998
------------- ------------
<S> <C> <C>
QUARTERLY STATEMENT OF
OPERATIONS DATA:
Total revenue............. $ 33,804 $ 37,110
Total costs and
expenses................ 62,944 62,943
-------- --------
Loss from operations...... $(29,140) $(25,833)
======== ========
Net loss attributable to
common stockholders..... $(33,606) $(33,737)
======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31, 1998
DECEMBER 31, -----------------------
1997 ACTUAL PRO FORMA
------------ --------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments........ $ 72,586 $577,387 $ 404,547
Restricted cash and securities.............................. 40,554 14,805 14,805
Goodwill, net............................................... 83,216 236,696 482,700
Total assets................................................ 246,471 933,712 1,026,718
Long-term debt and capital lease obligations, net of current
portions.................................................. 142,321 674,618 679,569
Redeemable preferred stock.................................. 97,249 -- --
Stockholders' equity (deficit).............................. (27,001) 202,681 276,173
</TABLE>
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RISK FACTORS
Before you participate in the exchange offer, you should be aware that
there are various risks, including the ones listed below. You should carefully
consider these risk factors and the other information contained in this
prospectus in evaluating the exchange offer.
WE HAVE A HISTORY OF LOSSES AND LIMITED OPERATING AND FINANCIAL DATA
We have incurred net losses since our inception in March 1996. For the
period from inception to December 31, 1996, we had a loss of $(5.1) million and
for the years ended December 31, 1997 and 1998, we had losses of $(46.1) million
and $(122.0) million, respectively. Because we have a relatively short operating
history, there is little operating and financial data about us and this makes an
evaluation of our business operations and prospects difficult. We have
experienced revenue growth on an annual basis with revenue increasing from $2.4
million from the period of inception (March 1, 1996) to December 31, 1996 to
approximately $35.7 million in 1997, and to approximately $120.7 million in
1998. However, we have incurred losses and experienced negative earnings before
depreciation and amortization, interest income and expense, other income (loss),
income tax expense (benefit), gain on sale of investments, equity in loss of
affiliate and intangible asset write-down ("EBITDA") during each of those
periods. We expect to continue to operate at a net loss and experience negative
EBITDA in the near term as we continue to expand our business and integrate our
operations. We have incurred net losses attributable to common stockholders of
$(5.1) million, $(46.3) million and $(122.0) million and have incurred negative
EBITDA of $(5.6) million, $(29.7) million and $(51.3) million for each of the
years ended December 31, 1996, 1997 and 1998, respectively. At December 31,
1998, we had an accumulated deficit of $(173.5) million. We cannot assure you
that we will be able to achieve or sustain profitability or a positive amount of
EBITDA.
WE EXPECT CONTINUING LOSSES
We expect to incur significant additional losses and to generate negative
operating cash flow in the foreseeable future. We will continue to use
significant amounts of cash as we continue our acquisition and integration
efforts, to build out our national network operations, expand and enhance our
product and service offerings, and further establish our brand name recognition.
The extent to which we experience negative cash flow will depend upon a number
of factors, including the following:
- the number and size of any additional acquisitions and investments;
- the expense and time required to integrate prior and future acquired
operations;
- the time and effort required to capture operating efficiencies;
- our ability to generate increased revenues and cash flow;
- the amount of our expenditures at the corporate and national level; and
- potential regulatory developments that may apply to our operations.
WE CANNOT ASSURE YOU THAT WE WILL BE PROFITABLE
In order to achieve profitability, Verio must develop and market products
and services which gain broad commercial acceptance. We cannot assure you that
we will ever achieve broad commercial acceptance or profitability. Although we
have experienced significant growth in revenues on an annual basis (see above),
we do not believe that this growth rate is necessarily indicative of future
operating results. We cannot assure that we will achieve or sustain positive
operating cash flow or generate income in the future. It is possible that we may
never achieve profitability on a quarterly or annual basis.
WE HAVE SUBSTANTIAL DEBT WHICH MAY IMPACT OUR FUTURE OPERATIONS AND AFFECT OUR
ABILITY TO MEET OUR DEBT OBLIGATIONS
We are highly leveraged and have substantial amounts of outstanding debt.
At December 31, 1998 our total long term debt was approximately $674.6 million
representing 77% of our total capitalization, and our
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interest expense for the year ended December 31, 1998 was approximately $35.9
million. After giving pro forma effect to the acquisition of Best Internet
Communications, Inc. (which does business as Hiway Technologies, Inc. and which
we refer to as Hiway), our total long term debt would be approximately $679.6
million representing 71% of our total pro forma capitalization. In addition, we
have obtained a $70.0 million revolving credit facility from a group of lending
banks. We have not drawn any funds from this credit facility.
High levels of debt could have several important effects on our future
operations. Some of these consequences include the following:
- a substantial portion of our cash flow from operations must be used to
pay interest on our debt and will not be available for other business
purposes; of the $64.2 million cash flow used by our operations for the
year ended December 31, 1998, $35.9 million, or approximately 56%, was
used to pay interest on our debt; and
- covenants imposed under certain of the financing agreements limit our
ability to borrow additional funds, dispose of assets and affects our
flexibility with respect to changes in our business, including possible
acquisitions and capital expenditures.
Our ability to meet our debt obligations and to reduce our total debt
depends on our future operating performance and on economic, financial,
competitive, regulatory and other factors. Many of these factors are beyond our
control. We believe that our existing current assets combined with working
capital from each of operations, existing credit facilities, capital lease
financings and proceeds of future equity or debt financings will be adequate to
meet our financial obligations. We cannot assure, however, that our business
will generate sufficient cash flow due to the various risk factors described or
that future financings will be available to provide sufficient proceeds to meet
these obligations or to service our total debt. In particular, our cash flow may
not be sufficient to pay:
- $13.5 million in annual interest (representing 38% of our total interest
expense for the year ended December 31, 1998) on the $150.0 million
principal amount of 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 we repurchased $50.0 million of the 1997 Notes
held by Brooks Fiber Properties, Inc. in March 1998;
- $18.2 million in annual interest (representing 51% of our total interest
expense for the year ended December 31, 1998) 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 $400.0 million principal amount
of 11 1/4% Senior notes due 2008; or
- any debt obligations we may incur under the credit facility, if drawn
upon.
WE ARE SUBJECT TO RESTRICTIVE COVENANTS THAT LIMIT OUR FLEXIBILITY
Our $70.0 million bank credit facility may only be used if we meet certain
financial tests and prohibits us from paying dividends or repurchasing our
capital stock without the lenders' consent. Failure to comply with these terms
would entitle the secured lenders to foreclose on certain of our assets,
including the capital stock of our subsidiaries and our capacity agreement with
Qwest. 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 credit facility,
as well as the 1997 Notes, the March 1998 Notes and the notes, impose
limitations on our ability to incur additional debt, and therefore may make it
difficult for us to borrow in the future. The restrictive covenants in our
existing financial arrangements other than the Notes are subject to change
without consent of the holders of the notes and hence may become more or less
restrictive in the future if such changes are implemented. The existing
financial arrangements require, and future financing arrangements are likely to
require, that we maintain certain financial ratios and comply with certain
covenants further restricting our ability to incur additional debt, pay
dividends or make other restricted payments, sell assets, enter into affiliate
transactions or take other actions. In addition, our ability to satisfy these
restrictive covenants may be affected by events beyond our control. As a result
we cannot assure you that we will be able to continue to satisfy these
covenants.
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WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN ORDER TO REMAIN COMPETITIVE
Verio depends on a number of different financing sources to fund its growth
and continued losses from operations. However, we cannot assure you that we will
be able to raise such funds on favorable terms. In the event that we are unable
to obtain such additional funds on acceptable terms, we may be unable or
determine not to take advantage of new opportunities or take other actions that
otherwise might be important to our operations.
We expect to make significant capital expenditures in order to maintain our
competitive position and continue to meet the increasing demands for service
quality, availability and competitive pricing. In addition to our continuing
acquisition efforts, we currently expect that our significant capital
expenditures will include the following:
- network equipment;
- network operating centers;
- network monitoring equipment;
- information technology systems; and
- customer support systems.
We believe that we will have a reasonable degree of flexibility to adjust
the amount and timing of these capital expenditures. However, we may need to
raise additional funds in order to take advantage of unanticipated
opportunities, such as acquisition opportunities that may arise in the U.S. and
internationally. In addition, we may need to raise additional funds to develop
new products or otherwise respond to changing business conditions or
unanticipated competitive pressures. We may be required to delay or abandon some
of our planned future expansion or expenditures if we fail to raise sufficient
funds.
OUR OPERATING RESULTS FLUCTUATE AND COULD DECLINE
Our operating results have fluctuated in the past and may fluctuate
significantly in the future depending upon a variety of factors, including the
incurrence of capital costs and the introduction of value-added services and new
services. Additional factors that may contribute to variability of operating
results include:
- the pricing and mix of services we offer;
- our customer retention rate;
- changes in pricing policies and product offerings by our competitors;
- growth in demand for network and Internet access services;
- one-time costs associated with acquisitions and regional consolidation;
and
- general telecommunications services' performance and availability.
We also have experienced seasonal variation in Internet use and, therefore,
revenue streams may fluctuate accordingly. In response to competitive pressures,
we may take certain pricing or marketing actions that could have a material
adverse effect on our business, financial condition and results of operations.
As a result, variations in the timing and amounts of revenues could have a
material adverse effect on our quarterly operating results. Therefore, we
believe that period-to-period comparisons of our operating results are not
necessarily meaningful and cannot be relied upon as indicators of future
performance. If our operating results in any future period fall below the
expectations of securities analysts and investors, the market price of our
securities would likely decline.
OUR ABILITY TO GROW DEPENDS ON OUR ABILITY TO EXPAND OUR SERVICE OFFERINGS AND
DISTRIBUTION CHANNELS
While we continue to seek to deepen and broaden our market presence in the
U.S. and internationally through acquisitions, our success is highly dependent
on the growth of our existing Internet access and Web hosting core service
platforms. We expect to drive this internal growth by expanding and enhancing
our product service base with additional value-added service capabilities and by
establishing further distribution capabilities. To a certain extent we may
develop these further product and distribution capabilities internally, but
expect that primarily we will look to formulate strategic relationships with
various vendors and distribution
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partners. Accordingly, it will be important that we either develop these
capabilities internally or identify suitable potential product and service
vendors and distributors with whom we are able to complete agreements on
acceptable terms. We expect that competition for strategic relationships with
key vendors and potential distributors could be significant, and that we may
have to compete with other companies with greater financial and other resources
to obtain these important relationships. We cannot assure you that we will be
able to identify suitable partnering candidates or be able to complete
agreements on acceptable terms with these parties.
OUR SUCCESS DEPENDS ON OUR SUCCESSFUL INTEGRATION EFFORTS
Our success also depends in large part on our ability to integrate the
operations and management of the independent Internet operations we have
acquired and those we may acquire in the future. If we fail to integrate our
acquisitions successfully this may result in significant operating
inefficiencies, which in turn may adversely affect our operating results. We
have to expend substantial managerial, operating, financial and other resources
to integrate these businesses and implement our business model. In particular,
to integrate our newly acquired Internet operations successfully, we must:
- install and standardize adequate operational and control systems;
- deploy standard equipment and telecommunications facilities;
- employ qualified personnel to provide technical and marketing support in
new as well as existing locations;
- eliminate redundancies in overlapping network systems and personnel;
- incorporate acquired technology and products into our existing service
offerings;
- implement and maintain uniform standards, procedures and policies;
- standardize marketing and sales efforts under the common Verio brand; and
- continue the expansion of our managerial, operational, technical and
financial resources.
The process of consolidating and integrating acquired operations takes a
significant period of time, places a significant strain on resources, and could
prove to be even more expensive and time-consuming than we have predicted. We
may increase expenditures in order to accelerate the integration and
consolidation process with the goal of achieving longer-term cost savings and
improved profitability. These expenses may include the following, among others:
eliminating redundant staffing positions; relocating personnel; canceling
overlapping Internet access contracts; closing down redundant points of presence
facilities; upgrading systems; and integrating these acquired providers' onto
our network, customer care, billing, financial and other national support
systems. For example, we recorded a one-time charge of approximately $1.9
million in 1998 relating to the elimination of 250 redundant positions. We
cannot assure you that our projected long-term cost savings and improvements in
profitability can or will be realized. We also cannot assure you that customer
support resources will be sufficient to manage the growth in our business or
that we will be successful in implementing our expansion program in whole or in
part.
In addition, future acquisitions could materially adversely affect our
operating results as a result of dilutive issuances of equity securities and the
incurrence of additional debt. In addition, the purchase price for many of these
acquired businesses likely will significantly exceed the fair values of the net
assets of the acquired businesses. As a result, material goodwill and other
intangible assets would be required to be recorded which would result in
significant amortization charges in future periods. These charges, in addition
to the financial impact of such acquisitions, could have a material adverse
effect on our business, financial condition and results of operations.
WE FACE CERTAIN PARTICULAR RISKS IN OUR INTEGRATION OF THE HIWAY OPERATIONS
We face certain key risks in successfully completing the integration of the
recently completed acquisition of the Hiway operations, which was a substantial
transaction for Verio. Difficulties we may experience
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associated with the integration of Hiway's operations with our existing business
may have an adverse impact on Verio. The key integration challenges we face in
connection with the Hiway acquisition include:
- the acquired operations, facilities, equipment, service offerings,
networks, technologies, brand names, and sales, marketing and service
development efforts may not be effectively integrated with our existing
operations;
- anticipated cost savings may not be realized;
- integration efforts may divert our resources from our existing business;
- standards, controls, procedures and policies may not be maintained; and
- employees who are key to the acquired operations may choose to leave.
Any of these difficulties could interrupt our business and operations. We
cannot assure you that we will effectively realize any of the anticipated
benefits from the integration of the Hiway acquisition. Specifically with
respect to Hiway, we expect to incur significant integration expenses. Factors
that could increase these costs include: (1) unexpected employee turnover; (2)
unforeseen delays in addressing duplicate facilities and the associated costs of
hiring temporary employees; and (3) 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.
Because the Best/Hiway Merger was accomplished fairly recently, the integration
of the operations of those two companies was not completed prior to our
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 we did not know at the time we executed the
agreement to acquire Hiway. We 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 we will realize any of those
anticipated benefits.
WE FACE RISKS ASSOCIATED WITH ACQUISITIONS GENERALLY
We expect to continue our acquisition and expansion strategy. Additional
acquisitions could have a material impact on the financial information we have
provided. Future acquisitions could materially adversely affect our operating
results as a result of dilutive issuances of equity securities and the
incurrence of additional debt. In addition, the purchase price for many of these
acquired businesses likely will significantly exceed the current fair values of
the net assets of the acquired businesses. As a result, material goodwill and
other intangible assets would be required to be recorded which would result in
significant amortization charges in future periods. These charges, in addition
to the financial impact of such acquisitions, could have a material adverse
effect on our business, financial condition and results of operations.
Up to now, we have recorded all business acquisitions under the purchase
method of accounting. With the acquisition of Hiway, which was completed on
January 5, 1999, we expect to record gross goodwill totaling approximately
$244.0 million, which will be amortized over a ten-year period from the
acquisition date. We cannot assure you of the number, timing or size of future
acquisitions, or the effect that any such acquisitions might have on our
operating or financial results.
THE FINANCIAL INFORMATION CONCERNING BUSINESSES WE ACQUIRE MAY BE INACCURATE
Many of the Internet businesses we have acquired did not have audited
financial statements, and this may be true for subsequent acquisitions as well.
These companies have had varying degrees of internal controls and detailed
financial information. Therefore, the financial information we are able to
provide in this prospectus includes financial information concerning certain
recently completed acquisitions for which audited financial statements may not
be available. Our subsequent audits of these recently acquired companies may
reveal significant issues with respect to revenues, expenses and liabilities,
contingent or otherwise, of any of these providers.
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We have completed valuations of certain of our acquisitions (including
TABNet and Hiway). This process included evaluation of in-process research and
development programs. We could not allocate a meaningful value to, and therefore
will not be recording any charge to operations for, in-process research and
development relating to these acquisitions. We have followed the Commission's
guidelines in the valuation of in-process research and development.
OUR RAPID GROWTH MAY STRAIN OUR RESOURCES
We have been growing and expect to continue to grow rapidly. This rapid
growth has placed, and is likely to continue to place, a significant strain on
our managerial, operating, financial and other resources, including our ability
to ensure customer satisfaction. For example, as our customer base grows, and
their need for Internet bandwidth expands, we will need to acquire substantial
network capacity to support their needs. Our expansion efforts also require
significant time commitments from our senior management and places a strain on
their ability to manage our existing business. We also may be required to manage
multiple relationships with third parties as we expand our value-added service
offerings, including Web hosting. Our future performance will depend, in part,
upon our ability to manage this growth effectively. To that end, we will have to
undertake the following improvements, among others:
- implement additional management information systems capabilities;
- further develop our operating, administrative and financial and
accounting systems and controls;
- improve coordination between our engineering, accounting, finance,
marketing and operations; and
- hire and train additional personnel.
WE DEPEND UPON CHANNEL PARTNERS
We depend on third party channel partners to stimulate demand for our
products and services where we do not have a direct sales force. These channel
partners include computer and telecommunications resellers, value-added
resellers, original equipment manufacturers, systems integrators, Web designers
and advertising agencies. If we fail to gain commercial acceptance in certain
markets channel partners may discontinue their relationships with us. Conflicts
may develop between our direct sales force efforts and those of our channel
partners as well as among different channel partners. These conflicts could
affect our relationship with various channel partners. The loss of channel
partners, the failure of such parties to perform under agreements with us, or
the inability to attract other channel partners with the expertise and industry
experience required to market our products and services could adversely affect
us. Furthermore, sales through channel partners are usually at discounted rates.
Therefore, the resulting revenues and gross margins will be less than if we had
sold the same services directly.
WE FACE RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND EXPANSION
With our recent Web hosting acquisitions of iServer, TABNet, WWW and Hiway,
we now provide Web hosting services to customers in over 170 countries. We
expect to continue to expand in these and other international markets. The rate
of development and adoption of the Internet has been slower outside the U.S.,
and the cost of bandwidth outside the U.S. has been higher, which may adversely
affect our ability to expand operations, and increase our costs of operations
internationally. We cannot assure you that acceptance of the Internet or demand
for Internet access, Web hosting and other value-added Internet services will
increase significantly in any international markets.
We may need to enter into joint ventures or other outsourcing agreements
with third parties, acquire complementary businesses or operations, or establish
or maintain new operations outside the U.S. in order to conduct our foreign
operations successfully. However, we cannot assure you that we will be able to
obtain the permits and operating licenses required to operate, to hire and train
employees or to market, sell and deliver high quality services in these markets.
In addition to the uncertainty as to our ability to expand our
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international presence, there are certain risks inherent in doing business on an
international level. These 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;
- employment laws and practices in foreign countries;
- delays from customs brokers or government agencies;
- differences in technology standards;
- seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world; and
- potentially adverse tax consequences.
We cannot assure you that these factors will not have an adverse effect on
our future international operations. In addition, we cannot assure you that
foreign laws or administrative practice relating to taxation, foreign exchange
or other matters will not change. Any such change could adversely affect us.
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"). We have not commenced any assessment of the effects or
potential impact that the Euro Conversion would have on us. 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. This could adversely affect our investment in
international operations such as WWW.
OUR MARKET IS EXTREMELY COMPETITIVE
The market for Internet access 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:
- national, regional and local Internet service providers;
- global, national, and regional long distance and local exchange
telecommunications companies;
- cable television companies;
- direct broadcast satellite and wireless communications providers;
- on-line service providers; and
- Web hosting providers, and providers of other value-added Internet
services.
Verio believes that the following are the primary competitive factors in
this market:
- Maintaining a secure and reliable national network with sufficient
capacity, quality of service and scalability to support continued growth.
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- Maintaining a knowledgeable and effective sales force and implementing
broad and effective distribution channels.
- Providing knowledgeable and capable technical support personnel, and
prompt and efficient customer care services.
- Maintaining Internet system engineering and other technical expertise.
- Offering competitive prices.
- Making timely introductions of new products and services.
- Having sufficient financial resources.
- Having a recognized and trusted brand name.
Many of our competitors have significantly greater market presence, brand
recognition, and financial, technical, network capacity and personnel resources
than we do. All of the major long distance companies, also known as
interexchange carriers, offer Internet access services and compete with us. The
recent sweeping reforms in the federal regulation of the telecommunications
industry have created greater opportunities for local exchange carriers,
including the regional bell operating companies, to enter the Internet access
market. In order to address the Internet access requirements of the current
business customers of long distance and local carriers, there is a move toward
integrating horizontally through acquisitions of, joint ventures with, and the
wholesale purchase of Internet access from, Internet service providers by these
telecommunications companies. In addition, many of the major cable companies and
other alternative service providers -- such as those companies utilizing
wireless terrestrial and satellite-based service technologies -- have announced
their plans to offer Internet access and related services. Accordingly, we
expect that we will experience increased competition from traditional and
emerging telecommunications providers. Many of these companies, in addition to
their substantially greater network coverage, market presence, and financial,
technical and personnel resources, also have large existing commercial customer
bases. Furthermore, they may have the ability to bundle Internet access with
basic local and long distance telecommunications services. This bundling of
services may have an adverse effect on our ability to compete effectively with
them and may result in pricing pressure on us that would adversely affect our
business, financial condition and results of operations.
The recent deployment and further planned deployment of broadband services
for high speed Internet access by cable and telephone companies through new
technologies such as cable modems and various digital subscriber lines
technologies also creates further competitive pressure in Verio's business.
While these providers initially targeted the residential consumer, more recently
a number of digital subscriber lines providers also have announced their intent
to offer digital subscriber lines services to our target business market. This
may significantly affect the pricing of our Internet access service offerings.
Similar to the co-marketing arrangement which we entered into with NorthPoint
Communications subsequent to December 31, 1998, a number of digital subscriber
lines providers have launched their services in conjunction with Internet
service providers, allowing those providers to offer Internet access over
digital subscriber lines circuits. These digital subscriber lines circuits,
which provide higher speed and lower latency Internet connections than a
standard dial-up phone connection, compete with our dedicated connectivity
offerings.
As we continue to expand internationally, we will encounter new
competitors. In some cases, we will be forced to compete with and buy services
from government-owned or subsidized telecommunications providers. Some of these
providers may enjoy a monopoly on telecommunications services essential to our
business. We cannot assure you that we will be able to purchase these services
at a reasonable price or at all. In addition to the risks associated with our
local competitors, foreign competitors may pose an even greater risk, as they
may possess a better understanding of their local markets and better working
relationships with local infrastructure providers and others. We cannot assure
you that we can obtain similar levels of local knowledge. Failure to obtain that
knowledge could place us at a significant competitive disadvantage.
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WE DEPEND UPON OUR NETWORK INFRASTRUCTURE
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 us to enter into additional agreements with providers of
infrastructure capacity and equipment and support services. We cannot assure you
that any of these agreements can be obtained on satisfactory terms and
conditions. We also anticipate that future expansions and adaptations of our
network infrastructure may be necessary in order to respond to growth in the
number of customers served, increased demands to transmit larger amounts of data
and changes to our customers' product and service requirements. This will
require substantial financial, operational and managerial resources. We cannot
assure you that we will be able to expand or adapt our network infrastructure to
meet the industry's evolving standards or our customers' growing demands and
changing requirements on a timely or cost-effective basis, or at all. Also, we
may not be able to deploy successfully any expanded and adapted network
infrastructure.
OUR NETWORK SYSTEM COULD FAIL OR SHUTDOWN
Our success depends upon our ability to deliver reliable, high-speed access
to the Internet and upon the ability and willingness of our telecommunications
providers to deliver reliable, high-speed telecommunications service through
their networks. Our network, and other networks providing services to us, are
vulnerable to damage or cessation of operations from fire, earthquakes, severe
storms, power loss, telecommunications failures and similar events, particularly
if the events occur within a high traffic location of the network. We have
designed our network to minimize the risk of such system failure, for instance,
with redundant circuits among points of presence facilities to allow traffic
rerouting. In addition, we perform lab and field testing before integrating new
and emerging technology into the network, and we engage in capacity planning.
Nonetheless, we cannot assure that we will not experience failures or shutdowns
relating to individual point of presence facilities or even catastrophic failure
of the entire network.
Hiway historically has offered its customers a service level warranty,
under which Hiway commits that a customer's Web site will be available at least
99.9% of the time in each calendar month for as long as the customer is using
the services. If uptime falls below this level in any month, the customer is
entitled to certain service credits for that month. Verio has not implemented a
policy providing a similar service warranty to our customers generally, although
we may do so in the future based on various competitive factors. To the extent
that Verio or Hiway is providing such a service level warranty in the future, we
could experience a material decline in our revenues in connection with any
significant system downtime experienced by our customers or other material
changes associated with such warranty coverage.
We carry business personal property insurance at both scheduled locations
and unscheduled locations, with a blanket property limit of $10.0 million per
location and business interruption insurance with a blanket limit of $2.0
million per location. This insurance may not be adequate or available to
compensate us. In addition, we generally attempt to limit our liability to
customers by contractually disclaiming liability or limiting liability to a
usage credit based upon the amount of time that the system was down. We cannot
assure, however, that such limitations of liability will be enforceable. In any
event, significant or prolonged system failures or shutdowns could damage our
reputation and cause us to lose our customers.
OUR NETWORK MAY EXPERIENCE SECURITY BREACHES
The ability to provide secure transmission of information over the Internet
is a significant barrier to electronic commerce and communications. We have
implemented certain network security measures, such as limiting physical and
network access to our routers. Nonetheless, we cannot assure that our network
infrastructure will not be vulnerable to computer viruses, break-ins and similar
disruptive problems caused by our customers or other Internet users. Computer
viruses, break-ins or other problems caused by third parties could lead to
interruptions, delays or cessation in service to our customers. Furthermore,
such incidents could deter potential customers and adversely affect existing
customer relationships.
Security problems represent an ongoing threat to public and private data
networks. Attacks upon the security of Internet sites and infrastructure
continue to be reported to organizations such as the CERT
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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 us, and the cost of eliminating these
security breaches could be prohibitively expensive.
WE MAY BE LIABLE TO CUSTOMERS FOR SECURITY BREACHES
The security services that we offer in connection with our customers'
networks cannot assure complete protection from computer viruses, break-ins and
other disruptive problems. Inappropriate use of the Internet by third parties
could also potentially jeopardize the security of confidential information
stored in the computer systems of our customers. Although we attempt to limit
contractually our liability in such instances, the occurrence of these problems
may result in claims against or liability on our part. Such claims, regardless
of their ultimate outcome, could result in costly litigation and adversely
affect our business or reputation or our ability to attract and retain
customers. Moreover, 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
our customer base and revenues.
OUR COSTS WILL INCREASE IF WE FAIL TO MAINTAIN OUR PEERING RELATIONSHIPS
The establishment and maintenance of peering relationships with other
Internet service providers is necessary in order to exchange traffic with other
Internet service providers without having to pay transit costs. The basis on
which the large national Internet service providers 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
Internet service providers develop, we may have to comply in order to maintain
our peering relationships. Failure to maintain peering relationships or
establish new ones, if necessary, would cause additional operating expenditures
which would adversely affect us.
WE DEPEND ON THE INTERNET AND INTERNET INFRASTRUCTURE DEVELOPMENT
Our products and services are targeted toward users of the Internet, which
has experienced rapid growth. Critical issues concerning the commercial use of
the Internet remain unresolved and may impact the growth of Internet use,
especially in our target business market. Despite growing interest in the many
commercial uses of the Internet, many businesses have been deterred from
purchasing Internet access services for a number of reasons, including:
- inconsistent quality of service;
- lack of availability of cost-effective, high-speed options;
- a limited number of local access points for corporate users;
- inability to integrate business applications on the Internet;
- the need to deal with multiple and frequently incompatible vendors;
- 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
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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. 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 are not broadly accepted, our business, operating results and
financial condition will be materially adversely affected. In addition, the rate
of development and adoption of the Internet has been slower outside of the
United States and the cost of bandwidth has been higher. The recent growth in
the use of the Internet has caused frequent periods of performance degradation,
requiring the upgrade of routers and switches, telecommunications links and
other components forming the infrastructure of the Internet by providers and
other organizations with links to the Internet. Any perceived degradation in the
performance of the Internet as a whole could undermine the benefits of our
services. Consequently, the emergence and growth of the market for our services
is dependent on improvements being made to the entire Internet infrastructure to
alleviate overloading and congestion.
WE MUST KEEP UP WITH TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS
The market for Internet access and related services is characterized by
rapidly changing technology, evolving industry standards, changes in customer
needs and frequent new product and service introductions. Our future success
will depend, in part, on our ability to effectively use leading technologies, to
continue to develop our technical expertise, to enhance our current services, to
develop new products and services that meet changing customer needs, and to
influence and respond to emerging industry standards and other technological
changes on a timely and cost-effective basis. We cannot assure that we will be
successful in accomplishing these tasks or that such new technologies or
enhancements will achieve market acceptance. We believe that our ability to
compete successfully is also dependent upon the continued compatibility and
interoperability of our services with products and architectures offered by
various vendors. We cannot assure that we will be able to effectively address
the compatibility and interoperability issues raised by technological changes or
new industry standards. In addition, we cannot assure that services or
technologies developed by others will not render our services or technology
uncompetitive or obsolete. For example, our services rely on the continued
widespread commercial use of Transmission Control Protocol/Internet Protocol
("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. The failure of the market for business-related
Internet solutions to continue to develop would adversely impact our business
financial condition and result of operations.
WE FACE POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH OUR NETWORK
The law relating to liability of Internet service providers for information
carried on or disseminated through their networks is not completely settled. A
number of lawsuits have sought to impose such liability for defamatory speech
and infringement of copyrighted materials. The U.S. Supreme Court has let stand
a lower court ruling which held that an Internet service provider was protected
from liability for material posted on its system by a provision of the
Communications Decency Act. However, the findings in that case may not be
applicable in other circumstances. Other courts have held that online service
providers and Internet service providers may, under certain circumstances, be
subject to damages for copying or distributing copyrighted materials. Certain
provisions of the Communications Decency Act, which imposed criminal penalties
for using an interactive computer service for transmitting obscene or indecent
communications, have been found unconstitutional by the U.S. Supreme Court.
However, on October 21, 1998, 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. We are unable to predict the outcome of this case. The imposition
upon Internet service providers or web server hosts of potential liability for
materials carried on or disseminated through their systems could require us to
implement measures to reduce our exposure to such liability. These measures may
require that we spend substantial
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resources or discontinues certain product or service offerings. Any of these
actions could have a material adverse effect on our business, operating results
and financial condition.
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. For example, the European Union
recently enacted its own privacy regulations. Decisions, laws, regulations and
other activities regarding regulation and content liability may significantly
affect the development and profitability of companies offering on-line and
Internet access services.
We carry an errors and omissions insurance policy. This insurance may not
be adequate or available to compensate us for all liability that may be imposed.
WE MAY BECOME SUBJECT TO GOVERNMENT REGULATION
Although we are not currently subject to direct government regulation other
than regulations applicable to businesses generally, changes in the regulatory
environment relating to the Internet connectivity market could affect our
pricing. For example, proposed regulations at the Federal Communications
Commission 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. We 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 Internet service
providers. Although in an April 1998 Report the FCC determined that Internet
service providers should not be treated as telecommunications carriers and
therefore not regulated, it is expected that future Internet service provider
regulatory status will continue to be uncertain. Indeed, in that report, the FCC
concluded that certain services offered over the Internet such as phone-to-phone
Internet protocol telephony, may be functionally indistinguishable from
traditional telecommunications service offerings and their non-regulated status
may have to be re-examined.
Changes in the regulatory structure and environment affecting the Internet
access market, including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood of competition from regional
bell operating companies or other telecommunications companies, could adversely
affect us. Although the FCC has decided not to allow local telephone companies
to impose per-minute access charges on Internet service providers, and that
decision has been upheld by the reviewing court, further regulatory and
legislative consideration of this issue is likely. In addition, some telephone
companies are seeking relief through state regulatory agencies. Such rules, if
adopted, are likely to have a greater impact on consumer-oriented Internet
access providers than on business-oriented Internet service providers such as
Verio. Nonetheless, the imposition of access charges would affect our costs of
serving dial-up customers and could have a material adverse effect on our
business, financial condition and results of operations.
WE DEPEND UPON SUPPLIERS AND LIMITED SOURCES OF SUPPLY
We rely on other companies to supply certain key components of our network
infrastructure, however, the quantity and quality of components we demand is
available only from limited sources. For example, we currently rely on Cisco
Systems to supply routers critical to our network. We could be adversely
affected if routers from Cisco were to become unavailable on commercially
reasonable terms. Qwest, Sprint, MCI and MFS, which are our competitors, are our
primary providers of data communications facilities and network capacity. We
also are dependent upon local exchange carriers, which often are our
competitors. Local exchange carriers provide telecommunications services and
lease physical space to us for routers, modems and other equipment. We have from
time to time experienced delays in our telecommunications services, which can
lead to the loss of existing or potential customers. We cannot assure that, on
an ongoing basis, we will be able to obtain such services cost-effectively and
on the scale and within the time frames we require, or at all. Failure to obtain
or to continue to make use of such services would have a material adverse effect
on its business, operating results and financial condition.
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WE DEPEND ON KEY PERSONNEL AND COULD BE AFFECTED BY THE LOSS OF THEIR SERVICES
Competition for qualified employees and personnel in the Internet services
industry is intense and there are a limited number of people with knowledge of
and experience in the Internet service industry. The process of locating
personnel with the combination of skills and attributes required to carry out
our strategies is often lengthy. Our success depends to a significant degree
upon our ability to attract and retain qualified management, technical,
marketing and sales personnel and upon the continued contributions of such
people. Our employees may voluntarily terminate their employment with us at any
time. We cannot assure you that we 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.
THERE IS NO PUBLIC MARKET FOR THE NEW NOTES
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 us that they intend to make a market in the new notes, however, they
are not obligated to do so. In addition, such market-making will be subject to
the limits imposed by the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). We cannot assure you 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 not be able 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-yield securities generally. We do
not intend to apply for listing of the new notes on any securities exchange or
on any automated quotation system.
YOU MUST COMPLY WITH RESTRICTIONS OF THE EXCHANGE OFFER
If you fail to follow the proper procedure for the exchange offer, your old
notes may not be exchanged for new notes. 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 the 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."
THERE MAY BE ADVERSE CONSEQUENCES IF YOU FAIL TO EXCHANGE YOUR OLD NOTES
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. 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 with us will terminate.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE
OF CONTROL OFFER WHICH MAY BE REQUIRED BY THE INDENTURE
Upon the occurrence of a change of control as defined in the indenture
governing the notes, we would be required to make an offer to purchase any or
all of the notes at a purchase price equal to 101% of the principal amount plus
accrued and unpaid interest. However, our ability to repurchase the notes upon a
change of control may be limited by the terms of our then existing contractual
obligations and those of our subsidiaries. We may not have adequate financial
resources to effect such a purchase, and there can be no assurance that we would
be able to obtain the necessary resources through a refinancing of the notes to
be purchased or otherwise. If we fail to repurchase all of the notes tendered
for purchase upon the occurrence of a change of control, such failure will
constitute and event of default under the indenture.
