<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 24, 1998
REGISTRATION NO. 333-45055
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1 TO
NOTE EXCHANGE ON
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CONCENTRIC NETWORK CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 4813 65-0257497
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
10590 NORTH TANTAU AVENUE
CUPERTINO, CA 95014
(408) 342-2800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
HENRY R. NOTHHAFT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CONCENTRIC NETWORK CORPORATION
10590 NORTH TANTAU AVENUE
CUPERTINO, CA 95014
(408) 342-2800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
DAVID J. SEGRE
CHRISTOPHER K. SADEGHIAN
PAUL B. SHINN
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304-1050
(650) 493-9300
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
PROSPECTUS
$150,000,000
[LOGO OF CONCENTRIC NETWORK]
OFFER TO EXCHANGE
NEW 12 3/4% SENIOR NOTES DUE 2007
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
FOR ALL OUTSTANDING
12 3/4% SENIOR NOTES DUE 2007
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME ON APRIL 27, 1998, UNLESS EXTENDED.
Concentric Network Corporation, a Delaware corporation ("Concentric" or the
"Company") hereby offers upon the terms and subject to the conditions set
forth in this Prospectus (the "Prospectus") and the accompanying Letter of
Transmittal (the "Letter of Transmittal") (the offering pursuant to the
Prospectus together with the Letter of Transmittal herein the "Exchange
Offer") to exchange up to an aggregate principal amount of $150,000,000 of its
new 12 3/4% Senior Notes due 2007 (as defined in that certain indenture dated
December 18, 1997 by and among the Company and Chase Manhattan Bank and Trust
Company, National Association ("Chase Manhattan") as Trustee (the
"Indenture")) (capitalized terms followed by the parenthetical remark "(as
defined)" and not otherwise defined herein shall have the meanings given to
them in the Indenture) (herein the "Exchange Notes") for up to an aggregate
principal amount of $150,000,000 of the Company's outstanding 12 3/4% Senior
Notes due 2007 (herein the "Existing Notes"). The terms of the Exchange Notes
are substantially identical in all material respects to those of the Existing
Notes, respectively, except that the Exchange Notes (i) will have been
registered under the Securities Act of 1933, as amended (the "Securities
Act"), and therefore will not be subject to certain restrictions on transfer
applicable to the Existing Notes and (ii) will not be entitled to registration
or other rights under the Registration Rights Agreement (as defined) including
the provision in the Registration Rights Agreement for payment of Liquidated
Damages (as defined) upon failure by the Company to consummate the Exchange
Offer or the occurrence of certain other events. See "Description of Notes."
The Exchange Notes will be issued pursuant to, and the holders thereof (herein
the "New Holders") will be entitled to the benefit of, the Indenture governing
the Existing Notes. In the event that the Exchange Offer is consummated, any
Existing Notes which remain outstanding after consummation of the Exchange
Offer and the Exchange Notes issued in the Exchange Offer will vote together
as a single class for purposes of determining whether Holders of the requisite
percentage in outstanding principal amount of Notes (as defined below) have
taken certain actions or exercised certain rights under the Indenture. See
"Description of Exchange Notes", "The Exchange Offer." Holders of Existing
Notes are referred to herein as "Existing Holders", and Existing Holders
together with New Holders are referred to herein collectively as "Holders".
The Exchange Notes together with the Existing Notes are referred to herein
collectively as the "Notes".
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED
TO EXISTING HOLDERS ON OR ABOUT MARCH 26 , 1998.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH EXISTING HOLDERS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE LETTER OF TRANSMITTAL. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
March 24 , 1998
<PAGE>
(continuation of cover page)
The Existing Notes were offered in connection with the issuance of 150,000
units (collectively, the "Units"), each consisting of $1,000 principal amount
of 12 3/4% Senior Notes due 2007 of the Company and one warrant (a "Warrant"),
each Warrant entitling the holder thereof to purchase 6.34 Shares of Common
Stock, par value $0.001 per share (the "Common Stock"), of the Company (the
"Existing Notes Offering"), to fund potential acquisitions and to support the
Company's general working capital purposes. See "Description of Units."
Interest on the Exchange Notes will be payable semi-annually in arrears on
June 15 and December 15 of each year, commencing June 15, 1998.
The Exchange Notes will be redeemable at the option of the Company, in whole
or in part, at any time on or after December 15, 2002, at the redemption
prices set forth herein, plus accrued interest to the date of redemption. In
addition, on or prior to December 15, 2000, the Company may redeem up to 35%
of the original aggregate principal amount of Notes at a redemption price of
112.750% of the principal amount, together with accrued and unpaid interest to
the date of redemption with the net cash proceeds of one or more Public Equity
Offerings (as defined) or the sale of Common Stock to a Strategic Investor (as
defined), provided that at least 65% of the original aggregate principal
amount of the Notes remain outstanding. See "Description of Notes--Optional
Redemption."
Following the occurrence of a Change of Control (as defined below), the
Company will be required to make an offer to purchase the Exchange Notes at a
purchase price equal to 101% of the principal amount thereof plus accrued and
unpaid interest, if any, to the date of purchase. The Company may not have
available sufficient funds or the financial resources necessary to satisfy its
obligations to repurchase the Notes and other debt that may become repayable
upon a Change of Control. See "Risk Factors--Change of Control" and
"Description of the Notes--Change of Control."
