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FORM 10-Q
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: June 30, 2000
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________TO ___________
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COMMISSION FILE NUMBER: 000-24219
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VERIO INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1339720
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8005 S. CHESTER STREET, SUITE 200
ENGLEWOOD, COLORADO 80112
(Address of principal executive offices)
(Zip Code)
303/645-1900
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the registrant's common stock outstanding as of
August 10, 2000 was 82,247,815.
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VERIO INC.
FORM 10-Q
June 30, 2000
INDEX PAGE
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 31, 1999 and June 30,
2000 (unaudited) ............................................................... 3
Condensed Consolidated Statements of Operations and Comprehensive Loss -
Three Months Ended June 30, 1999 and June 30, 2000 (unaudited) ................. 4
Condensed Consolidated Statements of Operations and Comprehensive Loss -
Six Months Ended June 30, 1999 and June 30, 2000 (unaudited) ................... 5
Condensed Consolidated Statement of Stockholders' Equity - Six Months
Ended June 30, 2000 (unaudited) ................................................ 6
Condensed Consolidated Statements of Cash Flows - Six Months Ended
June 30, 1999 and June 30, 2000 (unaudited) .................................... 7
Notes to Condensed Consolidated Financial Statements .............................. 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................................. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk .................. 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................................... 18
Item 2. Changes in Securities and Use of Proceeds ................................... 19
Item 3. Defaults Upon Senior Securities ............................................. 19
Item 4. Submission of Matters to a Vote of Security Holders ......................... 19
Item 5. Other Information ........................................................... 20
Item 6. Exhibits and Reports on Form 8-K ............................................ 20
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
VERIO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, JUNE 30,
1999 2000
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 506,055 $ 381,468
Securities available for sale ........................................... 358,969 318,167
Restricted cash and securities (notes 1 and 5) .......................... 18,801 7,063
Trade receivables, net of allowance for doubtful accounts
of $8,694 and $9,882, respectively .................................... 32,642 35,805
Prepaid expenses and other .............................................. 14,386 20,153
----------- -----------
Total current assets ............................................. 930,853 762,656
Restricted cash and securities (notes 1 and 5) ............................ 1,680 1,369
Investments in affiliates, at cost (note 2) ............................... 8,957 28,608
Prepaid marketing expense ................................................. 17,247 15,141
Equipment and leasehold improvements (note 3) ............................. 269,132 392,561
Less accumulated depreciation and amortization ............................ (64,002) (101,919)
----------- -----------
Net equipment and leasehold improvements ................................ 205,130 290,642
Other assets:
Goodwill, net of accumulated amortization of $79,263 and
$110,568, respectively ................................................ 546,936 513,739
Debt issuance costs, net of accumulated amortization of
$3,934 and $5,802, respectively ....................................... 28,362 26,743
Other, net of accumulated amortization of $8,262 and
$13,186, respectively ................................................. 24,559 24,503
----------- -----------
Total assets ..................................................... $ 1,763,724 $ 1,663,401
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 29,807 $ 23,125
Accrued expenses ........................................................ 42,223 57,534
Accrued interest payable ................................................ 18,620 19,657
Line of credit, notes payable and current portion of
long-term debt ........................................................ 945 473
Current portion of capital lease obligations ............................ 15,447 24,174
Deferred revenue ........................................................ 24,800 29,718
----------- -----------
Total current liabilities ........................................ 131,842 154,681
Long-term debt, less current portion, net of discount ..................... 1,070,601 1,071,156
Capital lease obligations, less current portion ........................... 16,080 26,568
Other long-term liabilities ............................................... 12,078 1,861
----------- -----------
Total liabilities ................................................ 1,230,601 1,254,266
----------- -----------
Stockholders' equity (note 5):
Preferred stock, 12,500,000 and 20,000,000 shares authorized at
December 31, 1999 and June 30, 2000, respectively; 7,200,000 shares
issued and outstanding of 6.75% Series A Convertible Preferred
(aggregate liquidation preference $360,000) (notes 5 and 6) .......... 347,304 347,536
Common stock, $.001 par value; 250,000,000 and 750,00,000 shares
authorized; 77,769,395 and 84,986,524 shares issued and 77,769,395
and 82,126,524 outstanding at December 31, 1999 and June 30, 2000,
respectively (notes 5 and 6) ......................................... 78 82
Additional paid-in capital .............................................. 462,480 518,012
Accumulated deficit ..................................................... (366,290) (519,824)
Accumulated other comprehensive income .................................. 89,551 63,329
----------- -----------
Total stockholders' equity ....................................... 533,123 409,135
----------- -----------
Commitments and contingencies (note 4)
Total liabilities and stockholders' equity ....................... $ 1,763,724 $ 1,663,401
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
JUNE 30,
---------------------------
1999 2000
--------- ----------
(UNAUDITED)
Revenue:
Internet connectivity:
Dedicated ........................................ $ 23,102 $ 29,043
Dial-up .......................................... 6,153 5,340
Enhanced services and other ......................... 32,681 49,775
--------- ----------
Total revenue ............................... 61,936 84,158
Costs and expenses:
Cost of service ..................................... 20,139 26,948
Sales and marketing ................................. 14,702 20,680
General and administrative and other ................ 31,040 47,472
Depreciation and amortization ....................... 25,126 41,230
--------- ----------
Total costs and expenses .................... 91,007 136,330
--------- ----------
Loss from operations ............................. (29,071) (52,172)
Other income (expense):
Interest income ..................................... 4,232 13,012
Interest and other expenses ......................... (20,854) (31,803)
Equity in losses of affiliates ...................... -- (3,471)
--------- ----------
Net loss .................................... (45,693) (74,434)
Return on convertible preferred stock(note 5) ........ -- (6,075)
--------- ----------
Net loss attributable to common ............. $ (45,693) $ (80,509)
========= ==========
stockholders
Weighted average number of common shares
outstanding -- basic and diluted .................... 74,894 80,285
========= ==========
Loss per common share -- basic and diluted ............ $ (0.61) $ (1.00)
========= ==========
Net loss .............................................. $ (45,693) $ (74,434)
Other comprehensive loss:
Foreign currency translation loss ................... -- (27)
Unrealized loss on securities ....................... -- (60,465)
--------- ----------
Other comprehensive loss .............................. -- (60,492)
--------- ----------
Total comprehensive loss .................... $ (45,693) $ (134,926)
========= ==========
See accompanying notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED
JUNE 30,
---------------------------
1999 2000
--------- ---------
(UNAUDITED)
Revenue:
Internet connectivity:
Dedicated .................................................. $ 44,572 $ 57,072
Dial-up .................................................... 12,766 11,240
Enhanced services and other ................................... 59,722 96,986
--------- ----------
Total revenue ......................................... 117,060 165,298
Costs and expenses:
Cost of service ............................................... 39,545 52,987
Sales and marketing ........................................... 29,533 40,406
General and administrative and other .......................... 59,845 92,507
Depreciation and amortization ................................. 46,740 78,686
--------- ----------
Total costs and expenses .............................. 175,663 264,586
--------- ----------
Loss from operations ....................................... (58,603) (99,288)
Other income (expense):
Interest income ............................................... 9,010 24,972
Interest and other expenses ................................... (41,212) (63,597)