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With respect to the sale of assets referred to in the definition of change
of control, the phrase "all or substantially all" as used in the definition
varies according to the facts and circumstances of the subject transaction, has
no clearly established meaning under the relevant law and is subject to judicial
interpretation. Accordingly, in some circumstances there may be a degree of
uncertainty in asserting whether a particular transaction would involve a
disposition of "all or substantially all" of the assets of a person and
therefore it may be unclear whether a change of control has occurred and whether
the notes are subject to an offer to purchase.
The change of control provision may not necessarily afford the holders of
the notes protection in the event of a highly leveraged transaction, including a
reorganization, restructuring, merger or other similar transaction involving
Verio that may adversely affect the holders of the notes. These transactions may
not involve a shift in voting power or beneficial ownership or, even if they do,
may not involve a shift of the magnitude required under the definition of change
of control to trigger such provisions. Except as described under "Description of
Notes -- Change of Control," the indenture governing the notes will not contain
provisions that permit the holders to require us to repurchase or redeem the
notes in the event of a takeover, recapitalization or similar transaction.
OUR BUSINESS MAY BE ADVERSELY IMPACTED BY YEAR 2000 ISSUES
We are 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.
We are currently engaged in a phased process to evaluate our internal
status with respect to the Year 2000 issue. The first phase, systems assessment,
was completed in the fourth quarter of 1998. Phase two, risk assessment and
contingency planning, is expected to be completed during the second quarter of
1999. Phase three, testing and final verification, is expected to be completed
in the third quarter of 1999.
We hired outside consultants and used certain designated employees in our
evaluation of possible Year 2000 problems. To date, we have not discovered Year
2000 issues in the course of our assessment that would have a material adverse
effect on our business, results of operations or financial condition; however,
we cannot assure you that errors or defects would not be discovered in the
future or remain undetected.
Concurrently with the analysis of our internal systems, we have begun to
survey third-party entities with which we transact business, including critical
vendors, suppliers and financial institutions, for Year 2000 compliance. With
respect to the most critical vendors, we are in the process of evaluating the
Year 2000 preparedness of our telecommunications providers, on which we are
reliant for the network services crucial to our business. We expect to complete
this survey in the second quarter of 1999. If we, or any of our key suppliers or
vendors, fail to mitigate internal and external Year 2000 risks, we may
temporarily be unable to provide our services to our customers or engage in
normal business activities which could have a material adverse effect on our
business, financial condition and results of operations.
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THE EXCHANGE OFFER
The following discussion summarizes the provisions of a registration rights
agreement that we entered into with the initial purchasers of the old notes. It
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 Verio.
PURPOSE AND EFFECT
The old notes were sold by us to Salomon Smith Barney Inc., Credit Suisse
First Boston Corporation, Donaldson, Lufkin & Jenrette Securities Corporation
and First Union Capital Markets, as initial purchasers, on November 20, 1998.
The initial purchasers subsequently resold the old notes in reliance on Rule
144A under the Securities Act. We entered into the registration rights agreement
with the initial purchasers, pursuant to which we agreed, with respect to the
old notes and subject to our determination that the exchange offer is permitted
under applicable law, to:
(1) file, on or prior to February 18, 1999, a registration statement
with the Securities and Exchange Commission under the Securities Act
concerning the exchange offer with respect to the notes;
(2) use our best efforts (a) to cause the registration statement to be
declared effective by the Securities and Exchange Commission on or before
May 17, 1999, and (b) to complete the exchange offer on or before June 16,
1999; and
(3) keep the exchange offer 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 our 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 transfer
restrictions. 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 exchange offer.
TERMS OF THE EXCHANGE OFFER
We are offering, upon the terms and subject to the conditions described
below, the registration rights agreement and 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. We 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.
We 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. You
may tender some or all of your old notes in the exchange offer. However, old
notes may be tendered only in integral multiples of $1,000. The new notes will
evidence the same debt as the old notes and will be entitled to the benefits of
the indenture. The form and terms of the new notes are substantially the same as
the form and terms of the old notes, except that:
- the new notes have been registered under the Securities Act and will not
bear legends restricting their transfer; and
- holders of the new notes generally will not be entitled to certain rights
under the registration rights agreement, which rights generally will
terminate upon completion of the exchange offer.
You may withdraw the tender of your old notes 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. See "-- Conditions of the Exchange Offer."
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As of the date of this prospectus, $400.0 million in aggregate principal
amount of the old notes is outstanding. As of March 31, 1999, there was one
registered holder of old notes with 43 Depository Trust Company ("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. We believe 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 Verio.
The exchange agent will act as agent for the tendering holders of old notes
and for the purposes of receiving the new notes from us. 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
unaccepted old notes will be returned, without expense, to the tendering holder
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 we decide in our sole discretion to extend 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, we will notify the exchange agent of
any extension by oral or written notice and will make a public announcement,
each prior to 9:00 a.m., New York City time, on the next business day after the
previously scheduled expiration date.
We reserve the right, in our sole discretion, (1) to delay accepting any
old notes, (2) 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 (3) to amend the terms of the exchange offer in any manner. If the
exchange offer is amended in a manner determined by us to constitute a material
change, we 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, we will notify the exchange agent of any
extension by oral or written notice and will make a public announcement, each
before 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 Securities and Exchange 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 accrued interest 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. Interest accrued on
the old notes at the rate of 11 1/4% per annum, and will cease to accrue on the
day 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 described below and the acceptance by
Verio will constitute a binding agreement between the tendering holder and Verio
upon the terms and subject to the conditions contained in this prospectus and in
the accompanying letter of transmittal. Except as described below, a holder who
wishes to tender old notes for exchange pursuant to the exchange offer must
transmit such old notes,
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together with a properly completed and duly executed letter of transmittal,
including all other documents required by such letter of transmittal, to the
exchange agent at the address set forth on the back cover page of this
prospectus prior to 5:00 p.m., New York City time, on the expiration date. The
method of delivery of old notes, letters of transmittal and all other required
documents is at the election and risk of the holder. If such delivery is by
mail, it is recommended that registered mail, properly insured, with return
receipt requested, be used. Instead of delivery by mail, it is recommended that
the holder use an overnight or hand delivery service. In all cases, sufficient
time should be allowed to ensure timely delivery.
Any financial institution that is a participant in DTC's book-entry
transfer facility system may make book-entry delivery of the old notes by
causing DTC to transfer such old notes into the exchange agent's account in
accordance with DTC's procedures for such transfer. In connection with a
book-entry transfer, a letter of transmittal need not be transmitted to the
exchange agent, provided that the book-entry transfer procedure is made in
accordance with DTC's ATOP (as defined below) procedures for transfer and such
procedures are complied with prior to 5:00 p.m., New York City time, on the
expiration date.
DTC's Automated Tender Offer Program ("ATOP") is the only method of
processing exchange offers through DTC. To accept the 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
are tendered:
(1) 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
(2) 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
U.S. or otherwise be an "eligible guarantor institution" within the meaning
of Rule 17Ad-15 under the Exchange Act (collectively, "eligible
institutions").
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 an eligible institution. 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 be endorsed by the registered holder, with
the signature thereon guaranteed by an eligible institution, or be accompanied
by a bond power, in satisfactory form as determined by us in our sole
discretion, duly executed by the registered holder, with the signature thereon
guaranteed by an eligible institution. The term "registered holder" as used 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 us in our sole discretion, which determination shall be final and
binding. We reserve the absolute right to reject any and all old notes not
properly tendered and to reject any old notes acceptance of which might, in our
judgment or the judgment of our counsel, be unlawful. We also reserve 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 us 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 determined by us. We
will use reasonable efforts to give notification of defects or irregularities
with respect to tenders of old notes for exchange but shall
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not incur any liability for failure to give such notification. Tenders of the
old notes will not be deemed to have been made until such irregularities have
been cured or waived.
If any letter of transmittal, endorsement, bond power, power of attorney or
any other document required by the letter of transmittal is signed by a trustee,
executor, corporation or other person acting in a fiduciary or representative
capacity, such person should so indicate when signing, and, unless waived by us,
proper evidence satisfactory to us, in our sole discretion, of such person's
authority to so act must be submitted.
If you are a beneficial owner of old notes and the old notes are registered
in the name of a broker, dealer, commercial bank, trust company or other
nominee, and you wish to tender old notes in the exchange offer, you should
contact such registered holder promptly and instruct such registered holder to
tender on your behalf. If you are a beneficial owner and you wish to tender
directly, you 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 your name. Beneficial owners should be aware that the transfer
of registered ownership may take considerable time.
By tendering, each registered holder will represent to us that, among other
things:
(1) 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;
(2) 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;
(3) the holder and each beneficial owner acknowledge and agree that any
person participating in the 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 Securities and Exchange Commission in its
no-action letters that are discussed below under "Resales of New Notes;"
(4) 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;
(5) the holder and each beneficial owner understand that a secondary
resale transaction described in clause (3) 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 Securities and
Exchange Commission; and
(6) neither the holder nor any beneficial owner is an "affiliate," as
defined under Rule 405 of the Securities Act, of Verio except as otherwise
disclosed to Verio 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 (1) whose old notes are not
immediately available or (2) 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 described in the letter of transmittal. According to those
procedures:
(a) 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;
29
<PAGE> 31
(b) 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) containing 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
(c) such properly completed and executed documents required by the
letter of transmittal and the tendered old notes in proper form for
transfer (or confirmation of a book-entry transfer of such old notes into
the exchange agent's account at DTC) must be received by the exchange agent
within five New York Stock Exchange trading days after the expiration date.
Any holder who wishes to tender old notes pursuant to the guaranteed
delivery procedures described above must ensure that the exchange agent receives
the notice of guaranteed delivery and letter of transmittal relating to such old
notes prior to 5:00 p.m., New York City time, on the expiration date. DTC
participants may also submit the notice of guaranteed delivery through ATOP.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
We 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
upon satisfaction or waiver of all the conditions to the exchange offer. The new
notes issued in the exchange offer will be delivered promptly after acceptance
of the old notes. For purposes of the exchange offer, we will be considered to
have accepted validly tendered old notes, when, as, and if we have given oral or
written notice 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 we reserve 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 as promptly as
practicable after the expiration or termination of the exchange offer.
WITHDRAWAL RIGHTS
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. To withdraw a tender of old notes in
the exchange offer, a written notice (or for DTC participants, transmission of
notice through ATOP) must be received by the exchange agent, at its address set
forth on the back cover page of this prospectus. Any such notice of withdrawal
must:
(1) specify the name of the person having deposited the old notes to be
withdrawn (the "Depositor");
(2) identify the old notes to be withdrawn (including the certificate
number or numbers and principal amount of such old notes, as applicable);
(3) 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 a form
satisfactory to us in our 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
(4) specify the name in which such old notes are to be re-registered, if
different from the Depositor, pursuant to such documents of transfer.
30
<PAGE> 32
Any questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by us, in our sole discretion. The
withdrawn old notes 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
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.
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 incurred in completing the exchange offer and complying with
the registration rights agreement, will be borne by Verio, including, without
limitation:
(1) all applicable Securities and Exchange Commission, stock exchange or
National Association of Securities Dealers, Inc. ("NASD") registration and
filing fees;
(2) 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;
(3) all applicable expenses we incur 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;
(4) all rating agency fees, if any; and
(5) the fees and disbursements of counsel.
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<PAGE> 33
We estimate that the amount of these fees and expenses will be
approximately $450,000.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers others soliciting
acceptance of the exchange offer. We, 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.
We 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.
ACCOUNTING TREATMENT
The new notes will be recorded at the same carrying value as the old notes,
as reflected in Verio's accounting records on the date of the exchange.
Accordingly, no gain or loss will be recognized by Verio 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 Securities and Exchange
Commission contained in the interpretive letters described below issued to third
parties in other transactions, we believe 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
(1) a broker-dealer who purchased old notes directly from Verio for resale
pursuant to Rule 144A under the Securities Act or any other available exemption
under the Securities Act, or (2) a person that is an affiliate of Verio 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, we
have not sought our own interpretive letter and there can be no assurance that
the Securities and Exchange Commission would make a similar determination with
respect to the exchange offer. Verio 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 Securities and Exchange Commission enunciated
in Morgan Stanley & Co. Incorporated (available June 5, 1991) and Exxon Capital
Holdings Corporation (available May 13, 1989), or interpreted in the Securities
and Exchange Commission's letter to Shearman and Sterling (available July 2,
1993), or similar no-action or interpretive letters. The holder 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 Verio 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 Verio. The foregoing is a summary only of Rule 144 as it may apply to
affiliates of Verio. 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.
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<PAGE> 34
USE OF PROCEEDS
We will receive no cash proceeds from the issuance of the new notes
pursuant to the exchange offer.
The exchange offer is intended to satisfy our obligations under the
registration rights agreement. In consideration for issuing the new notes as
contemplated in this prospectus, we 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 registration
rights. 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
increase our total debt.
The net proceeds from the offering of the old notes (after deducting the
initial purchasers' discounts and expenses) were approximately $389.0 million.
The net proceeds from the offering of the old notes have been and continue to be
used to further our 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
our general working capital purposes. Pending application of the proceeds as
described above, we have invested the net proceeds of the issuance of the old
notes in short-term, interest-bearing, investment-grade securities.
As of February 28, 1999, we had used the net proceeds as follows:
<TABLE>
<S> <C> <C>
- - Acquisitions and investments $184.0 47%
- - General working capital $ 47.1 12%
- - Cash, securities, and short-term investments $157.9 41%
</TABLE>
DIVIDEND POLICY
Verio has never declared or paid any dividends on its common stock and does
not expect to pay dividends in the foreseeable future. Our current policy is to
retain all of our earnings to finance future growth and acquisitions.
Furthermore, the terms of the indentures relating to the notes, the 1997 Notes
and the March 1998 Notes, as well as the $70.0 million revolving credit
facility, place limitations on our ability to pay dividends. Future dividends,
if any, will be at the discretion of our board of directors and will depend
upon, among other things, our operations, capital requirements and surplus,
general financial condition, contractual restrictions and such other factors as
our board may deem relevant. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
33
<PAGE> 35
CAPITALIZATION
(Amounts in Thousands)
The following table sets forth the cash and cash equivalents, restricted
cash and securities, long-term debt and capital lease obligations, and the
capitalization of Verio at December 31, 1998, on:
(1) an actual historical basis; and
(2) a pro forma basis giving effect to the Hiway acquisition as if the
acquisition had occurred on December 31, 1998.
Stockholders' equity does not include 6,601,349 shares of our common stock
reserved for issuance pursuant to outstanding stock options or 1,455,492 shares
issuable upon exercise of outstanding warrants, each as of December 31, 1998.
This table should be read in conjunction with the "Selected Consolidated
Financial Data," our "Consolidated Financial Statements" and notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
------------------------
HISTORICAL PRO FORMA
----------- ----------
<S> <C> <C>
Cash and cash equivalents and short-term investments........ $577,387 $ 404,547
Restricted cash and securities.............................. 14,805 14,805
======== =========
Long-term debt and capital lease obligations, net of current
portions.................................................. 674,618 679,569
-------- ---------
Stockholders' equity:
Common stock, par value $0.001 per share; 125,000,000
shares authorized; 33,146,010 shares outstanding
historical; 38,063,465 shares pro forma; and additional
paid in capital........................................ 376,197 449,689
Accumulated deficit....................................... (173,516) (173,516)
-------- ---------
Total stockholders' equity........................ 202,681 276,173
-------- ---------
Total capitalization.............................. $877,299 $ 955,742
======== =========
</TABLE>
34
<PAGE> 36
SELECTED CONSOLIDATED FINANCIAL DATA
(Amounts in Thousands, Except Share Data)
The selected historical consolidated financial data as of December 31,
1998, and for the period from inception (March 1, 1996) to December 31, 1996 and
the years ended December 31, 1997 and 1998 have been derived from our audited
Consolidated Financial Statements included elsewhere in this prospectus.
The information contained below should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our Consolidated Financial Statements and the notes thereto
included elsewhere in this prospectus. Results of operations for the period from
inception to December 31, 1996 and the year ended December 31, 1997 and 1998 are
not necessarily indicative of results of operations for future periods. Our
development and expansion activities, including acquisitions, during the periods
shown below may significantly affect the comparability of this data from one
period to another.
The unaudited pro forma balance sheet and statement of operations give
effect to the Hiway acquisition as if it had occurred on December 31, 1998 for
balance sheet purposes and on January 1, 1998 for statement of operations
purposes.
We define EBITDA as earnings (loss) from operations before interest, taxes,
depreciation, amortization and provision for loss on write-offs of investments
in Internet service providers and fixed assets and includes non-cash stock
option compensation and severance costs. The primary measure of operating
performance is net earnings (loss) and not EBITDA. Although EBITDA is a measure
commonly used in our industry, it should not be considered 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, our definition of
EBITDA may not be comparable to other similarly titled measures of other
companies.
We have not paid any cash dividends on our common stock since our
inception. For purposes of presenting capital expenditures, we have excluded
equipment and leasehold improvements acquired in our business acquisitions.
For the period ended December 31, 1996, and the year ended December 31,
1997 and 1998, earnings were insufficient to cover combined fixed charges by
$5.8 million, $48.0 million, and $112.4 million, respectively. On a unaudited
pro forma basis, giving effect to the Hiway acquisition, earnings would have
been insufficient to cover combined fixed charges by $150.8 million for the year
ended December 31, 1998. Combined fixed charges consist of interest expense and
that portion of rent expense we believe to be representative of interest (deemed
to be one third of rent expense), adjusted for minority interests.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEAR ENDED
(MARCH 1, 1996) YEAR ENDED DECEMBER 31, 1998
TO DECEMBER 31, DECEMBER 31, -------------------------
1996 1997 HISTORICAL PRO FORMA
---------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Dedicated connectivity................... $ 1,100 $ 16,383 $ 53,274 $ 64,109
Dial-up connectivity..................... 1,139 7,093 22,865 27,534
Enhanced services and other.............. 126 12,216 44,514 98,415
-------- ---------- ----------- -----------
Total revenue.................... 2,365 35,692 120,653 190,058
Costs and expenses:
Cost of service.......................... 974 15,974 54,023 74,611
Selling, general and administrative and
other................................. 7,002 49,383 117,922 168,220
Depreciation and amortization............ 669 10,624 39,726 75,689
-------- ---------- ----------- -----------
Total costs and expenses......... 8,645 75,981 211,671 318,520
-------- ---------- ----------- -----------
Loss from operations....................... (6,280) (40,289) (91,018) (128,462)
</TABLE>
35
<PAGE> 37
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEAR ENDED
(MARCH 1, 1996) YEAR ENDED DECEMBER 31, 1998
TO DECEMBER 31, DECEMBER 31, -------------------------
1996 1997 HISTORICAL PRO FORMA
---------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Other income (expense):
Interest income.......................... 593 6,080 14,628 15,095
Interest expense and other............... (115) (11,826) (35,946) (37,432)
Equity in losses of affiliates........... -- (1,958) -- --
Minority interests....................... 680 1,924 482 127
-------- ---------- ----------- -----------
Loss before extraordinary item........... (5,122) (46,069) (111,854) $ (150,672)
===========
Extraordinary item -- loss related to
debt repurchase....................... -- -- (10,101)
-------- ---------- -----------
Net loss......................... (5,122) (46,069) (121,955)
Accretion of preferred stock to liquidation
value.................................... (23) (260) (87)
-------- ---------- -----------
Net loss attributable to common
stockholders............................. $ (5,145) $ (46,329) $ (122,042)
======== ========== ===========
Loss per common share -- basic and diluted:
Loss per common share before
extraordinary item.................... $ (5.29) $ (40.47) $ (5.24) $ (5.74)
======== ========== =========== ===========
Loss per common share.................... $ (5.29) $ (40.47) $ (5.71)
======== ========== ===========
Weighted average common shares
outstanding -- basic and diluted......... 971,748 1,144,685 21,376,322 26,263,322
======== ========== =========== ===========
OTHER DATA:
EBITDA..................................... $ (5,611) $ (29,665) $ (51,292) $ (52,773)
Capital expenditures....................... 3,430 14,547 23,058
Cash dividends............................. -- -- --
Ratio of earnings to fixed charges......... -- -- --
Cash flows information:
Net cash used by operating activities.... (2,326) (35,323) (64,239)
Net cash used by investing activities.... (9,123) (130,254) (284,891)
Net cash provided by financing
activities............................ 77,916 161,772 719,892
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF DECEMBER 31, 1998
------------------ -----------------------
1996 1997 HISTORICAL PRO FORMA
------- -------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and short-term
investments..................................... $66,467 $ 72,586 $577,387 $ 404,547
Restricted cash and securities.................... -- 40,554 14,805 14,805
Goodwill, net..................................... 8,736 83,216 236,696 482,700
Total assets...................................... 82,628 246,471 933,712 1,026,718
Long-term debt and capital lease obligations, net
of discount..................................... 106 142,321 674,618 679,569
Redeemable preferred stock........................ 76,877 97,249 -- --
Stockholders' equity (deficit).................... (4,055) (27,001) 202,681 276,173
</TABLE>
36
<PAGE> 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and related notes included elsewhere in this
prospectus. We account for investments in affiliates in which we acquire a
minority interest at cost. We account for investments in affiliates in which we
acquire a majority interest, through the acquisition of net assets, common stock
or convertible preferred stock, and where we exercise significant control over
the operations, using purchase accounting. As such, we consolidate the financial
results of these acquired operations with our financial results. This discussion
contains forward-looking statements based on current expectations, which involve
risks and uncertainties. Actual results and the timing of certain events could
differ materially from the forward-looking statements as a result of a number of
factors including those referred to in Risk Factors.
OVERVIEW
Our Company was founded in March 1996. Since then, we have rapidly
established a global presence through acquiring, integrating and growing of
local Internet service providers with a business customer focus. We had,
together with our subsidiaries, total revenue of approximately $120.7 million
for the year ended December 31, 1998. Taking into account the combined revenue
of all majority owned acquired operations as of December 31, 1998, the pro forma
combined revenue for the three-month period ended December 31, 1998 was
approximately $39.9 million. The acquisition of Best Internet Communications,
Inc. (doing business as Hiway Technologies, Inc.) was completed on January 5,
1999. This acquisition would have increased our pro forma combined revenue for
the three months ended December 31, 1998 to approximately $50.4 million.
Our initial strategy was to acquire 51% to 100% of a large regional
Internet service provider, and a minority interest in smaller Internet service
providers within designated geographic regions. We have moved to a strategy of
acquiring 100% of new businesses. During the second quarter of 1998, we
completed the buyout of the remaining equity interests in all but one of the
operations in which we initially acquired less than a 100% interest. Since then,
we have undertaken to consolidate the ownership and management of the acquired
operations into five geographic operating regions. In addition, we have
integrated their network operations, customer support, marketing efforts,
financial and accounting systems, and other back-office functions onto our
national systems, in order to be more efficient. Although we have incurred
significant one-time costs in these consolidation efforts, we expect to
recognize substantial long-term cost savings as a result. We have the
contractual right to effect the buyout of the one remaining affiliate in which
we do not hold 100% ownership. In 1998 we incurred costs of approximately $52.0
million, in the aggregate, in connection with a total of 11 buyouts, and
approximately $116.1 million for acquisitions, which amounts were paid in cash,
shares of Verio stock and options to acquire stock. As a result of these
acquisitions, and the limited amount of fixed assets required to operate an
affiliate, we recorded significant amounts of goodwill in 1998, in the amount of
$171.5 million.
On July 7, 1998, we completed the acquisition of NTX, Inc. (doing business
as TABNet). We paid a purchase price of approximately $45.8 million in cash to
TABNet's shareholders. In January 1999, we closed the Hiway acquisition, for
which we paid total consideration of approximately $176.0 million in cash and
4.92 million fully diluted shares of our common stock to Hiway's shareholders,
option holders and warrant holders. In connection with the Hiway acquisition, we
expect to record additional goodwill in the amount of approximately $244.0
million which will increase goodwill significantly in 1999.
To fund our acquisitions and operations, from inception through December
31, 1998 we raised approximately $320.5 million from equity capital financings,
including approximately $120.8 million (after deducting underwriting discounts,
commissions and expenses) in our initial public offering. This additional
capital was used to fund our acquisitions and operations. We also raised
approximately $100.0 million in connection with the sale of our common stock to
an affiliate of Nippon Telegraph and Telephone Corporation, which occurred
together with our initial public offering in May 1998. We also have raised a
total of $725.0 million in debt, of which $50.0 million has been repaid. In
1997, we 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
37
<PAGE> 39
Fiber Properties, Inc., $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, we sold $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. On November
25, 1998, we sold $400.0 million principal amount of old notes resulting in net
proceeds of approximately $389.0 million. See "-- Liquidity and Capital
Resources."
We have incurred net losses since we were formed. For the period from
inception to December 31, 1996, the year ended December 31, 1997, and the year
ended December 31, 1998, we reported net losses of ($5.1) million, ($46.3)
million, and ($122.0) million, respectively. We expect to continue to incur
significant additional losses. See "Risk Factors -- We expect continuing
losses."
RESULTS OF OPERATIONS
Year Ended December 31, 1997 compared with Year Ended December 31, 1998
The following table presents operating data, as a percentage of total
revenue, for the years ended December 31, 1997 and 1998. This information is
from our Consolidated audited financial statements included in this prospectus.
This information should be read in conjunction with the consolidated financial
statements and notes.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------
1997 1998
---- ----
<S> <C> <C>
Revenue:
Internet connectivity..................................... 66% 63%
Enhanced services and other............................... 34% 37%
---- ----
Total revenue..................................... 100% 100%
Costs and expenses:
Cost of service........................................... 45% 45%
Sales and marketing....................................... 30% 27%
General and administrative and other...................... 108% 70%
Depreciation and amortization............................. 30% 33%
---- ----
Total costs and expenses.......................... 213% 175%
---- ----
Loss from operations.............................. (113)% (75)%
---- ----
Other income (expense):
Interest income........................................... 17% 12%
Interest expense.......................................... (33)% (30)%
Equity in losses of affiliates............................ (5)% --
---- ----
Loss before minority interests and extraordinary
item............................................. (134)% (93)%
Minority interests.......................................... 5% --
---- ----
Loss before extraordinary item.................... (129)% (93)%
Extraordinary item-- loss related to debt repurchase........ -- (8)%
---- ----
Net loss.......................................... (129)% (101)%
==== ====
</TABLE>
REVENUE
The majority of revenue is received from business customers who purchase
Internet connectivity, Web hosting products, and other enhanced services. Verio
offers a broad range of connectivity options to its customers including
dedicated, Digital Subscriber Line ("DSL"), Integrated Services Digital Network
("ISDN"), frame relay and dial-up connections. Connectivity customers typically
pay fixed, recurring monthly service charges plus a one-time setup fee. These
charges vary depending on the type of service, the length of the contract, and
local market conditions. Connectivity customers typically sign a contract for
one
38
<PAGE> 40
year of service. Web hosting customers typically pay fixed, recurring monthly
service charges plus a one-time setup fee. These charges vary depending on the
amount of disk space and transit required by the customer. Other enhanced
services include e-commerce, virtual private networks, security services,
co-location services, consulting and the sales of equipment and customer
circuits. Revenue for all products is recognized as the service is provided.
Amounts billed relating to future periods are recorded as deferred revenue and
amortized monthly as services are rendered.
In 1997 and 1998, connectivity services generated approximately two-thirds
of total revenue. In 1999 and beyond, revenue from Web hosting and other
enhanced services is expected to represent approximately 50% or more of total
revenue. The increase in revenue from Web hosting and other enhanced services is
primarily the result of recent acquisitions that have been concentrated in these
businesses. Verio has experienced some seasonality in its internal revenue
growth, with the period of higher growth being the fall and winter. Verio's
focus is on services that generate recurring revenues from small and mid sized
business customers. Revenues from business customers currently represent
approximately 90% of revenue, and approximately 80% of revenues are recurring.
No single customer represents more than 2% of revenue.
Total revenue increased 238% from $35.7 million for the year ended December
31, 1997 to $120.7 million for the year ended December 31, 1998. Acquisitions
completed after December 31, 1997 contributed significantly to this increase,
adding $41.4 million of the $85.0 million increase.
COST OF SERVICE
Cost of service consists primarily of local telecommunications expense and
Internet access expense. Local telecommunications expense is primarily the cost
of transporting data between Verio's local points of presence and a national
point of presence. Internet access expense is the cost that Verio pays to lease
fiber capacity that it uses to carry its customers' data between national point
of presences on the Internet. Prior to being acquired by Verio, most of Verio's
businesses entered into contracts with third parties for Internet access. Verio
is in the process of converting that traffic carried by third parties to its own
network, and expects to be substantially finished by the end of 1999. In March
1998, Verio signed a 15 year agreement with Qwest Communications Corporation
("Qwest") (the "Capacity Agreement") in order to fix and reduce the per-unit
costs of leasing fiber. That contract was amended in 1999 to further reduce the
per-unit costs and to increase Verio's commitment, which is now to spend a
minimum of $160 million over the first 10 years of the contract. While Verio
will continue to use a variety of fiber providers for its national network, it
expects to use Qwest for the majority of its fiber requirements. Verio has the
right to prepay its minimum commitment under this contract. Such capitalized
costs would be amortized over the term of the commitment. The amount of the
prepayment at December 31, 1998 would have been approximately $84.1 million.
Cost of service increased $38.0 million, from $16.0 million for the year
ended December 31, 1997 to $54.0 million for the year ended December 31, 1998,
primarily due to acquisitions. However, as a percentage of revenue, cost of
service remained constant between the two years, at 45%. Verio expects cost of
service to increase in absolute dollars but to decrease as a percentage of total
revenue. This decrease is expected to occur as Verio's revenue mix shifts to
more high margin Web hosting and enhanced services, as traffic is shifted from
third party networks to the Verio network, and as more traffic is carried by
Qwest.
SALES AND MARKETING EXPENSE
Sales and marketing expense consists primarily of salaries, commissions and
advertising. Sales and marketing expense decreased from 30% of total revenue for
the year ended December 31, 1997 to 27% for the year ended December 31, 1998,
due in part to efficiencies gained from the regionalization and nationalization
of certain sales and marketing functions. These savings were partially offset by
increased expenses related to an increase in the number of direct sales
representatives and marketing personnel, and the initiation of a national
advertising campaign.
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GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense consists primarily of salaries and
related benefits, and includes the expenses of general management, engineering,
customer care, accounting, billing, and office space. General and administrative
expense increased $46.0 million, from $38.6 million for the year ended December
31, 1997 to $84.6 million for the year ended December 31, 1998, primarily due to
acquisitions. However, as a percentage of revenue, general and administrative
expense decreased from 108% to 70%, which was the result of efficiencies being
realized by combining the operations of numerous acquisitions. In 1998, Verio
incurred significant one-time expenses in connection with the operational
consolidation and integration of its acquisitions. These expenses included
approximately $1.9 million primarily related to severance costs in connection
with the elimination of approximately 250 positions which are no longer
necessary due to the efficiencies of the national services. These terminations
have begun and will continue through the second quarter of 1999. The remaining
liability for unpaid severance costs totaled approximately $1.2 million at
December 31, 1998.
General and administrative expenses are expected to continue to increase in
absolute dollars but to decrease as a percentage of total revenue as Verio
increases its revenues. Verio's scalable systems limit the number of additional
personnel, and the need for additional office space to support incremental
revenue. One-time integration expenses are expected to continue as the
integration of previously acquired companies is not yet complete, and due to the
cost of integrating future acquisitions.
DEPRECIATION AND AMORTIZATION
Depreciation is provided over the estimated useful lives of assets ranging
from 3 to 5 years using the straight-line method. The excess of cost over the
fair value of net assets acquired, or goodwill, is amortized using the
straight-line method over a ten-year period. Additional acquisitions and
investments are expected to cause depreciation and goodwill amortization to
increase significantly in the future.
OTHER EXPENSES
Interest expense increased from $11.9 million for the year ended December
31, 1997 to $35.9 million for the year ended December 31, 1998, primarily as a
result of the issuance of the 1997 Notes, the March 1998 Notes and the notes.
Interest income increased from $6.1 million for the year ended December 31, 1997
to $14.6 million for the year ended December 31, 1998 due to increased cash
balances resulting from the debt and equity offerings. See "-- Liquidity and
Capital Resources."
In 1998, an extraordinary loss of $10.1 million was recorded in connection
with the refinancing of $50.0 million of the 1997 Notes. See "-- Liquidity and
Capital Resources."
During the year ended December 31, 1997, Verio recognized equity in losses
of affiliates of $2.0 million under the equity method of accounting for
investments owned 50% or less. Such losses were not significant for the year
ended December 31, 1998. See Note 1 to the consolidated financial statements of
Verio.
Period from Inception to December 31, 1996 compared to the Year Ended December
31, 1997
The following table presents operating data as a percentage of total
revenue for the period and year ended December 31, 1996 and 1997. This
information is from our consolidated audited financial statements
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<PAGE> 42
included in this prospectus. This information should be read in conjunction with
the consolidated financial statements and accompanying notes.
<TABLE>
<CAPTION>
PERIOD AND
YEAR ENDED
DECEMBER 31,
--------------
1996 1997
---- ----
<S> <C> <C>
Revenue:
Internet connectivity..................................... 95% 66%
Enhanced services and other............................... 5% 34%
---- ----
Total revenue..................................... 100% 100%
Costs and expenses:
Cost of service........................................... 41% 45%
Sales and marketing....................................... 51% 30%
General and administrative and other...................... 246% 108%
Depreciation and amortization............................. 28% 30%
---- ----
Total costs and expenses.......................... 366% 213%
---- ----
Loss from operations.............................. (266)% (113)%
==== ====
Other income (expense):
Interest income........................................... 25% 17%
Interest expense.......................................... (5)% (33)%
Equity in losses of affiliates............................ --% (5)%
---- ----
Loss before minority interests and extraordinary
item............................................. (245)% (134)%
Minority interests.......................................... 29% 5%
---- ----
Net loss.......................................... (217)% (129)%
---- ----
Number of ISPs consolidated at end of period................ 3 22
==== ====
Number of ISPs consolidated for entire period............... 0 3
==== ====
</TABLE>
REVENUE
Total consolidated revenue was $2.4 million for the period from inception
(March 1, 1996) to December 31, 1996 (the "1996 Period"), compared to $35.7
million for the year ended December 31, 1997. Revenue attributable to
acquisitions completed in 1996 accounted for $2.4 million or 100% of total
revenue for the 1996 Period. The increase in revenue, and in the percentage of
revenue derived from enhanced services, from the 1996 Period to the year ended
December 31, 1997 was primarily due to acquisitions. Acquisitions completed
after December 31, 1996 contributed significantly to this increase, adding $22.3
million of the $33.3 million increase.
COST OF SERVICE
Cost of service increased $15.0 million from $1.0 million for the period
ended December 31, 1996 to $16.0 million for the year ended December 31, 1997,
primarily due to acquisitions. As a percentage of revenue, cost of service
increased from 41% to 45% primarily as a result of the buildout of the national
network and the expense associated with the Internet access contracts that
existed at acquired companies, which are in the process of being canceled as the
traffic is moved onto the national network.