The Exchange Notes will be senior unsecured obligations of the Company,
ranking pari passu in right of payment with all existing and future unsecured
and unsubordinated indebtedness of the Company and senior in right of payment
to all existing and future Subordinated Indebtedness (as defined) of the
Company. The Notes will be effectively subordinated to all secured
indebtedness of the Company to the extent of the value of the assets securing
such indebtedness and to permitted indebtedness of subsidiaries of the
Company. As of December 31, 1997, there was approximately $194.5 million of
indebtedness of which $33.6 million was secured long-term indebtedness
(consisting entirely of capital lease obligations) outstanding to which
holders of the Notes would have been effectively subordinated in right of
payment. See "Description of Notes--Ranking."
On December 15, 1997, the Company issued $150.0 million aggregate principal
amount of Existing Notes. The Existing Notes were issued pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. The
Exchange Notes are being offered hereunder in order to satisfy certain
obligations of the Company under the Registration Rights Agreement by and
among the Company and UBS Securities LLC, Bear, Stearns & Co., Inc. and Wheat,
First Securities, Inc. as the initial purchasers (the "Initial Purchasers") of
the Existing Notes. The Exchange Offer is intended to satisfy the Company's
obligations under the Registration Rights Agreement. Once the Exchange Offer
is consummated, the Company generally will have no further obligations to
register any of the Existing Notes not tendered by Existing Holders for
exchange. See "Risk Factors--Consequences to Non-Tendering Holders of Existing
Notes."
The Exchange Notes generally will be issued in the form of Global Notes (as
defined) which will be deposited with, or on behalf of, the Depositary (as
defined) and registered in its name or in the name of a nominee of the
Depositary. Beneficial interests in the Global Notes representing the Exchange
Notes will be shown on, and transfers thereof will be effected through,
records maintained by DTC and its participants. See "Book-Entry; Delivery and
Form."
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The Company will accept for exchange any and all Existing Notes which are
properly tendered in the Exchange Offer prior to 5:00 p.m., New York City
time, on April 27, 1998 (the "Exchange Offer Registration Statement", which
term shall encompass all amendments, exhibits, annexes and schedules thereto),
unless extended by the Company in its sole discretion (the "Expiration Date").
The Expiration Date will not in any event be extended to a date later than May
5, 1998 (30 business days after effectiveness of the Exchange Offer
Registration Statement). Tenders of Existing Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the Expiration Date. In the
event the Company terminates the Exchange Offer and does not accept for
exchange any Existing Notes with respect to the Exchange Offer, the Company
will promptly return the Existing Notes to the Existing Holders. The Exchange
Offer is not conditioned upon any minimum principal amount of Existing Notes
being tendered for exchange, but is subject to certain events and conditions
that may be waived by the Company and to the terms and provisions of the
Registration Rights Agreement. The Existing Notes may be tendered in whole or
in part solely in integral multiples of $1,000.
The Company is making the Exchange Offer in reliance on the position of the
staff of the Division of Corporation Finance (the "Staff") of the Securities
and Exchange Commission (the "Commission") as set forth in the Staff's Exxon
Capital Holdings Corporation no-action letter (available May 13, 1988) (the
"Exxon Capital No-Action Letter"), Morgan Stanley & Co. Incorporated no-action
letter (available June 5, 1991) (the "Morgan Stanley No-Action Letter"),
Shearman & Sterling no-action letter (available July 2, 1993) (the "Shearman &
Sterling No-Action Letter"), and other interpretive letters addressed to third
parties in other transactions. However, the Company has not sought its own
interpretive letter addressing such matters and there can be no assurance that
the Staff would make a similar determination with respect to the Exchange
Offer as it has in such interpretive letters to third parties. Based on these
interpretations by the Staff, and subject to the two immediately following
sentences, the Company believes that Exchange Notes issued pursuant to this
Exchange Offer in exchange for Existing Notes may be offered for resale,
resold and otherwise transferred by such New Holder (other than a New Holder
who is a broker-dealer) without further compliance with the registration and
prospectus delivery requirements of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such New Holder's
business and that such New Holder is not participating, and has no arrangement
or understanding with any person to participate, in a distribution (within the
meaning of the Securities Act) of such Exchange Notes. However, any Existing
Holder who (i) is an "affiliate" of the Company (within the meaning of Rule
405 under the Securities Act), (ii) does not acquire such Exchange Notes in
the ordinary course of its business, (iii) intends to participate in the
Exchange Offer for the purpose of distributing Exchange Notes, or (iv) is a
broker-dealer who purchased such Existing Notes directly from the Company, (a)
will not be able to rely on the interpretations of the Staff set forth in the
above-mentioned interpretive letters, (b) will not be permitted or entitled to
tender such Existing Notes in the Exchange Offer and (c) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or other transfer of such Existing Notes unless such
sale is made pursuant to an exemption from such requirements. In addition, as
described below, if any broker-dealer holds Existing Notes acquired for its
own account as a result of market-making or other trading activities and
exchanges such Existing Notes for Exchange Notes (a "Participating Broker-
Dealer"), then such Participating Broker-Dealer may be deemed a statutory
"underwriter" within the meaning of the Securities Act and must deliver a
prospectus meeting the requirements of the Securities Act in connection with
any resales of such Exchange Notes. See "Plan of Distribution".