Equity in losses of affiliates ................................ -- (3,471)
--------- ----------
Net loss .............................................. (90,805) (141,384)
Return on convertible preferred stock (note 5) ................. -- (12,150)
--------- ----------
Net loss attributable to common stockholders .......... $ (90,805) $ (153,534)
========= ==========
Weighted average number of common shares
outstanding -- basic and diluted .............................. 73,903 79,423
========= ==========
Loss per common share -- basic and diluted ...................... $ (1.23) $ (1.93)
========= ==========
Net loss ........................................................ $ (90,805) $ (141,384)
Other comprehensive income (loss):
Foreign currency translation gain ............................. -- 131
Unrealized loss on securities ................................. -- (26,353)
--------- ----------
Other comprehensive loss ........................................ -- (26,222)
--------- ----------
Total comprehensive loss .............................. $ (90,805) $ (167,606)
========= ==========
See accompanying notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
CONVERTIBLE COMMON STOCK ADDITIONAL OTHER
PREFERRED --------------------- PAID-IN ACCUMULATED COMPREHENSIVE
STOCK SHARES AMOUNT CAPITAL DEFICIT INCOME TOTAL
----------- ---------- --------- ----------- ------------ ------------- ---------
Balances at January 1, 2000
(note 5): ....................... $ 347,304 77,769,395 $ 78 $ 462,480 $ (366,290) $ 89,551 $ 533,123
Issuance of common stock for:
Exercise of options ............. -- 1,968,929 2 20,207 -- -- 20,209
Exercise of warrants ............ -- 1,685,285 1 7 -- -- 8
Employee purchases .............. -- 62,915 -- 2,048 -- -- 2,048
Equity under swap agreement,
net (note 5) .................. -- 640,000 1 33,099 -- -- 33,100
Interest related to equity swap ... -- -- -- (543) -- -- (543)
Reimbursed issuance costs of
convertible preferred stock, net
of additional expenses..... ....... 232 -- -- -- -- -- 232
Stock option related compensation
and severance costs (note 5) .... -- -- -- 714 -- -- 714
Other comprehensive loss .......... -- -- -- -- -- (26,222) (26,222)
Return on convertible preferred
stock ........................... -- -- -- -- (12,150) -- (12,150)
Net loss .......................... -- -- -- -- (141,384) -- (141,384)
---------- ---------- ------ ---------- ---------- ---------- ----------
Balances at June 30, 2000
(unaudited) ..................... $ 347,536 82,126,524 $ 82 $ 518,012 $ (519,824) $ 63,329 $ 409,135
========== ========== ====== ========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
----------------------------
1999 2000
--------- ----------
(UNAUDITED)
Cash flows from operating activities:
Net loss ...................................................... $ (90,805) $ (141,384)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization ............................... 46,740 78,686
Stock option related compensation and severance costs ....... 1,345 714
Equity in losses of affiliates .............................. -- 3,471
Other ....................................................... -- 2,105
Changes in operating assets and liabilities, excluding
effects of business combinations:
Receivables ............................................... (4,810) (3,163)
Prepaid expenses and other current assets ................. (8,456) (5,766)
Accounts payable .......................................... (4,395) (6,681)
Accrued expenses .......................................... 12,099 6,741
Accrued interest payable .................................. (232) (11,073)
Deferred revenue .......................................... (784) 4,918
--------- ----------
Net cash used by operating activities .................. (49,298) (71,432)
--------- ----------
Cash flows from investing activities:
Acquisition of equipment and leasehold improvements ........... (21,459) (94,948)
Acquisition of net assets in business combinations
and investments in affiliates, net of cash acquired ......... (207,637) (30,751)
Change in restricted cash and securities ...................... 6,697 12,049
Change in securities available for sale ....................... 41,506 22,957
Other ......................................................... (10,559) (4,834)
--------- ----------
Net cash used by investing activities ....................... (191,452) (95,526)
--------- ----------
Cash flows from financing activities:
Debt issuance costs ........................................... (857) (249)
Repayments of lines of credit and notes payable ............... (2,723) (473)
Repayments of capital lease obligations ....................... (4,696) (12,272)
Proceeds from equity swap agreement, net ...................... -- 33,100
Proceeds from issuance of common and preferred stock,
net of issuance costs ....................................... 6,661 22,265
Net cash provided (used) by financing activities ............ (1,615) 42,371
--------- ----------
Net decrease in cash and cash equivalents ................... (242,365) (124,587)
Cash and cash equivalents:
Beginning of period ........................................... 433,424 506,055
--------- ----------
End of period ................................................. $ 191,059 $ 381,468
========= ==========
Supplemental disclosures of cash flow information:
Cash paid for interest ........................................ $ 40,858 $ 62,223
========= ==========
Cash paid for return on convertible preferred stock ........... $ -- $ 12,150
========= ==========
Supplemental disclosures of non-cash investing and
financing activities:
Equipment acquired through capital lease obligations .......... $ 11,990 $ 31,152
========= ==========
Acquisition of net assets in business combinations
through issuance of preferred stock, common stock and
preferred stock options ...................................... $ 65,508 $ --
========= ==========
Other liabilities incurred for prepaid marketing expense
and acquisition of customers through AOL agreement .......... $ 25,000 $ --
========= ==========
See accompanying notes to condensed consolidated financial statements.
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NOTES TO CONDENSED 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.
Since then, Verio has rapidly established a global presence by acquiring and
growing Internet service providers with a business customer focus. Verio is the
world-wide leader in hosting domain-based Web sites and is a leading provider of
high speed connectivity and enhanced services such as electronic commerce and
virtual private networks to small and medium sized businesses. Verio operates in
one business segment and has operations in the United States and Europe.
International customers generated approximately 10% of total revenue in each of
the six-month periods ended June 30, 1999 and June 30, 2000.
The accompanying unaudited financial information as of June 30, 2000 and for
the three and six-month periods ended on June 30, 1999 and June 30, 2000 has
been prepared in accordance with generally accepted accounting principles for
interim financial information. All significant adjustments, consisting of only
normal and recurring adjustments, which, in the opinion of management, are
necessary for a fair presentation of the results for each of the six-month
periods ended on June 30, 1999 and June 30, 2000 have been included. Operating
results for the six-month period ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the full year.
The accompanying condensed consolidated financial statements include the
accounts of Verio and its majority owned subsidiaries. All 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 significantly from those estimates. Certain
reclassifications have been made to the 1999 financial statements to conform
with the 2000 financial statement presentation. In particular, the financial
statements reflect the effect of the two-for-one stock split that became
effective on August 20, 1999 for stockholders of record at the close of business
on August 3, 1999 (the "Stock Split") which was effected in the form of a stock
dividend.
(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, 1999 and June 30, 2000 are U.S. government, municipal and
corporate debt securities, money market accounts and commercial paper totaling
$506.1 million and $381.5 million respectively, with maturities ranging from 30
to 90 days.
Restricted cash and securities include U.S. government securities that are
classified as securities held to maturity and are recorded at amortized cost. At
June 30, 1999 and June 30, 2000, amortized cost approximated fair value.
Verio has classified a portion of its investments as securities available
for sale, which are readily marketable debt securities with remaining maturities
of greater than 90 days but less than 360 days at time of purchase, and equity
securities. Available for sale securities are stated at fair value with
unrealized gains and loss included in other comprehensive income. Realized gains
and loss are determined on a specific identification basis. At June 30, 1999,
there were no material unrealized gains. At June 30, 2000, unrealized gains were
approximately $63.3 million, primarily related to equity securities.
(c) Other Assets
Goodwill consists of the excess of cost over the fair value of net assets
acquired and is generally amortized using the straight-line basis over 10 years.
Debt issuance costs are amortized using the interest method over the life of the
debt. Other intangibles consist primarily of costs associated with customer
acquisitions and non-compete agreements and are amortized on the straight-line
basis over three years.