SALES AND MARKETING EXPENSE
Sales and marketing expense consists primarily of salaries, commissions and
advertising. Sales and marketing expenses decreased from 51% of total revenue
for the year ended December 31, 1996 to 30% for the year ended December 31,
1998, due in part to efficiencies gained from the regionalization and
nationalization of certain sales and marketing functions.
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GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense consists primarily of salaries and
related benefits, and includes the expenses of general management, engineering,
customer care, accounting, billing, and office space. General and administrative
expense increased $32.8 million, from $5.8 million for the period ended December
31, 1996 to $38.6 million for the year ended December 31, 1998, primarily due to
acquisitions and the development of our administrative infrastructure. As a
percentage of revenue, General and administrative expense decreased from 246% to
108% primarily due to the significant increase in revenue without a commensurate
increase in general management expenses.
OTHER EXPENSES
During the year ended December 31, 1997, the Company recognized equity in
losses of affiliates in the amount of $2.0, representing losses of those
affiliates in excess of the equity of the common shareholders of the affiliates.
Such losses were not significant in 1996. See Note 1 to the Consolidated
Financial Statements of the Company.
Interest expense increased from $0.1 million in the 1996 Period to $11.8
million for the year ended December 31, 1997 primarily as a result of the
completion of the placement of the 1997 Notes. Interest income increased from
$0.6 million for the period ended December 31, 1996 to $6.1 million for the year
ended December 31, 1997 due to increased cash balances resulting from the 1997
Notes, and the issuance of $20.0 million of Series C Preferred Stock. See
"-- Liquidity and Capital Resources."
INCOME TAXES
As of December 31, 1998, a net operating loss carryforward for federal
income tax purposes of approximately $133.1 million was available to offset
future federal taxable income, if any, through 2018. 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 1996, 1997 or 1998 due to uncertainties regarding the utilization of
the loss carryforward.
STOCK-BASED COMPENSATION
We account for our stock-based compensation plans in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and Related Interpretations. Since inception, we have granted stock
options with exercise prices equal to the fair value of the underlying common
stock, as determined by our board of directors and based on our sales of stock
to third parties and based on quoted market prices subsequent to our initial
public offering. Accordingly, we have 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 initial public offering, we
granted options to employees with exercise prices which were less than $22 per
share, which was the low end of the initial public offering filing range
immediately prior to the initial public offering. We are recording compensation
expense totaling approximately $8.2 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. Compensation expense in 1998
related to these options was $1.9 million. No compensation expense was recorded
in 1996 or 1997.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased from December 31, 1996 to December
31, 1997 primarily due to the acquisition of affiliates and capital
expenditures.
CASH FLOW ACTIVITY
Fiscal 1998 -- Net cash used by operating activities was $64.2 million
during the year ended December 31, 1998, which includes an increase in cash of
$4.5 million related to working capital items. Sources of cash included
approximately $120.8 million net proceeds from our initial public offering,
$100.0 million from
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the sale of common stock to an affiliate of NTT, $175.0 million from the March
1998 Notes and $400.0 million from the old notes. Cash used during 1998 was
primarily for business combinations and capital expenditures, $151.1 million and
$23.1 million, respectively. Verio also used approximately $54.5 million of the
proceeds from the March 1998 Notes to repurchase $50.0 million principal amount
of the 1997 Notes.
Fiscal 1997 -- Net cash used by operating activities was $35.3 million
during the year ended December 31, 1997, which includes an increase in cash of
$0.1 million related to working capital items. Sources of cash included
approximately $20.0 million from the sale of 2.5 million shares of Series C
preferred stock and $150.0 million from the issuance of the 1997 Notes. Cash
used during 1997 was primarily for business combinations and capital
expenditures, $64.0 million and $14.5 million, respectively. Additionally,
approximately $46.6 million was invested in a restricted cash account to service
interest payments on the 1997 Notes.
LIQUIDITY AND CAPITAL RESOURCES
Our business strategy has required and is expected to continue to require
substantial capital for acquisitions and investments, capital expenditures, and
operating losses.
In 1996, we 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, we raised approximately $20.0 million from the sale of Series C
preferred stock, and issued 680,000 shares of Series D-1 preferred stock in
connection with an acquisition.
On June 24, 1997, we completed the placement of $150.0 million principal
amount of the 1997 Notes and attached warrants (the "Warrants"). One hundred and
fifty thousand units were issued, each consisting of $1,000 principal amount of
Notes and eight Warrants. The 1997 Notes mature on June 15, 2004 and interest,
at the annual rate of 13 1/2%, is payable semi-annually in arrears on June 15
and December 15 of each year. Each Warrant entitles the holder thereof to
purchase 1.76 shares of Verio's common stock at a price of $.01 per share, for a
total of 2,112,480 shares of common stock. The Warrants and the 1997 Notes were
separated on December 15, 1997. Concurrent with the completion of the sale of
the 1997 Notes, we were required to deposit funds into an escrow account in an
amount that together with interest is sufficient to fund the first five interest
payments. The 1997 Notes are redeemable at our option commencing June 15, 2002.
The 1997 Notes are senior unsecured obligations ranking equally in right of
payment with all existing and future unsecured and senior indebtedness.
In 1998, on March 25, we completed the placement of $175.0 million
principal amount of the March 1998 Notes. The March 1998 Notes are senior
unsecured obligations ranking equally in right of payment with all existing and
future unsecured and senior indebtedness, and mature on April 1, 2005. Interest
on the March 1998 Notes, at the annual rate of 10 3/8%, is payable semi-annually
in arrears on April 1 and October 1 of each year, commencing October 1, 1998.
The March 1998 Notes are redeemable at our option commencing April 1, 2002.
Verio used approximately $54.5 million of the proceeds from the March 1998 Notes
to repurchase $50.0 million principal amount of 1997 Notes from Brooks Fiber
Properties, Inc. ("Brooks") (the "Refinancing"). Upon consummation of the sale
of the March 1998 Notes and the Refinancing, $13.3 million of escrowed interest
funds were released to us.
At various times during the first four months of 1998, we issued 1,534,513
additional shares of Series D-1 preferred stock in connection with the purchases
of substantially all the remaining unowned interests in our subsidiaries and
affiliates.
On April 6, 1998, we entered into a $57.5 million revolving credit facility
with a group of commercial lending institutions secured by the stock of our
subsidiaries and the Qwest Capacity Agreement. The credit facility was increased
to $70.0 million on September 25, 1998. The credit facility requires no payments
of principal until its maturity on December 31, 1999. The terms of the credit
facility provide for borrowings at a margin of 2% above the London Interbank
Offer Rate. There is a commitment fee of 1/2% per annum on the undrawn amount
of the credit facility and a one-time fee of 1/2% on any amounts drawn. The
last $3.0 million of the credit facility can only be drawn for the payment of
interest. We have made no borrowings under the credit facility.
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The credit facility contains many other restrictions, including limitations
on our ability to:
- engage in businesses other than the Internet service business;
- place liens on our assets; and
- pay dividends.
Furthermore our indebtedness (less cash) may not exceed 2.35 times our
annualized pro forma revenue for the most recent quarter. We currently have the
ability to borrow the full $70.0 million commitment. We are required to pay back
any amounts borrowed under the credit facility with the proceeds of new
indebtedness, certain asset sales, free cash flow in excess of $5.0 million in
any quarter, or the net proceeds from insurance claims.
In 1998, we completed our initial public offering, selling an aggregate of
5,735,000 shares of common stock (including the partial exercise of the
over-allotment option by the underwriters in the initial public offering) for
net proceeds of approximately $120.8 million after deducting underwriting
discounts, commissions and expenses. Concurrently with our initial public
offering, we completed the sale of 4,493,877 shares of common stock to an
affiliate of NTT for net proceeds of approximately $100.0 million.
On November 25, 1998, we sold $400.0 million principal amount of the old
notes, for net proceeds of approximately $389.0 million. Interest at the annual
rate of 11 1/4%, is payable semi-annually in arrears on June 1 and December 1 of
each year, commencing June 1, 1999. We have the option of redeeming the notes
starting from December 1, 2003.
The 1997 Notes, the March 1998 Notes and the notes contain terms, other
than the rate of interest, that are substantially similar. The terms of the
indentures governing these Notes impose significant limitations on our ability
to incur additional indebtedness unless we have issued additional equity, or if
our Consolidated Pro Forma Interest Coverage Ratio (as defined in the
indentures) is greater than or equal to 1.8 to 1.0 prior to June 30, 1999, or
2.5 to 1.0 on or after that date, and if the ratio of our total debt to earnings
before interest, taxes, depreciation and amortization is not higher than 6:1.
The indentures contain many other restrictions, including limitations on
our ability to:
- engage in businesses other than the Internet service business;
- place liens on our assets; and
- pay dividends.
If a change of control with respect to Verio occurs, we are required to
make an offer to purchase all the Notes then outstanding at a price equal to
101% of the respective principal amount of the Notes, plus accrued and unpaid
interest. We are in compliance with the provisions of all of our material debt
agreements. The restrictive covenants in our existing financial arrangements
other than the notes are subject to change without consent of the holders of the
notes and hence may become more or less restrictive in the future if such
changes are implemented.
Verio is highly leveraged and has significant debt service requirements. At
December 31, 1998 our long-term debt was $674.6 million, and the annual interest
expense associated with the 1997 Notes, the March 1998 Notes and the notes is
approximately $76.7 million. The interest expense and principal repayment
obligations associated with our debt could have a significant effect on our
future operations. See "Risk Factors -- We have substantial debt which may
impact our future operations and affect our ability to meet our debt
obligations."
As of December 31, 1998, we had approximately $592.2 million in cash and
cash equivalents and short-term investments (including $14.8 million of
restricted cash). Our business plan currently anticipates investments of
approximately $350.0 million over the next 12 months for capital expenditures,
acquisitions completed since December 31,1998, operating losses and working
capital. This includes approximately $176.0 million for the acquisition of Hiway
which was consummated in January 1999, and $17.5 million that
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<PAGE> 46
was required as an initial payment under our March 1999 agreement with AOL.
Additional required payments to AOL total $25.0 million, and will be paid
between March 2000 and March 2001.
Cash flows used by operations increased from $(35.3) million for the year
ended December 31, 1997 to $(64.2) million for the year ended December 31, 1998.
However, cash flows used by operations as a percentage of revenue improved from
(99%) to (53%) from the year ended December 31, 1997 to the year ended December
31, 1998. We incurred $117.9 million in selling, general and administrative
expenses during the year ended December 31, 1998 as we invested in scaleable
systems, hired and trained sales personnel, and expanded our network. We expect
these investments will result in the ability to add significant additional
revenue at low incremental costs. Although we expect to continue to reduce our
operating losses as a percentage of revenue, there can be no assurance that we
will be able to do so, or that the rate of any reduction in losses will be as
rapid as is expected.
Since we achieved 100% ownership of substantially all of our subsidiaries
and affiliates in the second quarter of 1998, we have focused considerable
effort on, and incurred significant expense in connection with, the integration
of our operations and management. These expenses included approximately $1.9
million primarily related to severance costs in connection with the elimination
of approximately 250 positions that are no longer necessary due to the
efficiencies of our national services. These terminations have begun and will
continue through the second quarter of 1999. The remaining liability for unpaid
severance costs totaled approximately $1.2 million at December 31, 1998. We
expect to continue to incur integration costs related to our network, customer
care, billing and financial systems. While we anticipate that these expenses
will continue to be significant, we also expect to derive significant long-term
benefits as a result of lower incremental costs for local telecommunications
expense, Internet access expense, and general and administrative expenses as our
revenues increase.
Our anticipated expenditures are inherently uncertain and will vary widely
based on many factors including operating performance and working capital
requirements, the cost of additional acquisitions and investments, the
requirements for capital equipment to operate our business, and our ability to
raise additional funds. Accordingly, we may need significant amounts of cash in
excess of our plan, and no assurance can be given as to the actual amounts of
our future expenditures. We are constantly evaluating potential acquisition and
other investment opportunities which could significantly affect our cash needs.
We intend to use a significant portion of our cash for acquisitions, and will
have to increase revenue without a commensurate increase in costs to generate
sufficient cash to enable us to meet our debt service obligations. There can be
no assurance that we will have sufficient financial resources if operating
losses continue to increase or additional acquisition or other investment
opportunities become available.
We expect to meet our capital needs with cash on hand, proceeds from the
sale, or issuance of capital stock, the credit facility, lease financing, and
additional debt. We regularly examine financing alternatives based on prevailing
market conditions and expect to access capital markets from time to time based
upon our current or anticipated financing requirements. In the near term, we
intend to use our excess cash. Over the longer term, we will be dependent on
increased operating cash flow, and, to the extent cash flow is not sufficient,
the availability of additional financing, to meet our debt service obligations.
As an ongoing matter, we evaluate the potential sources of capital that may be
available to us, 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 our stock, and other
factors. Insufficient funding may require us to delay or abandon some of our
planned future expansion or expenditures, which could have a material adverse
effect on our growth and ability to realize economies of scale. In addition, our
operating flexibility with respect to certain business activities is limited by
covenants associated with our indebtedness. There can be no assurance that such
covenants will not adversely affect our ability to finance our future operations
or capital needs or to engage in business activities that may be in our
interest.
NEW ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting ("SFAS") No. 130, Reporting Comprehensive
Income (SFAS 130), No. 131, Disclosures About
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Segments of an Enterprise and Related Information (SFAS 131) and No. 132,
Employers' Disclosures about Pensions and Other Postretirement Benefits. During
1998, the FASB issued SFAS No. 134, Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise and the American Institute of Certified Public Accountants
issued Statement of Position No. 98-5, Reporting on the Costs of Start-up
Activities (SOP 97-5). The adoption of these pronouncements did not and is not
expected to have a significant effect on Verio's financial position, results of
operations or financial reporting.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. This statement establishes
accounting and reporting standards for derivative instruments, including some
derivative instruments embedded in other contracts, and for hedging securities.
To the extent we begin to enter into such transactions in the future, we will
adopt the statement's disclosure requirements in the financial statements for
the year ending December 31, 2000.
THE YEAR 2000 ISSUE
The "Year 2000" problem results from computer programs and systems using
only two digits instead of four to identify the year. Systems that do not
properly recognize such information could generate wrong data or fail. The Year
2000 problem is widespread and complex, as virtually every company's computer
operations could be affected in some way.
We rely upon computer systems, software applications, hardware and other
circuitry which may contain date-sensitive technology in our operations and
administrative support systems. Most of these technologies are
standard-purchased systems that may or may not have been customized for our own
particular applications while other technologies were internally developed. We
also rely upon various vendors and suppliers including telecommunications
providers with which we have interconnection, peering and resale agreements.
Many of our business systems are being replaced as part of our efforts to
integrate our acquisitions. As we evaluate new systems for purchase, we assess
whether they are Year 2000 compliant. We are currently engaged in a phased
process utilizing outside consultants and designated employees to evaluate our
internal status with respect to the Year 2000 issue. The costs and expenses of
these outside consultants and employees have not been material. To date, we have
not discovered any Year 2000 issues that would adversely affect us. We cannot
assure that all Year 2000 issues were discovered or that we will not discover
additional Year 2000 issues that could adversely affect us.
In our first phase, completed in the fourth quarter of 1998, we conducted
an assessment of our national systems in Denver, Colorado, Dallas, Texas and
regional networks and systems in our east operating region, including both
information technology systems and non-information technology systems such as
hardware containing embedded technology, for Year 2000 compliance. The network
systems of our operating regions have similar technology. No significant issues
have been identified. If issues are uncovered in the future, that knowledge will
be directly applied to other operating regions.
Prior to their acquisition by Verio, Hiway hired outside consultants to
evaluate their systems for Year 2000 compliance. Though issues were noted in the
internally developed provisioning systems, none were evaluated as material and
remediation activities are in progress.
We expect to complete phase two of the process during the second quarter of
1999. It will involve a more detailed and broader assessment of our systems'
degree of Year 2000 compliance, covering all operating regions and entities.
Specific risk assessments and contingency planning will be the primary focus of
this phase. We will also develop a fallback plan in the event any critical
systems remain non-compliant by January 1, 2000. As part of phase two, we will
attempt to quantify the impact, if any, of the failure to complete any necessary
corrective action. We cannot currently estimate the magnitude of such impact.
To date, the costs incurred with respect to phase two have not been
material. Future costs are difficult to estimate; however, we do not currently
anticipate that such costs will be material.
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Phase three of our Year 2000 plan will include performing end to end
testing of our supplied services under various scenarios to verify expected
performance of the network under various Year 2000 date failure modes. The
purpose of the testing will be to ensure continuity of service to customers, not
specific elemental component compliance status. This phase is expected to be
final verification of any required updates to Verio's systems and should be
completed in the third quarter of 1999.
We have begun to survey, among others, critical vendors, suppliers and
financial institutions for Year 2000 compliance. We are in the process of
evaluating the Year 2000 preparedness of our telecommunications providers, on
which we rely for the network services crucial to our business. In order to
reduce any adverse impact, we maintain diverse providers for such network
services. However, failure of any one provider may have a material impact on
Verio's operations. We expect to complete this survey in the second quarter of
1999. At this time we cannot estimate the effect, if any, that non-compliant
systems at these entities could have on us, however, it is possible that the
impact will be material.
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BUSINESS
Except for the historical information contained herein, the matters
discussed in this prospectus, and specifically in the sections entitled
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," or otherwise incorporated by reference into this
prospectus are "forward-looking statements" (as such term is defined in the
Private Securities Litigation Reform Act of 1995). These statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. The safe harbor provisions of the
Exchange Act and the Securities Act, apply to forward-looking statements made by
Verio. These forward-looking statements involve risks and uncertainties,
including those identified within "Risk Factors" beginning on page 12 above and
elsewhere in, or incorporated by reference into, this prospectus. The actual
results that Verio achieves may differ materially from any forward-looking
projections due to such risks and uncertainties. These forward-looking
statements are based on current expectations, and Verio assumes no obligation to
update this information. Readers are urged to carefully review and consider the
various disclosures made by Verio in this prospectus and in our other reports
filed with the Securities and Exchange Commission that attempt to advise
interested parties of the risks and factors that may affect Verio's business.
This prospectus contains trademarks of Verio and its affiliates, and may contain
trademarks, trade names and service marks of other parties. References to
"Verio" are to Verio Inc. and its subsidiaries.
BACKGROUND OF OUR BUSINESS
Internet access and value-added Internet services, including Web hosting
and electronic commerce services, represent two of the fastest growing segments
of the telecommunications services market. The availability of Internet access,
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 Internet users.
In order to capitalize on the power of the Internet, businesses must adopt
one or both of the fundamental Internet service platforms: Internet access and
an Internet Web site. Internet access provides a company with the
telecommunications circuits necessary to allow a company to connect to the
Internet, communicate with employees, customers and suppliers and other Internet
users, transfer electronic mail, and access the wealth of information available
over the Internet. A Web site provides a company with a corporate presence on
the Internet. This computer-based site allows a company to post information
about itself that is easily accessible to all Internet users. Businesses are
increasingly adding a variety of enhanced services and applications to their
basic Internet access and Web site platforms, in order to more fully capitalize
on the power of the Internet. These services and applications allow them to more
efficiently communicate company information, expand and enhance their
distribution channels, increase productivity through back-office automation and
reduce costs. Verio expects this trend to continue as high-bandwidth, high
functionality value-added services continue to be developed, improve and
proliferate and as Internet usage continues to expand. For example, once a
company has basic Internet access, by then connecting each of the company's
office locations and providing them with security tools, such as data
encryption, the company can implement a virtual private network permitting its
employees, vendors, customers, and other designated individuals to engage in
secure, private communications over the Internet. Further, by provisioning its
Web site with enhanced application tools, the company can automate business
processes such as sales order entry, shipping, inventory management and customer
service from this site. When conducting electronic commerce over a Web site, a
company typically will add security, shopping cart, and payment processing
capabilities to its basic Web site.
Industry analysts have reported that small and medium sized businesses
represent a potential market of over seven million customers in the U.S. Verio
has specifically targeted the small and medium sized business market for the
provision of our Internet services because:
- A small percentage of this market currently utilizes the Internet, but
that number is increasing rapidly and is expected to be one of the
fastest growing segments of the Internet industry.
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- These businesses have rapidly expanding Internet needs, as they and their
customers look more and more to the Internet for information, as a
standard mode of communication, and to conduct business in increasingly
sophisticated and cost-effective ways.
- These companies often look to an Internet service provider to fulfill
these needs, because they typically lack the technology expertise,
information technology 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 access.
- In selecting an Internet service provider, these businesses often prefer
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.
- Businesses that have outsourced their Internet requirements tend to
become quite dependent on their Internet provider and tend to change
Internet providers relatively infrequently.
The Internet service provider market is segmented into large national or
multinational providers such as Verio, which typically are full service
providers, and regional and local providers which generally offer a smaller
range of services and products and lack the ability to meet all the needs of a
business customer. Full service Internet providers also typically resell
capacity on their network to regional and local providers, who rely on the
larger providers for Internet access. The largest full service providers, like
Verio, have what are referred to as "Tier One" networks, which exchange Internet
traffic cost free at multiple public peering points known as network access
points, as well as through private peering arrangements. As the number of
Internet service providers has grown, the requirements to become a Tier One
network have increased, resulting in a higher barrier to achieving this Tier One
provider status.
OUR BUSINESS STRATEGY
Our business strategy of combining national scale with local presence was
specifically developed to serve the needs of the small and medium sized business
market. In formulating its business strategy, Verio concluded that the large,
national Internet service providers lacked the local presence to provide
customized hands-on support, while the smaller, local Internet service providers
did not have the requisite scale and resources to provide a full range of
services at an acceptable quality and pricing levels. We believe that Verio has
a competitive advantage in serving these business customers because we have
combined the technical expertise and hands-on support, provided through our
local sales and engineering personnel, with the quality and economic efficiency
of our national network, operational infrastructure and financial strength.
Verio's goal is to be the premier, full-service provider of Internet
services to small and medium sized businesses. The key elements of our strategy
in accomplishing this goal are:
- Build Scale, Market Presence and Service Offerings through Acquisitions
and Strategic Relationships. We have rapidly established a global
presence and expanded our customer base by acquiring established Internet
access and enhanced service providers with a business customer focus. We
intend to continue to expand our market presence, strengthen our Internet
access and Web hosting core service platforms, and add additional
value-added service capabilities, both through further acquisitions and
strategic relationships with key product and service partners. Given our
large customer base, broad distribution channels and established core
service strengths in Internet access and Web hosting, we believe that
Verio is an attractive potential acquirer or strategic partner for other
related value-added product and service companies.
- Integrate Operations and Leverage National Infrastructure to Reduce Costs
and Improve Quality. We continue to improve our efficiency, service
reliability, quality and scalability by: (1) integrating the Internet
operations we acquire onto core national service platforms for Internet
access and Web hosting; (2) focusing regional operations on sales,
distribution and customer support; and (3) leveraging a common set of
national systems and support services. We integrate the local networks we
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acquire and connect them to Verio's Tier One national backbone, provide
them with network management and monitoring services from our network
operations center, consolidate point of presence facilities, aggregate
traffic on higher capacity, lower cost telecommunication circuits,
consolidate engineering and network operations staffs, increase network
redundancy and ensure consistency of network operations. Similarly, we
integrate our Web hosting operations onto common national platforms with
regional data centers connected to Verio's Tier One national backbone and
monitored by Verio's network operations center. Through this integration,
we capture economies of scale, drive operational efficiency, ensure
operational control and improve the quality, consistency and scalability
of our services. We have leveraged our scale to negotiate advantageous
national volume purchasing agreements with key vendors such as Cisco,
Qwest and Raptor.
- Build Brand Recognition, Expand Distribution Channels and Leverage Local
Support to Drive Growth. We believe that brand recognition will be an
increasingly important decision factor among small and medium sized
businesses in choosing an Internet service provider. In conjunction with
the integration of our acquired providers, we have re-branded our
consolidated regional operations under the Verio name. We are building
national Verio brand recognition by aggressively marketing our full range
of services through a national advertising campaign using traditional
media, online campaigns and trade shows, strategic co-marketing
relationships, and a coordinated public relations program. Most recently,
in March 1999, we entered into a strategic relationship with AOL, which
we expect will substantially expand Verio's national brand name
recognition. Under this agreement, for a three-year period, Verio has
acquired exclusive rights to market its Web hosting and business-focused
electronic commerce services on AOL's four key on-line media properties
in the U.S.
We currently have over 200 local direct sales executives, over 300
local engineers and customer support technicians, and over 4,000 resellers
and referral partners. We expect to continue to expand this sales and
distribution force and to increase its effectiveness through national
training, sales support, advertising and marketing programs. We also
market our services nationally through direct mail, telemarketing and
online marketing campaigns. In addition, Verio has expanded the marketing
of its services through original equipment manufacturer type relationships
with major telecommunications carriers, such as Nippon Telegraph and
Telephone Corporation (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.
- Develop and Offer Value-Added Products and Services to Increase
Revenues. While basic Internet access and Web hosting constitute the
predominant services offered by Verio today, small and medium sized
businesses are increasingly looking for value-added products and services
that allow them to further leverage the power of the Internet to expand
markets, increase productivity and reduce costs. We believe that our
large existing customer base and strong, balanced position in both the
Internet access and Web hosting service platforms give us a competitive
edge in offering high-margin, value-added Internet services and bundled
packages to meet the evolving needs of our current and future customers.
As a result, we believe that we will be able to derive increasing revenue
from these customers and increase profitability by selling an expanding
array of value-added services, as well as higher functionality Web sites
and additional bandwidth to support these services. Examples of these
Web-based value-added services 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. We currently offer broadband
digital subscriber line circuits as an access option through the
relationship which we commenced with NorthPoint Communications subsequent
to December 31, 1998, and plan to offer additional alternative Internet
access options, as well as intranets and extranets incorporating both
Internet access and Web-hosting capabilities. We also offer value-added
Internet security capabilities and professional consulting services to
support a variety of Internet solutions. We expect to provide these
further value-added services through a combination of
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internal development and packaging, acquisitions and new relationships with
Internet hardware, software and service companies.
THE VERIO ORGANIZATION
Verio conducts its operations with both a national and regional approach.
Initially, we pursued a regional acquisition strategy, acquiring independent,
locally based Internet service providers to establish critical mass and a
widespread market presence in the top metropolitan statistical areas across the
U.S., which we then consolidated into regional operations. In order to provide
services such as Web hosting on a national basis, we have also sought to acquire
enhanced service providers with extensive national operations. Our acquisitions
of iServer, TABNet and Hiway established Verio as the largest Web hosting
company in the world based on the number of domain names hosted, and
significantly increased our technical, marketing and operational strength.
As of December 31, 1998, we had acquired over 45 Internet service
providers, including the funding of start-up operations in the Midwest and Rocky
Mountain regions. We continue to consolidate the ownership and management of
these providers, and to integrate their network operations, customer support,
marketing efforts, financial and accounting systems, and other back-office
functions onto our national systems, in order to maximize operating synergies
and efficiencies. We are now focusing our efforts on expanding our market
presence and our strength in our Internet access and Web hosting core service
platforms, and adding value-added service capabilities. We continue to evaluate
additional potential acquisition and strategic partner candidates.
PRODUCTS AND SERVICES
Verio currently offers a comprehensive range of business Internet services,
including its core Internet access and Web hosting services, as well as a
variety of related value-added products and services that enhance these core
offerings. Verio offers a core suite of products and services nationally, with
additional specific products offered in designated markets based on factors such
as unique needs within a particular market and local telecommunications tariffs.
As its customers needs evolve, Verio intends to continue to develop a broad
range of value-added products and services independently, through acquisition,
and through strategic relationships with key vendors.
Internet Access Services. Verio offers a variety of core Internet access
solutions, providing basic connectivity to the Internet, as well as a suite of
value-added products and services enabling our customers to expand their basic
Internet connectivity capability. For example, these additional services allow
them to send and receive e-mail, or to engage in private, secure data
transmissions between remote offices. These products are offered in bundled and
unbundled packages.
Our core Internet access services currently include:
- Basic Internet access: Our basic Internet access service currently
includes dial-up access at speeds ranging from 28.8 to 56 Kbps,
integrated services digital network providing 64 to 128 Kbps access,
digital subscriber line access providing 144 Kbps to over 1 Mbps, and
frame relay and leased line connectivity at speeds ranging from 28.8 Kbps
to 155 Mbps.
- Hardware products: As we provision access services, we provide necessary
hardware including routers, servers and other products as needed by the
particular customer. Our national purchasing and leasing relationships
with a variety of equipment partners provide improved hardware pricing,
lower cost leasing arrangements and bundled service offerings.
- Software products: Our software products include browsers, set up disks
and other solutions that permit customers to more effectively and easily
navigate and utilize the Internet.
- Configuration services: Our configuration solutions encompass services
such as domain name server support, supplying telecommunication circuits,
Internet protocol address space assignment, router set-up, electronic
mail configuration, router security configuration and other similar
set-up services.
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Our value-added Internet access services currently include:
- E-mail: We provide e-mail services that permit customers to send and
receive electronic mail messages. These services are offered either using
the customer's domain name or though Verio's generic domain name. In
order to provide our customers with the latest developments in e-mail and
messaging services, we are in the process of converting our over 800,000
e-mail boxes to a centralized, state of the art e-mail system supported
by technology licensed to us by Netscape Communications Corporation.
- Virtual Private Networks: Many companies today have private data
communication networks to transfer data between office locations. These
are often referred to as wide area networks, and tend to be built on
expensive leased telecommunication lines. The Internet offers companies a
cost-effective alternative to wide area networks through virtual private
networks, which are meant to provide secure transmission of private
Internet protocol traffic through the Internet. Additionally, many
companies require that their employees have remote access to these
private networks from home or while traveling, which a virtual private
network can also provide. Virtual private network products are available
in hardware, software, and firewall formats. These 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. We currently offer our customers a
number of virtual private network solutions, including Raptor's Firewall,
IRE's SafeNet(TM), and Watchguard's Firebox II(TM), and we continue to
evaluate additional products to meet our customers' needs in this area.
- 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 (1) an ability to
prevent intruders from accessing its corporate network, (2)
authentication of users attempting to gain access to the customer's local
area network or Web site, and (3) encryption services, providing secured
transmission of company data through the Internet. We currently offer a
comprehensive set of firewall products from Raptor, including the
sophisticated Eagle Firewall(TM). Additionally, we offer a "managed"
security solution that provides ongoing detection and prevention of
intrusions. We plan to expand our security product line with new
solutions that simplify, reduce cost, or offer greater functionality as
they become commercially available.
Businesses are increasingly seeking to use the Internet for an expanding
array of telecommunication services. We plan to likewise expand our ability to
serve these more sophisticated Internet access needs by deploying additional
value-added Internet access-based services as they become commercially
available. Such products that are currently under development include Internet
protocol telephony, which permits users to make voice calls on the Internet,
Internet faxing, Internet audio and video conferencing solutions. Additionally,
we are participating in trials for the deployment of new access technologies,
such as wireless access.
Web Hosting Services. A Web site provides a company with a tangible
identity and interactive presence on the Internet. This computer-based site
allows a company to post information about itself that is easily accessible to
all Internet users. Web sites are also the basis for providing electronic
commerce, where a company can advertise and sell its products and services.
Verio offers a comprehensive range of core Web site hosting products, as well as
a growing suite of enhanced web site hosting products including electronic
commerce solutions. Generally, our customers elect to outsource to us the
hardware and software provisioning that is necessary to host a Web site, where
we can provide these services from our highly reliable data center environments.
Our Web site hosting products currently range in price from $14.95 per month to
tens of thousands of dollars per month.
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Our core Web hosting services currently include:
- 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
Verio's expertise and equipment to deploy an effective Web site. Our
basic, standardized Web hosting option offers 6,000 megabytes of data
transfer per month and 30 megabytes of disk storage on computers that are
owned and maintained by Verio in one of its data centers and monitored
seven days a week, twenty-four hours a day. This service level allows
customers to store hyper text markup language (the language used to
create Web pages with links), graphics, video and sound files on Verio's
server. This basic shared server plan generally satisfies customers'
basic bandwidth and disk storage requirements. A majority of our 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, we provide additional services bundled into our shared
server hosting plans. For example, our shared server customers are
provided various Web-based electronic 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 priced shared
server Web hosting offerings, including the proprietary Virtual Server
technology, provide customers additional value-added services,
functionality and resources. Each successive pricing 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.
- Shared Server Support Tools: We have implemented a variety of tools to
allow our shared server 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, point of presence server and simple mail
transfer protocol gateway. In addition, we provide a number of popular
custom gateway interface scripts that allow customers to put into use hit
counters, guest books, mail forms and other useful graphics easily, and
also support custom gateway interface scripts that enable customers to
build additional functionality into their Web sites. We offer numerous
tools which allow a customer to have increased control over managing its
Web site, allowing them to change passwords, set electronic 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 offers dedicated server Web hosting
solutions for larger customers that prefer not to host their Web sites on
a shared server. This solution, which provides substantially more server
and network resources than those available from a shared server, gives
customers the ability to run complex applications without the additional
information technology administration costs and considerations that
customers would experience if they managed their own servers and Web
sites internally. The dedicated server Web hosting solutions provide the
customer with an NT or UNIX-based server that is owned and maintained by
Verio in one of its data centers and monitored seven days a week,
twenty-four hours a day. We maintain spare equipment and back up data
regularly. We offer 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. Our co-location facilities offer customers a secure
location, environmental control, monitoring and a high-speed connection
to the Internet. These facilities typically are designed to provide an
uninterruptible power source, a back-up diesel generator, climate control
and monitoring seven days a week, twenty-four hours a day.
- Domain Name Registration: 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
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more difficult to secure. We are the world leader in providing this important
service, registering more domain names (.com, .net, .org) with Network Solutions
(currently the single designated domain name registrar) than any other company.
For a one-time fee, we 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. We believe that offering this service provides us a
marketing advantage when these domain name registration customers then
select a Web hosting provider. We actively telemarket to new customers
registering a domain name and have a high conversion rate of these
customers to our recurring revenue Web hosting services.
- Electronic Commerce Solutions: Electronic commerce provides businesses
the ability to sell products and services on the Internet. The electronic
commerce or e-commerce capability can be added to an existing Web site or
it can be the basis for a Web site, starting with the customer's product
catalog. The principle basic components of an e-commerce enabled Web site
include:
- a hosted Web site;
- a catalog of the products to be sold from the site, including prices
and inventory -- a secure means of accepting orders from customers
visiting the site;
- a secure means of accepting payment for those orders -- a means of
calculating the appropriate tax and shipping costs attributable to the
order;
- transaction reporting capability; and
- a means of reconciling these transactions with the company's
accounting records.