Each Existing Holder who wishes to exchange Existing Notes for Exchange
Notes in the Exchange Offer will be required to represent that (i) it is not
an affiliate of the Company, (ii) any Exchange Notes to be received by it are
being acquired in the ordinary course of its business, and (iii) it has no
arrangement or understanding with any person to participate in a distribution
(within the meaning of the Securities Act) of such Exchange Notes. Each
broker-dealer that receives Exchange Notes for its own account pursuant to the
Exchange Offer must acknowledge that it acquired the Existing Notes for its
own account as a result of market-making activities or other trading
activities (and not directly from the Company) and must agree that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will
ii
<PAGE>
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. Based on the position taken by the Staff in the interpretive
letters referred to above, the Company believes that Participating Broker-
Dealers may fulfill their prospectus delivery requirements with respect to the
Exchange Notes received upon exchange of such Existing Notes with a prospectus
meeting the requirements of the Securities Act, which may be the prospectus
prepared for an exchange offer so long as it contains a description of the
plan of distribution with respect to the resale of such Exchange Notes.
Accordingly, this Prospectus, as it may be amended or supplemented from time
to time, may be used by a Participating Broker-Dealer during the period
referred to below in connection with resales of Exchange Notes received in
exchange for Existing Notes where such Existing Notes were acquired by such
Participating Broker-Dealer for its own account as a result of market-making
or other trading activities. Subject to certain provisions set forth in the
Registration Rights Agreement, the Company shall use its best efforts to keep
the Exchange Offer Registration Statement continuously effective, supplemented
and amended to the extent necessary to ensure that it is available for sales
of Exchange Notes by Participating Broker-Dealers, and to ensure that the
Exchange Offer Registration Statement conforms with the requirements of the
Act and the policies, rules and regulations of the Commission as announced
from time to time, for a period expiring approximately 180 days from the date
on which the Exchange Offer Registration Statement is declared effective. See
"Plan of Distribution." Any Participating Broker-Dealer who is an affiliate of
the Company may not rely on such interpretive letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. See "The Exchange Offer-Resales of
Exchange Notes."
Each Participating Broker-Dealer who surrenders Existing Notes pursuant to
the Exchange Offer will be deemed to have agreed, by execution of the Letter
of Transmittal, that, upon receipt of notice from the Company of the
occurrence of any event or the discovery of any fact which makes any statement
contained or incorporated by reference in this Prospectus untrue in any
material respect or which causes this Prospectus to omit to state a material
fact necessary in order to make the statements contained or incorporated by
reference herein, in light of the circumstances under which they were made,
not misleading or of the occurrence of certain other events specified in the
Registration Rights Agreement, such Participating Broker-Dealer will suspend
the sale of Exchange Notes pursuant to this Prospectus until the Company has
amended or supplemented this Prospectus to correct such misstatement or
omission and has furnished copies of the amended or supplemented Prospectus to
such Participating Broker-Dealer or the Company has given notice that the sale
of the Exchange Notes may be resumed, as the case may be.
The Exchange Notes will be a new issue of securities for which there
currently is no established trading market. Although the Initial Purchasers
have informed the Company that they currently intend to make a market in the
Exchange Notes, they are not obligated to do so, and any such market making
may be discontinued at any time without notice. As the Existing Notes were
issued and the Exchange Notes are being issued to a limited number of
institutions who typically hold similar securities for investment, the Company
does not expect that an active public market for the Exchange Notes will
develop. Accordingly, there can be no assurance as to the development,
liquidity or maintenance of any market for the Exchange Notes. The Existing
Notes have been approved for trading in the Private Offerings, Resale and
Trading through Automatic Linkages (PORTAL) market. The Company does not
currently intend to apply for listing of the Exchange Notes on any securities
exchange or for quotation through the Nasdaq Stock Market. See "Risk Factors--
Restrictions on Resale; Absence of Public Market for the Existing Notes."
Any Existing Notes not tendered and accepted in the Exchange Offer will
remain outstanding and will be entitled to all the same rights and will be
subject to the same limitations applicable thereto under the Indenture (except
for those rights which terminate upon consummation of the Exchange Offer).
Following consummation of the Exchange Offer, the Existing Holders will
continue to be subject to the existing restrictions upon transfer thereof and
the Company will have no further obligation to such Existing Holders (except
for limited instances involving Existing Holders that are not eligible to
participate in the Exchange Offer) to provide for registration under the
Securities Act of the Existing Notes held by them. To the extent that Existing
Notes are tendered and accepted in the Exchange Notes Offering, an Existing
Holder's ability to sell untendered Existing Notes could
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<PAGE>
be adversely affected. See "Summary--Certain Consequences of a Failure to
Exchange Existing Notes" and "Risk Factors".
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF EXISTING NOTES ARE URGED TO READ THIS PROSPECTUS AND
THE RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER
THEIR EXISTING NOTES PURSUANT TO THE EXCHANGE OFFER.