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(2) INVESTMENTS IN AFFILIATES
In March 2000, Verio, LLC, a wholly-owned subsidiary of the Company,
invested $30.0 million in cash in Agilera.com, a next generation application
service provider that delivers customized e-business and enterprise solutions to
emerging and middle-market companies. Verio's Board of Directors designated
Verio, LLC as an "Unrestricted Subsidiary" in connection with its $100.0 million
revolving credit facility and each of the indentures pursuant to which Verio has
issued debt instruments. Verio accounts for its 39% equity interest in
Agilera.com under the equity method. In connection with the investment, Verio
entered into a commercial agreement with Agilera.com under which the Company
will provide infrastructure and services to Agilera.com, including Internet
connectivity through its Tier One network, as well as the servers, data center
facilities and managed services necessary for Agilera.com to offer its hosted
applications.
(3) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consisted of the following (in
thousands):
DECEMBER 31, JUNE 30,
1999 2000
------------ ---------
Internet access and computer equipment ........... $ 175,111 $ 255,513
Fiber capacity ................................... 65,477 65,477
Furniture, fixtures and computer software ........ 9,062 13,324
Leasehold improvements ........................... 19,482 58,247
--------- ---------
$ 269,132 $ 392,561
========= =========
Depreciation expense was $16.7 million and $38.5 million for the six months
ended June 30, 1999 and 2000, respectively. During the six months ended June 30,
2000, $2.1 million of purchased software was written off as management abandoned
the related project.
(4) COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is subject to certain legal
proceedings. In the opinion of management, the outcome of such litigation will
not have a material adverse effect on the Company's financial position,
operating results or liquidity.
(5) STOCKHOLDERS' EQUITY AND LOSS PER SHARE
A two-for-one stock split, which was effected on August 20, 1999 for
stockholders of record at the close of business on August 3, 1999, is reflected
in the accompanying financial statements for all periods presented.
At the April 27, 2000 annual meeting of the Company's stockholders,
amendments were adopted to restate the Company's certificate of incorporation to
increase the number of authorized common shares from 250.0 million to 750.0
million and to increase the number of authorized preferred shares from 12.5
million to 20.0 million.
In July 1999 Verio issued 7.2 million shares of its Series A 6.75%
Convertible Preferred Stock, with a liquidation preference of $50.00 per share,
for approximate net proceeds of $347.3 million. The shares of preferred stock
are convertible to shares of common stock at $48.2813 per share. The convertible
preferred stock may be redeemed, at the Company's option, at 102.0% of the
liquidation preference, plus accumulated and unpaid dividends on or after August
1, 2001, but prior to August 1, 2002, if the trading price of Verio common stock
equals or exceeds $72.4219 per share for a specified period. In addition to the
payments described above, holders would receive a payment equal to the present
value of the dividends that would thereafter have been payable on the
convertible preferred stock through and including August 1, 2002. Except as
described above, the Company may not redeem the convertible preferred stock
prior to August 1, 2002. Beginning on August 1, 2002, Verio may redeem the
convertible preferred stock initially at 103.8571% of the liquidation preference
and thereafter at prices declining to 100.0% on and after August 1, 2006, plus,
in each case, all accumulated and unpaid dividends. Verio may effect any
redemption, in whole or in part, by delivering cash, shares of common stock or a
combination thereof. At the closing of this offering, the initial purchasers of
the convertible preferred stock deposited approximately $24.3 million of the
proceeds into an account from which four, equal quarterly cash payments were
made to the preferred stockholders of record in the form of a return of capital.
As of June 30, 2000, three of the quarterly payments had been made; the
remaining payment of $6.1 million is included in restricted cash on the
consolidated balance sheet. The deposit account was fully disbursed on August 1,
2000. Subsequent to August 1, 2000, dividends will accrue on a cumulative basis
at 6.75% per annum.
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In March 2000, the Company and Verio, LLC entered into several agreements
with Salomon Brothers Holding Inc. ("Salomon"). Pursuant to a purchase agreement
("Purchase Agreement"), Verio, LLC sold 640,000 shares of Verio common stock to
Salomon for gross proceeds of $33.6 million. Simultaneously, the Company, Verio,
LLC and Salomon entered into an agreement ("Equity Swap Facility") whereby
Verio, LLC is obligated to repay the gross proceeds of $33.6 million, plus a
periodic fee equal to the LIBOR rate plus a 2% margin. The Equity Swap Facility
matures on December 18, 2000, but can be settled earlier by Verio, LLC without
penalty. Verio, LLC may, at its sole option, elect the method of settlement as
either share settlement or cash settlement. Due to Verio, LLC's ability and sole
option to distribute or receive shares of Verio common stock to settle the
Equity Swap Facility, the Company records all amounts received or paid under
this agreement as increases or decreases to equity.
In connection with the Equity Swap Facility, Verio, LLC entered into a
pledge agreement with Salomon. Under the terms of the pledge agreement, Verio,
LLC pledged an additional 2.86 million shares of Verio common stock to secure
the Equity Swap Facility. If the market value of these shares and the original
640,000 shares sold to Salomon falls below a specified ratio, Verio, LLC may be
required to pledge additional shares of Verio common stock.
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 June 30,
2000, Verio had reserved 25.9 million 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 was granted, with such price being not less than the
estimated fair value of Verio's common stock. Options granted subsequent to the
initial public offering are granted at fair value based on quoted prices for
Verio's common stock. As of June 30, 2000, options had been granted and remained
outstanding under the Plans entitling the holders to purchase approximately 15.8
million shares of Verio's common stock, at exercise prices ranging from $0.46 to
$61.13 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
on December 20, 1997 or later, vest over periods up to four years, and expire
eight years from the date of grant. Certain options granted prior to March 1998
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. In
addition, Verio has established a non-employee director stock incentive plan
(the "Director Plan") under which non-employee directors are granted stock
options in order to provide an incentive to them to serve the Company. As of
June 30, 2000, Verio has reserved 1.1 million shares for issuance under the
Director Plan. Options granted under the Director Plan are granted at fair value
based on quoted prices for Verio's common stock. As of June 30, 2000, options
had been granted and remained outstanding under the Director Plan entitling the
holders to purchase approximately 0.4 million shares of Verio's common stock.
With respect to certain option grants made subsequent to February 28, 1998
and before the completion of the initial public offering ("IPO"), Verio granted
options to employees with exercise prices that subsequently were determined to
be less than the fair value per share based upon Verio's estimated price per
share in the IPO. Accordingly, Verio is recognizing compensation expense
totaling approximately $7.5 million, as adjusted for forfeitures, pro rata over
the forty-eight month vesting period of the options. This compensation expense
totaled approximately $0.9 and $0.7 million for the six months ended June 30,
1999 and 2000, respectively.
Loss per share is calculated using weighted average common shares
outstanding, which in the case of weighted average diluted shares, excludes the
effect of common stock options and warrants, and convertible preferred stock,
all of which are anti-dilutive in 1999 and 2000.