Verio currently offers a variety of e-commerce packages. Our entry level
"CyberStand" product is designed for a merchant with a very limited number of
products to sell that does not require real time payment clearing. Another more
advanced product is the "eVendor" product which allows a substantially greater
number of products to be offered in the catalog, but still relies on manual
payment processing. The "MarketPlace" product is for the more sophisticated
merchant who desires an unlimited number of products to be sold and requires
secure, on-line real time payment settlement. We have relationships with
numerous providers of the various components of our e-commerce solutions,
including tools for catalog and site creation, merchant accounts, digital
certificates, transaction processing and numerous additional components that are
required to build a completely commerce enabled Web site. Most recently, Verio
entered into an agreement with iMall, Inc., a leading provider of fully
integrated, "one-stop" e-commerce solutions, and a related agreement with First
Data Merchant Services Corporation (FDMS), one of the nation's leading providers
of Internet payment processing solutions, in order to offer complete e-commerce
services to businesses. Verio will offer the iMall/FDMS solution as Verio's
preferred e-commerce service through verio.com, select other Web sites, and its
direct marketing sales forces, as well as marketing the solution to its existing
Web hosting customers. These VerioStore(TM) plans offer small and medium-sized
businesses a complete, affordable and easy way to set up virtual storefronts on
the Web. Based on the comprehensive e-commerce solution jointly developed by
iMall and FDMS, VerioStore will include on-line product catalogs, a search
engine, cash register, shopping cart, shipping and sales tax calculations,
on-line merchant account establishment, and a fully-integrated payment gateway.
In addition, Verio's leading Web-hosting and domain name registration services
are integrated to provide businesses with true one-stop shopping for all the
components of an electronic commerce-enabled Web site. Once online, VerioStore
customers' merchandise will be featured on the Stuff.com shopping portal
operated by iMall, where potential customers can find and purchase their
products. We will continue to invest in creating a greater suite of e-commerce
packages as this market develops.
- Web Site Design: Web site design is the development of the Web site
content that will be displayed on the Web site when it is being viewed on
the Internet. We rely principally on our resellers to create the Web
sites for our customers. In addition to relying on the Web design
services of our resellers, we offer Web design services to a select set
of our customers. This may entail development of a basic Web page through
to the development of a sophisticated e-commerce Web site.
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We believe that more advanced Web-site based application products will
continue to expand as businesses require more sophisticated on-line commerce
capabilities. We are continually seeking to acquire technology from third
parties to incorporate with our existing solutions to provide more and more
functionality to our commerce product offerings, as well as exploring additional
Web-based services through internal development. In particular, our efforts are
focused on expanded Web-site based electronic commerce capabilities, Web-based
faxing and electronic 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. We continue to assess potential opportunities to
extend new offerings as they become available, and to evaluate our ability to
implement these solutions in a cost-effective way while maintaining quality of
service for our customers.
MARKETING
Verio's marketing organization focuses on stimulating demand for Verio's
services and extending Verio's brands, and is responsible for advertising,
marketing communications and public relations. We rely on a combination of
traditional media and online advertising. We focus our traditional media efforts
on advertisements in major business and technical publications, television
commercials, radio spots and direct mail. Our online marketing program consists
of general rotation and keyword-specific Web banner advertisements. We 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 media,
search engine and portal companies such as AOL, Netscape, Yahoo, Excite,
Infoseek, and others. Other marketing vehicles include collateral materials,
trade shows, direct response programs and management of our Web site. Public
relations focuses on cultivating industry analyst and media relationships with
the goal of securing broad media coverage and public recognition of the Verio
brand name.
We have consolidated the operations and marketing efforts of our acquired
operations under the Verio brand name, although in certain instances, where an
acquired operation has established particularly strong brand identity (such as
Hiway and its RapidSite(TM) product offering), we may continue to market
particular products and services under that name. Recently, we have focused
significant efforts in marketing campaigns and brand recognition. We have
undertaken national public relations efforts to raise the awareness and
visibility of Verio through a national print, radio and television advertising
campaign.
Recently, we have undertaken significant marketing efforts to build Verio's
national brand name recognition. We have commenced a joint marketing effort with
NorthPoint Communications to market digital subscriber line services in 21
cities nationwide.
On March 4, 1999, we entered into a strategic agreement with America
Online, Inc. ("AOL"), under which, for a three year period, Verio has acquired
exclusive rights to market its Web hosting and business-focused electronic
commerce services on AOL's four key on-line media properties in the US: AOL,
CompuServe, AOL.COM and AOL's Digital City. The agreement also includes the
transition of nearly 7,000 AOL PrimeHost and CompuServe BusinessWeb customers to
Verio for continued Web hosting service. AOL will receive guaranteed payments
totaling a minimum of $42.5 million from us, and will also participate in future
revenue sharing. Verio will receive significant online advertising and promotion
of a co-branded Verio and AOL Web site that will offer a broad range of Verio
Web hosting products and electronic commerce solutions.
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, online marketing, telemarketing,
value-added resellers and private label resellers.
Direct Sales. We have a direct sales force of more than 200 professionals.
These local sales representatives have a strong Internet technical background,
understand the local telco tariffs and the needs of their local business
community, and are familiar with local companies to assist in implementing
tailored solutions.
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Since these representatives are locally-based, they are able to meet
face-to-face to discuss a particular customer's Internet needs and technical
requirements and develop tailored solutions. We have developed programs at the
national level to attract and train high quality, motivated sales
representatives that have the necessary technical skills, experience and
knowledge. 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, we plan to continue to expand our direct sales force. At the local
level, direct marketing techniques are being used to target customers 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. We work with key vendors to assist in
these direct marketing efforts. We co-market with these vendors through direct
mail programs, joint seminar development and joint trade show involvement.
Through the TABNet acquisition, we acquired a centralized outbound and inbound
telemarketing sales capability targeted at offering Web hosting services.
Online Sales. We have an extensive online marketing program, consisting of
general rotation and keyword-specific Web banner advertisements, which stimulate
interest in and leads for our products and services. Much of this online
activity directs prospects to our online Web sites from which prospects may make
a product selection and order a product online. We are able to generate a
substantial amount of sales of our Web hosting products through this selling
technique as a result of the high degree of automation built into our Web site
provisioning process. Through our recently announced strategic agreement with
AOL, we expect to substantially expand Verio's national brand name recognition
through this major new on-line marketing relationship.
Resellers and Indirect Sales. We believe that indirect sales channels
contribute significantly to our growth, and have developed three primary
reseller partner programs that provide us with a formal indirect distribution
strategy. Through these programs, we have a worldwide indirect distribution
channel with over 4,000 resellers in the U.S. and over 170 other countries.
These programs include our:
- Authorized Solutions Partner (ASP) program: This program offers our
reseller the ability to share in the ongoing revenue stream of customers
they bring to Verio. Authorized Solutions Partners include computer
resellers, value-added resellers, systems integrators and other
organizations focused on providing information technology hardware,
software, and services to the business community. They 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 Partner Program: These partners include organizations such as
Web designers, advertising agencies, and telco resellers. We target
organizations that are less capable of, or interested in, selling
Internet services, or where Internet services fall outside their core
business interests.
- Private Label Partner Program: This is a wholesale program which allows
qualifying organizations to resell our services under their own brand.
The benefits that we derive from these programs including 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, we are working with several national companies to expand our
indirect sales capability. We also intend to pursue additional private label
original equipment manufacturer-like relationships with major telecommunications
carriers, similar to our current arrangement with NTT America. NTT America
recently has launched its branded ArcStar Internet service in the U.S., and is
reselling the full range of Verio services under this brand. We also are party
to this type of agreement with a number of the regional bell operating companies
and a large European telecommunications company.
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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. Verio believes this network is adequate for the provision of
current and future planned access and services needs. Verio's national network
interconnects more than 29 national nodes and over 200 local point of presence
facilities across the United States. By aggregating the bandwidth and capacity
requirements of our acquired operations onto one national network, we continue
to increase our operational control and efficiency, reduce costs, and provide
redundancy and higher quality service. In this way, we are able to address some
of the most significant challenges that an Internet service provider 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 Internet service
providers, 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,
[US MAP]
carrier class facilities at point of presence locations (such as back up power,
fire suppression and climate control), and redundant telecommunications lines.
With our substantial national capacity, network support capabilities, and
peering relationships, Verio has achieved "Tier One" status as one of the
largest national, full service Internet network providers.
National Network. As of December 31, 1998, the national network carried
traffic for 37 of the acquired Internet service providers. The remaining
providers' 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.
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Currently, the national network architecture includes a presence at
selected national exchange points and redundant network nodes to link our
regional networks to the national network. As of December 31, 1998, our network
included connectivity at:
- the major public national exchange points -- MAE West, MAE East and the
NY NAP;
- the Palo Alto Internet Exchange (PAIX);
- NASA Ames; and
- other regional connecting points, including Seattle (Washington);
Portland (Oregon); Los Angeles, 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 locations uses leading router technology. The equipment is
located in facilities leased from a variety of telco providers, including MCI
WorldCom, Sprint and others. These access points are linked, using a nationwide,
high-speed asynchronous transfer mode and clear line network infrastructure
ranging in capacity from DS-3 to OC-12. This network capacity is leased
primarily from Qwest and a variety of other national telecommunications
providers, including Sprint and MCI WorldCom. This combination of clear channel
circuits, asynchronous transfer mode and router architecture makes the network
reliable by diversifying the path of Internet traffic and maintaining redundant
paths. Our regional networks either co-locate at these access nodes or lease
connectivity from a local service provider such as a regional bell operating
company or other local exchange carrier to connect to our equipment.
We are continuing to add national access nodes to serve additional parts of
the Midwest, Southern California, the Southeast and the Northeast, all of which
we currently plan to put on-line during 1999. Multiple national access nodes
facilitate connection of our regional operations to our national network. We
continue to add additional private peering points and access nodes as we acquire
more Internet service providers and expand 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. We have begun the migration of
selected links from asynchronous transfer mode to clear line, over 10,000 miles
of which has been leased from Qwest. We have implemented nationwide OC-3
capacity and, on some routes, OC-12 links to handle our projected traffic
requirements.
In March 1998, we entered into a 15-year capacity and services agreement
with Qwest Communications Corporation, which we amended in December 1998. Under
this agreement, we will have access to long haul capacity and ancillary services
on Qwest's nationwide MacroCapacity(SM) Fiber Network. Initially, the agreement
required that over the first seven years we must purchase, and Qwest must
provide, not less than $100.0 million of capacity and services, at agreed upon
prices. Under the amendment, we agreed to increase that commitment by an
additional $60 million and to extend the term of our minimum commitment from 7
to 10 years. With this extended contract and higher volume of service
commitment, we received improved pricing for our capacity purchases. This
contract provides us with the flexibility to deploy circuits from DS-3 (45
megabits per second) to multiple OC-48 (2.4 gigabits per second) as our customer
needs expand. We have the right to order capacity and services in excess of the
minimum commitment at any time during the 15-year term. We also currently are a
party to a number of other long haul capacity agreements with additional telco
providers. These agreements are for various terms and at varied pricing. We
anticipate that we will satisfy a substantial portion of our capacity and
ancillary services needs under the Qwest agreement, because we believe that the
pricing levels that we are entitled to under the amended agreement will
significantly reduce the per unit costs that we otherwise would pay under our
other existing long haul capacity agreements.
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We believe that the currently installed Cisco and Juniper Networks routers
will be sufficient to support our traffic routing needs up to and including OC-3
and OC-12 speeds. We are investigating and testing various options to support
higher than OC-12 speeds and bandwidth requirements. Our options include
switching, higher capacity and faster routers, or hybrid routing and switching
solutions.
Peering Relationships. Peering is the Internet practice under which
Internet service providers exchange each other's traffic without the payment of
settlement charges. The basis on which the large national providers 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 providers 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.
We believe that substantial traffic volume and national scale will continue to
be the focal criteria necessary to establish and maintain peering relationships.
As a result, it has become increasingly important for companies seeking to take
advantage of peering to have significant traffic, a national network and
monitoring capability.
Verio has established public or private peering relationships with all of
the major national Internet service providers, as well as with many smaller
domestic and international networks, and continues to evaluate additional
private peering proposals. By implementing our own national network and
establishing peering relationships with other national Internet service
providers, we believe we can lower the cost of our Internet transit and increase
the performance and reliability of our network operations. With over 100 peering
partners, including all of the largest Internet service providers, 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. We currently
anticipate that, as our traffic grows, more peering relationships can be
obtained. However, no assurance can be given that peering relationships will
continue to be made available to us. Even if these relationships are not
maintained or established, we believe that it will be more economical for Verio
to maintain an exchange point transit agreement than to pay other national
providers for transit. See "Risk Factors -- We depend upon our network
infrastructure" and "-- Our costs will increase if we fail to maintain our
peering relationships."
Web Hosting Operations. Through the iServer, TABNet and Hiway acquisitions,
we have developed high-performance, reliable, secure and scalable Web hosting
solutions, which we believe provide us with a significant competitive advantage.
These solutions consist of multiple proprietary Web hosting platforms that
incorporate automated functionality and a highly reliable network infrastructure
that includes multiple data centers monitored by our network operations center
seven days a week, twenty-four hours per day. Our strategy in developing our Web
hosting solutions focuses on utilizing proprietary technological innovations
that we integrate with third-party software and hardware to configure integrated
solutions.
Web Hosting Platform. We have established multiple proprietary Web hosting
platforms through our acquisitions. As a result we can efficiently host up to
two thousand Web sites on a single server. Although industry-standard Web
servers can enable Web hosting, we believe that efficiently managing large
numbers of Web sites and users on a single shared server is technically
difficult and requires significant technological innovations. Accordingly, we
have focused our technology development efforts on creating various proprietary
operating system level tools to facilitate a high-density customer to server
ratio. We also have 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 central processing units and
memory resources. Our solution can easily allow server groups to be added
seamlessly and to be monitored centrally wherever they are located. To address
the diverse requirements of our customers, we offer Web hosting services on a
range of operating systems and computing platforms.
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We also have developed proprietary software that allows us to provide our
services on an efficient and cost-effective basis by automating the following
back-end functions:
1. order-taking and processing;
2. customer billing via credit cards, check, bank transfer and accounts
receivable;
3. account provisioning and activation;
4. server management and monitoring;
5. coordination of the electronic mail subsystem to integrate electronic
mail forwarding, multiple electronic mail accounts on a single Web site and
autoresponders;
6. inherent distributor-dealer-customer hierarchy of all data; and
7. support for third-party feature "plug-ins."
In addition, we provide 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 value-added resellers and original equipment
manufacturers to localize for foreign languages and customize the interface
quickly and with minimal effort.
Data Centers. We currently have data centers located in Orem, Utah; San
Francisco and Mountain View, California; Seattle, Washington; Dallas, Texas;
Boca Raton, Florida and Washington, D.C. An upgraded data center in the San
Francisco Bay Area is planned for 1999, and additional east coast data centers
as well as expansions of certain of our existing data centers also are being
planned. Primarily all of Verio's data centers include environmental controls,
back-up generators, Cisco routers and switches, and continuous monitoring
capabilities to ensure high-quality service with minimal interruptions.
National Network Management. We consider world-class network management an
essential capability for network monitoring and expansion, maintaining high
customer satisfaction and improving network quality. We have established a
network operations center to allow continuous monitoring of the network 24 hours
per day, 7 days per week. Our network operations center also provides a single
point of contact for real-time network status information and customer technical
problem resolution. The network operations center is designed to provide
real-time alarming, event correlation, traffic management and forecasting, and
distributed notification of the network events and network status. We use many
leading edge systems to provide the network operations center capabilities. As
of December 31, 1998, we monitored the national network and the local networks
of approximately 27 of the Internet service providers we had acquired as of such
time.
Engineering Support Services. We have negotiated national level telco
contracts with local exchange carriers, such as MCI WorldCom, providing
favorable terms for local transport. We plan to expand national purchasing and
leasing benefits as well as technical planning and support to improve the
performance, reliability and economics of our regional networks. National level
purchasing benefits include both cost and vendor performance issues as well
providing 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 WorldCom and Digital
Equipment Corporation. We are pursuing additional vendor and telco relationships
in an effort to reduce the cost of equipment and improve network quality.
Technical Planning and Support. Our engineering team provides engineering
support for routing configurations, telco management and pricing, development of
our regional and national networks and purchasing and contract negotiation. The
engineering team also works to standardize certain network elements nationally,
improve performance and reduce network costs. Support includes Internet protocol
addressing support, training and technology. This effort of sharing ideas across
our operations is intended to enhance the engineering talent available locally
and to share best practices nationally.
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NATIONAL SUPPORT SERVICES
In addition to our 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. Our customer care combines the responsiveness
and on-site capabilities of our local operations with the scale economies of a
national customer support center. Our network operations center in Dallas,
Texas, enables us to provide responsiveness twenty-four hours per day, seven
days a week 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, we were providing customer
care services to 33 of the providers we had acquired and will offer services to
all of our regional operations as the national customer support center continues
to expand throughout 1999. The support center team is using a leading customer
support trouble ticketing and workflow management system offered by Vantive
Corporation. The system enables us to track, route, and report on customer
issues. It 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, we are able
to monitor network reliability and outage experiences. To date, this information
reflects that the outages experienced by our customers, for the most part, are
minor and attributable to ordinary course of business service interruptions,
telecommunication network capacity demands, and the customer's hardware and
software functionality issues. In certain instances, our customers experienced
downtime and outages in the course of our conversion of systems and processes
associated with our integration and consolidation efforts. While historically
Verio has not, as a general matter, provided service warranties or offered a
standard service credit policy, in the future we may as and to the extent that
it becomes a necessary or desirable commercial practice. To date, Verio has
provided credits resulting from network outages and system failures in certain
circumstances, but the amount of these credits has not been material. Certain of
the entities that we have acquired have offered and implemented various service
credit policies, some of which remain in effect with respect to customers of
those acquired entities. Again, however, credits required as a result of those
policies to date have not been material. We will continue to monitor network
outage experiences, and expect to record appropriate reserves if the level of
outage credits becomes material.
Financial Information Management. We are in the process of converting all
of our acquired Internet service provider 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 our acquired operations were using the financial reporting system and 41
were using the payroll/human resources system. These systems enable us 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 our initiative to implement
continuous improvement methodology and to create a learning organization.
Billing and Collections. We have 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 our acquired
Internet service operations. We are aggressively rolling out this billing
platform to all of our regional operations to centralize our 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 its
initial public offering, NTT acquired 4,493,877 shares of
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Verio's 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 "Material 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, which
took effect upon the completion of NTT's investment. Pursuant to this 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 this 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. NTT America and Verio subsequently
executed a further agreement setting forth the details for implementation of the
specific technical and administrative aspects arising under the outside service
provider 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 Internet service
providers' operations, Verio's early acquisition strategy was to acquire less
than 100% of its Internet service providers. In each of these cases, 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
U.S.-based companies in which it did not initially acquire 100% ownership. With
the completion of these buyouts, Verio then undertook its efforts to consolidate
the management of the acquired operations in order to minimize administrative
costs.
Verio currently holds an approximately 15% fully diluted equity interest in
VIA Internet, Inc. ("VIANet"), which was formed in 1997 to pursue a strategy
similar to that of Verio's outside of the U.S. and Canada. See "Material
Transactions -- 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. Upon the completion of the Hiway
acquisition, Verio acquired the majority and minority equity positions held by
Hiway at that time. Verio has completed the acquisition of the remaining equity
in one of these entities, WWW-Service Online-Dienstleistungen AG, a German Web
hosting company. We may seek to acquire the remaining equity of the other
partially owned international entities in the future. However, we also may
decide to leave some equity in our international subsidiaries in the hands of
local owners in order to retain their continued services and expertise in
managing these distant operations.
COMPETITION
The market for Internet access 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:
- national, regional and local Internet service providers;
- global, national, and regional long distance and local exchange
telecommunications companies;
- cable television companies;
- direct broadcast satellite and wireless communications providers;
- on-line service providers; and
- Web hosting providers, and providers of other value-added Internet
services.
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Verio believes that the following are the primary competitive factors in
this market:
- Maintaining a secure and reliable national network with sufficient
capacity, quality of service and scalability to support continued growth.
- Maintaining a knowledgeable and effective sales force and implementing
broad and effective distribution channels.
- Providing knowledgeable and capable technical support personnel, and
prompt and efficient customer care services.
- Maintaining Internet system engineering and other technical expertise.
- Offering competitive prices.
- Making timely introductions of new products and services.
- Having sufficient financial resources.
- Having a recognized and trusted brand name.
Many of our competitors have significantly greater market presence, brand
recognition, and financial, technical, network capacity and personnel resources
than we do. All of the major long distance companies, also known as
interexchange carriers, offer Internet access services and compete with us. The
recent sweeping reforms in the federal regulation of the telecommunications
industry have created greater opportunities for local exchange carriers,
including the regional bell operating companies, to enter the Internet access
market. In order to address the Internet access requirements of the current
business customers of long distance and local carriers, there is a move toward
integrating horizontally through acquisitions of, joint ventures with, and the
wholesale purchase of Internet access from, Internet service providers by these
telecommunications companies. In addition, many of the major cable companies and
other alternative service providers -- such as those companies utilizing
wireless terrestrial and satellite-based service technologies -- have announced
their plans to offer Internet access and related services. Accordingly, we
expect that we will experience increased competition from traditional and
emerging telecommunications providers. Many of these companies, in addition to
their substantially greater network coverage, market presence, and financial,
technical and personnel resources, also have large existing commercial customer
bases. Furthermore, they may have the ability to bundle Internet access with
basic local and long distance telecommunications services. This bundling of
services may have an adverse effect on our ability to compete effectively with
them and may result in pricing pressure on us that would adversely affect our
business, financial condition and results of operations.
The recent deployment and further planned deployment of broadband services
for high speed Internet access by cable and telephone companies through new
technologies such as cable modems and various digital subscriber lines
technologies also creates further competitive pressure in Verio's business.
While these providers initially targeted the residential consumer, more recently
a number of digital subscriber lines providers also have announced their intent
to offer digital subscriber lines services to our target business market. This
may significantly affect the pricing of our Internet access service offerings.
Similar to the co-marketing arrangement which we entered into with NorthPoint
Communications subsequent to December 31, 1998, a number of digital subscriber
lines providers have launched their services in conjunction with Internet
service providers, allowing those providers to offer Internet access over
digital subscriber lines circuits. These digital subscriber lines circuits,
which provide higher speed and lower latency Internet connections than a
standard dial-up phone connection, compete with our dedicated connectivity
offerings.
PROPERTIES
Verio's corporate headquarters is located in Englewood, Colorado where it
leases approximately 43,400 square feet of office space. Its lease agreement,
which commenced February 1, 1998 is for a term of five years. Verio also has
executed a lease covering approximately 20,700 square feet of space in the
InfoMart in Dallas, Texas, where it maintains its network operations center and
customer support center. That lease expires on June 30, 2002. Verio also has
executed a ten-year lease covering approximately 6,203 square feet
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in Vienna, Virginia, where it maintains a data center and offices for
locally-based personnel. That lease expires on May 31, 2008. Verio also leases
space, typically less than 200 square feet, in various geographic locations to
house network infrastructure and telecommunications equipment. Certain
operational functions are also located in various regional operation offices,
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. Hiway's principal executive offices and data center was
located in Boca Raton, Florida. The lease, which covers rentable area of
approximately 78,971 square feet, commenced on February 1, 1998 and is for a
term of seven years, expiring on January 31, 2005. Verio currently uses this
space to house locally-based personnel and as a data center. Hiway also entered
into a seven year lease for approximately 15,850 square feet of office space in
Mountain View, California. This lease commenced on June 1, 1995 and expires on
May 31, 2002. Verio currently uses this space for a data center and to house
locally-based personnel.
EMPLOYEES
As of December 31, 1998, Verio employed approximately 1,360 people,
including full-time and part-time employees at our corporate headquarters in
Colorado, our network operations and customer support center in Texas and at our
distributed operational offices across the country and around the world. We
consider our employee relations to be good. None of our employees are covered by
a collective bargaining agreement.
TRADEMARKS AND TRADE NAMES
Verio filed for federal trademark protection of "Verio" on November 29,
1996. On September 2, 1998, Verio filed for protection of its service mark "The
New World of Business." These applications are pending and there is no assurance
that they 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. Hiway Technologies(R) and Best Internet
Communications(R) are registered trademarks of Hiway. Hiway(TM), HWAY(TM), A
Home Page(TM) and RapidSite(TM) are trademarks of Hiway. TABNET(R) is a
registered trademark of TABNet. TABNet has applied for federal trademark
protection for the following marks: 1-800-800-WEBSITE(TM), NETANNOUNCE(TM),
NTX(TM), TAB.NET(TM), WHOIS(TM) and WHOIS.NET(TM).
LEGAL PROCEEDINGS
Verio is party to various legal proceedings that have arisen in the
ordinary course of business, none of which is material.
ADDITIONAL INFORMATION
Verio has filed with the Securities and Exchange 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 Securities and Exchange
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,
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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 Securities and Exchange Commission through its Electronic Data
Gathering, Analysis and Retrieval ("EDGAR") system are publicly available
through the Securities and Exchange 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion relates to Verio's exposure to market risk related
to changes in interest rates, and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results may differ materially due to a number of factors
including those set forth under the captions "We have substantial debt which may
impact our future operations and affect our ability to meet our debt
obligations" and "We may need to raise additional capital in order to remain
competitive" in the section titled "Risk Factors."
INTEREST RATE RISK
Verio has limited exposure to financial market risks, including changes in
interest rates. At December 31, 1998, Verio had short-term investments of
approximately $592.2 million. These short-term investments consist of highly
liquid investments in debt obligations of highly rated entities with maturities
of between one and 360 days. These investments are subject to interest rate risk
and will fall in value if market interest rates increase. Verio expects to hold
these investments until maturity, and therefore expects to realize the full
value of these investments, even though changes in interest rates may affect
their value prior to maturity. If interest rates decline over time, this will
result in a reduction of our interest as our cash is reinvested at lower rates.
Verio has debt that is substantial in relation to its stockholders' equity
and cash flow. At December 31, 1998, Verio had long term debt in the aggregate
amount of $674.6 million, representing 77% of total capitalization. A change of
interest rates would not affect our obligations under these agreements.
Increases in interest rates could, however, increase the interest expense
associated with future borrowings and borrowings under our bank credit facility.
FOREIGN CURRENCY RATE RISK
Verio does not currently have any significant foreign currency exposure.
However, a portion of its revenue (less than 10%) is generated from sources
outside the United States. These payment obligations are generally denominated
in local currencies, and any currency devaluation would affect the amount of
revenues that Verio would receive from its international operations. As these
operations only represent a small portion of Verio's revenue, we do not have any
significant overall currency exposure at December 31, 1998. Verio does not hedge
against foreign currency rate changes.
On January 1, 1999, 11 of 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 we are unsure of the potential impact of the Euro Conversion on
our international operations. Based on the size of our international
investments, these fluctuations are not expected to have a material impact.
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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................... 53 Chairman of the Board
Justin L. Jaschke.................... 41 Chief Executive Officer, Director
Herbert R. Hribar.................... 47 President and Chief Operating Officer, Director
James C. Allen....................... 52 Director
Trygve E. Myhren..................... 62 Director
Paul J. Salem........................ 35 Director
George J. Still, Jr. ................ 41 Director
Yukimasa Ito......................... 43 Director
Arthur L. Cahoon..................... 43 Director
Sean G. Brophy....................... 40 Vice President of Corporate Development
James E. Cunningham.................. 42 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.................. 41 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>
The Audit Committee consists of Trygve E. Myhren. The members of the
Compensation Committee are James C. Allen and Trygve E. Myhren. The members of
the Executive Committee are Steven C. Halstedt, Justin L. Jaschke and Herbert R.
Hribar. The members of the Finance Committee are Steven C. Halstedt, Justin L.
Jaschke, Trygve E. Myhren and George J. Still.
All of the officers identified above serve at the discretion of Verio's
board of directors. There are no family relationships between any persons
identified above. There is currently one vacancy on the board. The following are
brief biographies of these individuals.
Steven C. Halstedt has served as Chairman of the board since we were formed
in March 1996. Mr. Halstedt is a co-founder of The Centennial Funds. Mr.
Halstedt has 18 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, Gabriel
Communications, Inc. and WLL International, Inc. He is a 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.
Justin L. Jaschke has served as Chief Executive Officer of Verio since we
were formed in March 1996. He also is a member of the 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
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<PAGE> 68
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 previously was a member of the board of directors of MetroNet
Communications Corp. ("MetroNet"), a local exchange carrier.
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 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.
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<PAGE> 69
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.
George J. Still, Jr. has been a director of Verio since our 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 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 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
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<PAGE> 70
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 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,
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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.
COMMITTEES OF THE BOARD
The 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 board for
review and ratification at the next meeting, except in those cases when the
board has specifically delegated final decision-making authority to the
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 Internet service providers 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
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benefit plans, 401(k) plans, stock option and purchase plans and other forms of
compensation. The Compensation Committee is composed of Messrs. Allen and
Myhren.
The board also has established an Audit Committee consisting of Mr. Myhren.
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 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 board.
DIRECTORS COMPENSATION
Each non-employee director receives an annual retainer fee of $5,000 and a
fee of $1,000 for each meeting of the board attended in person or $500 for each
meeting attended by telephone. The fee for board committee meetings is $500 per
meeting. A director may elect to receive these payments in the form of common
stock. Upon completion of our initial public offering, 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 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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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 $100,000 who were serving as executive officers as of December
31, 1998.
Information shown for fiscal year 1996 covers the period from inception on
March 1, 1996 to December 31, 1996. Salary information for 1996 for Mr. Jaschke,
Mr. DeMarche and Ms. Donelson and for 1997 for Mr. Fritzinger reflects
compensation paid to each in their principal positions commencing on April 1996,
May 1996, October 1996, and June 1997, respectively. Information shown under
"All Other Compensation" represents costs of providing relocation benefits to
Messrs. Hribar and Fritzinger and represents costs of tax reimbursements paid to
Ms. Donelson.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -----------------------
----------------------------- RESTRICTED SECURITIES
FISCAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDS($) OPTIONS(#) COMPENSATIONS($)
- --------------------------- ------ --------- -------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Justin L. Jaschke............................... 1998 221,041 -- -- 300,000 --
Chief Executive Officer 1997 175,003 66,500 85,000 -- --
1996 124,631 44,867 -- 240,000 --
Herbert R. Hribar............................... 1998 125,004 235,998 -- -- 125,000
President and Chief 1997 -- -- -- 350,000 --
Operating Officer 1996 -- -- -- -- --
Chris J. DeMarche............................... 1998 173,541 -- -- 100,000 --
Chief Technical Officer 1997 160,004 57,780 25,000 20,000 --
1996 106,666 38,215 -- 70,000 --
Carla Hamre Donelson............................ 1998 173,541 -- -- 140,000 --
Vice President, General 1997 160,004 60,800 -- 20,000 --
Counsel and Secretary 1996 26,320 13,680 50,000 60,000 42,678
Peter B. Fritzinger............................. 1998 173,541 -- -- 110,000 --
Chief Financial Officer 1997 89,443 31,287 -- 75,000 70,267
1996 -- -- -- -- --
</TABLE>
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 in 1998.
Prior to completing our initial public offering, all options were granted
at an exercise price per share equal to at least the fair market value of our
common stock on the date of grant, as determined by the board. Subsequent to our
initial public offering, all options were granted at an exercise price equal to
the market price of our common stock on the last trading day before the date of
grant.
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 Securities and Exchange 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
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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.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL
NUMBER OF TOTAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM($)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED(#) FISCAL YEAR ($/SHARE) 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>
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. It shows 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. The value of unexercised options at year-end is based
on the December 31, 1998 closing price of $22.375 per share of common stock.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS AT IN-THE-MONEY OPTIONS
SHARES FISCAL YEAR-END(#) AT FISCAL YEAR-END($)
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>
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 with each of Mr.
Jaschke, Mr. Hribar, Mr. DeMarche, Ms. Donelson and Mr. Fritzinger and certain
additional 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 the 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
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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 by any person 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 board, are members of the board, cease for
any reason to constitute at least a majority of the 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 satisfies certain specified conditions;
(d) Any other merger, consolidation or reorganization that at least
two-thirds of the incumbent board determines constitutes a change in
control; and
(e) If a protected officer's employment is terminated prior to a change
in control and the board determines that such termination was at the
request of a third party who has indicated an intention or taken steps to
effect a change in control and who subsequently effectuates a change in
control, or occurred in connection with, or in anticipation of, a change in
control which actually occurs, then a change in control is considered to
have occurred with respect to that protected officer.
Upon termination within 12 months following a change in control, each
protected officer will receive the following compensation and benefits:
(1) If a protected officer's employment with Verio is terminated within
12 months following a change in control by Verio for cause 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 due through the date of termination. 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.
(2) 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) a bonus 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;
(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 in (B). 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 of the compensation
protection agreement, or, if greater, at any time within 90 days
preceding the date of the change in control; and
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(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
Verio's 1996 stock incentive plan was adopted and approved by the board in
May 1996 and by Verio's stockholders in June 1996. In February 1998, the 1996
plan was amended to reserve a total of 2,205,300 shares of common stock for
issuance under this plan. At February 28, 1999, options to purchase 226,023
shares of common stock granted under the 1996 plan had been exercised, options
to purchase 1,610,789 shares of common stock were outstanding and no additional
options to purchase shares of common stock remained available for grant. Of the
226,023 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 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 outstanding options were exercisable at a weighted
average exercise price of $6.13 per share. Outstanding options to purchase an
aggregate of 968,265 shares were held by employees who are not officers or
directors of Verio.
All options granted under the 1996 plan that expire after the date of the
1996 plan amendment without having been exercised increase the number of options
available for grant under the 1998 Stock Incentive Plan and are no longer
available for grant under the 1996 plan. The 1996 plan will terminate in 2006,
unless sooner terminated by the board.
The board has delegated administration of the 1996 plan to its compensation
committee. The compensation committee is made up of two or more non-employee
directors within the meaning under Rule 16b-3 of the Exchange Act. Awards under
the 1996 plan may consist of stock options that qualify under Section 422 of the
Code ("incentive stock options") or stock options that do not qualify under that
provision ("non-qualified stock options").
The compensation committee may grant incentive stock options to employees
and officers of Verio or any of our affiliates, and non-qualified stock options
to employees, officers, directors or consultants of Verio or any of our
affiliates. The compensation committee may set the terms of such grants, subject
to the restrictions in the 1996 plan. Incentive stock option grants are subject
to the following limitations:
- the term of any incentive stock option may not be longer than ten years;
- 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;
- 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;
- the exercise price of incentive stock options may not be less than the
fair market value of the underlying shares on the grant date; and
- 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.
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The exercise price for non-qualified stock options may not be less than 85%
of the fair market value of the underlying shares on the grant date. As of
December 31, 1998, no such below-market grant has been made.
During an optionee's lifetime, only an optionee can exercise an incentive
stock option or non-qualified stock option. He or she cannot transfer such
options other than by will or the laws of descent and distribution. In addition,
with respect to a non-qualified stock option, an optionee may not transfer such
options other than 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 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 the termination, or such longer or
shorter period specified in the option, that portion of the options that is
exercisable at the time of the termination unless such options terminate or
expire sooner by their terms. In the event the optionee becomes disabled, the
options vested as of the date of disability may be exercised prior to the
earlier of their expiration date or 12 months from the date of the optionee's
disability, or 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 as specified in the option.