The Company has agreed to pay all expenses of the Exchange Offer. See "The
Exchange Offer--Fees and Expenses." Each Exchange Note will bear interest from
the most recent date to which interest has been paid or duly provided for on
the Existing Note surrendered in exchange for such Exchange Note or, if no
such interest has been paid or duly provided for on such Existing Note, from
December15, 1997. Holders of the Existing Notes whose Existing Notes are
accepted for exchange will not receive accrued interest on such Existing Notes
for any period from and after the last Interest Payment Date (as defined
below) to which interest has been paid or duly provided for on such Existing
Notes prior to the original issue date of the Exchange Notes or, if no such
interest has been paid or duly provided for, will not receive any accrued
interest on such Existing Notes, and will be deemed to have waived the right
to receive any interest on such Existing Notes accrued from and after such
Interest Payment Date or, if no such interest has been paid or duly provided
for, from and after December 15, 1997.
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. No dealer-manager is being used in connection
with this Exchange Offer. See "Use of Proceeds" and "Plan of Distribution."
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE EXCHANGE NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE
AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY OF THE EXCHANGE
NOTES TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
UNTIL JUNE 24, 1998 (90 DAYS AFTER COMMENCEMENT OF THE EXCHANGE OFFER), ALL
DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS
IN CONNECTION WITH SUCH TRANSACTION.
iv
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ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 pursuant to the Securities Act, and the rules and regulations promulgated
thereunder, covering the Exchange Notes offered hereby (the "Exchange Offer
Registration Statement"). This Prospectus does not contain all the information
set forth in the Exchange Offer Registration Statement. For further
information with respect to the Company and the Exchange Offer, reference is
made to the Exchange Offer Registration Statement. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to are necessarily incomplete. With respect to each such contract,
agreement or other document filed as an exhibit to the Exchange Offer
Registration Statement, reference is made to the exhibit for a more complete
description of the document or matter involved, and each such statement shall
be deemed qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy and information statements
and other information with the Commission. Copies of such materials can be
obtained by mail from the Public Reference Section of the Commission, at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, such reports, proxy and information statements and other
information can be inspected and copied at the public reference facility
referenced above and at the SEC's regional offices at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World
Trade Center, Suite 1300, New York, New York 10048. The Commission maintains a
web site (http:www.sec.gov) that contains reports, proxy and information
statements and other information regarding Company, such as the Company, that
file electronically with the Commission. In addition, for so long as any of
the Notes remain outstanding, the Company has agreed to make available to any
prospective purchaser of the Notes or beneficial owners of the Notes, in
connection with the sale thereof, the information required by Rule 144A(d)(4)
under the Securities Act. The Common Stock of the Company is traded on the
Nasdaq National Market. Reports of the Company may also be inspected at the
offices of the Nasdaq National Market, Nasdaq Operations, 1735 K Street, N.W.
Washington, D.C. 20006. Any such request and requests for the agreements
summarized herein should be directed to Peter Bergeron, Secretary, at the
Company's principal executive offices, 10590 N. Tantau Road, Cupertino,
California 95014, telephone number (408) 342-2800.
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PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information, including "Risk Factors" and
the Financial Statements and Notes thereto, appearing elsewhere in this
Prospectus. Certain terms used in this Prospectus are defined in the Glossary
of Terms beginning on page G-1.
THE COMPANY
Concentric provides tailored, value-added Internet Protocol ("IP") based
network services for businesses and consumers. To provide these services, the
Company utilizes its low/fixed latency, high-throughput network, employing its
advanced network architecture and the Internet. Concentric's service offerings
for enterprises include virtual private networks ("VPNs"), dedicated access
facilities ("DAFs"), remote access services and Web hosting services. These
services enable enterprises to take advantage of standard Internet tools such
as browsers and high-performance servers for customized data communications
within an enterprise and between an enterprise and its suppliers, partners and
customers. These services combine the cost advantages, nationwide access and
standard protocols of public networks with the customization, high performance,
reliability and security of private networks. Among the current enterprise
customers are Acer America Corporation, Inc., Intuit, Inc. ("Intuit"), Netscape
Communications Corporation ("Netscape"), Microsoft Corporation ("Microsoft")
and WebTV Networks, Inc., a subsidiary of Microsoft ("WebTV"). Concentric's
service offerings for consumers and small office/home office customers include
local Internet dial-up access and applications hosting services.
The Concentric network employs an advanced, geographically dispersed ATM and
frame relay backbone, SuperPOPs in 16 major metropolitan areas and 139
secondary and tertiary POPs in other cities, allowing dial-up network access in
the U.S. and Canada. In addition, the Company can provide analog dial-up, frame
relay, fractional T-1, T-1 and DS3 access to the network. The Concentric
network is engineered and managed to provide superior quality of service,
balancing several key performance criteria. The Company provides guaranteed
levels of service for DAFs to enterprise customers, and targets performance
benchmarks for connection success rates, latency levels and throughput for all
of its service offerings.
In addition to strong network performance capabilities, the Company believes
that several factors distinguish its ability to provide value-added network
services. These factors include: (i) excellent service quality; (ii) rapid
development time and flexibility in meeting custom applications requirements;
(iii) responsive customer support and effective account management, available
24 hours per day, seven days per week through the Company's 163 customer
service personnel; and (iv) the Company's technical expertise in devising cost-
effective network solutions for customers.