(6) MERGER AND TENDER OFFERS
On May 7, 2000, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with NTT Communications Corporation ("NTT
Communications") and Chaser Acquisition, Inc., an indirect wholly-owned
subsidiary of NTT Communications ("Chaser"). Pursuant to the Merger Agreement,
and upon the terms and subject to the conditions thereof and as set forth in the
Offer to Purchase, dated May 17, 2000 (the "Offer to Purchase"), and in the
related Letters of Transmittal (which, together
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with the Offer to Purchase, as amended or supplemented from time to time,
constitute the "Equity Tender Offer"), Chaser has commenced a cash tender offer
for (i) all of the issued and outstanding shares of common stock of the Company
(other than shares of common stock already owned by NTT Communications and its
subsidiaries), at a purchase price of $60.00 per share, net to the seller in
cash, without interest thereon, (ii) all of the issued and outstanding shares of
Series A 6.75% convertible preferred stock, par value $.001 per share, of the
Company, at a purchase price of $62.136 per share, plus all accumulated and
unpaid dividends on each share of convertible preferred stock from August 1,
2000 to and including the expiration date of the Equity Tender Offer, net to the
seller in cash, without interest thereon, and (iii) certain outstanding warrants
to purchase 1,306,228 shares of common stock of the Company. The Equity Tender
Offer is subject to customary terms and conditions, including the tender of that
number of shares of the Company's common stock that, together with shares of
Company common stock currently held by NTT Communications and its subsidiaries,
constitute at least a majority of the Company's outstanding shares of common
stock on a fully diluted basis. Following the Equity Tender Offer, Chaser will
merge with and into the Company (the "Merger") and the Company will become an
indirect wholly-owned subsidiary of NTT Communications. In the Merger, the
remaining common and preferred shareholders of the Company will become entitled
to receive the per share consideration paid in the Equity Tender Offer.
Separately, pursuant to an Offer to Purchase and Consent Solicitation
Statement dated July 17, 2000 (the "Offer to Purchase the Notes"), the Company
commenced cash tender offers and consent solicitations for $1,075,000,000
aggregate principal amount of all of its outstanding 13 1/2% Senior Notes due
2004, 10 3/8% Senior Notes due 2005, 11 1/4% Senior Notes due 2008, and 10 5/8%
Senior Notes due 2009 (collectively, the "Notes"). On July 28, 2000, the Company
received tenders and the requisite consents from the holders of more than a
majority of the outstanding principal amount of each series of the Notes.
Accordingly, upon the terms and subject to the conditions set forth in the Offer
to Purchase the Notes, the Company and the trustee under each of the indentures
governing the Notes executed supplemental indentures with respect to each series
of Notes to eliminate certain covenants and amend certain provisions of the
indentures governing each series of Notes. Amendments implemented by a
supplemental indenture will not become operative until the Company accepts the
validly tendered Notes with respect to such indenture following the expiration
of the applicable offer to purchase the Notes.
The Company's acceptance of and payment for tendered Notes and consents with
respect to any series of Notes is subject to certain conditions, including: (i)
valid tender of a majority in outstanding principal amount of such series of
Notes; (ii) execution of a supplemental indenture for such series of Notes;
(iii) consummation of the Equity Tender Offer; (iv) funding provided by NTT
Communications to purchase the tendered Notes and make the consent payments; and
(v) satisfaction of certain general conditions.
The Company has obtained a loan commitment from NTT Communications to
provide debt financing of up to $1.3 billion to fund the payments pursuant to
the tender offers for the Notes and the related consent solicitations. The
funding of this financing is subject to certain conditions, including the
consummation of the Equity Tender Offer.
(7) SUBSEQUENT EVENTS
During August 2000, the Company and Verio, LLC invested an additional $5.7
million and $14.3 million in cash, respectively to Agilera.com. The Company's
equity interest is now 32% and is accounted for under the equity method.
On August 3, 2000, Verio, LLC and Citibank, N.A. entered into a $11.2
million credit agreement (the "Credit Agreement") in order to partially fund the
additional investment of $20.0 million by Verio, LLC in Agilera.com. As part of
the transaction, Verio, LLC and Salomon amended and restated their pledge
agreement to allow, among other things, for the 2.86 million shares of Verio
common stock to secure the amount loaned to Verio, LLC by Citibank, N.A. Also,
the Company, Verio, LLC and Salomon amended the terms of the Equity Swap
Facility in order, among other things, to allow Verio, LLC to enter into the
Credit Agreement, to grant Citibank, N.A. a right of payment under the Equity
Swap Facility and to acknowledge that Salomon has tendered in the on-going
Lender offer by Chaser Acquisition, Inc. (see note 6 below) the 640,000 shares
sold to Salomon in March 2000.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the audited
consolidated financial statements and related notes thereto included in Verio's
Annual Report on Form 10-K/A-1 for the year ended December 31, 1999, and the
condensed consolidated financial statements and related notes thereto appearing
elsewhere in this Form 10-Q.
OVERVIEW
Verio was founded in March 1996 and is the world's largest operator of Web
sites for businesses and a leading provider of comprehensive Internet services
with an emphasis on serving the small and medium sized business market. We offer
customers a broad range of Internet solutions, including:
o Telecommunication circuits -- permitting our customers to make
connections to and transmit data over the Internet.
o Web hosting services -- providing our customers with a presence on the
Internet in the form of a Web site. We offer a complete suite of Web
hosting services, including shared and dedicated server hosting for
customers who prefer that we provide the server hardware, as well as
co-location services where customers bring their own servers to a Verio
data center.
o Domain name registration -- providing a fast, on-line process for our
customers to reserve their personalized Web address (such as
www.yourcompany.com).
o Electronic commerce services -- enabling our customers to conduct
transactions with their customers and vendors over the Internet.
o Application hosting services -- providing our customers with the
functionality and features of business-focused software and database
applications on a shared or rented basis via the Internet. These
applications support and automate office systems and business processes,
such as financial reporting, payroll, sales order entry, shipping,
inventory management and customer service systems.
o Secure Internet communication links -- permitting our customers to
establish "virtual private networks" in order to engage in private and
secure Internet communication with their employees, vendors, customers
and suppliers.
o Other enhanced value Internet services, such as automated Web site
development tools and templates.
As of June 30, 2000, we served over 330,000 customer accounts, including
over 440,000 hosted Web sites, and had total revenue of approximately $165.3
million for the six months ended June 30, 2000.
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RESULTS OF OPERATIONS
The following table presents operating data, as a percentage of total
revenue, for the three and six-month periods ended June 30, 1999 and 2000. This
information has been derived from our Condensed Consolidated Financial
Statements included in this Form 10-Q. This information should be read in
conjunction with the Condensed Consolidated Financial Statements and Notes
thereto:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1999 2000 1999 2000
------- -------- -------- -------
Revenue:
Internet connectivity ................................... 47% 41% 49% 41%
Enhanced services and other ............................. 53% 59% 51% 59%
---- ---- ---- ----
Total revenue ...................................... 100% 100% 100% 100%
Costs and expenses:
Cost of service ......................................... 33% 32% 34% 32%
Sales and marketing ..................................... 24% 25% 25% 24%
General and administrative and other .................... 50% 56% 51% 56%
Depreciation and amortization ........................... 40% 49% 40% 48%
---- ---- ---- ----
Total costs and expenses ........................... 147% 162% 150% 160%
---- ---- ---- ----
Loss from operations ............................... (47)% (62)% (50)% (60)%
Other income (expense):
Interest income ......................................... 7% 15% 7% 15%
Interest expense ........................................ (34)% (38)% (35)% (38)%
Equity in losses of affiliates .......................... -- (4)% -- (2)%
---- ---- ---- ----
Net loss ........................................... (74)% (89)% (78)% (85)%
Return on convertible preferred stock ..................... -- (7)% -- (7)%
---- ---- ---- ----
Net loss attributable to common stockholders........ (74)% (96)% (78)% (92)%
==== ==== ==== ====
Revenue
Most of our revenue is received from business customers who purchase Web
hosting products, high-speed Internet connectivity, and other enhanced value
Internet services. Verio offers a broad range of connectivity options to its
customers including digital subscriber lines, integrated services digital
network, dedicated lines, frame relay and dial-up connections. Connectivity
customers typically sign a contract for one year of service and pay fixed,
recurring monthly service charges plus a one-time set-up fee under those
agreements. These charges vary depending on the type of service, the length of
the contract and local market conditions. Our shared and dedicated Web hosting
customers typically pay fixed, recurring monthly service charges plus a one-time
set-up fee. These charges vary depending on the amount of disk space and transit
required by the customer. Other enhanced services include:
o e-commerce;
o virtual private networks permitting our customers to engage in private
and secure Internet communication with their employees, vendors,
customers and suppliers;
o security services;
o co-location services, which include leased space, connectivity and
support services in specialized facilities for customers that wish to
place their own equipment and software in our secure, controlled
facilities;
o consulting; and
o the sales of equipment and customer circuits.