The 1996 plan provides that if any of the following events occurs, (1) any
surviving corporation shall assume any outstanding options, (2) the options will
continue to be effective, or (3) the options will expire if they are not
exercised prior to such event:
- a dissolution or liquidation of Verio;
- a merger or consolidation in which Verio is not the surviving
corporation;
- a reverse merger in which Verio is the surviving corporation but the
shares of Verio's outstanding common stock immediately prior to the
merger are converted into other property, whether in the form of
securities, cash or otherwise; or
- any other capital reorganization in which our stockholders receive less
than 50% of the outstanding voting shares of the surviving corporation.
1997 California Stock Option Plan
Verio's 1997 stock incentive plan was adopted by the board in February
1997, and approved by Verio's stockholders in April 1997. In February 1998, the
1997 plan was amended, with the approval of the board and our stockholders, to
reserve a total of 795,400 shares of common stock for issuance under this plan.
At February 28, 1999, options to purchase 11,540 shares of common stock had been
exercised under the 1997 plan, options to purchase 430,522 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. The
outstanding options were exercisable at a weighted average exercise price of
$13.41 per share. Outstanding options to purchase an aggregate of 403,022 shares
were held by employees who are not officers or directors of Verio, and the
remaining outstanding options to purchase 70,000 shares are held by Mr.
Johnson's estate.
All options granted under the 1997 plan that expire after the date of the
1997 plan amendment without having been exercised increase the number of options
available for grant under Verio's 1998 Stock Incentive Plan and are no longer
available for grant under the 1997 plan.
The 1997 plan may be administered by the board or the compensation
committee. The 1997 plan provides for the granting to employees of Verio and our
subsidiaries or parent corporations of incentive stock options, and for the
granting to our 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 payment upon exercise. An
optionee cannot transfer his or her options 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
plan must be at least equal to the fair market value, as determined by the
board, of the common stock on the grant date. The exercise price of
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all non-qualified stock options granted under the 1997 plan must be at least 85%
of the fair market value, as determined by the plan administrator, of the common
stock on the grant date. With respect to any participant who owns stock
possessing more than 10% of the voting power or value of all classes of our
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 plan may
not exceed ten years. The payment 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 applicable option agreement.
The 1997 plan provides that if we merge with or into another corporation or
consolidate, sell substantially all of our assets or like transaction involving
Verio in which the stockholders before the transaction do not retain a majority
interest in Verio occurs, 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 plan, the options not otherwise
exercisable will terminate immediately before the completion of the transaction.
The 1997 plan will terminate automatically in 2007 unless it is terminated
sooner. The board has the authority to amend, suspend or terminate the 1997
plan, subject to stockholder approval of certain amendments. However, no action
may be taken which will affect any share of common stock previously issued and
sold or any option previously granted under the 1997 plan without the optionee's
consent.
1998 Stock Incentive Plan
Verio's 1998 stock incentive plan, which was adopted by the board in
February 1998, was amended and restated as of March 19, 1998. Under this plan we
reserved 6,199,300 shares of common stock for issuance under the 1998 incentive
plan, which is increased by:
- any shares of common stock available for future awards under the 1997
plan as of our initial public offering; and
- any shares of common stock represented by awards under the 1996 plan and
the 1997 plan, that are forfeited, expired or cancelled following our
initial public offering.
Since our initial public offering, all further option grants, including
Hiway's options assumed by Verio in the Hiway acquisition, are made solely under
the 1998 incentive plan.
At February 28, 1999, options to purchase 203,307 shares of common stock
had been exercised under the 1998 incentive plan, options to purchase 5,127,741
shares of common stock were outstanding, and no options remained available for
grant. The outstanding options were exercisable at a weighted average exercise
price of $19.31 per share. Outstanding options to purchase an aggregate of
3,231,015 shares were held by employees who are not officers or directors of
Verio.
The purpose of the 1998 incentive plan is to attract and retain the best
available personnel, to provide additional incentive to employees, directors and
consultants of Verio and our related entities and to promote the success of our
business. The 1998 incentive plan provides for the granting to employees of
incentive stock options, and the granting to employees, directors and
consultants of Verio and our related entities of nonstatutory stock options,
stock appreciation rights, dividend equivalent rights, restricted stock,
performance units, performance shares, and other equity-based rights.
With respect to 1998 plan awards granted to directors or officers, the 1998
incentive plan is administered by the board or a committee designated by the
board made up of two or more non-employee directors so that such awards would be
exempt from Section 16(b) of the Exchange Act. With respect to 1998 plan awards
granted to other participants, the 1998 incentive plan is administered by the
board or a committee designated by the board. In each case, the respective plan
administrator shall determine the provisions, terms and conditions of each
award.
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An optionee cannot transfer an incentive stock option other than by will or
the laws of descent or distribution. Each incentive stock option is exercisable
during the lifetime of the optionee only by such optionee. Other 1998 plan
awards shall be transferable to the extent provided in the agreement evidencing
the award.
The exercise price of incentive stock options must be at least equal to the
fair market value of the common stock on the date of grant, and the term of the
option must not exceed ten years. The term of other 1998 plan 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 our
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 plan 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 form of payment for the shares of common
stock upon exercise or purchase of a 1998 plan 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 award.
Where the award agreement permits the exercise or purchase of an award for
a certain period of time following the recipient's termination of service with
Verio, disability or death, such 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 award, whichever occurs first.
Unless terminated sooner, the 1998 incentive plan will terminate
automatically in 2008. The board has the authority to amend, suspend or
terminate the 1998 incentive plan, subject to stockholder approval of certain
amendments. However, no action may be taken which will affect awards previously
granted under the 1998 incentive plan unless agreed to by the affected grantees.
1998 Employee Stock Purchase Plan
Verio's 1998 stock purchase plan was approved by the board in February 1998
and has been approved by the stockholders. The stock purchase plan was amended
and restated as of April 13, 1998. The stock purchase plan is intended to
provide employees with an opportunity to purchase common stock through payroll
deductions under Section 423 of the Code. An aggregate of 3,000,000 shares of
common stock has been reserved for issuance under the stock purchase plan
subject to adjustment in the event of a change in the common stock or capital
structure of Verio. All employees of Verio, its subsidiaries and parent
corporations (as defined in the plan) 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.
Employees of Verio are eligible to participate after they have been employed
with us for six months. 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.
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
our initial public offering, and ends on May 14, 1999. Additional purchase
periods will commence each May 15 and November 15. Accrual periods are generally
six month periods commencing each May 15 and November 15. The initial accrual
period commenced on the effective date of the stock purchase plan and ended on
November 14, 1998. Exercise dates are the last day of each accrual period. The
administrator of the stock purchase plan may elect to shorten the purchase
period then in progress in the event:
(1) we merge with or into another corporation;
(2) sell all or substantially all of our assets; or
(3) or enter into other transactions in which our stockholders before
the transaction own less than 50% of the total combined voting power of
Verio's outstanding securities following the transaction
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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. When the purchase right is
exercised, an authorized deduction from the participant's salary is used to
purchase shares of common stock. The price per share at which shares of common
stock are to be purchased during any accrual period is the lesser of (1) 85% of
the fair market value of the common stock on the date of the grant of the
option, or (2) 85% of the fair market value of the common stock on the exercise
date. The participant's purchase right is exercised in this manner on both
exercise dates arising in the purchase period unless, on the first day of any
accrual period, the fair market value of the common stock is lower than the fair
market value of the common stock on the first day of the purchase period. If so,
the participant's participation in the original purchase period is terminated,
and the participant is automatically enrolled in the new purchase period
effective the same date.
Payroll deductions may range from 1% to 10%, in whole percentage
increments, of a participant's regular base pay and bonuses, exclusive of
overtime, shift-premiums or commissions. Participants may not make direct cash
payments to their accounts. The maximum number of shares of common stock which
any employee may purchase under the stock purchase plan during an accrual period
is 1,250 shares. Certain additional limitations on the amount of common stock
which may be purchased during any calendar year are imposed by the Code.
The stock purchase plan will be administered by the board or a committee
designated by the board, which will have the authority to terminate or amend the
stock purchase plan subject to specified restrictions and otherwise to
administer the stock purchase plan.
1998 Non-Employee Director Stock Incentive Plan
In April 1998, the board adopted the 1998 non-employee director plan which
was subsequently approved by our stockholders. The total number of shares
available for grant is 550,000 shares of common stock. This is available for
option grants and stock issuances to members of the board who are not employees
of Verio. At February 28, 1999, options to purchase 210,000 shares of common
stock are outstanding under the non-employee director plan. Options to purchase
an additional 340,000 shares of common stock are 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 our 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.
Under the automatic option grant program, each of the six non-employee
directors serving on the board at the time of our initial public offering were
automatically granted an option to acquire 30,000 shares of common stock at an
exercise price per share equal to the fair market value at the date of grant.
These options will vest and become exercisable in three equal installments on
each yearly anniversary of the grant date. Each non-employee director appointed
to the 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 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 has a term of eight years and is transferable
to the extent provided in the option agreement. The payment 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 of these. In the event we merge with or into another
corporation, sell substantially all of our assets, a person becoming more than a
50% owner of Verio or a like transaction involving Verio in which our
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
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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 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 shares will be rounded down
to the next whole share.
The 1998 non-employee director plan is administered by the board or a
committee designated by the board made up of two or more non-employee directors
so that such awards would be exempt from Section 16(b) of the Exchange Act. 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.
The 1998 non-employee director plan will terminate automatically in 2008
unless it is terminated sooner. The board has the authority to amend, suspend or
terminate the 1998 non-employee director plan, subject to stockholder approval
of certain amendments. However, no action may be taken which will affect awards
previously granted under the plan unless agreed to by the affected non-employee
directors.
401(K) PLAN
In January 1997, we implemented an employee savings and retirement plan
(the "401(k) Plan") covering certain of our employees who have at least one
month of service 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. We 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
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 board or the Compensation
Committee.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Certificate of Incorporation and Bylaws of Verio provide that we will
indemnify to the fullest extent permitted by Section 145 of the General
Corporation Law of the State of Delaware, as it now exists or as amended, all
directors and officers. The Certificate of Incorporation and Bylaws also
authorize us to
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indemnify our employees and other agents, at our option, to the fullest extent
permitted by Section 145, as it now exists or as amended. We entered into
agreements to indemnify our directors and officers, in addition to
indemnification provided for in our charter documents. These agreements, among
other things, provide for the indemnification of our 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. We believe that these provisions and
agreements will assist us in attracting and retaining qualified persons to serve
as directors and officers.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
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 (1) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (2) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (3) under Section 174 of the General Corporation Law of the State of
Delaware or (4) for any transaction from which the director derived an improper
personal benefit. Our 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 General Corporation Law of the State of Delaware.
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 our charter documents, the General
Corporation Law of the State of Delaware or otherwise, we have been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by 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, we will, unless in the opinion of our counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by us is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
We have purchased and maintain insurance on behalf of the officers and
directors insuring them against liabilities that they may incur in such
capacities or arising out of such status.
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CERTAIN RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
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, we entered
into an agreement with Brooks pursuant to which we agreed to repurchase the
$50.0 million principal amount of the 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 our initial public offering), pursuant to
a Stock Purchase and Master Strategic Relationship Agreement, dated as of April
7, 1998, between Verio and NTT, NTT purchased 4,493,877 shares of our common
stock for approximately $100.0 million. We granted NTT certain registration
rights with respect to the common stock it had acquired.
We also entered into an investment agreement with NTT on April 7, 1998,
providing for certain arrangements effective from and after the completion 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, we have agreed to appoint an individual designated by NTT
to our board of directors. The initial NTT designee, Yukimasa Ito, will serve
for an initial term ending as of the third annual stockholder meeting following
the closing of our initial public offering. Thereafter, for so long as NTT
continues to meet the share ownership requirement, we have agreed, subject to
certain exceptions, to nominate as a member of the board at each subsequent
election of the applicable class of directors a person designated by NTT who
will be subject to election by our stockholders.
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 our common stock, so long as the total holdings of NTT and
its affiliates do not exceed 17.5% of our fully diluted common stock after
taking into account such acquisition. The "standstill" obligations terminate
five years after the completion of the NTT investment. NTT has also agreed,
among other things, that it will not (1) solicit proxies or participate in a
proxy solicitation or otherwise seek to influence voting with respect to Verio,
(2) call a stockholders meeting, or (3) make any announcement or proposal for a
tender offer that would result in NTT owning more than 17.5% of our 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, it will not
transfer any securities of Verio in connection with an acquisition proposal,
unless such acquisition proposal has been recommended by our board or our board
has not publicly recommended against such acquisition proposal within three
months of the public announcement or presentation to it 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. We have
been granted rights of first offer and rights of first refusal 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 our competitors or, subject to
certain conditions, to any person that as a result of such transfer would
beneficially own more than 10% of our common stock.
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In connection with the NTT investment agreement, Verio and NTT also entered
into an outside service provider agreement, under which we were designated as
the preferred provider of Internet access and related services to customers of
NTT America on a reseller basis. In addition Verio and NTT agreed to connect
their backbones and establish a peering and transit relationship, and that we
would provide NTT America with full back-office and engineering support. NTT
America has agreed to pay us for our services 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 outside
service provider agreement, we agreed to continue to negotiate the specific
terms of these arrangements with NTT. See "Business -- NTT Strategic
Relationship." Recently, we executed a further strategic partner services
agreement with NTT America describing the details for implementing the specific
technical and administrative aspects arising under the outside service provider
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, we completed an additional equity investment in VIANet
in which we purchased shares of VIANet's Series B Preferred Stock for an
aggregate purchase price of $8.0 million. As a result we own an approximately
16% equity position in VIANet. We have 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, our board of directors
has determined that its investment in VIANet currently will be the primary
component of its international expansion strategy in the Internet access market
in the near term. However, we also may pursue direct investments in certain
international markets where appropriate opportunities exist. We believe that our
indirect strategy through VIANet currently is the most effective means to
leverage our resources in pursuing Internet access business internationally.
Certain of Verio's stockholders also are investors in VIANet. Mr. Hribar
and Mr. Halstedt serve as members of VIANet's board of directors.
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PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of Verio's common
stock, as of February 28, 1999, by:
(1) each stockholder known by Verio to own beneficially more than five
percent, in the aggregate, of Verio's common stock;
(2) each director of Verio who owns shares of Verio's common stock;
(3) each executive officer of Verio named below who owns shares of
Verio's common stock;
(4) all executive officers and directors of Verio as a group who own
shares of Verio's common stock (excluding the options held by Mr. Johnson's
estate); and
(5) the number of shares of Verio's common stock subject to options or
warrants owned by such person that are currently exercisable or exercisable
within 60 days of December 31, 1998.
The beneficial ownership is calculated based on 36,670,542 total shares of
Verio common stock outstanding as of February 28, 1999 (assuming that we issued
3,144,846 shares of common stock in the acquisition of Hiway as if such
acquisition was completed on December 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
presenting 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 December 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 below and pursuant to
applicable community property laws, each of the persons named in this table has
sole voting and investment power with respect to the shares set forth opposite
such person's name.
WorldCom may be deemed to indirectly beneficially own the shares owned by
Brooks as a result of the acquisition of Brooks by WorldCom, which resulted in
Brooks becoming a wholly owned subsidiary of WorldCom.
The ownership percentage shown for NTT is higher than the maximum
percentage of fully diluted shares that NTT was permitted to purchase in NTT's
investment in Verio because the percentage of beneficial ownership following our
initial public offering reflected in this table is based on outstanding and not
fully diluted shares.
The shares of Verio common stock beneficially owned by Centennial Fund V,
L.P. does not include 39,205 shares 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.
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
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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.
The shares of Verio's common stock held by Mr. Halstedt includes the 289
shares held of record by The Halstedt Family Limited Partnership.
On April 6, 1998, James C. Allen transferred 25,000 of his shares of
Verio's 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.
Paul J. Salem holds 2,174 shares of Verio's 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.
The sole general partner of Norwest Equity Partners V, L.P. is Itasca
Partners V. George J. 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.
The shares of Verio's common stock held by Mr. Still includes 13,206 shares
held of record by Still Family Partners.
The shares of Verio's common stock held by Arthur L. Cahoon includes the
shares held of record by Pam Fitch as Trustee of the Arthur Logan Cahoon Grantor
Retained Annuity Trust dated May 29, 1998.
On September 11, 1998, Verio issued options to purchase 30,000 shares of
its common stock to Yukimasa 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.
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<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE EXERCISABLE
HOLDERS BENEFICIALLY OWNED BENEFICIALLY OWNED OPTIONS/WARRANTS
- ------- ------------------ ------------------ ----------------
<S> <C> <C> <C>
Brooks Fiber Properties, Inc................. 5,369,131 14.64% 704,160
425 Woods Mill Road South
Suite 300
Town & Country, Missouri 63017
Nippon Telegraph and Telephone Corporation... 4,493,877 12.25%
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............... 2,800,000 7.64%
245 Lytton Avenue
Palo Alto, California 94301
Providence Equity Partners, L.P.............. 3,055,693 8.33%
50 Kennedy Plaza
Providence, Rhode Island 02903
Centennial Fund V, L.P....................... 1,286,303 3.51%
1428 Fifteenth Street
Denver, Colorado 80202
Centennial Fund IV, L.P...................... 1,207,105 3.30%
1428 Fifteenth Street
Denver, Colorado 80202
Steven C. Halstedt........................... 2,220 *
Herbert R. Hribar............................ -- --
Justin L. Jaschke............................ 249,097 * 70,000
Estate of Mark D. Johnson.................... 130,000 * 70,000
James C. Allen............................... 52,713 *
Trygve E. Myhren............................. 20,000 * 10,000
Paul J. Salem................................ 2,174 *
George J. Still, Jr. ........................ 34,370 --
Arthur L. Cahoon............................. 542,312 1.48% 456,947
Yukimasa Ito................................. -- --
Chris J. DeMarche............................ 103,417 * 41,334
Carla Hamre Donelson......................... 55,848 * 37,333
Peter B. Fritzinger.......................... 42,772 * 15,000
All executive officers and directors as a
group (13 persons)......................... 1,146,341 3.13% 653,281
</TABLE>
- ---------------
* Less than 1%
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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 Verio and U.S. Bank Trust
National Association, as trustee. A copy of the Indenture may be obtained upon
request from Verio, 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 some of the 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 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 Verio. 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 Verio 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. Verio 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 Verio 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.
REDEMPTION
Optional Redemption. The notes are redeemable, at the option of Verio, 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
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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 Verio issues, in one or more transactions, Capital
Stock (other than Disqualified Stock) of Verio 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"), Verio 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 Verio defaults in providing the funds for such
redemption) and such notes will cease to be outstanding.
RANKING
The indebtedness of Verio evidenced by the notes ranks senior in right of
payment to all subordinated indebtedness of Verio and pari passu in right of
payment with all other existing and future unsubordinated indebtedness of Verio
including the 1997 Notes and the March 1998 Notes. Verio has no existing
unsecured and unsubordinated indebtedness or any existing subordinated
indebtedness. Accordingly, there is no existing debt that is subordinated to the
notes.
Verio is a holding company with limited assets and no significant business
operations of its own. Verio operates its business through its subsidiaries. Any
right of Verio and its creditors, including holders of the notes, to participate
in the assets of any of Verio's subsidiaries upon any liquidation or
administration of any such subsidiary will be subject to the prior claims of the
subsidiary's creditors, including trade creditors. As of December 31, 1998, on a
pro forma basis (taking into account the acquisitions completed through December
31, 1998 and the Hiway acquisition), there would have been approximately $16.1
million of secured indebtedness outstanding to which holders of notes would have
been effectively subordinated in right of payment and approximately $15.8
million of subsidiary indebtedness to which holders of notes would have been
structurally subordinated; $10.8 million of which is included in the secured
long-term figure above. In addition, the $70.0 million revolving credit 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 notes are effectively
subordinated to the credit facility to the extent of the value of such assets.
For a discussion of certain adverse consequences of Verio being a holding
company and of the terms of potential future indebtedness of Verio and its
subsidiaries, see "Risk Factors -- We have substantial debt which may impact our
future operations and affect
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our ability to meet our debt obligations," and "-- Our holding company structure
depends on access to 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 Verio
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) Verio 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 Verio 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, Verio
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 Verio accrued on a
cumulative basis during the period beginning on January 1, 1998 and
ending on the last day of the fiscal quarter of Verio immediately
preceding the date of such proposed Restricted Payment (or, if such
cumulative Consolidated Net Income of Verio for such period is a
deficit, minus 100% of such deficit); plus
(b) the aggregate net cash proceeds received by Verio either (x) as
capital contributions to Verio after the Prior Issue Date or (y) from
the issue and sale (other than to a Restricted Subsidiary of Verio) 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 Verio from the issuance
(other than to a Restricted Subsidiary of Verio) 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 Verio; 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
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(e) in the case of any Revocation with respect to a Subsidiary of
Verio 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
Verio 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 (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 Verio or (2) is a New ISP
that becomes or has become a Restricted Subsidiary or is merged with
Verio, 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 Verio 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 Verio 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 Verio in exchange for, or out of the net cash
proceeds of the substantially concurrent issue and sale (other than to a
Restricted Subsidiary of Verio) of, shares of Capital Stock of Verio (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 Verio) of (x) Capital Stock (other than
Disqualified Stock) of Verio 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 Verio 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 Verio 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 Verio (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;
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(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 Verio 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 Verio or (2) issue or sale of Capital Stock (other than
Disqualified Stock) of Verio (other than to a Restricted Subsidiary of
Verio); provided that any such proceeds are excluded from clause (iii)(b)
of the second preceding paragraph;
(viii) loans or advances to employees of Verio or any Restricted
Subsidiary made in the ordinary course of business, including to fund the
purchase of Capital Stock of Verio (provided that any proceeds from such
purchase are excluded from clause (iii)(b) of the second preceding
paragraph to the extent such loan or advance is not reimbursed) in an
amount not to exceed $2.0 million at any time outstanding;
(ix) so long as no Default shall have occurred and be continuing,
Investments constituting Restricted Payments in joint ventures formed to
provide services in furtherance of an Internet Service Business of Verio
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 Verio 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 Verio 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 Verio 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 Verio 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 Verio will not, and
will not permit any of the Restricted Subsidiaries to, engage in a business
which is not substantially an Internet Service Business.
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Limitation on Certain Guarantees and Indebtedness of Restricted
Subsidiaries. The indenture provides that Verio 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 Verio 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 Verio or a Restricted
Subsidiary of Verio to any person that is not an Affiliate of Verio 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 Verio, such Guarantor will be deemed to be automatically and
unconditionally released from all obligations under its Guarantee; provided that
each such Guarantor is sold or disposed of in accordance with the "Disposition
of Proceeds of Asset Sales" covenant.
Change of Control. Upon the occurrence of a Change of Control (the date of
such occurrence being the "Change of Control Date"), Verio 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 Verio 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 Verio
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.
Verio 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 Verio and purchases all notes validly tendered
and not withdrawn under such Change of Control Offer.
If Verio is required to make a Change of Control Offer, Verio 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 Verio 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 Verio or any Restricted Subsidiary;
(b) pay any Indebtedness owed to Verio or any Restricted Subsidiary;
(c) make any Investment in Verio or any Restricted Subsidiary; or
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(d) transfer any of its properties or assets to Verio 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 Verio, but, provided, further, that such
agreement may nevertheless contain customary net worth, leverage,
invested capital and other financial covenants, customary covenants
regarding the merger of or sale of all or any substantial part of the
assets of Verio or any Restricted Subsidiary, customary restrictions on
transactions with affiliates, and customary subordination provisions
governing Indebtedness owed to Verio or any Restricted Subsidiary.
Disposition of Proceeds of Asset Sales. The indenture provides that Verio
will not, and will not permit any Restricted Subsidiary to, make any Asset Sale
unless:
(a) Verio 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 Verio 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).
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Verio 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 Verio 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 Verio 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, Verio 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, Verio 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 Verio is required to make an Asset Sale Offer, Verio 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 Verio will not permit any Restricted
Subsidiary to issue any Preferred Stock (other than to Verio or a Restricted
Subsidiary).
Limitation on Transactions with Affiliates. The indenture provides that
Verio 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 Verio or any Wholly Owned Restricted
Subsidiary) or any beneficial holder of 10% or more of the Common Stock of Verio
or any officer or director of Verio (each, an "Affiliate Transaction"), unless
the terms of the Affiliate Transaction are set forth in writing, and are fair
and reasonable to Verio 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, Verio may obtain a written opinion from an Independent
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Financial Advisor stating that the terms of such Affiliate Transaction to Verio
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 Verio 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, Verio
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 Verio
or such Restricted Subsidiary, as the case may be, and (y) in the good
faith judgment of Verio or the applicable Restricted Subsidiary, the Fair
Market Value of the consideration received by Verio or such Restricted
Subsidiary, as the case may be, reasonably approximates the Fair Market
Value of the services provided;
(iv) dividends paid by Verio 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 Verio.
Verio is required to use, or to cause each Restricted Subsidiary to use,
its commercially reasonable best efforts to ensure that each person in which
Verio 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 Verio has a class of securities registered under
the Exchange Act, Verio shall furnish without cost to each holder of notes and
file with the trustee and file with the Securities and Exchange Commission:
(i) within the applicable time period required under the Exchange Act,
after the end of each fiscal year of Verio, 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 Verio, 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 Verio will not designate any Subsidiary of Verio (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;
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(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, Verio 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 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) Verio 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 Verio 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,
Verio 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 Verio 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 Verio
may pledge Capital Stock or Indebtedness of any Unrestricted Subsidiary on
a nonrecourse basis such that the pledgee has no claim whatsoever against
Verio 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 Verio 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
Verio will not, and will not permit any of its Subsidiaries or controlled
Affiliates to, conduct its business in a fashion that would cause Verio 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 Verio'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.
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CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
The indenture provides that Verio 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 Verio and the
Restricted Subsidiaries on a consolidated basis, unless, in the case of
either (i) or (ii):
(a) Verio shall be the continuing person or, if Verio 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 Verio 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), Verio or
the surviving entity (assuming such surviving entity's assumption of
Verio'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
Verio 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) Verio 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 Verio in accordance with the foregoing in which Verio 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 Verio 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, Verio 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 Verio 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 Verio, Verio 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
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as provided pursuant to the covenant "Limitation on Designations of Unrestricted
Subsidiaries" and all Indebtedness, and all Liens on property or assets, of
Verio 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 Verio by the trustee or to Verio and the
trustee by the 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 Verio 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 Verio or any Material Restricted Subsidiary shall
commence judicial proceedings or take any other action to foreclose upon,
or dispose of assets of Verio 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, Verio 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 Verio 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 Verio 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 Verio) 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 Verio 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.
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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.
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.
Verio is required to furnish to the trustee annually a statement as to its
compliance with all conditions and covenants under the indenture.
DEFEASANCE
Verio 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. Verio
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, Verio 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.
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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 Verio and thereafter repaid to Verio 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 Verio 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) Verio has paid all sums payable by it under the indenture; and
(iii)Verio 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, Verio must
deliver an officers' certificate and an opinion of counsel stating that
all conditions precedent to satisfaction and discharge have been
complied with.
AMENDMENT AND WAIVERS
From time to time, Verio, 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 Verio
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 Verio'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.
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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 Verio's 13 1/2% Senior Notes due 2004.
"March 1998 Notes" means Verio'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 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 Verio'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 Verio or any Restricted Subsidiary in any
other person, or any acquisition or purchase of Capital Stock of any other
person by
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Verio 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 Verio or any Restricted Subsidiary; or
(ii) any acquisition by Verio 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
Verio 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 Verio or any Restricted Subsidiary which constitute
substantially all of an operating unit or line of business of Verio and the
Restricted Subsidiaries; or
(iii) any other property or asset of Verio 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 Verio 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 Verio 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 Verio
or any Restricted Subsidiary.
"Board" means the Board of Directors of Verio.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of Verio 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.
"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
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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 Verio) 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 Verio) 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
Verio; or
(b) Verio 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, Verio, in any such event pursuant to a
transaction in which the outstanding Voting Stock of Verio is converted
into or exchanged for cash, securities or other property, other than any
such transaction where:
(i) the outstanding Voting Stock of Verio 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
Verio 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 Verio 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.
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The good faith determination by the Board, based upon advice of outside counsel,
of the beneficial ownership of securities of Verio 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 Securities and Exchange Commission.
"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 Verio 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 Verio 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 Verio 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
Verio 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 Verio 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 Verio 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 Verio 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
Verio 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.
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"Consolidated Net Income" means, with respect to any period, the
consolidated net income of Verio 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 Verio 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
Verio or any Restricted Subsidiary;
(iii) the portion of net income (or loss) of such person allocable to
minority interests in Restricted Subsidiaries for such period;
(iv) net income (or loss) of any other person combined with such person
on a "pooling of interests" basis attributable to any period prior to the
date of combination;
(v) any gain or loss, net of taxes, realized by such person upon the
termination of any employee pension benefit plan during such period;
(vi) gains or losses in respect of any Asset Sales (net of fees and
expenses relating to the transaction giving rise thereto) during such
period; and
(vii) except in the case of any restriction or encumbrance permitted
under clause (viii) of the covenant "Limitation on Dividends and Other
Payment Restrictions Affecting Restricted Subsidiaries," the net income of
any Restricted Subsidiary for such period to the extent that the
declaration of dividends or similar distributions by that Restricted
Subsidiary of that income is not at the time permitted, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental
regulations applicable to that Restricted Subsidiary or its stockholders.
"Consolidated Net Worth" means, with respect to any person, the
consolidated stockholders' or partners' equity of such person reflected on the
most recent financial statements of such person, determined in 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 Verio 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 Verio 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 Verio and the Restricted Subsidiaries for such
period;
(iv) amortization of Verio 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 Verio, the consolidation of the
accounts of the Restricted Subsidiaries with those of Verio, all in accordance
with GAAP; provided that "consolidation" will not include consolidation of the
accounts of any Unrestricted Subsidiary with the accounts of Verio. The term
"consolidated" has a correlative meaning to the foregoing.
"Debt Securities" means any debt securities issued by Verio in a public
offering or a private placement.
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"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 Verio 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 Verio 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
Verio'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.
"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 Verio or a Subsidiary of Verio 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
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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 Verio (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 Verio.
"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 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 Verio 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 Verio 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
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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 Verio 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 Verio in exchange for Capital Stock, property or assets
of another person constitute an Investment by Verio in such other person.
"ISP" means any person:
(a) engaged principally in an Internet Service Business;
(b) of which Verio 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 Verio 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 Verio or
any such Wholly Owned Restricted Subsidiary, as the case may be;
(d) as to which Verio 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 Verio, or a majority of such person's board of directors, in the case
where such person would be a Subsidiary of Verio; and
(e) which has no outstanding Indebtedness or Disqualified stock other
than Indebtedness or Disqualified stock of such person having an aggregate
outstanding principal balance and liquidation preference, respectively,
that (x) in the case of a person that is a Restricted Subsidiary, is
permitted to be incurred under the covenant "Limitation on Additional
Indebtedness" and (y) in the case of a person that is not a Restricted
Subsidiary, does not at any time exceed 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.
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"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 Verio for that purpose and is reasonably acceptable to the
trustee.
"Material Restricted Subsidiary" means any Restricted Subsidiary of Verio,
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 Verio
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 Verio 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 Verio 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 Verio 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 Verio or any Restricted Subsidiary, as the case may be, after such Asset
Sale, including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities under
any indemnification obligations associated with such Asset Sale, all as
reflected in an officers' certificate delivered to the trustee.
"New ISP" means any ISP in which Verio or a Subsidiary of Verio makes its
first Investment after the Prior Issue Date.
"Newly Acquired Assets" means any assets (other than cash) of Verio or any
Restricted Subsidiary which did not constitute assets of Verio, 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.
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"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 Verio outstanding at the time of the
applicable Asset Sale with respect to which Verio 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 Verio outstanding
at the time of the applicable Asset Sale Offer with respect to which Verio 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 Verio 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
Verio or a Restricted Subsidiary and (ii) Indebtedness of Verio, 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 Verio or a
Restricted Subsidiary referred to in this clause (c) to a person (other
than Verio 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 Verio or another Restricted
Subsidiary such that such Restricted Subsidiary, in any such case, ceases
to be a Restricted Subsidiary;
(d) Interest Rate Obligations of Verio and/or any Restricted Subsidiary
relating to Indebtedness of Verio 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 Verio and/or any Restricted Subsidiary in respect of
performance bonds of Verio or any Restricted Subsidiary or surety bonds
provided by Verio or any Restricted Subsidiary incurred in the ordinary
course of business;
(f) Indebtedness of Verio and/or any Restricted Subsidiary to the extent
it represents a replacement, renewal, refinancing or extension (a
"Refinancing") of outstanding Indebtedness of Verio and/or of any
Restricted Subsidiary incurred or outstanding pursuant to clause (a), (b),
(g), (h) or (i) of this
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definition or the proviso of the covenant "Limitation on Additional
Indebtedness"; provided that (1) Indebtedness of Verio 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 Verio 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 Verio and/or any Restricted Subsidiary incurred
under any Permitted Credit Facility and/or Indebtedness of Verio
represented by Debt Securities of Verio, 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 Verio 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 Verio 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 Verio 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 Verio 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 Verio and the Restricted Subsidiaries of (i) trade
credit to Subsidiaries of Verio 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."
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"Permitted Liens" means:
(a) Liens on property of a person existing at the time such person is
merged into or consolidated with Verio 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 Verio 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 Verio 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 Verio 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 Securities and Exchange 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 Verio or any Restricted Subsidiary.
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"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 Verio 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."
"Restricted Payment" means any of the following:
(i) the declaration or payment of any dividend or any other distribution
on Capital Stock of Verio or any payment made to the direct or indirect
holders (in their capacities as such) of Capital Stock of Verio (other than
dividends or distributions payable solely in Capital Stock (other than
Disqualified Stock) of Verio or in options, warrants or other rights to
purchase Capital Stock (other than Disqualified Stock) of Verio);
(ii) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock of Verio (other than any such Capital Stock
owned by Verio 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 Verio or any Restricted Subsidiary of any Investment
(other than a Permitted Investment) in any person (other than an Investment
by a Restricted Subsidiary in Verio or an Investment by Verio 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 Verio 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 Verio 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 Verio.
"S&P" means Standard & Poor's Corporation.
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"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 Verio or any
Guarantor which is expressly subordinated in right of payment to any other
Indebtedness of Verio 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 Verio 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 Verio 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 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 Verio; plus
(ii) the Fair Market Value (determined at the time of issuance) of any
Capital Stock (other than Disqualified Stock) of Verio 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 Verio 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 Verio 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 Verio 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.
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"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of
which 99% or more of the outstanding Capital Stock is owned by Verio 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 ("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 Verio as follows: The Depository is a limited
purpose trust company organized under the laws of the State of New York, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code, and "a clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. The Depository
was created to hold securities of institutions that have accounts with the
Depository ("participants") and to facilitate the clearance and settlement of
securities transactions among its participants in such securities through
electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. The
Depository's participants include securities brokers and dealers (which may
include the initial purchasers), banks, trust companies, clearing corporations
and certain other organizations. Access to the Depository's book-entry system is
also available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a participant,
whether directly or indirectly.
Upon the issuance of 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. Verio 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
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<PAGE> 117
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.
Verio 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. Verio 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.
Verio 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, Verio nor the paying agent will have any responsibility for the
performance by the Depository or its participants or indirect participants of
their respective obligations under the rules and procedures governing their
operations.