The Company was incorporated in Florida in 1991 under the name Engineered
Video Concepts, Inc., changed its name to Concentric Research Corporation in
1992 and commenced network operations in 1994. In 1995, the Company changed its
name to Concentric Network Corporation and reincorporated into Delaware in
1997. Unless the context otherwise requires, "Concentric" and the "Company"
refer to Concentric Network Corporation. The address of the Company's principal
executive offices is 10590 N. Tantau Avenue, Cupertino, CA 95014, and its
telephone number at that address is (408) 342-2800.
Concentric Network Corporation, The Concentric Network, Concentric
RemoteLink, ConcentricView, ConcentricHost, FlexChannel, FullChannel, Powered
by Concentric Network, and PremierConnect are among the trademarks of the
Company. This Prospectus contains other product names, trade names and
trademarks of the Company and of other organizations.
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THE EXCHANGE OFFER
Securities Offered.......... $150.0 million aggregate principal amount of new
12 3/4% Senior Notes due 2007 (the "Exchange
Notes").
The Exchange Offer.......... $1,000 principal amount of the Exchange Notes in
exchange for each $1,000 principal amount of
$150.0 million aggregate principal amount of 12
3/4% Senior Notes due 2007 previously issued by
the Company in December 1997 (the "Existing
Notes"). As of the date hereof, $150.0 million
aggregate principal amount of Existing Notes are
outstanding. The Company will issue the Exchange
Notes to New Holders on or promptly after the
Expiration Date.
Based on an interpretation by the Staff set forth
in no-action letters issued to third parties, the
Company believes that Exchange Notes issued
pursuant to the Exchange Offer in exchange for
Existing Notes may be offered for resale, resold
and otherwise transferred by such New Holder
(other than any such New Holder which is an
affiliate of the Company or is a broker-dealer
which acquired such Existing Notes directly from
the Company) without compliance with the
registration and prospectus delivery provisions
of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary
course of such New Holder's business and that
such New Holder does not intend to participate
and has no arrangement or understanding with any
person to participate in the distribution of such
Exchange Notes. Each Participating Broker-Dealer
that acquired such Existing Notes as a result of
market making or other trading activity and that
receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan
of Distribution."
Any Existing Holder who (i) is an affiliate of
the Company, (ii) does not acquire such Exchange
Notes in the ordinary course of its business,
(iii) tenders in the Exchange Offer with the
intention to participate, or for the purpose of
participating, in a distribution of the Exchange
Notes, or (iv) is a broker-dealer which acquired
such Existing Notes directly from the Company,
could not rely on the position of the Staff
enunciated in the Exxon Capital No-Action Letter,
the Morgan Stanley No-Action Letter or similar
no-action letters and, in the absence of an
exemption therefrom, must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with the
resale of the Exchange Notes. Failure to comply
with such requirements in such instance may
result in such Holder incurring liability under
the Securities Act for which the Holder is not
indemnified by the Company.
No federal or state regulatory requirements must
be complied with or approval obtained in
connection with the Exchange Offer, other than
registration requirements under the Securities
Act.
2
<PAGE>
Expiration Date............. 5:00 p.m., New York City time, on April 27, 1998
(20 business days after effectiveness of the
Exchange Offer Registration Statement), unless
the Exchange Offer is extended by the Company in
its sole discretion, in which case the term
"Expiration Date" means the latest date and time
to which the Exchange Offer is extended.
Interest on the Exchange
Notes and the Existing Each Exchange Note will bear interest from the
Notes....................... most recent date to which interest has been paid
or duly provided for on the Existing Note
surrendered in exchange for such Exchange Note
or, if no such interest has been paid or duly
provided for on such Existing Note, from December
15, 1997. Holders of the Existing Notes whose
Existing Notes are accepted for exchange will not
receive accrued interest on such Existing Notes
for any period from and after the last Interest
Payment Date to which interest has been paid or
duly provided for on such Existing Notes prior to
the original issue date of the Exchange Notes or,
if no such interest has been paid or duly
provided for, will not receive any accrued
interest on such Existing Notes, and will be
deemed to have waived the right to receive any
interest on such Existing Notes accrued from and
after such Interest Payment Date or, if no such
interest has been paid or duly provided for, from
and after December 15, 1997.
Conditions to the Exchange The Exchange Offer is subject to certain
Offer....................... customary conditions, which may be waived by the
Company. See "The Exchange Offer--Conditions."
Procedures for Tendering
Existing Notes............. Each Existing Holder wishing to accept the
Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a
facsimile thereof, in accordance with the
instructions contained herein and therein, and
mail or otherwise deliver the Letter of
Transmittal, or such facsimile, together with the
Existing Notes and any other required
documentation to the Exchange Agent (as defined)
at the address set forth in the Letter of
Transmittal. Persons holding Existing Notes
through the Depositary (initially the Depository
Trust Company ("DTC")) and wishing to accept the
Exchange Offer must do so pursuant to DTC's
Automated Tender Offer Program ("ATOP"), by which
each tendering participant will agree to be bound
by the Letter of Transmittal. By executing or
agreeing to be bound by the Letter of
Transmittal, each Existing Holder will represent
to the Company that, among other things, the
Existing Holder or the person receiving such
Exchange Notes, whether or not such person is the
Existing Holder, is acquiring the Exchange Notes
in the ordinary course of business and that
neither the Existing Holder nor any such other
person has any arrangement or understanding with
any person to participate in the distribution of
such Exchange Notes within the meaning of the
Securities Act.