Revenue for all products is recognized as the service is provided. Amounts
billed relating to future periods are recorded as deferred revenue and are
recognized monthly as services are rendered.
We have experienced some seasonality in our internal revenue growth, with
the period of higher growth being the fall and winter. Verio's focus is on
services that generate recurring revenue from small and mid-sized business
customers. Revenue from business customers currently represents approximately
90% of revenue, and approximately 86% of revenue is recurring. No single
customer represents more than approximately 2% of revenue.
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Total revenue increased 36% from $61.9 million for the three months ended
June 30, 1999 to $84.2 million for the three months ended June 30, 2000 and
increased 41% from $117.1 million for the six months ended June 30, 1999 to
$165.3 million for the six months ended June 30, 2000. Internal growth
contributed significantly to this increase as well as the acquisition of
digitalNATION, which was completed after June 30, 1999. Revenue from Web hosting
and other Internet enhanced value services increased from 53% of revenue for the
three months ended June 30, 1999 to 59% for the three months ended June 30, 2000
and increased from 51% of revenue for the six months ended June 30, 1999 to 59%
for the six months ended June 30, 2000, and is expected to continue to grow as a
percent of revenue. Revenue growth rates for the three months ended June 30,
2000 were slower than anticipated due in part to delays in obtaining telco
circuits for new dedicated access customers and new colocation facilities, and a
decline in the market prices for domain name registration services. Dedicated
server sales were largely unaffected by these factors and continued increase
significantly. Also, during this period and the three months ended March
31,2000, there was a significant diversion of management resources to the events
leading to the Merger Agreement with NTT Communications and the closing efforts
required thereafter. This diversion of management resources continues as
management works to satisfy the closing requirements for the Equity Tender
Offer. However, once the Equity Tender Offer is completed, management expects
that its attention will be refocused on Verio's operations, as well as the
development and implementation, along with NTT Communications, of the new
strategic opportunities that this transaction provides.
Cost of Service
Cost of service consists primarily of local telecommunications expense,
which is the cost of transporting data between a customer's place of business,
Verio's local points of presence and a national point of presence. Cost of
service also includes Internet access expense and the cost of equipment sold to
customers. Internet access expense is the cost that we pay to lease fiber
capacity that we use to carry our customers' data between national points of
presence on the Internet. Most of the Internet businesses and operations we have
acquired were parties to various local telecommunications and Internet access
contracts with third parties when we acquired them. We are continuing the
process of converting the traffic carried by third parties to our own network.
Cost of service increased $6.8 million from $20.1 million for the three
months ended June 30, 1999 to $26.9 million for the three months ended June 30,
2000 and increased $13.5 million from $39.5 million for the six months ended
June 30, 1999 to $53.0 million for the six months ended June 30, 2000, primarily
as a result of internal growth and acquisitions. As a percentage of revenue,
cost of service decreased from 33% for the three months ended June 30, 1999 to
32% for the three months ended June 30, 2000 and decreased from 34% for the six
months ended June 30, 1999 to 32% for the six months ended June 30, 2000. This
improvement primarily reflects the scale efficiencies of our local and national
networks and the shift in our revenue mix to products with higher gross margin,
such as Web hosting. As Verio continues to grow, we expect our cost of service
to continue to increase in absolute dollars and decrease as a percentage of
total revenue. This decrease reflects Verio's revenue mix shift to higher margin
Web hosting and other enhanced value Internet services and the benefits of
shifting traffic from third party networks to the Verio network.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of salaries, commissions and
advertising.
Sales and marketing expenses increased $6.0 million from $14.7 million, or
24% of revenue, for the three months ended June 30, 1999 to $20.7 million, or
25% of revenue, for the three months ended June 30, 2000 and increased $10.9
million from $29.5 million, or 25% of revenue, for the six months ended June 30,
1999 to $40.4 million, or 24% of revenue, for the six months ended June 30,
2000, due to increases in the number of direct sales representatives, indirect
channel managers and marketing personnel. As Verio seeks to accelerate our
revenue growth, we also expect an increase in sales and marketing expenses -in
absolute dollars but we expect only limited changes as a percentage of revenue.
General and Administrative and Other Expenses
General and administrative and other expenses consist primarily of salaries
and related benefits, rent and utilities. Such expenses also include the
expenses of general management, engineering, customer care and accounting.
General and administrative and other expenses increased $16.5 million from
$31.0 million, or 50% of revenue, for the three months ended June 30, 1999, to
$47.5 million, or 56% of revenue, for the three months ended June 30, 2000 and
increased $32.7 million from $59.8 million, or 51% of revenue, for the six
months ended June 30, 1999, to $92.5 million, or 56% of revenue, for the six
months ended June 30, 2000. Included in the three and six months ended June 30,
2000 is approximately $1.0 million of fees related to the NTT Communications
Merger. Verio expects significant increases in general and administrative
expenses in absolute dollars primarily as a result of planned investments in new
and expanded data centers and customer operations.
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Depreciation and Amortization
Depreciation is provided over the estimated useful lives of assets ranging
from three to five years using the straight-line method. The excess of cost over
the fair value of net assets acquired, or goodwill, is amortized using the
straight-line method over a ten-year period. Debt issuance costs are amortized
over the life of the debt. Other intangibles consist primarily of the costs
associated with customer acquisitions and non-compete agreements and are
amortized over a three-year period or the life of the agreement. In 1999, the
Company entered into a 20-year capacity agreement with Qwest to acquire fiber
capacity on Qwest's fiber optic network for $65.5 million. This payment is being
depreciated over the life of the agreement.
Depreciation and amortization expenses increased $16.1 million from the
three months ended June 30, 1999 to June 30, 2000 and increased $31.9 million
from the six months ended June 30, 1999 to June 30, 2000, primarily as a result
of our investments in new and expanded data centers and goodwill. During the six
months ended June 30, 2000, $2.1 million of purchased software was written off
as management abandoned the related project. Depreciation expense is expected to
continue to significantly increase as we continue to invest in data centers and
customer operations.
Other Income (Expenses)
Interest income increased from $4.2 million for the three months ended June
30, 1999 to $13.0 million for the three months ended June 30, 2000 and increased
from $9.0 million for the six months ended June 30, 1999 to $25.0 million for
the six months ended June 30, 2000 due to increased cash balances resulting from
debt offerings, proceeds from the issuance of $360.0 million in preferred stock
in July 1999, and a $2.5 million gain on the sale of securities. See "--
Liquidity and Capital Resources." Interest and other expenses increased from
$20.9 million for the three months ended June 30, 1999 to $31.8 million for the
three months ended June 30, 2000 and increased from $41.2 million for the six
months ended June 30, 1999 to $63.6 million for the six months ended June 30,
2000, primarily due to the issuance of 10 5/8% Senior Notes due 2009 in November
1999.
Equity in Losses of Affiliates
Equity in losses of affiliates represents Verio's 39% equity interest in
Agilera.com, which was purchased in March 2000.