Certificated Securities. Interests in the Global New Note will be exchanged
for Certificated Securities if (1) DTC notifies Verio 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 Verio within 90 days, or (2) 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, Verio will cause the
appropriate Certificated Securities to be delivered.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
consequences that apply to the exchange of old notes for new notes and the
ownership and disposition of the new notes. It is based on the Internal Revenue
Code of 1986, as amended (the "Code"), applicable U.S. Treasury Regulations,
judicial authority, and administrative rulings and practice, as of the date of
this exchange offer. The discussion below does not address any state, local or
foreign tax consequences of an exchange of old notes for new notes, or of
ownership and disposition of the new notes. Your tax treatment may vary
depending upon your particular situation. You may also be subject to special
rules not discussed below if you are a certain kind of note owner, including:
- an owner which did not purchase the old notes for cash at original issue;
- a financial institution or broker-dealer;
- an insurance company;
- a tax-exempt organization; or
- a holder of a note as part of a hedge, straddle or conversion
transaction.
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The following discussion assumes that you hold your old notes as capital
assets at the time of the exchange and will hold your new notes as capital
assets.
The tax law upon which this discussion is based is subject to change at any
time, and any change may be applied retroactively in a manner that could
adversely affect you. In addition, Verio has not requested an advance ruling
from the Internal Revenue Service as to the tax consequences of the exchange
offer. The Internal Revenue Service could take different positions concerning
the tax consequences of the exchange offer and the tax consequences of ownership
and disposition of the new notes discussed below and such positions could be
sustained.
The tax consequences to you of the exchange offer and of ownership and
disposition of the new notes may depend upon whether you are a "U.S. holder."
You are a U.S. holder if you are a beneficial owner of notes who or that is:
- a citizen or resident of the United States;
- a corporation, partnership or other legal entity created or organized in
or under the laws of the United States or one of its political
subdivisions;
- an estate, if your income is subject to U.S. federal income taxation
regardless of its source;
- a trust if (A) a U.S. court is able to exercise primary supervision over
your administration and (B) one or more U.S. persons (as defined in
Section 7701(c)(30) of the Code) has authority to control all of your
substantial decisions; or
- otherwise subject to U.S. federal income tax on a net income basis with
respect to the new notes.
If you are not a U.S. holder under these rules, you should review the
discussion below with respect to ownership of the new notes by a non-U.S.
holder.
WE STRONGLY URGE YOU TO CONSULT WITH YOUR OWN TAX ADVISOR REGARDING THE
PARTICULAR TAX CONSEQUENCES OF THE EXCHANGE OFFER TO YOU, AND REGARDING YOUR
PARTICULAR TAX CONSEQUENCES IN OWNING AND DISPOSING OF THE NEW NOTES, INCLUDING
THE EFFECT OF U.S. FEDERAL ESTATE AND GIFT TAX LAWS, AS WELL AS WITH RESPECT TO
THE EFFECT OF ANY FOREIGN, STATE, OR LOCAL LAWS APPLICABLE TO YOU.
EXCHANGE OFFER
Your exchange of old notes for new notes in the exchange offer will not be
treated as a taxable event for U.S. federal income tax purposes because the old
notes do not differ materially in kind or extent from the new notes. Your new
notes will be treated as a continuation of the old notes. You will have the same
tax basis and holding period in the new notes as you had in the old notes
immediately before the exchange.
OWNERSHIP AND DISPOSITION OF NEW NOTES BY U.S. HOLDERS
Taxation of interest. Stated interest on your new notes generally will be
taxable to you as ordinary income at the time it is paid or accrued, depending
on your method of accounting for federal income tax purposes. The new notes are
not expected to give rise to "original issue discount" to you.
Sale or redemption of a new note. You will recognize gain or loss upon the
sale, retirement, redemption or other taxable disposition of your new note. The
amount of gain or loss will be equal to the difference between the amount of
cash and the fair market value of other property you receive (except for cash or
other property attributable to accrued but unpaid stated interest), and your
adjusted tax basis in the new note. The gain or loss will be capital gain or
loss. However, you should know that a purchaser of a new note from you may be
subject to the "market discount" rules, discussed below.
Under the "market discount" rules of the Code, someone who purchases a new
note from you at a discount generally will be required to include as ordinary
income a portion of any gain realized upon the subsequent disposition or
retirement of the new note equal to the amount of the market discount the
purchaser has not previously included in income.
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<PAGE> 119
OWNERSHIP AND DISPOSITION OF NEW NOTES BY NON-U.S. HOLDERS
U.S. withholding and income tax. You will not be subject to U.S.
withholding tax on interest payments on the new notes provided:
- you do not actually or constructively own 10 percent or more of the total
combined voting power of all classes of Verio stock;
- you are not a controlled foreign corporation for U.S. federal income tax
purposes that is related to Verio through stock ownership;
- you are not a bank that received the old note on an extension of credit
made pursuant to a loan agreement with Verio entered into in the ordinary
course of your trade or business; and
- you provide a statement to Verio signed under penalties of perjury that
includes your name and address and you certify that you are not a United
States person, as required by applicable tax regulations.
If you cannot meet these requirements, you generally will be subject to
U.S. withholding tax at a rate of 30% on interest payments, unless you are
eligible for a reduced withholding tax rate under a U.S. tax treaty.
If you are engaged in a trade or business in the United States, and the
interest paid or accrued on the new note is effectively connected with your
conduct of that trade or business, you will be subject to federal income tax on
the interest to the same extent as if you were a U.S. holder. However, you will
not be subject to withholding tax if you provide a properly completed Internal
Revenue Service Form 4224 to Verio.
Sale or retirement of a new note. Any gain realized by you on a sale,
exchange, or redemption of a new note will not be subject to U.S. withholding or
income tax unless the gain is effectively connected with your conduct of a trade
or business in the United States or you are an individual who is present in the
United States for 183 days or more during the taxable year in which you realize
the gain and certain other conditions are satisfied.
U.S. estate tax. If you hold the new notes at the time of your death, the
new notes generally will not be includible in your estate for U.S. estate tax
purposes. However, the new notes will be included in your estate if, at the time
of your death, you owned, actually or constructively, 10 percent or more of the
total combined voting power of all classes of Verio stock or if the new notes
were effectively connected with your conduct of a trade or business in the
United States.
INFORMATION REPORTING AND BACKUP WITHHOLDING
If you are a U.S. person and are not a corporation, you may be subject to
information reporting to the Internal Revenue Service with respect to the new
notes. You may also be subject to backup withholding at a rate of 31% on
payments of principal and interest on the new notes, and on the proceeds from
disposition of the new notes. However, backup withholding will be imposed on you
only if:
- you fail to furnish to Verio your taxpayer identification number ("TIN"),
which, if you are an individual, is normally your social security number;
- you furnish to Verio an incorrect taxpayer identification number;
- you are notified by the Internal Revenue Service you have failed to
properly report the receipt of interest or dividend income; or
- under certain circumstances, you fail to certify to Verio, under
penalties of perjury, that you have furnished Verio a correct taxpayer
identification number and that you have not been notified by the Internal
Revenue Service that you are subject to backup withholding.
Verio will also start backup withholding if the Internal Revenue Service
instructs it to do so.
You should consult your own tax advisor to determine whether you may
qualify for an exemption from information reporting or backup withholding and
the procedure for obtaining an exemption.
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If you certify to Verio that you are a non-U.S. holder, you will not be
subject to information reporting or backup withholding with respect to payments
of interest on the new notes unless Verio has actual knowledge that you are a
U.S. holder.
If you dispose of the new notes to or through the U.S. office of any
broker, you will be subject to information reporting and you may be subject to
backup withholding unless you certify to the broker that you are a non-U.S.
holder or that you otherwise are exempt from information reporting or backup
withholding. You will also be subject to information reporting and may be
subject to backup withholding if the broker has actual knowledge that you are a
U.S. holder or that the conditions of your claimed exemption are not satisfied.
If you dispose of the new notes to or through a non-U.S. office of a
non-U.S. broker that is not a "U.S. related person" you will not be subject to
information reporting or backup withholding. For this purpose, a "U.S. related
person" is a corporation which is a "controlled foreign corporation" for U.S.
income tax purposes, or a foreign person, 50% or more of whose gross income from
all sources for the 3-year period ending with the close of its taxable year
preceding the payment (or the period of the person's existence, if less than 3
years) is derived from activities that are effectively connected with the
conduct of a U.S. trade or business.
If you dispose of the new notes to or through a non-U.S. office of a broker
that is a U.S. related person, information reporting will be required unless the
broker has documentary evidence in its files that you are a non-U.S. holder and
the broker has no knowledge to the contrary. However, backup withholding will
not apply to these payments unless the broker has actual knowledge that you are
a U.S. holder.
If a payment to you is subject to backup withholding, you will be allowed a
credit for the amount withheld against your U.S. income tax liability for the
year, or you may obtain a refund of the withheld amount if no tax is due and you
follow the necessary procedures for claiming a refund.
PROSPECTIVE TAX REGULATIONS AFFECTING NON-U.S. HOLDERS
In 1997, the Internal Revenue Service published new regulations to modify
the requirements imposed on non-U.S. holders and certain intermediaries to
establish the status of the holder as a non-U.S. holder eligible for exemption
from or reduction in U.S. withholding tax and from the backup withholding rules.
The new regulations generally will be effective for payments made after December
31, 1999, subject to certain transition rules. In general, the new regulations
do not significantly alter the substantive withholding and information reporting
requirements. Rather, they unify 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 certification on behalf of non-U.S. holders. Under the new
regulations, an intermediary may be required to enter into an agreement with the
IRS to audit certain documentation with respect to such certifications. You
should consult your own tax adviser to determine the effects of the application
of the new regulations to your particular circumstances.
PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account in the
exchange offer must acknowledge that it will deliver a prospectus in connection
with any resale of 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. Verio 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
resale. In addition, until such date, all dealers effecting transactions in the
new notes may be required to deliver a prospectus.
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<PAGE> 121
Verio 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 in 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.
They can be sold 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 in 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. Any profit or commissions received by them from
any resale 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, Verio will promptly
send additional copies of this prospectus, including any amendment or
supplement, to any broker-dealer that requests such documents in the letter of
transmittal. Verio 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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EXPERTS
The consolidated financial statements of Verio Inc. and subsidiaries as of
December 31, 1997 and 1998 and for the period from inception (March 1, 1996) to
December 31, 1996, and the years ended December 31, 1997 and 1998 and the
financial statements of NSNet, Inc. as of December 31, 1996 and 1997 and for the
years ended December 31, 1996 and 1997 and the period from January 1, 1998 to
February 27, 1998; Access One, Inc. as of December 31, 1997 and for the year
ended December 31, 1997 and the period from January 1, 1998 to February 27,
1998; STARnet, L.L.C. as of December 31, 1997 and for the year ended December
31, 1997 and the period from January 1, 1998 to April 14, 1998; Computing
Engineers Inc. as of December 31, 1996 and 1997 and for the years ended December
31, 1996 and 1997 and the period from January 1, 1998 to April 15, 1998; LI Net,
Inc. as of April 30, 1997 and January 31, 1998 and for the years ended April 30,
1996 and 1997, the nine months ended January 31, 1998 and the period from
February 1, 1998 to April 9, 1998; NTX, Inc. as of and for the nine months ended
June 30, 1998; and Best Internet Communications, Inc. and subsidiaries as of and
for the year ended December 31, 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.
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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 December
31, 1998 (unaudited)................................... F-4
Pro Forma Condensed Combined Statement of Operations for
the Year Ended December 31, 1998 (unaudited)........... F-5
Notes to Pro Forma Condensed Combined Financial Statements
(unaudited)............................................ F-7
Verio Inc. and Subsidiaries -- Consolidated Financial
Statements:
Independent Auditors' Report.............................. F-11
Consolidated Balance Sheets as of December 31, 1997 and
1998................................................... F-12
Consolidated Statements of Operations for the Period from
Inception (March 1, 1996) to December 31, 1996 and the
Years Ended December 31, 1997 and 1998................. F-13
Consolidated Statements of Stockholders' Equity (Deficit)
for the Period from Inception (March 1, 1996) to
December 31, 1996 and the Years Ended December 31, 1997
and 1998............................................... F-14
Consolidated Statements of Cash Flows for the Period from
Inception (March 1, 1996) to December 31, 1996 and the
Years Ended December 31, 1997 and 1998................. F-15
Notes to Consolidated Financial Statements................ F-16
NSNet, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-31
Balance Sheets as of December 31, 1996 and 1997........... F-32
Statements of Operations for the Years Ended December 31,
1996 and 1997 and the Period from January 1, 1998 to
February 27, 1998...................................... F-33
Statements of Owner's and Stockholder's Equity for the
Years Ended December 31, 1996 and 1997 and the Period
from January 1, 1998 to February 27, 1998.............. F-34
Statements of Cash Flows for the Years Ended December 31,
1996 and 1997 and the Period from January 1, 1998 to
February 27, 1998...................................... F-35
Notes to Financial Statements............................. F-36
Access One, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-39
Balance Sheet as of December 31, 1997..................... F-40
Statements of Operations and Accumulated Deficit for the
Year Ended December 31, 1997 and the Period from
January 1, 1998 to February 27, 1998................... F-41
Statements of Cash Flows for the Year Ended December 31,
1997 and the Period from January 1, 1998 to February
27, 1998............................................... F-42
Notes to Financial Statements............................. F-43
STARnet, L.L.C. -- Financial Statements:
Independent Auditors' Report.............................. F-47
Balance Sheet as of December 31, 1997..................... F-48
Statements of Operations for the Year Ended December 31,
1997 and the Period from January 1, 1998 to April 14,
1998................................................... F-49
Statements of Members' Equity for the Year Ended December
31, 1997 and the Period from January 1, 1998 to April
14, 1998............................................... F-50
Statements of Cash Flows for the Year Ended December 31,
1997 and the Period from January 1, 1998 to April 14,
1998................................................... F-51
Notes to Financial Statements............................. F-52
</TABLE>
F-1
<PAGE> 124
<TABLE>
<S> <C>
Computing Engineers Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-54
Balance Sheets as of December 31, 1996 and 1997........... F-55
Statements of Operations for the Years Ended December 31,
1996 and 1997 and the Period from January 1, 1998 to
April 15, 1998......................................... F-56
Statements of Stockholders' Equity for the Years Ended
December 31, 1996 and 1997 and the Period from January
1, 1998 to April 15, 1998.............................. F-57
Statements of Cash Flows for the Years Ended December 31,
1996 and 1997 and the Period from January 1, 1998 to
April 15, 1998......................................... F-58
Notes to Financial Statements............................. F-59
LI Net, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-61
Balance Sheets as of April 30, 1997 and January 31,
1998................................................... F-62
Statements of Operations for the Years Ended April 30,
1996 and 1997, the Nine Months Ended January 31, 1998
and the Period from February 1, 1998 to April 9,
1998................................................... F-63
Statements of Stockholders' Equity (Deficit) for the Years
Ended April 30, 1996 and 1997, the Nine Months Ended
January 31, 1998 and the Period from February 1, 1998
to April 9, 1998....................................... F-64
Statements of Cash Flows for the Years Ended April 30,
1996 and 1997, the Nine Months Ended January 31, 1998
and the Period from February 1, 1998 to April 9,
1998................................................... F-65
Notes to Financial Statements............................. F-66
NTX, Inc. -- Financial Statements:
Independent Auditors' Report.............................. F-70
Balance Sheet as of June 30, 1998......................... F-71
Statement of Operations for the Nine Months Ended June 30,
1998................................................... F-72
Statement of Stockholders' Deficit for the Nine Months
Ended June 30, 1998.................................... F-73
Statement of Cash Flows for the Nine Months Ended June 30,
1998................................................... F-74
Notes to Financial Statements............................. F-75
Best Internet Communications, Inc. and Subsidiaries --
Financial Statements:
Independent Auditors' Report.............................. F-78
Consolidated Balance Sheet as of December 31, 1998........ F-79
Consolidated Statement of Operations for the Year Ended
December 31, 1998...................................... F-80
Consolidated Statement of Shareholders' Equity for the
Year Ended December 31, 1998........................... F-81
Consolidated Statement of Cash Flows for the Year Ended
December 31, 1998...................................... F-82
Notes to Consolidated Financial Statements................ F-83
</TABLE>
F-2
<PAGE> 125
VERIO INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
During the period from August 1, 1996 through December 31, 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. 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. Business combinations completed in 1998 (the 1998
Acquisitions) are described in Note A to the accompanying pro forma condensed
combined financial statements. The Company also 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 December 31, 1998, the Company completed the
acquisition of a 100% interest in the outstanding common stock of Hiway
Technologies, Inc. (the "Hiway Acquisition") including Hiway's 20% interest in
WWW-Service Online-Dienstleistungen AG in which Verio purchased an 80% interest
during 1998. These acquisitions have been accounted for using the purchase
method of accounting. The Hiway Acquisition is 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. Those buyouts in which the Company did not previously own
a majority interest on a fully diluted basis, are included in the 1998
Acquisitions, as described in Note A. 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 1999. 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
Hiway Acquisition occurred on December 31, 1998 and includes the December 31,
1998 historical consolidated balance sheets of Verio and Hiway adjusted for the
pro forma effects of this acquisition. The assets and liabilities of the 1998
Acquisitions, adjusted for the application of the purchase method of accounting,
are included in the December 31, 1998 historical Verio consolidated balance
sheet. The unaudited pro forma condensed combined statement of operations for
the year ended December 31, 1998 assumes that the 1998 Acquisitions and the
Hiway Acquisition had occurred on January 1, 1998 and includes the historical
consolidated statements of operations of Verio and the acquired businesses for
the year ended December 31, 1998, adjusted for the pro forma effects of the
acquisitions.
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, 1998 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.
F-3
<PAGE> 126
VERIO INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1998 (UNAUDITED)
AMOUNTS IN THOUSANDS
ASSETS
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
VERIO HIWAY (NOTE C) VERIO
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents and short term
investments................................ $ 577,387 $ 4,960 $(177,800)(1) $ 404,547
Restricted cash and
securities................................. 13,629 -- -- 13,629
Receivables, net.............................. 15,084 3,562 -- 18,646
Prepaid expenses and other.................... 7,831 431 -- 8,262
--------- ------- --------- ----------
Total current assets.................. 613,931 8,953 (177,800) 445,084
Investments in affiliates....................... 8,298 577 -- 8,875
Restricted cash and securities.................. 1,176 -- -- 1,176
Equipment and leasehold improvements, net....... 50,446 15,111 -- 65,557
Other assets:
Goodwill, net................................. 236,696 976 245,028(1) 482,700
Other, net.................................... 23,165 161 -- 23,326
--------- ------- --------- ----------
Total assets.......................... $ 933,712 $25,778 $ 67,228 $1,026,718
========= ======= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses......... $ 34,363 $ 8,219 $ -- $ 42,582
Lines of credit, notes payable and current
portion of long-term debt and capital lease
obligations................................ 9,177 1,781 -- 10,958
Deferred revenue.............................. 12,512 4,924 -- 17,436
--------- ------- --------- ----------
Total current liabilities............. 56,052 14,924 -- 70,976
Long-term debt and capital lease obligations,
less current portion.......................... 674,618 4,951 -- 679,569
--------- ------- --------- ----------
Total liabilities..................... 730,670 19,875 -- 750,545
Minority interest............................... 361 -- (361) --
Stockholders' equity:
Common stock and additional paid-in capital... 376,197 8,056 (8,056)(2) 449,689
73,492(1)
Retained earnings (deficit)................... (173,516) (2,153) 2,153(2) (173,516)
--------- ------- --------- ----------
202,681 5,903 67,589 276,173
--------- ------- --------- ----------
Total liabilities and stockholders'
equity.............................. $ 933,712 $25,778 $ 67,228 $1,026,718
========= ======= ========= ==========
</TABLE>
F-4
<PAGE> 127
VERIO INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 (UNAUDITED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
PRO FORMA
COMBINED -- TOTAL
VERIO AND PRO FORMA
1998 COMBINED
ACQUISITIONS PRO FORMA VERIO
BEFORE HISTORICAL ADJUSTMENTS INCLUDING
HIWAY HIWAY (NOTE C) HIWAY
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Internet connectivity...................... $ 91,643 $ -- $ -- $ 91,643
Enhanced services and other................ 57,702 40,713 -- 98,415
----------- ------- ---------- -----------
Total revenue...................... 149,345 40,713 -- 190,058
----------- ------- ---------- -----------
Costs and expenses:
Cost of service............................ 62,724 11,887 -- 74,611
Selling, general and administrative and
other................................... 140,988 27,232 -- 168,220
Depreciation and amortization.............. 48,118 3,068 24,503(5) 75,689
----------- ------- ---------- -----------
Total costs and expenses........... 251,830 42,187 24,503 318,520
----------- ------- ---------- -----------
Earnings (loss) from operations......... (102,485) (1,474) (24,503) (128,462)
Other income (expense):
Interest income............................ 14,812 283 -- 15,095
Interest expense and other................. (36,028) (1,404) -- (37,432)
----------- ------- ---------- -----------
Earnings (loss) before minority
interests, income taxes, and
extraordinary item.................... (123,701) (2,595) (24,503) (150,799)
Minority interests........................... 127 -- -- 127
Income taxes................................. -- (935) 935(7) --
----------- ------- ---------- -----------
Earnings (loss) before extraordinary item.... $ (123,574) $(3,530) $ (23,568) $ (150,672)
=========== ======= ========== ===========
Weighted average shares outstanding -- basic
and diluted................................ 21,376,322 4,887,000(8) 26,263,322
=========== ========== ===========
Loss per common share before extraordinary
item -- basic and diluted.................. $ (5.78) $ (5.74)
=========== ===========
</TABLE>
F-5
<PAGE> 128
VERIO INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 (UNAUDITED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
PRO FORMA
COMBINED --
HISTORICAL VERIO AND
-------------------------- 1998
1998 PRO FORMA ACQUISITIONS
ACQUISITIONS ADJUSTMENTS BEFORE
VERIO (NOTE B) (NOTE C) HIWAY
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenue:
Internet connectivity.................. $ 76,139 $15,504 $ -- $ 91,643
Enhanced services and other............ 44,514 13,330 (142)(3) 57,702
----------- ------- ---------- -----------
Total revenue.................. 120,653 28,834 (142) 149,345
----------- ------- ---------- -----------
Costs and expenses:
Internet services operating costs...... 54,023 8,783 (82)(3) 62,724
Selling, general and administrative and
other............................... 117,922 23,126 (60)(3) 140,988
Depreciation and amortization.......... 39,726 758 7,634(4) 48,118
----------- ------- ---------- -----------
Total costs and expenses....... 211,671 32,667 7,492 251,830
----------- ------- ---------- -----------
Loss from operations................ (91,018) (3,833) (7,634) (102,485)
Other income (expense):
Interest income........................ 14,628 184 -- 14,812
Interest expense and other............. (35,946) (82) -- (36,028)
----------- ------- ---------- -----------
Loss before minority interests,
income taxes, and extraordinary
item.............................. (112,336) (3,731) (7,634) (123,701)
Minority interests....................... 482 -- (355)(6) 127
Income taxes............................. -- (552) 552(7) --
----------- ------- ---------- -----------
Loss before extraordinary item......... (111,854) (4,283) (7,437) (123,574)
Accretion of preferred stock to
liquidation value...................... (87) -- 87(2) --
----------- ------- ---------- -----------
Loss attributable to common stockholders
before extraordinary item.............. $ (111,941) $(4,283) $ (7,350) $ (123,574)
=========== ======= ========== ===========
Weighted average shares
outstanding -- basic and diluted....... 21,376,322 21,376,322
=========== ===========
Loss per common share before
extraordinary item -- basic and
diluted................................ $ (5.24) $ (5.78)
=========== ===========
</TABLE>
F-6
<PAGE> 129
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(A) BASIS OF PRESENTATION
During the year ended December 31, 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 December 31, 1998, Verio completed the acquisition of 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 1998 Acquisitions and the Hiway Acquisition is as follows:
<TABLE>
<CAPTION>
CONSIDERATION (IN THOUSANDS)
-------------------------------
PREFERRED
DECEMBER 31, 1998 ACQUISITION OWNERSHIP CASH AND OR COMMON
COMPLETED ACQUISITIONS DATE(S) PERCENTAGE NOTES STOCK(A) TOTAL(B)
---------------------- ------------------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
National Knowledge Networks, Inc................ August 2, 1996 26%
November 7, 1997 15%
February 27, 1998 59% $ 2,991 -- $ 2,991
Access One, Inc................................. December 12, 1996 20%
February 27, 1998 80% 6,107 -- 6,107
Signet Partners, Inc............................ December 19, 1996 25%
November 20, 1997 16%
February 26, 1998 59% 1,459 $ 1,283 2,742
Pacific Rim Network, Inc........................ February 4, 1997 27%
February 16, 1998 73% 880 -- 880
Internet Engineering Associates, Inc............ March 4, 1997 20%
February 25, 1998 80% 207 1,607 1,814
Structured Network Systems, Inc................. March 6, 1997 20%
April 16, 1998 80% 1,400 -- 1,400
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% 45,800 -- 45,800
Magic Net, Inc.................................. July 23, 1998 100% 3,300 -- 3,300
WWW-Service Online-Dienstleistungen AG.......... October 21, 1998 80% 80% -- 8,430
Tinkleman Enterprises, Inc. (NYNet)............. December 3, 1998 100% 100% -- 7,000
QualNet, Inc. (Internet Access Group, Inc. and
Great Plains Net, Inc.)....................... December 31, 1998 100% 100% -- 15,535
--------
Total................................... $124,860
========
Hiway........................................... January 5, 1999 100% 176,000 73,492 $249,492
========
</TABLE>
The total consideration, exclusive of acquisition costs of approximately
$6.4 million, for the above acquisitions has been allocated as follows:
<TABLE>
<CAPTION>
1998 ACQUISITIONS HIWAY
----------------- --------
<S> <C> <C>
Equipment................................................... $ 5,909 $ 15,111
Goodwill.................................................... 122,256 243,228
Net current assets (liabilities)............................ (3,305) (8,847)
-------- --------
Total............................................. $124,860 $249,492
======== ========
</TABLE>
F-7
<PAGE> 130
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(a) Represents shares of common stock or Series D-1 Preferred Stock valued at
$15 per share prior to February 28, 1998 or $22 per share after February
28, 1998. 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 for the 1998
Acquisitions. The share price used in the Hiway Acquisition represents the
quoted market price at the date of the Acquisition.
(b) Total consideration does not include acquisition costs.
The accompanying unaudited pro forma condensed combined balance sheet as of
December 31, 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 Hiway Acquisition. 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 statement of operation
for the year ended December 31, 1998 includes 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 Hiway Acquisition, adjusted for the pro forma
effects of the acquisitions.
(B) HISTORICAL CONDENSED STATEMENTS OF OPERATIONS INFORMATION -- 1998
ACQUISITIONS
Historical condensed statement of operations information for the 1998
Acquisitions for the year ended December 31, 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,
YEAR ENDED DECEMBER 31, 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:
Cost of service................................ 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>
F-8
<PAGE> 131
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<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
--------- --------- ----------- --------- -------- ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Internet
connectivity......... $265 $554 $435 $ 914 $472 $546 $ -- $1,302
Enhanced services and
other................ 68 147 180 491 26 155 5,430 203
---- ---- ---- ------ ---- ---- ------- ------
Total revenue.... 333 701 615 1,405 498 701 5,430 1,505
Operating costs and
expenses:
Cost of service........ 147 299 158 373 89 187 289 574
Selling, general and
administrative and
other................ 246 408 415 873 326 437 8,781 728
Depreciation and
amortization......... 9 39 27 54 15 44 99 55
---- ---- ---- ------ ---- ---- ------- ------
Total costs and
expenses........ 402 746 600 1,300 430 668 9,169 1,357
---- ---- ---- ------ ---- ---- ------- ------
Earnings (loss) from
operations......... (69) (45) 15 105 68 33 (3,739) 148
Interest income......... -- -- -- 9 -- 1 3 --
Interest expense........ -- (34) (3) (20) -- (18) -- (3)
---- ---- ---- ------ ---- ---- ------- ------
Earnings (loss)
before income
taxes.............. (69) (79) 12 94 68 16 (3,736) 145
Income taxes............ -- -- (4) (28) (20) (5) -- (43)
---- ---- ---- ------ ---- ---- ------- ------
Net earnings
(loss).......... $(69) $(79) $ 8 $ 66 $ 48 $ 11 $(3,736) $ 102
==== ==== ==== ====== ==== ==== ======= ======
<CAPTION>
WWW-SERVICE
ONLINE-
DIENSTLEISTUNGEN AG NYNET QUALNET, INC. TOTAL
------------------- ------- ------------- -------
<S> <C> <C> <C> <C>
Revenue:
Internet
connectivity......... $ -- $2,907 $6,526 $15,504
Enhanced services and
other................ 4,868 -- 1,432 13,330
------ ------- ------ -------
Total revenue.... 4,868 2,907 7,958 28,834
Operating costs and
expenses:
Cost of service........ 1,659 88 4,199 8,783
Selling, general and
administrative and
other................ 2,458 3,950 3,088 23,126
Depreciation and
amortization......... -- 151 151 758
------ ------- ------ -------
Total costs and
expenses........ 4,117 4,189 7,438 32,667
------ ------- ------ -------
Earnings (loss) from
operations......... 751 (1,282) 520 (3,833)
Interest income......... 153 -- 27 184
Interest expense........ -- -- -- (82)
------ ------- ------ -------
Earnings (loss)
before income
taxes.............. 904 (1,282) 547 (3,731)
Income taxes............ (271) -- (181) (552)
------ ------- ------ -------
Net earnings
(loss).......... $ 633 $(1,282) $ 366 $(4,283)
====== ======= ====== =======
</TABLE>
(C) PRO FORMA ADJUSTMENTS
The following pro forma adjustments have been made to the condensed
combined balance sheet as of December 31, 1998 and the condensed combined
statement of operations for the year ended December 31, 1998. The purchase
accounting adjustments relating to the 1998 Acquisitions are included in the
historical consolidated balance sheet of the Company as of December 31, 1998.
(1) To reflect cash of $177.8 million, including estimated acquisition
costs of $1.8 million, and the issuance of 4.9 million shares of common
stock (including 1.78 million shares to be issued for outstanding options
and warrants) valued at approximately $73.5 million in connection with the
Hiway Acquisition, and the allocation of the excess purchase price to
goodwill in the amount of approximately $245.0 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.
(2) To eliminate the equity accounts of the acquisitions and the
accretion of preferred stock to liquidation value.
(3) To eliminate intercompany revenue, expenses, receivables and
payables.
(4) To adjust amortization expense due to increase in carrying value of
goodwill resulting from the 1998 Acquisitions, using a ten-year life, as if
the acquisitions had occurred as of January 1, 1998.
(5) To adjust amortization expense due to increase in carrying value of
goodwill resulting from the Hiway Acquisition, using a ten-year life.
(6) To eliminate minority interests share of equity and equity in losses
of affiliates upon acquisition of 100% ownership interests.
F-9
<PAGE> 132
VERIO INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(7) To eliminate income tax expense or benefit of acquired businesses
due to consolidated net operating loss for the year ended December 31,
1998.
(8) To reflect the issuance of 4.9 million shares of common stock in
connection with the Hiway Acquisition.