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Existing Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other
3
<PAGE>
nominee and who wishes to tender should contact
such registered Existing Holder promptly and
instruct such registered Existing Holder to
tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's
own behalf, such owner must, prior to completing
and executing the Letter of Transmittal and
delivering its Existing Notes, either make
appropriate arrangements to register ownership of
the Existing Notes in such owner's name or obtain
a properly completed bond power from the
registered Existing Holder. The transfer of
registered ownership may take considerable time.
Guaranteed Delivery
Procedures.................. Existing Holders who wish to tender their
Existing Notes and whose Existing Notes are not
immediately available or who cannot deliver their
Existing Notes, the Letter of Transmittal or any
other documents required by the Letter of
Transmittal to the Exchange Agent (or comply with
the procedures for book-entry transfer) prior to
the Expiration Date must tender their Existing
Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer--
Guaranteed Delivery Procedures."
Withdrawal Rights........... Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration
Date pursuant to the procedures described under
"The Exchange Offer--Withdrawals of Tenders."
Acceptance of Existing
Notes and Delivery of
Exchange Notes.............. The Company will accept for exchange any and all
Existing Notes that are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The Exchange Notes
issued pursuant to the Exchange Offer will be
delivered promptly following the Expiration Date.
See "The Exchange Offer--Terms of the Exchange
Offer."
Certain Federal Income Tax
Consequences................ The exchange of the Existing Notes for the
Exchange Notes pursuant to the Exchange Offer
should not be taxable to the Holders thereof for
federal income tax purposes. See "Certain Federal
Income Tax Consequences."
Effect on Holders of
Existing Notes.............. As a result of the making of this Exchange Offer,
the Company will have fulfilled certain of its
obligations under the Registration Rights
Agreement, and Existing Holders who do not tender
their Existing Notes, except for limited
instances involving the Existing Holders that are
not eligible to participate in the Exchange
Offer, will not have any further registration
rights under the Registration Rights Agreement or
otherwise. See "The Exchange Offer--Purposes and
Effect of Exchange Offer." Such Existing Holders
will continue to hold the untendered Existing
Notes and will be entitled to all the rights and
subject to all the limitations applicable thereto
under the Indenture, except to the extent such
rights or limitations, by their terms, terminate
or cease to have further effectiveness as a
result of
4
<PAGE>
the Exchange Offer. All untendered Existing Notes
will continue to be subject to certain
restrictions on transfer. Accordingly, if any
Existing Notes are tendered and accepted in the
Exchange Offer, the trading market for the
untendered Existing Notes could be adversely
affected. See "Risk Factors--Consequences of
Failure to Exchange."
Exchange Agent.............. Chase Manhattan Bank and Trust Company, National
Association
5
<PAGE>
SUMMARY OF TERMS OF EXCHANGE NOTES
The form and terms of the Exchange Notes are the same as the form and terms
of the Existing Notes (which they replace) except that (i) the Exchange Notes
have been registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof and (ii) the New Holders, except for
limited instances involving the Initial Purchasers and certain Existing Holders
that are not eligible to participate in the Exchange Offer, will not be
entitled to further registration rights under the Registration Rights
Agreement, which rights will be satisfied when the Exchange Offer is
consummated, and will not be entitled to any payments of Liquidated Damages (as
defined) for failure to satisfy such rights. The Exchange Notes will evidence
the same debt as the Existing Notes and will be entitled to the benefits of the
Indenture. From time to time in this Prospectus, the Exchange Notes and the
Existing Notes are collectively referred to as the "Notes". See "Description of
Notes".
Notes Offered:.............. $150.0 million aggregate principal amount of New
12 3/4% Senior Notes due 2007 (the "Exchange
Notes").
Maturity:................... December 15, 2007.
Escrow Proceeds:............
$52.5 million of the net proceeds from the
issuance of the Existing Notes have been invested
in U.S. Government Securities (as defined) to be
held in an Escrow Account (as defined) for the
benefit of the Holders of the Notes to fund, when
due, the first six scheduled interest payments on
the Notes, with any balance to be retained by the
Company. The Notes will be collateralized by a
first priority security interest in the Escrow
Account. See "Description of Notes--Escrow
Account."
Interest Payment Dates:..... The Exchange Notes will bear interest at the rate
of 12 3/4% per annum, payable semiannually in
arrears on June 15 and December 15, commencing
June 15, 1998.
Ranking:....................
The Exchange Notes will be senior unsecured
obligations of the Company, ranking pari passu in
right of payment with all existing and future
unsecured and unsubordinated indebtedness of the
Company and senior in right of payment to all
existing and future Subordinated Indebtedness (as
defined) of the Company. The Exchange Notes will
be effectively subordinated to all secured
indebtedness of the Company to the extent of the
value of the assets securing such indebtedness
and to permitted indebtedness of subsidiaries of
the Company. As of December 31, 1997, there was
approximately $194.5 million of indebtedness of
which $33.6 million was secured long-term
indebtedness (consisting entirely of capital
lease obligations) outstanding to which holders
of the Notes would have been effectively
subordinated in right of payment. See
"Description of Notes--Ranking."
Sinking Fund................ None
Optional Redemption:........ The Exchange Notes will be redeemable at the
option of the Company, in whole or in part, at
any time on or after December 15,
6
<PAGE>
2002, at the redemption prices set forth herein,
plus accrued interest to the date of redemption.