Return on Convertible Preferred Stock
The return on convertible preferred stock relates to the payments required
to be made at 6.75% per annum on $360.0 million, which was paid in cash
quarterly through August 1, 2000 from the deposit account established in
connection with the issuance of our Series A 6.75% Convertible Preferred Stock.
Amounts on deposit in the deposit account are recorded as restricted cash.
Subsequent to August 1, 2000, the obligation accrues on a cumulative basis at
the same rate of 6.75% per annum.
Other Comprehensive Loss
Other comprehensive loss was $60.5 million for the three months ended June
30, 2000, and $26.2 million for the six months ended June 30, 2000 primarily due
to the unrealized losses on investments in publicly traded equity securities.
Since these securities were not publicly traded as of June 30, 1999, no
comprehensive loss is recorded as of that date.
LIQUIDITY AND CAPITAL RESOURCES
Our business strategy has required, and is expected to continue to require,
substantial capital to fund acquisitions and investments, capital expenditures
and interest expense.
As of June 30, 2000, we had approximately $708.1 million in cash and cash
equivalents and securities available for sale (including $8.4 million of
restricted cash). Significant cash activity for the six months ended June 30,
2000 includes equipment purchases, investments and the Equity Swap Facility that
we entered into with Salomon. Cash used to purchase equipment increased $73.5
million for the six months ended June 30, 2000 compared to the six months ended
June 30, 1999, as we expanded our Web hosting and co-location physical
infrastructure, systems and personnel. The acquisition of Hiway in January 1999
resulted in an aggregate cash outflow of approximately $176.0 million in
investing activities compared to the March 2000 investment in shares of
Agilera.com, a subsidiary of CIBER, Inc., resulted in a cash outflow of
approximately $30.0 million. Also in 2000, the Equity Swap Facility with Salomon
resulted in $33.1 million (net) additional cash provided by financing
activities. Cash used by working capital items was $6.6
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million for the six months ended June 30, 1999, compared to $15.0 million used
by working capital items for the six months ended June 30, 2000.
Our business plan for 2000 currently anticipates investing approximately
$350.0 million over the year for capital expenditures. Approximately $300.0
million of the budgeted amount is for the expansion of hosting operations.
Specifically, the expenditures include $200.0 million for new and expanded
hosting centers, $45.0 million for additional servers, and the balance for
product development, software licenses, IT systems, a new Web operations control
center and leasehold improvements. The remaining $50.0 million of capital has
been budgeted for network equipment, systems and facilities to support the
growth of our high-speed access business. During the six months ended June 30,
2000, Verio made capital investments of $126.1 million.
We also have significant debt service requirements. At June 30, 2000 our
long-term liabilities were $1,099.6 million, and the expected annual interest
expense is approximately $119.2 million. The interest expense and principal
repayment obligations associated with our debt could have a significant effect
on our future operations.
We have a $100.0 million revolving credit facility with a group of
commercial lending institutions. This facility is secured by substantially all
of the stock of our subsidiaries and by an agreement with Qwest pursuant to
which Verio may lease fiber capacity from time to time. The credit facility
requires no payments of principal until its maturity on June 30, 2002. The terms
of the credit facility provide for borrowings at a margin of 2% above LIBOR.
There is a commitment fee of 1/2 of 1% per annum on the undrawn amount of the
credit facility. We have made no borrowings under the credit facility as of June
30, 2000.
The credit facility contains a number of other restrictions, including
limitations on our ability to:
o engage in businesses other than the Internet service business;
o place liens on our assets; and
o pay cash dividends on common stock.
In addition, under the credit facility, our indebtedness (less cash) may not
exceed 2.35 times our annualized pro forma revenue for the most recent quarter.
We currently have the ability to borrow the full $100.0 million commitment. We
are required to pay back any amounts borrowed under the credit facility with the
proceeds of new indebtedness, asset sales, free cash flow in excess of $5.0
million in any quarter, or the net proceeds from insurance claims.
Certain of our other debt instruments also 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
consolidated annualized pro forma operating cash flow is not higher than 6:1.
The indentures contain a number of other restrictions, including, among
others, limitations on our ability to:
o engage or make investments in businesses other than the Internet
service business;
o place liens on or dispose of our assets; and
o pay cash dividends on common stock.
If a change of control with respect to Verio occurs, we are required to make
an offer to purchase all the debt instruments then outstanding at a price equal
to 101% of the respective principal amount of the notes, plus accrued and unpaid
interest. We are in compliance with the provisions of all of our debt
agreements.
Pursuant to the Offer to Purchase the Notes, the Company commenced cash
tender offers and consent solicitations for $1,075,000,000 aggregate principal
amount of all of its outstanding Notes. On July 28, 2000, the Company received
tenders and the requisite consents from the holders of more than a majority of
the outstanding principal amount of each series of the Notes. Accordingly, upon
the terms and subject to the conditions set forth in the Offer to Purchase the
Notes, the Company and the trustee under each of the indentures governing the
Notes executed supplemental indentures with respect to each series of Notes to
eliminate
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certain covenants and amend certain provisions of the indentures governing each
series of Notes. The supplemental indentures will not become operative until the
Company accepts the validly tendered Notes with respect to such indenture
following the expiration of the applicable offer to purchase the Notes.
The Company's acceptance of and payment for tendered Notes and consents with
respect to any series of Notes is subject to certain conditions, including: (i)
valid tender of a majority in outstanding principal amount of such series of
Notes; (ii) execution of a supplemental indenture for such series of Notes;
(iii) consummation of the Equity Tender Offer; (iv) funding provided by NTT
Communications to purchase the tendered Notes and make the consent payments; and
(v) satisfaction of certain general conditions. As of the date of this filing, a
majority of the outstanding principal amount of each such series of Notes has
been tendered and the Company has executed the supplemental indenture for each
such series of Notes.
The Company has obtained a loan commitment from NTT Communications to
provide debt financing of up to $1.3 billion to fund the payments pursuant to
the tender offers for the Notes and the related consent solicitations. The
funding of this financing is subject to certain conditions, including the
consummation of the Equity Tender Offer.
In July 1999, we issued 7.2 million shares of Series A 6.75% Convertible
Preferred Stock, with a liquidation preference of $50.00 per share, for
approximate net proceeds of $347.3 million. The shares of preferred stock are
convertible to shares of common stock at $48.2813 per share. The convertible
preferred stock may be redeemed, at the Company's option, at 102.0% of the
liquidation preference, plus accumulated and unpaid dividends on or after August
1, 2001, but prior to August 1, 2002, if the trading price of Verio common stock
equals or exceeds $72.4219 per share for a specified period. In addition to the
payments described above, holders would receive a payment equal to the present
value of the dividends that would thereafter have been payable on the
convertible preferred stock through and including August 1, 2002. Except as
described above, the Company may not redeem the convertible preferred stock
prior to August 1, 2002. Beginning on August 1, 2002, Verio may redeem the
convertible preferred stock initially at 103.8571% of the liquidation preference
and thereafter at prices declining to 100.0% on and after August 1, 2006, plus,
in each case, all accumulated and unpaid dividends. Verio may effect any
redemption, in whole or in part, by delivering cash, shares of common stock or a
combination thereof.
On November 19, 1999, we sold $400.0 million principal amount of 10 5/8%
Senior Notes due 2009 in November 1999, for net proceeds of approximately $388.0
million. Interest at the annual rate of 10 5/8% is payable semi-annually in
arrears on May 15 and November 15 of each year commencing May 15, 2000. We have
the option of redeeming these notes at 105.313% of the principal amount starting
November 15, 2004 and at decreasing redemption premiums thereafter.
In March 2000, the Company and Verio, LLC entered into several agreements
with Salomon. Pursuant to the Purchase Agreement, Verio, LLC sold 640,000 shares
of Verio common stock to Salomon for gross proceeds of $33.6 million.