F-10
<PAGE> 133
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, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
period from inception (March 1, 1996) to December 31, 1996 and the years ended
December 31, 1997 and 1998. These consolidated financial statements are the
responsibility of Verio'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, 1997 and 1998, and the results of their
operations and their cash flows for the period from inception (March 1, 1996) to
December 31, 1996 and the years ended December 31, 1997 and 1998 in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Denver, Colorado
March 4, 1999
F-11
<PAGE> 134
VERIO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- ---------
(AMOUNTS IN
THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 62,662 $ 433,424
Securities available for sale............................. 9,924 143,963
Restricted cash and securities (note 3)................... 21,015 13,629
Receivables:
Trade, net of allowance for doubtful accounts of $1,233
and $4,763............................................. 7,565 15,084
Affiliates.............................................. 735 --
Prepaid expenses and other................................ 3,921 7,831
-------- ---------
Total current assets................................ 105,822 613,931
Restricted cash and securities (note 4)..................... 19,539 1,176
Investments in affiliates, at cost (note 2)................. 2,378 8,298
Equipment and leasehold improvements:
Internet access and computer equipment.................... 30,535 66,408
Furniture, fixtures and computer software................. 3,301 5,823
Leasehold improvements.................................... 1,596 4,887
-------- ---------
35,432 77,118
Less accumulated depreciation and amortization............ (7,219) (26,672)
-------- ---------
Net equipment and leasehold improvements................ 28,213 50,446
Other assets:
Goodwill, net of accumulated amortization of $3,595 and
$21,614 (note 2)........................................ 83,216 236,696
Debt issuance costs, net of accumulated amortization of
$330 and $1,710......................................... 4,858 18,542
Other, net................................................ 2,445 4,623
-------- ---------
Total assets........................................ $246,471 $ 933,712
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 7,389 $ 10,501
Accrued expenses.......................................... 11,401 14,228
Accrued interest payable.................................. 844 9,634
Lines of credit, notes payable and current portion of
long-term debt (note 3)................................. 2,751 3,329
Current portion of capital lease obligations (note 4)..... 1,575 5,848
Deferred revenue.......................................... 7,177 12,512
-------- ---------
Total current liabilities........................... 31,137 56,052
Long-term debt, less current portion, net of discount (note
3)........................................................ 139,376 668,177
Capital lease obligations, less current portion (note 4).... 2,945 6,441
-------- ---------
Total liabilities................................... 173,458 730,670
-------- ---------
Minority interests in subsidiaries (note 2)................. 2,765 361
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, 1997....................................... 18,080 --
Series B, convertible, $.001 par value; 10,117,000 shares
authorized; 10,028,334 shares issued and outstanding at
December 31, 1997....................................... 59,193 --
Series C, convertible, $.001 par value; 2,500,000 shares
authorized, issued and outstanding at December 31,
1997.................................................... 19,976 --
-------- ---------
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 --
Preferred stock, undesignated; 12,500,000 shares
authorized; no shares issued and outstanding (note 5)... -- --
Common stock, $.001 par value; 125,000,000 shares
authorized; 1,254,533 and 33,146,010 shares issued and
outstanding at December 31, 1997 and 1998............... 1 33
Additional paid-in capital................................ 14,272 376,164
Accumulated deficit....................................... (51,474) (173,516)
-------- ---------
Total stockholders' equity (deficit)................ (27,001) 202,681
-------- ---------
Commitments and contingencies (note 4)
Total liabilities and stockholders' equity
(deficit)........................................... $246,471 $ 933,712
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE> 135
VERIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEARS ENDED
(MARCH 1, 1996) DECEMBER 31,
TO DECEMBER 31, -------------------------
1996 1997 1998
----------------- ---------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenue:
Internet connectivity:
Dedicated......................................... $ 1,100 $ 16,383 $ 53,274
Dial-up........................................... 1,139 7,093 22,865
Enhanced services and other.......................... 126 12,216 44,514
------- -------- ---------
Total revenue................................ 2,365 35,692 120,653
Costs and expenses:
Cost of service...................................... 974 15,974 54,023
Sales and marketing.................................. 1,190 10,744 33,320
General and administrative and other (note 6)........ 5,812 38,639 84,602
Depreciation and amortization........................ 669 10,624 39,726
------- -------- ---------
Total costs and expenses..................... 8,645 75,981 211,671
------- -------- ---------
Loss from operations......................... (6,280) (40,289) (91,018)
Other income (expense):
Interest income...................................... 593 6,080 14,628
Interest expense..................................... (115) (11,826) (35,946)
Equity in losses of affiliates....................... -- (1,958) --
------- -------- ---------
Loss before minority interests and
extraordinary item......................... (5,802) (47,993) (112,336)
Minority interests..................................... 680 1,924 482
------- -------- ---------
Loss before extraordinary item............... (5,122) (46,069) (111,854)
Extraordinary item -- loss related to debt repurchase
(note 3)............................................. -- -- (10,101)
------- -------- ---------
Net loss..................................... (5,122) (46,069) (121,955)
Accretion of preferred stock to liquidation value...... (23) (260) (87)
------- -------- ---------
Net loss attributable to common
stockholders............................... $(5,145) $(46,329) $(122,042)
======= ======== =========
Weighted average number of common shares outstanding --
basic and diluted.................................... 972 1,145 21,376
======= ======== =========
Loss per common share -- basic and diluted:
Loss per common share before extraordinary item...... $ (5.29) $ (40.47) $ (5.24)
Extraordinary item................................... -- -- (0.47)
------- -------- ---------
Loss per common share........................ $ (5.29) $ (40.47) $ (5.71)
======= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE> 136
VERIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
PREFERRED ------------------- PAID-IN ACCUMULATED
STOCK SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ---------- ------ ---------- ----------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<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........................ -- 157,885 -- 665 -- 665
Exercise of warrants....................... -- 656,988 1 5 -- 6
Employee purchases......................... -- 71,547 -- 988 -- 988
Issuance of common stock in initial public
offering, net of expenses (note 6)......... -- 5,735,000 6 120,812 -- 120,818
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 (note 2)...................... -- -- -- 1,937 -- 1,937
Stock option related compensation and
severance costs (note 6)................... -- -- -- 3,279 -- 3,279
Net loss..................................... (121,955) (121,955)
-------- ---------- --- -------- --------- ---------
BALANCES AT DECEMBER 31, 1998................ $ -- 33,146,010 $33 $376,164 $(173,516) $ 202,681
======== ========== === ======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE> 137
VERIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEARS ENDED
(MARCH 1, 1996) DECEMBER 31,
TO DECEMBER 31, ----------------------
1996 1997 1998
--------------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(5,122) $ (46,069) $(121,955)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization........................... 669 10,624 39,726
Minority interests' share of losses..................... (680) (1,924) (482)
Stock option related compensation and severance costs... -- -- 3,279
Equity in losses of affiliates.......................... -- 1,958 --
Extraordinary item -- loss related to debt repurchase... -- -- 10,101
Changes in operating assets and liabilities, excluding
effects of business combinations:
Receivables........................................... (265) (1,561) (2,058)
Prepaid expenses and other current assets............. (284) (2,305) (1,283)
Accounts payable...................................... 1,439 (1,656) (1,766)
Accrued expenses...................................... 1,910 3,082 654
Accrued interest payable.............................. -- 844 9,674
Deferred revenue...................................... 7 1,684 (129)
------- --------- ---------
Net cash used by operating activities.............. (2,326) (35,323) (64,239)
------- --------- ---------
Cash flows from investing activities:
Acquisition of equipment and leasehold improvements..... (3,430) (14,547) (23,058)
Acquisition of net assets in business combinations and
investments in affiliates, net of cash acquired....... (5,627) (64,023) (151,119)
Change in restricted cash and securities................ (40,554) 25,750
Purchase of securities available for sale, net.......... -- (9,924) (134,039)
Other................................................... (66) (1,206) (2,425)
------- --------- ---------
Net cash used by investing activities.............. (9,123) (130,254) (284,891)
------- --------- ---------
Cash flows from financing activities:
Proceeds from lines of credit, notes payable and
long-term debt........................................ -- 145,512 559,340
Repayments of lines of credit and notes payable......... (20) (3,468) (57,885)
Repayments of capital lease obligations................. (8) (950) (4,039)
Proceeds from issuance of common and preferred stock,
net of issuance costs................................. 77,944 20,678 222,476
------- --------- ---------
Net cash provided by financing activities.......... 77,916 161,772 719,892
------- --------- ---------
Net increase (decrease) in cash and cash
equivalents...................................... 66,467 (3,805) 370,762
Cash and cash equivalents:
Beginning of period..................................... -- 66,467 62,662
------- --------- ---------
End of period........................................... $66,467 $ 62,662 $ 433,424
======= ========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest.................................. $ -- $ 10,982 $ 27,156
======= ========= =========
Supplemental disclosures of non-cash investing and financing
activities:
Equipment acquired through capital lease obligations.... $ 58 $ 3,301 $ 11,027
======= ========= =========
Acquisition of net assets in business combinations
through issuance of notes payable..................... $ 6,675 $ 4,718 $ --
======= ========= =========
Acquisition of net assets in business combinations
through issuance of preferred stock and preferred
stock options......................................... $ -- $ 10,200 $ 28,663
======= ========= =========
Warrants issued in connection with debt offering........ $ -- $ 12,675 $ --
======= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-15
<PAGE> 138
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 Verio is to be the dominant,
full-service national provider of Internet connectivity and enhanced Internet
services to small and medium sized businesses. Verio commenced operations in
April 1996 and had no activity other than the sale of common stock to founders
prior to April 1, 1996. Verio operates in one business segment and has
operations in the United States and Europe. International operations were not
significant in 1996, 1997 or 1998.
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 amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
(b) Cash and Cash Equivalents, Restricted Cash and Securities Available for
Sale
Verio 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, 1997 and 1998 are U.S. government, municipal and corporate debt
securities, money market accounts and commercial paper totaling $65,518,000
(exclusive of cash overdraft in the amount of $11,228,000) and $433,304,000,
respectively, with maturities ranging from thirty to ninety days. Verio's
short-term investments consist of readily marketable debt securities with
remaining maturities of more than 90 days at time of purchase. Verio has
classified its entire investment portfolio as available for sale. Available for
sale securities are stated at fair value with unrealized gains and losses
included in stockholders' equity. At December 31, 1997 and 1998, the amortized
cost of these securities approximated market value.
Restricted cash and securities include U.S. government securities which are
considered to be securities held to maturity and recorded at cost. At December
31, 1997 and 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 generally represent newly issued preferred shares
of various affiliates. The preferred shares are convertible at the option of
Verio into common shares on a one-for-one basis and represent future common
stock ownership interests, upon conversion, of less than 50%. As Verio did not
acquire a common stock ownership interest, these investments are recorded at
cost until such time as the preferred shares are converted to common. In
addition, if these entities incur losses resulting in the equity of the common
shareholders being reduced to zero, Verio 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 Verio's investment, based
on the inability of the majority common shareholders to fund additional losses.
During the year ended December 31, 1997, Verio recognized equity in losses of
affiliates of $1,958,000 under this method of accounting. Such losses were not
significant for the year ended December 31, 1998.
F-16
<PAGE> 139
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Verio has also acquired preferred shares in certain entities which are
convertible into future common stock ownership interests of greater than 50%. In
these situations, Verio 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. As of December 31, 1998, Verio had acquired a 100% ownership interest in
all but two affiliates. Accordingly, the accounts of these investees have been
consolidated with those of Verio in the accompanying consolidated financial
statements from the dates of acquisition (see note 2).
(e) Other Assets
The excess of cost over the fair value of net assets acquired, or goodwill,
is amortized using the straight-line method over a 10-year period. Other
intangibles are amortized using the straight-line method over periods ranging
from three to seven years.
(f) Long-Lived Assets
Verio evaluates the carrying value of its long-lived assets, including
goodwill, 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 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
Verio 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 not reflected in the operations of Verio.
(i) Income Taxes
Verio 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.
F-17
<PAGE> 140
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(j) Stock-Based Compensation
Verio accounts for its stock-based 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).
Verio 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 years ended
December 31, 1996, 1997 and 1998.
(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). Under
SFAS 128, basic EPS excludes dilution for potential common stock 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. Basic and
diluted EPS are the same in 1996, 1997 and 1998, as all potential common stock
instruments are antidilutive.
(2) BUSINESS COMBINATIONS, INVESTMENTS IN AFFILIATES AND ASSET ACQUISITIONS
During the period from inception (March 1, 1996) to December 31, 1996,
Verio 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 Verio'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
INTEREST DECEMBER 31, APPROXIMATE
BUSINESS NAME ACQUISITION DATE PURCHASED(A) 1996(A) PURCHASE 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>
F-18
<PAGE> 141
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unconsolidated investments in 1996:
<TABLE>
<CAPTION>
TOTAL OWNERSHIP
OWNERSHIP INTEREST AT
INTEREST DECEMBER 31, APPROXIMATE
BUSINESS NAME ACQUISITION DATE PURCHASED(A) 1996(A) PURCHASE PRICE
------------- ---------------- ------------ --------------- --------------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C> <C> <C>
West Coast Online, Inc...... July 26, 1996 20% 20%(b) $ 225
National Knowledge Networks,
Inc....................... August 2, 1996 26% 26%(b) 300
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>
During the year ended December 31, 1997, Verio 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 Verio's consolidated statement of operations
from the dates of acquisition.
F-19
<PAGE> 142
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Seventeen subsidiaries were acquired and newly consolidated during 1997. In
addition, Verio 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>
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>
F-20
<PAGE> 143
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unconsolidated investments in 1997:
<TABLE>
<CAPTION>
TOTAL OWNERSHIP
OWNERSHIP INTEREST AT APPROXIMATE
INTEREST DECEMBER 31, PURCHASE
BUSINESS NAME ACQUISITION DATE PURCHASE(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 March 4, 1997 20% 20%(b) 206
Associates, Inc............
Internet Online, Inc......... March 5, 1997 35% 35%(b) 1,050
Structured Network Systems, March 6, 1997 20% 20%(b) 150
Inc........................
National Knowledge Networks, November 7, 1997 15% 41%(b) 599
Inc........................
Signet Partners, Inc......... November 20, 1997 16% 41%(b) 414
------
Acquisition costs.................................................................. $2,569
253
------
$2,822
======
</TABLE>
During the year ended December 31, 1998, Verio purchased additional
investments in 11 of Verio's affiliates and acquired 15 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 Verio's
F-21
<PAGE> 144
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
consolidated statement of operations from the dates of acquisition. Summary
information regarding the business combinations is as follows:
Consolidated acquisitions in 1998:
<TABLE>
<CAPTION>
OWNERSHIP TOTAL OWNERSHIP APPROXIMATE
INTEREST INTEREST AT PURCHASE
BUSINESS NAME ACQUISITION DATE PURCHASE(A) DECEMBER 31, 1998(A) PRICE(E)
------------- ---------------- ----------- -------------------- -----------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C> <C> <C>
Signet Partners, Inc............ January 30, 1998 14% -- --
February 26, 45% 100% $ 1,925
1998.............
Pacific Rim Network, Inc........ February 16, 1998 73% 100% 730
Clark Internet Services, Inc.... February 25, 1998 49% 100% 3,863
Internet Engineering Associates,
Inc........................... February 25, 1998 80% 100% 1,608
On-Ramp Technologies, Inc....... February 26, 1998 45% 100% 11,849
National Knowledge Networks,
Inc........................... February 27, 1998 59% 100% 2,092
Access One, Inc................. February 27, 1998 80% 100% 5,601
NSNet, Inc...................... February 27, 1998 100% 100% 3,661
NorthWestNet, Inc............... March 6, 1998 15% 100% 4,803
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% 45,800
MagicNet, Inc................... July 23, 1998 100% 100% 3,300
Smart.Connect (a division of
FiberServices, Inc.).......... August 5, 1998 100% 100% 1,009
TerraNet........................ August 7, 1998 100% 100% 4,271
Internet Now, Inc............... August 20, 1998 100% 100% 998
WWW-Service Online-
Dienstleistungen AG........... October 21, 1998 80% 80% 8,430
Tinkleman Enterprises, Inc.
(NYNet)....................... December 3, 1998 100% 100% 7,000
QualNet, Inc. (Internet Access
Group, Inc. and Great Plains
Net, Inc.).................... December 31, 1998 100% 100% 15,535
--------
168,237
Acquisition costs...................................................................... 6,255
--------
$174,492
========
</TABLE>
The aggregate purchase price, including acquisition costs, was allocated
based upon fair values as follows:
<TABLE>
<S> <C>
Equipment................................................... $ 6,586
Goodwill.................................................... 171,499
Net current liabilities..................................... (3,593)
--------
Total purchase price............................... $174,492
========
</TABLE>
F-22
<PAGE> 145
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------
(a) Represented 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) Represented ownership of preferred stock of affiliate or subsidiary.
(c) Represented ownership of common stock of affiliate or subsidiary.
(d) Represented 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 Verio in May 1998, as described in
note 5, was generally determined by Verio'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.
The following presents the condensed unaudited pro forma results of
operations of Verio as though the above noted acquisitions had occurred at the
beginning of the respective period in which the acquisition occurred, as well as
at the beginning of the immediately preceding period:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1998
----------- ------------
(AMOUNTS IN THOUSANDS,
EXCEPT FOR PER SHARE DATA)
<S> <C> <C>
Revenue..................................................... $106,524 $ 149,345
Loss before extraordinary item and accretion of preferred
stock..................................................... (71,525) (123,574)
Net loss.................................................... (71,525) (133,675)
Net loss attributable to common stockholders................ (71,785) (133,762)
Loss per common share -- basic and diluted.................. $ (62.69) $ (6.26)
</TABLE>
The pro forma results do not necessarily represent results that would have
occurred if the consolidated acquisitions had occurred at the beginning of the
respective periods nor are they necessarily indicative of the results of future
operations.
Investment in affiliates at December 31, 1998 represents the Company's
investment V-I-A Internet, Inc.
Subsequent to December 31, 1998, Verio completed the acquisition of all the
outstanding common stock of Best Internet Communications, Inc. (doing business
as Hiway Technologies, Inc.) for total consideration of approximately $254.7
million, including $176.0 million in cash and 4.92 million fully diluted shares
of common stock. Verio also completed another acquisition for approximately $8.0
million in cash subsequent to December 31, 1998.
Effective March 4, 1999, Verio entered into an agreement with America
Online, Inc. (AOL). Under this agreement, for a three-year period, Verio will
purchase advertising promotions from AOL to promote Verio's Web hosting and
related business-focused commerce products and services on AOL's four key U.S.
on-line media properties. Verio's promotional rights with respect to its Web
hosting and designated electronic commerce products and services are exclusive
during this period on these four specified sites. AOL also will transition its
approximately 7,000 Prime Host and CompuServe BusinessWeb hosting customers to
Verio, further expanding Verio's Web hosting customer base. Verio agreed to make
guaranteed payments totaling $42.5 million over the first two years of the three
year term of the agreement, with AOL participating in future revenue sharing
under specified circumstances defined in the agreement.
F-23
<PAGE> 146
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) DEBT
Lines of credit, notes payable and long-term debt as of December 31
consists of the following:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
11 1/4% Senior Notes due 2008(a)............................ $ -- $400,000
10 3/8% Senior Notes due 2005(b)............................ -- 175,000
13 1/2% Senior Notes due in 2004, net of unamortized
discount of $12,130,000 and 7,296,000 as of December 31,
1997 and December 31, 1998, respectively(c)............... 137,870 92,704
Revolving lines of credit, bearing interest at .5% to 2.00%
above prime, (9.0% to 10.5% at December 31, 1997) repaid
in 1998................................................... 788 --
Unsecured notes payable bearing interest primarily at 7%,
due in 1998 and 1999...................................... 2,809 1,418
Other....................................................... 660 2,384
-------- --------
142,127 671,506
Less current portion........................................ (2,751) (3,329)
-------- --------
Long-term debt, less current portion........................ $139,376 $668,177
======== ========
</TABLE>
- ---------------
(a) On November 25, 1998, Verio completed the private placement of $400.0
million principal amount of senior notes (the "November 1998 Notes"). The
November 1998 Notes are redeemable at the option of Verio commencing
December 1, 2003. The November 1998 Notes mature on December 1, 2008.
Interest on the November 1998 Notes, at the annual rate of 11 1/4%, is
payable semi-annually in arrears on June 1 and December 1 of each year,
commencing June 1, 1999. The November 1998 Notes are senior unsecured
obligations of Verio ranking equally in right of payment with all existing
and future unsecured and senior indebtedness. The November 1998 Notes
contain terms that are substantially similar to the March 1998 Notes and
the 1997 Notes.
(b) On March 25, 1998, Verio 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 Verio commencing April 1, 2002. The
March 1998 Notes mature on April 1, 2005. Interest on the March 1998 Notes,
at the annual rate of 10 3/8%, is payable semi-annually in arrears on April
1 and October 1 of each year, commencing October 1, 1998. The March 1998
Notes are senior unsecured obligations of Verio ranking equally in right of
payment with all existing and future unsecured and senior indebtedness. The
March 1998 Notes contain terms that are substantially similar to the 1997
Notes. Verio used approximately $54.5 million of the proceeds plus accrued
interest to repurchase $50.0 million principal amount of the 1997 Notes. As
a result, Verio was refunded approximately $13.3 million from the escrow
account for the 1997 Notes, of which approximately $1.9 million was used to
pay accrued and unpaid interest. This transaction resulted in an
extraordinary loss of $10.1 million.
(c) In June 1997, Verio completed a debt offering of $150.0 million, 13 1/2%
Senior Notes due 2004 (the "1997 Notes") and warrants to purchase 2,112,480
shares of common stock at $.01 per share, expiring on June 15, 2004, which
were valued at approximately $12.7 million based on Verio's most recent
equity offering. Interest on the 1997 Notes is payable semi-annually on
June 15 and December 15 of each year. The value attributed to the warrants
was recorded as debt discount and is being amortized to interest expense
using the interest method over the term of the 1997 Notes. Upon closing,
Verio deposited U.S. Treasury securities in an escrow account in an amount
that, together with interest on the securities, will be sufficient to fund
the first five interest payments (through December 1999) on the 1997 Notes.
This restricted cash and securities balance totaled $13.1 at December 31,
1998. The 1997 Notes are redeemable on or after June 15, 2002 at 103% of
the face value, decreasing to face value at
F-24
<PAGE> 147
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
maturity. The indenture covering the 1997 Notes includes various covenants
restricting the payment of dividends, additional indebtedness, disposition
of assets, and transactions with affiliates.
Maturities of lines of credit, notes payable and long-term debt are as
follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 3,329
2000........................................................ 473
2001........................................................ --
2002........................................................ --
2003........................................................ --
Thereafter.................................................. 667,704
--------
$671,506
========
</TABLE>
Verio 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 secured by substantially all of the
assets of Verio and expiring on December 31, 1999 with interest at 2% above the
London Interbank Offer Rate. There is a commitment fee of 1/2% per annum on the
undrawn amount of the credit facility and a one-time fee of 1/2% on any amounts
drawn. No borrowings are outstanding under this facility as of December 31,
1998.
(4) LEASES, COMMITMENTS AND CONTINGENCIES
Verio 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 2008. Future minimum annual lease
payments under these leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
1999........................................................ $ 6,578 $ 6,858
2000........................................................ 5,511 5,325
2001........................................................ 2,092 3,360
2002........................................................ 52 2,064
2003........................................................ 5 1,197
Thereafter.................................................. -- 3,185
------- -------
Total minimum payments............................ $14,238 $21,989
=======
Less amount representing interest and taxes................. (1,949)
-------
Present value of net minimum lease payments....... 12,289
Less current portion........................................ (5,848)
-------
$ 6,441
=======
</TABLE>
Rent expense for the period from inception (March 31, 1996) to December 31,
1996 and the years ended December 31, 1997 and 1998 was $128,000, $1,856,000,
and $4,048,000, respectively.
In addition, Verio has entered into agreements with three
telecommunications companies to provide Verio with products and services to be
used in its operations.
On March 31, 1998, Verio entered into a 15-year Capacity and Services
Agreement with Qwest Communications Corporation ("Qwest"), under which Verio
will have access to long haul capacity and
F-25
<PAGE> 148
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ancillary services on Qwest's nationwide MacroCapacity(sm) Fiber Network. The
Capacity and Services Agreement was amended on December 17, 1998 (as amended,
the "Capacity Agreement"). Over the first ten years of the term of the Capacity
Agreement (the "Commitment Term"), Verio must purchase, and Qwest must provide,
not less than $160.0 million, in the aggregate, of such capacity and services
(the "Commitment"), at agreed upon prices. Additionally, Verio has the right to
prepay its minimum commitment under this contract. If prepaid, such capitalized
costs would be amortized to operations over the term of the agreement. The
amount of the prepayment available at December 31, 1998 was approximately $84.1
million. 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 during the term of the Capacity Agreement, and after
the expiration of the Commitment Term, at the same prices.
Under the second agreement, Verio is obligated to spend a total of $39
million between June 16, 1997 and June 16, 2002 of which approximately $3.7
million had been paid as of December 31, 1998. Annual payments will be based on
actual usage by Verio.
Under the third agreement, Verio is obligated to spend $0.5 million during
1999.
Verio had an outstanding irrevocable letter of credit in the amount of $1.4
million as of December 31, 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 Verio's lease obligation to a third party.
The fair value of this letter of credit approximates contract value which is
fixed over the life of the commitment. Restricted cash in the amount of
approximately $1.5 million secures the letter of credit.
The Company is subject to litigation and claims incidental to its business.
While it is not feasible to predict or determine the financial outcome of these
matters, management does not believe they should result in a materially adverse
effect on the Company's financial position, results of operations or liquidity.
(5) PREFERRED STOCK
Series A, B and C preferred shares were issued at $3, $6 and $8 per share
for total proceeds of $18,100,001, $60,170,004 and $20,000,000, respectively, in
1996 and 1997. 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, Verio 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, Verio issued 1,534,513 additional shares of Series D-1 preferred stock
with values ranging from $15 to $22 per share in connection with business
combinations. In connection with Verio's initial public offering of common stock
discussed in note 6, all outstanding preferred shares were converted to common
stock in May 1998. At December 31, 1998, no preferred shares were issued and
outstanding. The Board of Directors have the authority to issue from time to
time up to 12,500,000 shares of undesignated preferred stock.
(6) STOCKHOLDERS' EQUITY
Common Stock Offerings
On May 15, 1998, Verio completed its initial public offering of common
stock. Verio issued 5,735,000 shares for net proceeds, after offering costs, of
approximately $120.8 million.
Concurrent with the above offering, Verio also sold an additional 4,493,877
shares to a strategic investor for total proceeds of approximately $100.0
million.
F-26
<PAGE> 149
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation Plans
Verio has established Incentive Stock Option Plans (the Plans) whereby, at
the discretion of the Board of Directors (the Board), Verio may grant stock
options to employees of Verio and its controlled subsidiaries. As of December
31, 1998, Verio had reserved 6,601,349 shares for issuance under the Plans.
Prior to Verio's initial public offering, the option price was determined by the
Board at the time the option is granted, with such price being not less than the
fair market value of Verio's common stock at the date of grant, as determined by
the Board. Options granted subsequent to the initial public offering are granted
at fair value based on quoted prices for Verio's common stock. As of December
31, 1998 options had been granted entitling the holders to purchase 6,601,349
shares of Verio's common stock, at exercise prices ranging from $1 to $30.06 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 Verio'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. Options may be
exercised prior to their scheduled vesting date, but are subject to a repurchase
by Verio at the exercise price until the scheduled vesting date.
The following table summarizes option activity for the period from
inception (March 1, 1996) through December 31, 1998:
<TABLE>
<CAPTION>
1996 1997 1998
------------------ -------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year.......................... -- $ -- 707,700 $2.83 2,183,850 $ 5.54
Granted......................... 707,700 2.83 1,747,550 6.54 5,738,614 18.46
Exercised....................... -- -- (76,200) 1.95 (157,885) 4.29
Canceled........................ -- -- (195,200) 6.06 (1,163,230) 11.51
------- --------- ----------
Outstanding at end of year...... 707,700 $2.83 2,183,850 $5.54 6,601,349 $15.75
======= ========= ==========
Options exercisable at year
end........................... -- -- 54,700 $5.67 607,846 $ 4.86
</TABLE>
A summary of the range of exercise prices and the weighted-average
contractual life of outstanding stock options at December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ----------------------------
WEIGHTED
NUMBER WEIGHTED AVERAGE WEIGHTED
OUTSTANDING AVERAGE REMAINING NUMBER AVERAGE
RANGE OF DECEMBER 31, EXERCISE CONTRACTUAL EXERCISABLE EXERCISE
EXERCISE PRICES 1998 PRICE LIFE (YEARS) DECEMBER 31, 1998 PRICE
- --------------- ------------ -------- ------------ ----------------- --------
<S> <C> <C> <C> <C> <C>
$ 1.00-$ 6.75 1,510,266 $ 4.91 8.5 559,418 $ 4.31
8.50- 13.50 1,474,980 $ 7.46 7.9 48,428 11.19
17.00- 19.00 843,845 $18.29 8.0 -- --
20.50- 22.75 2,457,358 $21.86 8.0 -- --
24.50- 30.06 314,900 $27.25 8.0 -- --
--------- -------
$ 1.00-$30.06 6,601,349 $15.75 8.1 607,846 $ 4.86
========= =======
</TABLE>
F-27
<PAGE> 150
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the period and years ended December 31, 1996, 1997 and 1998, the per
share weighted-average fair value of stock options granted was $.46, $1.08 and
$11.54, respectively, on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions: no
dividends, volatility of 0% in 1996 and 1997 and 95% in 1998, risk-free interest
rate of 6%, and expected life of three years. If Verio had recorded compensation
expense for the period and years ended December 31, 1996, 1997 and 1998, based
on the fair value of the options at the grant date under SFAS No. 123, net loss
attributable to common stockholders would increase to $5,210,000, $46,737,000
and $137,248,000, respectively, and basic and diluted net loss per common share
would increase to $5.36, $40.83 and $6.42, respectively.
Since inception, Verio has generally 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 prior
to the initial public offering, and quoted prices of Verio's common stock
thereafter. Accordingly, Verio had not recorded compensation expense related to
the granting of stock options in 1996, 1997 and through February 28, 1998.
Subsequent to February 28, 1998, Verio granted options to employees with
exercise prices less than the fair value per share based upon Verio's estimated
price per share in the initial public offering. Accordingly, Verio will record
compensation expense totaling approximately $8.2 million, as adjusted for
forfeitures, pro rata over the forty-eight month vesting period of the options.
This compensation expense totaled approximately $1.9 million for the year ended
December 31, 1998. In addition, Verio incurred $1.4 million in compensation
expense during the year ended December 31, 1998 related to accelerated vesting
of options and approximately $0.6 million in compensation expense related to
options issued to Verio's new president.
(7) INCOME TAXES
Income tax benefit for the period and years ended December 31 differs from
the amounts that would result from applying the federal statutory rate of 34% as
follows (in thousands):
<TABLE>
<CAPTION>
PERIOD OR YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Expected tax benefit.................................. $(1,749) $(15,752) $(41,494)
State income taxes, net of federal benefit............ (180) (1,622) (4,271)
Nondeductible goodwill amortization................... 26 820 5,374
Change in valuation allowance for deferred tax assets,
exclusive of effect of acquired net operating
losses.............................................. 1,877 16,472 38,698
Nondeductible portion of loss related to debt
repurchase.......................................... -- -- 1,375
Other, net............................................ 26 82 318
------- -------- --------
Actual income tax benefit............................. $ -- $ -- $ --
======= ======== ========
</TABLE>
F-28
<PAGE> 151
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Temporary differences that give rise to the components of deferred tax
assets as of December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Net operating loss carryforwards, including acquisitions.... $ 18,586 $ 50,597
Receivables due to allowance for doubtful accounts for tax
purposes only............................................. -- 779
Difference in amortization period for deductible goodwill... -- 1,140
Equipment and leasehold improvements due to differences in
depreciation.............................................. -- 2,739
Compensation expense related to stock options for financial
statement purposes only................................... -- 1,474
Other, net.................................................. 163 718
-------- --------
Gross deferred tax asset.......................... 18,749 57,447
Valuation allowance......................................... (18,749) (57,447)
-------- --------
Net deferred tax asset............................ $ -- $ --
======== ========
</TABLE>
At December 31, 1998, Verio has a net operating loss carryforward for
federal income tax purposes of approximately $133.1 million, which is available
to offset future federal taxable income, if any, through 2018. As a result of
various equity transactions during 1996, 1997 and 1998, management believes
Verio has undergone an "ownership change" as defined by section 382 of the
Internal Revenue Code. Accordingly, the utilization of a portion of the net
operating loss carryforward may be limited. Due to this limitation, and the
uncertainty regarding the ultimate utilization of the net operating loss
carryforward, no tax benefit for losses has been recorded by Verio in 1996, 1997
or 1998, and a valuation allowance has been recorded for the entire amount of
Verio's deferred tax asset.
(8) CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments that potentially subject Verio to concentrations of
credit risk consist primarily of cash, cash equivalents and accounts receivable.
As of December 31, 1996, 1997 and 1998, Verio had no significant concentrations
of credit risk. Concentrations of credit risk with respect to trade receivables
are limited due to the large number of customers comprising Verio's customer
base and the relatively minor balances of each individual account. At December
31, 1996, 1997 and 1998, the fair values of Verio's financial instruments
approximate their carrying value, based on their terms and interest rates and
quoted market prices.
(9) EMPLOYEE BENEFIT PLAN
Verio has a 401(k) Plan (the Plan) for all full time employees of Verio.
Verio may make discretionary contributions to the Plan on behalf of employees
that meet certain contribution eligibility requirements defined under the terms
of the Plan. Verio did not make any contributions to the Plan during 1996, 1997
or 1998.
F-29
<PAGE> 152
VERIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) QUARTERLY FINANCIAL DATA (UNAUDITED)
Summary quarterly financial information for Verio is as follows. The second
quarter of 1996 represents the period from inception (March 1, 1996) to June 30,
1996 (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 attributable to
common stockholders....... -- (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 attributable to
common stockholders....... (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 DECEMBER 31 TOTAL
---- -------- -------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenue........................ $ 21,198 $ 28,541 $ 33,804 $ 37,110 $ 120,653
Loss from operations........... (14,718) (21,327) (29,140) (25,833) (91,018)
Loss before extraordinary
item......................... (18,217) (26,294) (33,606) (33,737) (111,854)
Net loss attributable to common
stockholders................. (28,383) (26,316) (33,606) (33,737) (122,042)
Loss per common share before
extraordinary item -- basic
and diluted.................. (14.45) (1.44) (1.03) (1.02) (5.24)
Loss per common share -- basic
and diluted.................. (22.44) (1.44) (1.03) (1.02) (5.71)
</TABLE>
F-30
<PAGE> 153
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 ended December 31, 1996
and 1997 and the period from January 1, 1998 to February 27, 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 NSNet, Inc. as of December
31, 1996 and 1997, and the results of its operations and its cash flows for the
years ended December 31, 1996 and 1997 and the period from January 1, 1998 to
February 27, 1998 in conformity with generally accepted accounting principles.
KPMG LLP
Denver, Colorado
March 13, 1998
F-31
<PAGE> 154
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-32
<PAGE> 155
NSNET, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1997
AND PERIOD FROM JANUARY 1, 1998 TO FEBRUARY 27, 1998
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED DECEMBER 31, JANUARY 1, 1998
------------------------ TO
1996 1997 FEBRUARY 27, 1998
--------- ----------- -----------------
<S> <C> <C> <C>
Revenue:
Internet services................................. $887,939 $1,832,374 $324,718
Other............................................. -- 14,550 25,450
-------- ---------- --------
Total revenue............................. 887,939 1,846,924 350,168
-------- ---------- --------
Operating expenses:
Internet services operating costs................. 210,517 471,247 126,081
Selling, general and administrative............... 485,128 938,523 286,996
Depreciation...................................... 61,106 126,301 31,896
-------- ---------- --------
Total operating expenses.................. 756,751 1,536,071 444,973
-------- ---------- --------
Income (loss) from operations............. 131,188 310,853 (94,805)
Other income (expense), net......................... 1,885 (5,508) 4,581
-------- ---------- --------
Net income (loss)......................... $133,073 305,345 (90,224)
======== ========== ========
Pro forma information (unaudited):
Historical net income (loss)...................... 133,073 305,345 (90,224)
Pro forma adjustment for income tax expense....... (51,000) (116,000) --
-------- ---------- --------
Pro forma net income (loss)............... $ 82,073 $ 189,345 $(90,224)
======== ========== ========
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE> 156
NSNET, INC.
STATEMENTS OF OWNER'S AND STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1997
AND PERIOD FROM JANUARY 1, 1998 TO FEBRUARY 27, 1998
<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 income.................................... 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 income.................................... -- -- 305,345 305,345
--------- -------- --------- ---------
BALANCES AT DECEMBER 31, 1997................... -- 204,645 183,767 388,412
Net loss...................................... -- -- (90,224) (90,224)
--------- -------- --------- ---------
BALANCES AT FEBRUARY 27, 1998................... $ -- $204,645 $ 93,543 $ 298,188
========= ======== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE> 157
NSNET, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1997
AND PERIOD FROM JANUARY 1, 1998 TO FEBRUARY 27, 1998
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED JANUARY 1,
DECEMBER 31, 1998 TO
--------------------- FEBRUARY 27,
1996 1997 1998
--------- --------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $ 133,073 $ 305,345 (90,224)
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation......................................... 61,106 126,301 31,896
Provision for bad debts.............................. 3,133 24,334 --
Changes in operating assets and liabilities:
Receivables........................................ (17,073) (103,098) (5,336)
Prepaid expenses and other......................... (124,829) (208,301) 122,414
Accounts payable and accrued liabilities........... 26,911 93,726 33,968
Deferred revenue and customer advances............. 25,647 39,872 (5,692)
--------- --------- --------
Net cash provided by operating activities....... 107,968 278,179 87,026
--------- --------- --------
Cash flows from investing activities:
Purchases of equipment.................................. (141,372) (217,958) (39,043)
(Decrease) increase in other assets..................... -- (67,665) 17,665
--------- --------- --------
Net cash used by investing activities........... (141,372) (285,623) (21,378)
--------- --------- --------
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) (6,700)
Distributions........................................... (3,465) (121,578) --
--------- --------- --------
Net cash provided (used) by financing
activities.................................... 37,592 23,425 (6,700)
--------- --------- --------
Increase in cash................................ 4,188 15,981 58,948
Cash at beginning of period............................... -- 4,188 20,169
--------- --------- --------
Cash at end of period..................................... $ 4,188 $ 20,169 $ 79,117
========= ========= ========
Supplemental disclosure of cash flow information -- cash
paid during the period for interest..................... $ -- $ 5,508 $ 21,000
========= ========= ========
Noncash investing and financing activities -- equipment
acquired through capital lease obligations.............. $ -- $ 109,807 $ 32,313
========= ========= ========
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE> 158
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-36
<PAGE> 159
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-37
<PAGE> 160
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-38
<PAGE> 161
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
We have audited the accompanying balance sheets of Access One, Inc. as of
December 31, 1997 and the related statements of operations and accumulated
deficit, and cash flows for the year ended December 31, 1997 and period from
January 1, 1998 to February 27, 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 Access One, Inc. as of
December 31, 1997, and the results of its operations and its cash flows for the
year ended December 31, 1997 and period from January 1, 1998 to February 27,
1998 in conformity with generally accepted accounting principles.