In addition, on or prior to December 15, 2000,
the Company may redeem up to 35% of the original
aggregate principal amount of Notes at a
redemption price of 112.750% of the principal
amount, together with accrued and unpaid interest
to the date of redemption with the net cash
proceeds of one or more Public Equity Offerings
or the sale of Common Stock to a Strategic
Investor; provided that at least 65% of the
original aggregate principal amount of Notes are
outstanding following such redemption. See
"Description of Notes--Optional Redemption."
Change of Control:.......... Following the occurrence of a Change of Control
(as defined below), the Company will be required
to make an offer to purchase the Exchange Notes
at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid
interest, if any, to the date of purchase. The
Company may not have available sufficient funds
or the financial resources necessary to satisfy
its obligations to repurchase the Exchange Notes
and other debt that may become repayable upon a
Change of Control. See "Risk Factors--Change of
Control" and "Description of the Notes--Change of
Control."
Certain Covenants:.......... The indenture under which the Existing Notes are
and the Exchange Notes will be governed (the
"Indenture") contains certain covenants,
including, among others, covenants with respect
to the following matters: (i) limitation on
indebtedness, (ii) limitation on restricted
payments, (iii) limitation on transactions with
affiliates, (iv) limitation on liens, (v)
limitation on sale of assets, (vi) limitation on
issuances of guarantees of indebtedness, (vii)
limitation on sale and leaseback transactions,
(viii) limitation on Subsidiary capital stock,
(ix) limitation on dividends and other payment
restrictions affecting Subsidiaries, (x)
limitations on unrestricted Subsidiaries, (xi)
provision of financial statements, and (xii)
limitation on business. These covenants are
subject to important exceptions and
qualifications. See "Description of Notes--
Certain Covenants."
Transfer Restrictions:...... For restrictions on transfer of the Exchange
Notes, see "The Exchange Offer--Resale of
Exchange Notes".
For a discussion of certain factors that should be considered in connection
with a decision to exchange Existing Notes for Exchange Notes, see "Risk
Factors."
7
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED DECEMBER 31, YEAR ENDED
---------------------------------------------- DECEMBER 31,
1993 1994 1995 1996 1997 1997(5)
------- ------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $ 23 $ 442 $ 2,483 $ 15,648 $ 45,457 $ 55,411
Cost of revenue......... 130 2,891 16,168 47,945 61,439 70,635
Network equipment
write-off(1)........... -- -- -- 8,321 -- --
Total operating
expenses............... 1,114 1,784 7,602 22,503 34,262 44,446
------- ------- -------- -------- -------- --------
Loss from operations.... (1,221) (4,233) (21,287) (63,121) (50,244) (59,670)
Net loss................ $(1,245) $(4,290) $(22,008) $(66,381) $(55,582) $(83,354)
======= ======= ======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA(2)............... $(1,080) $(4,064) $(19,091) $(53,651) $(27,346) $(34,342)
Capital
expenditures(3)........ 817 718 17,176 39,093 5,783 7,099
Ratio of Earnings to
Fixed Charges(4)....... N/A N/A N/A N/A N/A N/A
Deficiency of Earnings
Available to Cover
Fixed Charges(4)....... (1,221) (4,309) (22,145) (66,995) (58,032) (59,670)
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1997
----------------------
ACTUAL PRO FORMA(6)
--------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 119,959 104,480
Property and equipment, net............................ 53,710 58,450
Total assets........................................... 244,489 247,707
Long term debt and capital lease obligations, net of
current portion....................................... 179,172 180,024
Total stockholders' equity............................. 31,918 26,718
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
QUARTERLY STATEMENT OF
OPERATIONS DATA:
Revenue................. $ 1,533 $ 2,489 $ 4,193 $ 7,433 $ 9,154 $ 10,814 $ 11,824 $ 13,665
Cost of revenue......... 7,256 11,782 11,913 16,994 15,744 14,913 14,838 15,944
Network equipment
write-off(1)........... -- -- -- 8,321 -- -- -- --
Total operating
expenses............... 4,196 5,475 5,464 7,368 7,021 8,421 8,954 9,866
-------- -------- -------- -------- -------- -------- -------- --------
Loss from operations.... (9,919) (14,768) (13,184) (25,250) (13,611) (12,520) (11,968) (12,145)
Net loss................ $(10,380) $(15,420) $(14,473) $(26,108) $(14,681) $(12,904) $(14,218) $(13,779)
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- --------
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 2 of Notes to Financial Statements.
(2) EBITDA is loss from operations before interest, taxes, depreciation and
amortization. EBITDA is included herein because management believes that
certain investors find it to be a useful tool for measuring a company's
ability to service its debt; however, EBITDA does not represent cash flow
from operations, as
8
<PAGE>
defined by generally accepted accounting principles, should not be
considered as a substitute for net loss as an indicator of the Company's
operating performance or cash flow as a measure of liquidity, and should be
examined in conjunction with the Financial Statements and Notes thereto of
the Company included elsewhere in this Prospectus.
(3) Capital expenditures include assets acquired through capital lease
financing and other debt.
(4) For purposes of this computation, the ratio of earnings to fixed charges
has been calculated by dividing fixed charges into loss before income
taxes, fixed charges and other income. Fixed charges consist of interest
on expense and a portion of lease rental charges considered to represent
interest cost.