Simultaneously, Verio, LLC and Salomon entered into the Equity Swap Facility
whereby Verio, LLC is obligated to repay the gross proceeds of $33.6 million,
plus a periodic fee equal to a LIBOR based rate plus a 2% margin. The Equity
Swap Facility matures on December 18, 2000, but can be settled earlier by Verio,
LLC without penalty. Verio, LLC may, at its sole option, elect the method of
settlement as either share settlement or cash settlement. Due to Verio, LLC's
ability and sole option to distribute or receive shares of Verio common stock to
settle the Equity Swap Facility, the Company records all amounts received or
paid under this agreement as increases or decreases to equity.
During August 2000, the Company and Verio, LLC invested an additional $5.7
million and $14.3 million in cash, respectively to Agilera.com. The Company's
equity interest is now 32% and is accounted for under the equity method.
On August 3, 2000, Verio, LLC and Citibank, N.A. entered into a $11.2
million credit agreement (the "Credit Agreement") in order to partially fund the
additional investment of $20.0 million by Verio, LLC in Agilera.com. As part of
the transaction, Verio, LLC and Salomon amended and restated their pledge
agreement to allow, among other things, for the 2.86 million shares of Verio
common stock to secure the amount loaned to Verio, LLC by Citibank, N.A. Also,
the Company, Verio, LLC and Salomon amended the terms of the Equity Swap
Facility in order, among other things, to allow Verio, LLC to enter into the
Credit Agreement, to grant Citibank, N.A. a right of payment under the Equity
Swap Facility and to acknowledge that Salomon has tendered in the on-going
Lender offer by Chaser Acquisition, Inc. the 640,000 shares sold to Salomon in
March 2000.
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 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 increase or additional acquisition or
other investment opportunities become available.
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We expect to meet our capital needs for the next 12 months with cash on
hand, and beyond 12 months, to the extent that the Equity Tender Offer is not
consummated, with the proceeds from the sale or issuance of capital stock, the
credit facility, lease financing and additional debt. We regularly examine
financing alternatives based on prevailing market conditions and expect, if
appropriate, to access the capital markets from time to time based on our
current and anticipated cash needs and market opportunities. Over the longer
term, to the extent that the Equity Tender Offer is not consummated, we will be
dependent on obtaining positive operating cash flows and, to the extent cash
flows are not sufficient, the availability of additional financing, to meet our
debt service obligations. Insufficient funding may require us to delay or
abandon some of our planned future expansion or expenditures, which could have a
material adverse effect on our growth and ability to realize economies of scale.
In addition, our operating flexibility with respect to certain business
activities currently is limited by covenants associated with our indebtedness.
There can be no assurance that, if the Equity Tender Offer and the tender offers
for the Notes are not consummated, 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
In December 1999, the SEC released Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements", which provides guidance on
the recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. Subsequently, the SEC released SAB 101B, which delayed the
implementation date of SAB 101 for registrants with fiscal years that begin
between December 16, 1999 and March 15, 2000. We are required to be in
conformity with the provisions of SAB 101, as amended by SAB 101B, on October 1,
2000, and do not expect a material effect on our financial position, results of
operations or cash flows as a result of SAB 101.
In June 1998, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133). Statement of Financial Accounting Standards
No. 137, Accounting for Derivative Instruments and Hedging Activities --
Deferral of the Effective Date of SFAS 133 -- An Amendment of SFAS 133, has
delayed the effective date of SFAS 133 to fiscal years beginning after June 15,
2000. The adoption of these pronouncements is not expected to have a significant
effect on the Company's financial position or results of operations.
FORWARD-LOOKING STATEMENTS
The statements included in the discussion and analysis above that are not
historical or factual are "forward-looking statements" (as that term is defined
in the Private Securities Litigation Reform Act of 1995). The safe harbor
provisions provided in Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended, apply to
forward-looking statements made by Verio. These statements can be identified by
the use of forward-looking terminology such as "believes," "expects," "may,"
"will," "should," or "anticipates" or the negative thereof or other variations
thereon or comparable terminology, or by discussions of strategy that involve
risks and uncertainties. Management cautions the reader that these
forward-looking statements addressing the timing, costs and scope of our
acquisition of, or investments in, existing affiliates, the revenue and
profitability levels of the affiliates in which we invest, the anticipated
reduction in operating costs resulting from the integration and optimization of
those affiliates, and other matters contained herein or therein from time to
time regarding matters that are not historical facts, are only predictions. No
assurance can be given that future results indicated, whether expressed or
implied, will be achieved. While sometimes presented with numerical specificity,
these projections and other forward-looking statements are based on current
expectations and a variety of assumptions relating to the business of Verio,
which, although we consider them reasonable, may not be realized. Because of the
number and range of the assumptions underlying Verio's projections and forward-
looking statements, many of which are subject to significant uncertainties and
contingencies that are beyond the reasonable control of Verio, some of the
assumptions will not materialize and unanticipated events and circumstances may
occur subsequent to the date of this report. Therefore, the actual experience of
Verio and results achieved during the period covered by any particular
projections or forward-looking statements may differ substantially from those
projected.
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
No significant changes in the quantitative and qualitative disclosures about
market risk have occurred from the discussion contained in our report on Form
10-K/A-1 for the year ended December 31, 1999, which was filed with the
Securities and Exchange Commission (the "Commission") on March 27, 2000.
In connection with the Equity Swap Facility, Verio, LLC entered into a
pledge agreement with Salomon, which was amended and restated as of August 3,
2000. Under the terms of the pledge agreement, Verio, LLC pledged 2.86 million
shares of Verio common stock to secure the Equity Swap Facility and, as of
August 3, 2000, the Credit Agreement. If the market value of these shares and
the
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original 640,000 shares sold to Salomon falls below a specified ratio, Verio,
LLC will be required to pledge additional shares of Verio common stock to
Salomon.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Verio is party to various legal proceedings that have arisen in the ordinary
course of its business. We do not believe that any of these proceedings, if
determined adversely to us, would have a material adverse effect on us. In
addition, certain class action law suits have been filed against Verio and its
directors relating to the Equity Tender Offer (as disclosed in our previous
filings with the Commission in connection with the Equity Tender Offer). Verio
believes that these complaints are meritless and they will be defended
vigorously.
ITEM 2. Changes in Securities and Use of Proceeds
On April 26, 2000, the Company filed a Certificate of Amendment of
Certificate of Incorporation (the "Certificate of Amendment") with the Secretary
of State of the State of Delaware, which increased the number of shares of
capital stock that the Company is authorized to issue from 137,500,000 shares to
262,500,000 shares, consisting of 250,000,000 shares of common stock and
12,500,000 shares of preferred stock. This increase in the number of shares of
capital stock of the Company authorized for issuance was approved at the 1999
Annual Meeting of Stockholders, which was held on June 17, 1999. The stockholder
proposal authorized the Company's Board of Directors to file the Certificate of
Amendment at any time prior to the 2000 Annual Meeting of Stockholders of the
Company.
On April 28, 2000, following the 2000 Annual Meeting of Stockholders on
April 27, 2000, the Company filed a Certificate of Amendment of Certificate of
Incorporation with the Secretary of State of the State of Delaware, which
increased the number of shares of capital stock that the Company is authorized
to issue from 262,500,000 shares to 770,000,000 shares, consisting of
750,000,000 shares of common stock and 20,000,000 shares of preferred stock.
This increase in the number of shares of capital stock of the Company authorized
for issuance was approved at the 2000 Annual Meeting of Stockholders, which was
held on April 27, 2000.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its 2000 Annual Meeting of Stockholders on April 27,
2000.