KPMG LLP
Denver, Colorado
April 9, 1998
F-39
<PAGE> 162
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-40
<PAGE> 163
ACCESS ONE, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
YEAR ENDED DECEMBER 31, 1997
AND PERIOD FROM JANUARY 1, 1998 TO FEBRUARY 27, 1998
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
YEAR ENDED 1998 TO
DECEMBER 31, FEBRUARY 27,
1997 1998
---------------- ------------
<S> <C> <C>
Revenue:
Internet services......................................... $2,485,583 643,000
Enhanced services......................................... 702,639 108,000
Computer hardware and software sales...................... 303,465 --
Other..................................................... 27,019 --
---------- ---------
Total revenue..................................... 3,518,706 751,000
---------- ---------
Operating expenses:
Internet and enhanced services operating costs (note 5)... 613,084 268,000
Cost of hardware and software sales....................... 226,205 --
Selling, general and administrative (note 5).............. 2,922,073 535,000
Depreciation.............................................. 245,003 53,000
---------- ---------
Total operating expenses.......................... 4,006,365 856,000
---------- ---------
Loss from operations.............................. (487,659) (105,000)
Other expense:
Interest expense.......................................... (21,833) (11,000)
Other, net................................................ (3,808) --
---------- ---------
Net loss.......................................... $ (513,300) $(116,000)
========== =========
Retained earnings (accumulated deficit) at beginning of
period.................................................... 14,985 (498,315)
Accumulated deficit at end of period........................ (498,315) (614,315)
========== =========
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE> 164
ACCESS ONE, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
AND PERIOD FROM JANUARY 1, 1998 TO FEBRUARY 27, 1998
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1998 TO
DECEMBER 31, 1997 FEBRUARY 27, 1998
----------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(513,300) $(116,000)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation......................................... 245,003 53,000
Provision for bad debts.............................. 386,983 --
Changes in operating assets and liabilities:
Receivables....................................... (445,284) (53,611)
Inventory......................................... (40,635) 40,635
Prepaid expenses and other current assets......... (96,000) 4,698
Other assets...................................... (9,708) 9,853
Accounts payable and accrued liabilities.......... 541,280 255,571
Deferred revenue.................................. 148,798 20,665
--------- ---------
Net cash provided by operating activities.... 217,137 214,811
--------- ---------
Cash flows from investing activities -- purchase of
equipment................................................. (559,530) (89,859)
--------- ---------
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) (152,648)
Borrowings under notes to related parties................. 6,965 --
Principal payments under capital lease obligations........ (15,501) (5,757)
--------- ---------
Net cash provided (used) by financing
activities................................. 190,014 (158,405)
--------- ---------
Net decrease in cash......................... (152,379) (33,453)
Cash at beginning of period................................. 411,523 259,144
--------- ---------
Cash at end of period....................................... $ 259,144 $ 225,691
========= =========
Supplemental disclosure of cash flow information -- cash
paid during the period for interest....................... $ 21,822 $ 11,000
========= =========
</TABLE>
See accompanying notes to financial statements.
F-42
<PAGE> 165
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-43
<PAGE> 166
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-44
<PAGE> 167
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-45
<PAGE> 168
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-46
<PAGE> 169
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 ended December 31, 1997 and the period from January 1,
1998 to April 14, 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 STARnet, L.L.C. as of
December 31, 1997, and the results of its operations and its cash flows for the
year ended December 31, 1997 and the period from January 1, 1998 to April 14,
1998 in conformity with generally accepted accounting principles.
KPMG LLP
Denver, Colorado
March 4, 1999
F-47
<PAGE> 170
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-48
<PAGE> 171
STARNET, L.L.C.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM JANUARY 1, 1998 TO APRIL 14, 1998
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1998
DECEMBER 31, 1997 TO APRIL 14, 1998
----------------- -----------------
<S> <C> <C>
Revenue:
Internet services......................................... $1,201,504 $472,000
Computer hardware sales................................... 386,376 --
Other..................................................... 13,094 26,000
---------- --------
Total revenue..................................... 1,600,974 498,000
---------- --------
Operating expenses:
Internet services operating costs......................... 397,019 89,000
Cost of hardware sales.................................... 319,486 --
Selling, general and administrative....................... 570,461 326,000
Depreciation.............................................. 155,968 15,000
---------- --------
Total operating expenses.......................... 1,442,934 430,000
---------- --------
Earnings from operations.......................... 158,040 68,000
Other income (expense):
Interest income........................................... 9,411 --
Other, net................................................ (6,282) --
---------- --------
Net earnings...................................... $ 161,169 $ 68,000
========== ========
Pro forma information (unaudited):
Historical net earnings................................... 161,169 68,000
Pro forma adjustment for income tax expense............... (61,000) (20,000)
---------- --------
Pro forma net earnings............................ $ 100,169 $ 48,000
========== ========
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE> 172
STARNET, L.L.C.
STATEMENTS OF MEMBERS' EQUITY
YEAR ENDED DECEMBER 31, 1997 AND PERIOD
FROM JANUARY 1, 1998 TO APRIL 14, 1998
<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
---------
Net earnings................................................ 68,000
---------
Balance at April 14, 1998................................... $ 274,543
=========
</TABLE>
See accompanying notes to financial statements.
F-50
<PAGE> 173
STARNET, L.L.C.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 AND PERIOD
FROM JANUARY 1, 1998 TO APRIL 14, 1998
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1998 TO
DECEMBER 31, 1997 APRIL 14, 1998
----------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 161,169 $ 68,000
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation........................................... 155,968 15,000
Provision for bad debts................................ 44,484 --
Loss on sale of assets................................. 6,282 --
Changes in operating assets and liabilities:
Receivables.......................................... (40,725) (78,000)
Inventory............................................ 50,205 12,000
Prepaid expenses and other current assets............ (13,944) (3,000)
Other assets......................................... 834 --
Accounts payable and accrued liabilities............. (54,304) 28,000
Deferred revenue..................................... (3,346) (33,000)
--------- --------
Net cash provided by operating activities......... 306,623 9,000
--------- --------
Cash flows from investing activities -- purchase of
equipment................................................. (117,202) (9,000)
--------- --------
Cash flows from financing activities -- distributions to
members................................................... (244,735) --
--------- --------
Net decrease in cash.............................. (55,314) --
Cash at beginning of period................................. 265,403 210,000
--------- --------
Cash at end of period....................................... $ 210,089 $210,000
========= ========
</TABLE>
See accompanying notes to financial statements.
F-51
<PAGE> 174
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.
Effective April 14, 1998, the net assets of STARnet, L.L.C. were acquired
by Verio Inc.
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-52
<PAGE> 175
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-53
<PAGE> 176
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 ended December 31, 1996 and
1997 and the period from January 1, 1998 to April 15, 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 Computing Engineers Inc. as
of December 31, 1996 and 1997, and the results of its operations and its cash
flows for the years ended December 31, 1996 and 1997 and the period from January
1, 1998 to April 15, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Denver, Colorado
March 4, 1999
F-54
<PAGE> 177
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-55
<PAGE> 178
COMPUTING ENGINEERS INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1997
AND PERIOD FROM JANUARY 1, 1998 TO APRIL 15, 1998
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERIOD FROM
------------------------ JANUARY 1, 1998
1996 1997 TO APRIL 15, 1998
---------- ---------- -----------------
<S> <C> <C> <C>
Revenue:
Internet services................................. $2,326,898 $3,321,562 $ 914,000
Consulting services............................... -- 162,683 --
Computer hardware and software sales.............. 88,664 537,057 491,000
Other............................................. -- 58,176 --
---------- ---------- ----------
Total revenue............................. 2,415,562 4,079,478 1,405,000
---------- ---------- ----------
Operating expenses:
Internet services operating costs................. 606,522 632,653 174,000
Costs of hardware and software sales.............. 148,770 392,676 199,000
Marketing and selling............................. 47,155 299,990 112,000
General and administrative........................ 1,179,149 2,041,265 761,000
Depreciation and amortization..................... 144,953 329,296 54,000
---------- ---------- ----------
Total operating expenses.................. 2,126,549 3,695,880 1,300,000
---------- ---------- ----------
Earnings from operations.................. 289,013 383,598 105,000
Interest expense.................................... (19,254) (95,223) (11,000)
---------- ---------- ----------
Net earnings.............................. $ 269,759 $ 288,375 $ 94,000
========== ========== ==========
Pro forma information (unaudited):
Historical net earnings........................... $ 269,759 $ 288,375 $ 94,000
Pro forma adjustment for income tax expense....... (103,000) (110,000) (28,000)
---------- ---------- ----------
Pro forma net earnings.................... $ 166,759 $ 178,375 $ 66,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-56
<PAGE> 179
COMPUTING ENGINEERS INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1997
AND PERIOD FROM JANUARY 1, 1998 TO APRIL 15, 1998
<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
Net earnings........................... -- -- -- 94,000 94,000
--- ------ ------ --------- ---------
BALANCES AT APRIL 15, 1998............. -- $ -- $ -- $ 212,339 $ 218,339
=== ====== ====== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-57
<PAGE> 180
COMPUTING ENGINEERS INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1997
AND PERIOD FROM JANUARY 1, 1998 TO APRIL 15, 1998
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, PERIOD FROM
---------------------- JANUARY 1, 1998
1996 1997 TO APRIL 15, 1998
--------- --------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.................................... $ 269,759 $ 288,375 $ 94,000
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization................ 144,953 329,296 54,000
Provision for bad debts...................... 133,739 165,153 --
Changes in operating assets and liabilities:
Trade receivables.......................... (472,524) (253,525) (56,000)
Inventory.................................. -- (37,411) --
Prepaid expenses and other................. 142 -- (7,000)
Accounts payable........................... 355,223 (130,070) (32,000)
Accrued liabilities........................ 238 28,121 50,000
Deferred revenue........................... 146,010 103,807 (16,000)
--------- --------- ---------
Net cash provided by operating
activities............................ 577,540 493,746 87,000
--------- --------- ---------
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) (24,000)
Principal payments on capital lease
obligations.................................. (102,551) (319,441) (78,995)
Distributions to shareholders................... (122,899) (524,000) --
--------- --------- ---------
Net cash used by financing activities... (240,764) (248,859) (102,995)
--------- --------- ---------
Increase (decrease) in cash............. -- 15,995 (15,995)
Cash at beginning of period....................... -- -- 15,995
--------- --------- ---------
Cash at end of period............................. $ -- $ 15,995 $ --
========= ========= =========
Supplemental disclosure of cash flow
information -- cash paid during the period for
interest........................................ $ 19,254 $ 95,223 $ 20,000
========= ========= =========
Noncash investing and financing
activities -- equipment acquired through capital
lease obligations............................... $ 346,200 $ 328,429 $ --
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-58
<PAGE> 181
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.
Effective April 15, 1998, the net assets of Computing Engineers Inc. 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.
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
F-59
<PAGE> 182
COMPUTING ENGINEERS 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.
(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-60
<PAGE> 183
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, the nine months ended January 31, 1998 and the period from
February 1, 1998 to April 9, 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, the nine months ended January 31,
1998 and the period from February 1, 1998 to April 9, 1998 in conformity with
generally accepted accounting principles.
KPMG LLP
Denver, Colorado
March 4, 1999
F-61
<PAGE> 184
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-62
<PAGE> 185
LI NET, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED APRIL 30, 1996 AND 1997, NINE MONTHS ENDED JANUARY 31, 1998
AND PERIOD FROM FEBRUARY 1, 1998 TO APRIL 9, 1998
<TABLE>
<CAPTION>
NINE MONTHS PERIOD FROM
YEARS ENDED APRIL 30, ENDED FEBRUARY 1,
---------------------- JANUARY 31, 1998 TO
1996 1997 1998 APRIL 9, 1998
-------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Revenue:
Internet services......................... $608,714 $1,033,595 $1,430,480 $554,000
Computer hardware sales................... 152,854 325,723 90,233 147,000
-------- ---------- ---------- --------
Total revenue..................... 761,568 1,359,318 1,520,713 701,000
-------- ---------- ---------- --------
Operating expenses:
Internet services operating costs......... 197,025 317,225 551,993 228,000
Costs of hardware sold.................... 73,370 156,347 42,987 71,000
Selling, general and administrative
expenses(note 7)....................... 358,627 769,898 1,180,146 408,000
Depreciation.............................. 64,470 77,762 100,902 39,000
-------- ---------- ---------- --------
Total operating expenses.......... 693,492 1,321,232 1,876,028 746,000
Earnings (loss) from operations... 68,076 38,086 (355,315) (45,000)
Interest expense............................ (10,596) (55,325) (29,293) (34,000)
-------- ---------- ---------- --------
Earnings (loss) before income
taxes........................... 57,480 (17,239) (384,608) (79,000)
Income tax expense (note 5)................. (7,600) -- -- --
-------- ---------- ---------- --------
Net earnings (loss)............... $ 49,880 $ (17,239) $ (384,608) $(79,000)
======== ========== ========== ========
</TABLE>
See accompanying notes to financial statements.
F-63
<PAGE> 186
LI NET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED APRIL 30, 1996 AND 1997, NINE MONTHS ENDED JANUARY 31, 1998
AND PERIOD FROM FEBRUARY 1, 1998 TO APRIL 9, 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)
Net loss........................... -- -- (79,000) -- (79,000)
------- -------- --------- -------- ---------
BALANCES AT APRIL 9, 1998.......... $44,000 $273,100 $(457,233) $ -- $(140,133)
======= ======== ========= ======== =========
</TABLE>
See accompanying notes to financial statements.
F-64
<PAGE> 187
LI NET, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED APRIL 30, 1996 AND 1997, NINE MONTHS ENDED JANUARY 31, 1998 AND
PERIOD FROM FEBRUARY 1, 1998 TO APRIL 9, 1998
<TABLE>
<CAPTION>
NINE PERIOD FROM
YEARS ENDED MONTHS FEBRUARY 1,
APRIL 30, ENDED 1998
--------------------- JANUARY 31, TO APRIL 9,
1996 1997 1998 1998
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss).......................... $ 49,880 $ (17,239) $(384,608) $ (79,000)
Adjustments to reconcile net earnings (loss)
to net cash provided by operating
activities:
Depreciation.............................. 64,470 77,762 100,902 39,000
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) (24,000)
Prepaid expenses and other current
assets............................... -- (3,850) -- 1,000
Other assets............................ (13,602) (6,580) (3,651) 15,000
Accounts payable and accrued
liabilities.......................... 88,042 67,313 83,318 124,000
Deferred revenue........................ -- 77,766 80,974 8,000
--------- --------- --------- ---------
Net cash provided by operating
activities......................... 122,572 132,941 88,430 84,000
--------- --------- --------- ---------
Cash flows from investing
activities -- purchases of equipment......... (149,667) (94,633) (182,471) (143,000)
--------- --------- --------- ---------
Cash flows from financing activities:
Borrowings under revolving lines of credit... -- 15,265 24,728 --
Proceeds from borrowings from debt
issuances................................. -- -- 130,000 287,000
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) (137,000)
Purchase of treasury stock................... (10,000) (13,800) -- --
--------- --------- --------- ---------
Net cash provided (used) by financing
activities......................... 76,585 (52,084) 69,580 150,000
--------- --------- --------- ---------
Net increase (decrease) in cash...... 49,490 (13,776) (24,461) 91,000
Cash at beginning of period.................... 13,322 62,812 49,036 24,575
--------- --------- --------- ---------
Cash at end of period.......................... $ 62,812 $ 49,036 $ 24,575 $ 115,575
========= ========= ========= =========
Supplemental disclosure of cash flow
information -- cash paid during the period
for interest................................. $ 10,596 $ 39,621 $ 22,593 $ 34,000
========= ========= ========= =========
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-65
<PAGE> 188
LI NET, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1997 AND 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.
Effective April 30, 1998, the net assets of LI Net, Inc. 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.
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.
F-66
<PAGE> 189
LI NET, 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 April 30, 1997 and January 31, 1998, 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 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-67
<PAGE> 190
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-68
<PAGE> 191
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-69
<PAGE> 192
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-70
<PAGE> 193
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-71
<PAGE> 194
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-72
<PAGE> 195
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-73
<PAGE> 196
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-74
<PAGE> 197
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-75
<PAGE> 198
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-76
<PAGE> 199
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-77
<PAGE> 200
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio, Inc.:
We have audited the accompanying consolidated balance sheet of Best
Internet Communications, Inc. and subsidiaries as of December 31, 1998 and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. These consolidated statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Best
Internet Communications, Inc. and subsidiaries as of December 31, 1998 and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
KPMG LLP
Denver, Colorado
March 10, 1999
F-78
<PAGE> 201
BEST INTERNET COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents................................. $ 4,911
Certificate of deposit.................................... 49
Accounts receivable, net of allowance for doubtful
accounts of $1,792..................................... 3,562
Inventory................................................. 22
Prepaid expenses and other current assets................. 409
-------
Total current assets.............................. 8,953
Equipment and leasehold improvements, net................... 15,111
Investments................................................. 577
Goodwill, net of accumulated amortization of $533........... 976
Other assets................................................ 161
-------
Total assets...................................... $25,778
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 3,678
Other accrued liabilities................................. 4,541
Deferred revenue.......................................... 4,924
Current portion of notes payable.......................... 1,473
Current portion of capital lease obligations.............. 308
-------
Total current liabilities......................... 14,924
Notes payable, less current portion, net of discount........ 4,077
Deferred rent............................................... 729
Capital lease obligations, less current portion............. 145
-------
Total liabilities................................. 19,875
-------
Shareholders' equity:
Preferred stock, $0.001 par value, authorized 10,000,000
shares; none issued or outstanding..................... --
Common stock, $0.001 par value, authorized 60,000,000
shares; issued and outstanding 35,890,398 shares....... 36
Additional paid-in capital................................ 9,533
Notes receivable from shareholders........................ (1,513)
Accumulated deficit....................................... (2,153)
-------
Total shareholders' equity........................ 5,903
-------
Commitments (notes 5 and 8)
Total liabilities and shareholders' equity........ $25,778
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-79
<PAGE> 202
BEST INTERNET COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
Revenue..................................................... $40,713
-------
Operating costs and expenses:
Cost of revenue........................................... 11,887
Sales and marketing....................................... 6,895
Product development and systems engineering............... 2,822
General and administrative................................ 13,908
Merger costs.............................................. 6,675
-------
Total operating costs and expenses................ 42,187
-------
Loss from operations........................................ (1,474)
Other expense:
Interest expense, net..................................... (328)
Other, net................................................ (793)
-------
Loss before income taxes.................................... (2,595)
Income tax expense.......................................... 935
-------
Net loss.......................................... $(3,530)
=======
Pro forma information (unaudited) (note 1):
Historical net loss....................................... $(3,530)
Pro forma adjustment to income tax expense................ 843
-------
Pro forma net loss................................ $(4,373)
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-80
<PAGE> 203
BEST INTERNET COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 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,
1998.................. 3,462,000 $ 4,229 31,120,237 $31 4,209 (889) 1,377 8,957
Exercise of stock
options for cash...... -- 687,446 1 450 -- -- 451
Exercise of stock
options for notes..... -- 620,715 1 468 (469) -- --
Interest on notes
receivable from
shareholders.......... -- -- -- -- (155) -- (155)
Conversion of preferred
shares to common
stock................. (3,462,000) (4,229) 3,462,000 3 4,226 --
Contribution from
shareholders.......... -- -- -- -- 180 -- -- 180
Net loss................ (3,530) (3,530)
---------- ------- ---------- --- ----- ------ ------ ------
Balances, December 31,
1998.................. -- $ -- 35,890,398 $36 9,533 (1,513) (2,153) 5,903
========== ======= ========== === ===== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-81
<PAGE> 204
BEST INTERNET COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(3,530)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 3,068
Loss (gain) on sale and trade-in of equipment.......... 276
Amortization of discount on convertible debt........... 310
Deferred income tax expense............................ 88
Changes in operating assets and liabilities:
Accounts receivable.................................. (1,012)
Inventory............................................ 13
Prepaid expenses and other assets.................... (77)
Accounts payable..................................... 2,444
Other accrued liabilities............................ 3,942
Deferred revenue..................................... 2,346
Deferred rent........................................ 610
-------
Net cash provided by operating activities......... 8,478
-------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements......... (9,344)
Issuance of note receivable............................... 160
Purchase of investments................................... (233)
Purchase of certificate of deposit........................ (49)
Other..................................................... (23)
-------
Net cash used by investing activities............. (9,489)
-------
Cash flows from financing activities:
Proceeds from exercise of stock options................... 451
Proceeds from notes payable............................... 680
Principal payments on notes payable....................... (609)
Loans to shareholder...................................... (154)
Principal payments on capital lease obligations........... (298)
Contribution from shareholders............................ 180
-------
Net cash provided by financing activities......... 250
-------
Net decrease in cash and cash equivalents......... (761)
Cash and cash equivalents, beginning of year................ 5,672
-------
Cash and cash equivalents, end of year...................... $ 4,911
=======
Supplemental disclosures of cash flow information:
Cash paid for interest.................................... $ 612
=======
Cash paid for income taxes................................ $ 200
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-82
<PAGE> 205
BEST INTERNET COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BUSINESS AND BASIS OF PRESENTATION
Best Internet Communications, Inc. (the Company) was incorporated in
California on September 21, 1994. The Company is a 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 24X7 customer support. On May 27, 1998, the Company merged with
Hiway Technologies, Inc. (Hiway Florida), a company based in Florida in a
business combination accounted for as a pooling of interests. Hiway Florida was
formed on April 6, 1995 and operated as an S corporation. On January 5, 1999,
all of the Company's outstanding common shares were acquired by Verio, Inc.
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.
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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(B) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with
maturities of three months or less to be cash equivalents.
(C) 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 debt with
similar terms, the carrying values of notes payable and capital lease
obligations approximate fair value.
(D) 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 held
for resale.
(E) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements is stated at cost and is depreciated
using the straight line method over estimated useful lives ranging from five to
seven years. Leasehold improvements are amortized over the term of the lease or
the estimated useful life of the asset, 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.
F-83
<PAGE> 206
BEST INTERNET COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(F) LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets,
including goodwill, 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 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 amount or fair value, less costs to sell.
Intangible assets consist of goodwill which is being amortized on a
straight-line basis over seven years.
(G) REVENUE RECOGNITION
Revenue consists 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. Revenue from these
services is 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 not been significant.
(H) PRODUCT DEVELOPMENT
Product development expenses are charged to operations as incurred.
(I) INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109).
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.
(J) PRO FORMA NET INCOME
To properly reflect the Company's pro forma net income, the net income of
Hiway Florida (see note 2), which was not subject to income taxes prior to the
merger with the Company due to its S corporation status, has been tax effected
and included as a pro forma adjustment to income tax expense in the accompanying
consolidated statement of operations. This adjustment was computed as if the
merged company had been a taxable entity subject to federal and state income
taxes for the full year at the marginal tax rates applicable in such periods.
F-84
<PAGE> 207
BEST INTERNET COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) BUSINESS COMBINATION
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 at the same exchange rate as the common stock. The
transaction was accounted for as a pooling of interests and, accordingly, the
Company's financial statements have been presented to include the results of
Hiway Florida for the entire year.
Separate and combined results of operations for the year ended December 31,
1998 are as follows:
<TABLE>
<S> <C>
Revenue:
Best.................................................... $25,952
Hiway Florida........................................... 14,761
-------
Combined............................................. $40,713
=======
Net income (loss):
Best.................................................... $(5,683)
Hiway Florida........................................... 2,153
-------
Combined............................................. $(3,530)
=======
</TABLE>
(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 are comprised principally of cash and cash
equivalents, trade accounts receivable, and other receivables and deposits. As
of December 31, 1998, 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 histories and establishes reserves for
bad debts 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) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following at December
31, 1998:
<TABLE>
<S> <C>
Network, computer equipment and software................... $12,226
Furniture and fixtures..................................... 870
Leasehold improvements..................................... 1,748
Other...................................................... 4,584
-------
19,428
Less accumulated depreciation and amortization............. (4,317)
-------
$15,111
=======
</TABLE>
F-85
<PAGE> 208
BEST INTERNET COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in network and computer equipment is $923 of equipment acquired
under capital leases at December 31, 1998. Accumulated amortization related to
such capital leases was $313 at December 31, 1998.
(5) LEASES
The Company leases office space and network equipment under capital and
operating leases expiring at various dates through 2005. Future minimum annual
lease payments under these leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1999....................................................... $ 333 1,104
2000....................................................... 149 1,513
2001....................................................... 21 1,326
2002....................................................... -- 1,144
2003....................................................... -- 1,087
Thereafter................................................. -- 1,217
----- -----
Total minimum payments........................... 503 7,391
=====
Less amount representing interest.......................... (50)
-----
Present value of minimum lease payments.................... 453
Less current portion....................................... (308)
-----
$ 145
=====
</TABLE>
Rent expense on operating leases was $1,638 for the year ended December 31,
1998.
(6) NOTES PAYABLE
Notes payable consist of the following at December 31, 1998:
<TABLE>
<S> <C>
Bank notes and line of credit(a)........................... $ 1,385
Senior unsecured notes(b).................................. 4,077
Other...................................................... 88
-------
5,550
Less current portion....................................... (1,473)
-------
$ 4,077
=======
</TABLE>
(a) 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 monthly 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. At December 31, 1998
the Company was out of compliance with the covenants, and, accordingly, the
entire balance of the bank notes is classified as current. The Company also
has a 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. At December 31, 1998 the
amount outstanding on the line of credit was $500. In connection with the
acquisition by Verio Inc. the bank notes and line of credit were repaid.
F-86
<PAGE> 209
BEST INTERNET COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) 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 was recorded as
additional paid in capital and as debt discount thereby increasing the
effective interest rate to 13.895% and increasing interest expense for the
year ended December 31, 1998 to $558. The unamortized balance of debt
discount at December 31, 1998 was $923.
Future maturities of the notes payable, net of discount, as of December
31, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................ $1,473
2002........................................................ 4,077
------
$5,550
======
</TABLE>
(7) NOTES RECEIVABLE FROM SHAREHOLDERS
Notes receivable from shareholders consist of loans made to shareholders in
connection with the exercise of options for the Company's common stock or to
purchase common stock. The loans are recourse to the personal assets of the
shareholders, and bear interest at rates from 2% above prime to 8.5%, and are
due at various dates through 2000.
During 1997, the Company 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 the prime rate
and is due in 2000. The exercise price of the warrant 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.
(8) SHAREHOLDERS' EQUITY
(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 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.
(B) WARRANTS
In 1996 and 1997, the Company issued warrants to purchase common stock to
investors and lenders. At December 31, 1998 outstanding warrants were as
follows:
<TABLE>
<CAPTION>
SHARES OF
COMMON EXERCISE EXPIRATION
STOCK PRICE DATE PURPOSE OF WARRANT
- --------- -------- ---------- ------------------
<C> <C> <C> <S>
100,000 $0.50 January 2001 Issued in connection with note payable
200,000 0.50 January 2001 Issued in connection with note payable
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>
F-87
<PAGE> 210
BEST INTERNET COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(C) STOCK OPTIONS
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
options) 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 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 is the successor
to the 1996 Stock Option Plan. The Company has reserved a total of 4,000,000
shares of common stock for issuance under the Plan. 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. No additional options were
granted under these Plans prior to the Company's acquisition by Verio, Inc.
Activity under the Plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- --------
<S> <C> <C>
Balances, January 1, 1998................................... 2,115,044 $0.83
Options granted............................................. 852,150 5.80
Options exercised........................................... (1,308,161) .70
Options canceled............................................ (273,570) 3.45
---------- -----
Balances, December 31, 1998................................. 1,385,463 $3.46
========== =====
</TABLE>
The following table summarizes information with respect to stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING CURRENTLY
------------------------------------- EXERCISABLE
WEIGHTED -----------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
----------- ------------ -------- ----------- -----------
<S> <C> <C> <C> <C>
140,000 6.07 $0.10 140,000 $0.10
25,000 6.50 0.25 25,000 0.25
41,374 8.00 0.36 41,374 0.36
114,676 7.58 0.50 108,889 0.50
50,019 8.04 0.75 17,212 0.75
69,427 8.47 1.25 38,283 1.25
135,770 8.84 1.75 47,651 1.75
99,447 8.84 2.00 17,835 2.00
41,000 9.14 3.00 21,947 3.00
664,250 9.58 6.00 67,949 6.00
4,500 9.54 7.00 4,500 7.00
--------- -------
1,385,463 8.71 3.46 530,640 1.46
========= ==== ===== ======= =====
</TABLE>
F-88
<PAGE> 211
BEST INTERNET COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following pro forma 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>
<S> <C>
Risk-free interest rates................................... 6.25%
Expected volatility........................................ 0%
Expected life.............................................. 5 years
Dividends.................................................. None
</TABLE>
The weighted average fair value of the options granted in 1998 was $1.26.
The following pro forma net loss information has been prepared as if the
Company had followed the provisions of SFAS No. 123:
<TABLE>
<S> <C>
Net loss:
As reported.............................................. $3,530
Pro forma................................................ 4,321
</TABLE>
These pro forma amounts may not be representative of the effects on
reported net loss for future years as options vest over several years and
additional awards are generally made each year.
(9) INCOME TAXES
The Company's provision for income taxes for the year ended December 31,
1998 is as follows:
<TABLE>
<S> <C>
Current:
Federal................................................... $684
State..................................................... 163
----
847
Deferred:
Federal................................................... 77
State..................................................... 11
----
88
----
Total income tax expense.......................... $935
====
</TABLE>
F-89
<PAGE> 212
BEST INTERNET COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the Company's deferred income tax assets and liabilities
as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
Deferred tax assets (current):
Allowance for doubtful accounts.......................... $ 524
Deferred rent............................................ 252
Accrued liabilities...................................... 247
Other.................................................... 25
------
1,048
Deferred tax assets (non-current):
Amortization............................................. 91
Loss on asset sale....................................... 66
------
Deferred tax assets...................................... 1,205
Valuation allowance...................................... (758)
------
Net deferred tax asset........................... 447
Deferred tax liabilities (non-current):
Depreciation............................................. (447)
------
$ --
======
</TABLE>
Due to the uncertainty of the ultimate realization of the deferred tax
assets, a valuation allowance has been recorded for the entire amount of the net
deferred tax asset.
Actual income tax expense for the year ended December 31, 1998 differs from
the amount that would result from applying the federal statutory rate of 34% as
follows:
<TABLE>
<S> <C>
Expected tax benefit....................................... $ (882)
State income taxes, net.................................... 107
Change in valuation allowance.............................. 758
S corporation income of Hiway.............................. (843)
Nondeductible merger costs................................. 1,755
Other...................................................... 40
------
Actual income tax expense.................................. $ 935
======
</TABLE>
(10) EMPLOYEE BENEFIT PLAN
In September 1995, the Company adopted a retirement savings 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. The Company did not make any contribution to the
Plan during the year ended December 31, 1998.
F-90
<PAGE> 213
- ------------------------------------------------------
- ------------------------------------------------------
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> 214
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 which provides for indemnification of directors, officers and
other employees in certain circumstances, and to Section 102(b)(7) of the
General Corporation Law of the State of Delaware, 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
General Corporation Law of the State of Delaware. 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> 215
<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> 216
<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).
23.5**** -- Consent of Morrison & Foerster LLP.
24.1**** -- Power of Attorney.
25.1**** -- Form of T-1 Statement of Eligibility and Qualification
under the Trust Indenture Act of 1939 of First Trust
National Association.
27.1* -- Financial Data Schedule.
99.1**** -- Form of Letter of Transmittal with respect to the
Exchange 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.
**** Exhibit previously filed.
+ 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> 217
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> 218
(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> 219
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement on Form S-4
to be signed on its behalf by the undersigned, thereunto duly authorized, in
Englewood, Colorado, on April 9, 1999.
VERIO INC.
By: /s/ CARLA HAMRE DONELSON
------------------------------------
Carla Hamre Donelson
Vice President, General Counsel
and Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the 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 April 9, 1999
- -----------------------------------------------------
Steven C. Halstedt
/s/ JUSTIN L. JASCHKE* Chief Executive Officer and April 9, 1999
- ----------------------------------------------------- Director
Justin L. Jaschke
/s/ HERBERT R. HRIBAR* President and Chief Operating April 9, 1999
- ----------------------------------------------------- Officer and Director
Herbert R. Hribar
/s/ JAMES C. ALLEN* Director April 9, 1999
- -----------------------------------------------------
James C. Allen
/s/ TRYGVE E. MYHREN* Director April 9, 1999
- -----------------------------------------------------
Trygve E. Myhren
/s/ PAUL J. SALEM* Director April 9, 1999
- -----------------------------------------------------
Paul J. Salem
/s/ GEORGE J. STILL, JR.* Director April 9, 1999
- -----------------------------------------------------
George J. Still, Jr.
/s/ YUKIMASA ITO* Director April 9, 1999
- -----------------------------------------------------
Yukimasa Ito
/s/ ARTHUR L. CAHOON* Director April 9, 1999
- -----------------------------------------------------
Arthur L. Cahoon
/s/ PETER B. FRITZINGER* Chief Financial Officer April 9, 1999
- ----------------------------------------------------- (Principal Accounting Officer)
Peter B. Fritzinger
*By: /s/ CARLA HAMRE DONELSON
------------------------------------------------
Carla Hamre Donelson
Attorney-in-fact
</TABLE>
II-6
<PAGE> 220
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Verio Inc.:
Under date of March 4, 1999, we reported on the consolidated balance sheets
of Verio Inc. and subsidiaries as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the period from inception (March 1, 1996) to December 31, 1996 and the
years ended December 31, 1997 and 1998, 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 II -- Valuation and Qualifying Accounts. 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.
/s/ KPMG LLP
Denver, Colorado
March 4, 1999
S-1
<PAGE> 221
SCHEDULE II
VERIO INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND ADDITIONS FROM END OF
DESCRIPTION PERIOD EXPENSES ACQUISITIONS DEDUCTIONS PERIOD
----------- ------------ ---------- -------------- ---------- ----------
<S> <C> <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... $ 117 948 623 (455) 1,233
Year ended December 31, 1998:
Allowance for doubtful Accounts... $1,233 $3,204 $1,586 $(1,260) $4,763
</TABLE>
S-2
<PAGE> 222
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> 223
<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> 224
<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).
23.5**** -- Consent of Morrison & Foerster LLP.
24.1**** -- Power of Attorney.
25.1**** -- Form of T-1 Statement of Eligibility and Qualification
under the Trust Indenture Act of 1939 of First Trust
National Association.
27.1* -- Financial Data Schedule.
99.1**** -- Form of Letter of Transmittal with respect to the
Exchange 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.
**** Exhibit previously filed.
+ 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 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
April 7, 1999