(b) There were 78,724,424 shares of common stock of the Company outstanding
as of the record date and 86.51%, or 68,104,800 shares of common stock were
represented at such meeting, in person or by proxy, which constituted a quorum.
The matters voted upon at the Annual Meeting and the results of the voting as to
each such matter are set forth below:
(i) The following individuals were elected as Class II directors of the
Company, for terms to expire at the Annual Meeting to be held in the year 2003:
Votes For Votes Withheld
Steven C. Halstedt 63,139,393 4,965,407
James C. Allen 59,384,902 8,719,898
(ii) Approval of an amendment to the Company's Restated Certificate of
Incorporation to increase the authorized number of shares of common stock of the
Company from 125,000,000 shares to 750,000,000 shares:
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For Against Abstain Broker Non-Votes
48,470,010 19,598,743 38,047 0
(iii) Approval of an amendment to the Company's Restated Certificate of
Incorporation to increase the authorized number of shares of preferred stock of
the Company from 12,500,000 shares to 20,000,000 shares:
For Against Abstain Broker Non-Votes
48,573,356 5,209,392 42,803 14,279,249
(iv) Approval and ratification of amendments to the Company's 1998
Stock Incentive Plan to increase the number of shares reserved for issuance
under the 1998 Stock Incentive Plan by 7,500,000 shares, adopt a limit on the
maximum number of shares with respect to which options may be granted to any
grantee in any fiscal year of the Company and certain other administrative
provisions to comply with the performance-based compensation exception to the
deduction limit of Section 162(m) of the Internal Revenue Code of 1986, as
amended, as well as certain other amendments that do not require stockholder
approval:
For Against Abstain Broker Non-Votes
35,779,785 17,977,329 68,437 14,279,249
(v) The ratification of the appointment by the Board of Directors of
KPMG LLP as independent auditors of the Company for the fiscal year ending
December 31, 2000.
For Against Abstain Broker Non-Votes
67,374,234 31,506 35,080 0
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See attached exhibit index.
(b) Reports on Form 8-K
On May 1, 2000, the Company filed a Current Report on Form 8-K, dated
the same date. The Current Report included as an exhibit a press release issued
by the Company announcing the appointment of Thomas A. Marinkovich to the
Company's Board of Directors, effective as of April 27, 2000, and that Mr.
Marinkovich would also serve as chairman of the Audit Committee of the Board of
Directors.
On May 8, 2000, the Company filed a Current Report on Form 8-K, dated
the same date, reporting that the Company, NTT Communications and Chaser, a
wholly-owned subsidiary of NTT Communications, entered into the Merger Agreement
discussed in note 6 to Item 1.
On June 2, 2000, the Company filed a Current Report on Form 8-K, dated
the same date, reporting that no change in control of the Company had occurred,
but that, if the Equity Tender Offer is consummated as described in the Merger
Agreement, the Tender Offer Statement on Schedule TO and the Solicitation/
Recommendation Statement on Schedule 14D-9, a change in control of the Company
will occur as described in those documents. The Current Report incorporated by
reference the following exhibits: Tender Offer Statement on Schedule TO, dated
May 17, 2000, filed with the Commission by Chaser, NTT Communications and Nippon
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Telegraph and Telephone Corporation ("NTT"); the Solicitation/Recommendation
Statements on Schedule 14D-9, dated May 18, 2000, filed with the Commission by
Verio; Amendment No. 1 to the Tender Offer Statement on Schedule TO, dated May
23, 2000, filed with the Commission by Chaser, NTT Communications and NTT;
Amendment No. 1 to the Solicitation/Recommendation Statement on Schedule 14D-9,
dated May 24, 2000, filed with the Commission by Verio; and Amendment No. 2 to
the Tender Offer Statement on Schedule TO, dated May 31, 2000, filed with the
Commission by Chaser, NTT Communications and NTT.
On June 28, 2000, the Company filed a Current Report on Form 8-K, dated
the same date, reporting that since June 2, 2000, Chaser, NTT Communications and
NTT filed with the Commission on each of June 13, 2000, June 15, 2000 and June
20, 2000, respectively, Amendment No. 3, Amendment No. 4 and Amendment No. 5 to
the Tender Offer Statement on Schedule TO. On each of June 13, 2000, June 15,
2000 and June 20, 2000, respectively, the Company filed with the Commission
Amendment No. 2, Amendment No. 3 and Amendment No. 4 to the
Solicitation/Recommendation Statement on Schedule 14D-9. The Current Report
incorporated by reference each of the amendments described above.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VERIO INC.
Date: August 14, 2000 /s/ Peter B. Fritzinger
-----------------------------------------------
Peter B. Fritzinger
Chief Financial Officer
Date: August 14, 2000 /s/ Carla Hamre Donelson
-----------------------------------------------
Carla Hamre Donelson
Vice President, General Counsel and Secretary
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1* Agreement and Plan of Merger, dated as of May 7, 2000, among NTT
Communications Corporation, Chaser Acquisition, Inc. and the Company+
4.2++ Company's 1998 Stock Incentive Plan, as Amended and Restated on February
17, 2000
3.1** Restated Certificate of Incorporation, as amended
4.1 Restated Certificate of Incorporation, as amended (see Exhibit 3.1 of
this report)
10.1 Agreement and Plan of Merger (see Exhibit 2.1 to this report)
10.2*** Confidentiality Agreement between the Company and NTT Communications
Corporation, dated as of April 7, 2000
10.3**** Letter Agreement, dated May 7, 2000, between the Company and Justin L.
Jaschke
10.4**** Letter Agreement, dated May 7, 2000, between the Company and Sean G.
Brophy
10.5**** Letter Agreement, dated May 7, 2000, between the Company and Chris
DeMarche
10.6**** Letter Agreement, dated May 7, 2000, between the Company and Carla Hamre
Donelson
10.7**** Letter Agreement, dated May 7, 2000, between the Company and Peter B.
Fritzinger
10.8**** Letter Agreement, dated May 7, 2000, between the Company and James M.
Kieffer
10.9**** Letter Agreement, dated May 7, 2000, between the Company and Mark A.
Orland
10.10**** Letter Agreement, dated May 7, 2000, between the Company and Barbara L.
Goworowski
10.11**** Letter Agreement, dated May 7, 2000, between the Company and James P.
Treuting
10.12**** Letter Agreement, dated May 7, 2000, between the Company and Douglas R.
Schneider
10.13**** Letter Agreement, dated May 7, 2000, between the Company and Isabel
Ehringer
27.1 Financial Data Schedule
- ------------------------------------------------------
* Incorporated by reference to the Company's Current Report on Form 8-K
filed with the Commission on May 8, 2000.
** Incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form S-4 (Registration No. 333-31184), filed
with the Commission on May 11, 2000.
*** Incorporated by reference to the Tender Offer Statement on Schedule TO
filed with the Commission on May 17, 2000 by Chaser Acquisition, Inc.,
NTT Communications Corporation and Nippon Telegraph and Telephone
Corporation.
**** Incorporated by reference to the Solicitation/Recommendation Statement on
Schedule 14D-9 filed with the Commission on May 18, 2000 by the Company.
+ Pursuant to Item 601(b)(2) of Regulation S-K, the Company has omitted
from Exhibit 2.1 the disclosure schedule denoted as the "Company Letter"
in the Agreement and Plan of Merger. The Company agrees to furnish
supplementally a copy of the "Company Letter" to the Commission upon
request.
++ Incorporated by reference to the Company's Registration Statement on Form
S-8 (Registration No. 333-36250), filed with the Commission on May 4,
2000.