(5) The pro forma statement of operations data for the year ended December 31,
1997 has been prepared as if the acquisition of InterNex Information
Services, Inc. (the "InterNex Acquisition") had occurred as of January 1,
1997 and the pro forma balance sheet data has been prepared as if the
acquisition occurred as of December 31, 1997. In addition, the pro forma
adjustments reflect the interest that would have been incurred had the
Existing Notes been outstanding as of January 1, 1997 and interest expense
and related charges of bridge financings have been excluded since such
bridge financings would not have occurred. See Selected Unaudited Pro
Forma Condensed Combined Financial Information.
9
<PAGE>
RISK FACTORS
Holders of Existing Notes should carefully consider the risk factors set
forth below, as well as the other information appearing in this Prospectus,
before tendering any Existing Notes for exchange into Exchange Notes. Certain
matters set forth below also apply to the Existing Notes and will continue to
apply to any Existing Notes remaining outstanding after the Exchange Offer.
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Those statements appear in a number of places in this
Prospectus and include statements regarding the intent, belief or current
expectations of the Company or its directors or officers with respect to,
among other things: (i) trends affecting the Company's financial condition or
results of operation; and (ii)the Company's business and growth strategies.
Prospective investors are cautioned that any such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties,
and that actual results may differ materially from those projected, expressed
or implied, in the forward-looking statements as a result of various factors.
The accompanying information contained in this Prospectus, including without
limitation the information set forth under the headings "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," identifies important factors that could cause such
differences. Such forward-looking statements speak only as of the date of this
Prospectus, and the Company cautions potential investors not to place undue
reliance on such statements.
SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE DEBT
The Company is and will continue to be highly leveraged, with significant
debt service requirements. At December 31, 1997, the Company's total debt was
$194.5 million and stockholders' equity was $31.9 million. The degree to which
the Company is leveraged has important consequences to the Company, including
the following: (i) the Company's ability to obtain additional financing in the
future, whether for working capital, capital expenditures, acquisitions or
other purposes, may be impaired; (ii) a substantial portion of the Company's
cash flow from operations is required to be dedicated to the payment of
interest on its debt, thereby reducing funds available to the Company for
other purposes; (iii) the Company's flexibility in planning for or reacting to
changes in market conditions may be limited; and (iv) the Company may be more
vulnerable in the event of a downturn in its business.
The ability of the Company to meet its debt service obligations will depend
on the future operating performance and financial results of the Company,
which will be subject in part to factors beyond the control of the Company.
Although the Company believes that its cash flow will be adequate to meet its
interest payments, there can be no assurance that the Company will continue to
generate sufficient cash flow in the future to meet its debt service
requirements including those with respect to the Units. If the Company is
unable to generate cash flow in the future sufficient to cover its fixed
charges and is unable to borrow sufficient funds from other sources, it may be
required to refinance all or a portion of its existing debt or to sell all or
a portion of its assets. There can be no assurance that a refinancing would be
possible, nor can there be any assurance as to the timing of any asset sales
or the proceeds which the Company could realize therefrom. In addition, the
terms of certain of the Company's debt restrict its ability to sell assets and
the Company's use of the proceeds therefrom.
LIMITED OPERATING HISTORY; CONTINUING OPERATING LOSSES
The Company was incorporated in 1991, commenced network operations in 1994
and completed initial deployment of its current network architecture and use
of an advanced ATM backbone network in late 1996. Accordingly, the Company has
a limited operating history upon which an evaluation of the Company and its
prospects can be based. In addition, a majority of the Company's senior
management team have been working together at the Company for less than two
years. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in new and
rapidly evolving markets. To
10
<PAGE>
address these risks, the Company must, among other things, respond to
competitive developments, continue to attract, retain and motivate qualified
persons, and continue to upgrade its technologies and commercialize its
network services incorporating such technologies. There can be no assurance
that the Company will be successful in addressing such risks and the failure
to do so could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company has incurred net
losses and experienced negative cash flow from operations since inception and
expects to continue to operate at a net loss and experience negative cash flow
at least through 1998, although the Company's ability to achieve profitability
and positive cash flow from operations is dependent upon the Company's ability
to substantially grow its revenue base and achieve other operating
efficiencies. The Company experienced net losses of approximately $22.0
million, $66.4 million and $55.6 million for the years ended December 31,
1995, 1996 and 1997, respectively. At December 31, 1997, the Company had an
accumulated deficit of approximately $149.5 million. There can be no assurance
that the Company will be able to achieve or sustain revenue growth,
profitability or positive cash flow on either a quarterly or an annual basis.
At December 31, 1997, the Company had approximately $58.0 million of gross
deferred tax assets comprised primarily of net operating loss carryforwards.
The Company believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability
of the deferred tax assets such that a full valuation allowance has been
recorded. These factors include the Company's history of net losses since its
inception and the fact that the market in which the Company competes is
intensely competitive and characterized by rapidly changing technology. The
Company believes that, based on the current available evidence, it is more
likely than not that the Company will not generate taxable income through
1999, and possibly beyond, and accordingly will not realize the Company's
deferred tax assets through 1999 and possibly beyond. The Company will
continue to assess the realizability of the deferred tax assets based on
actual and forecasted operating results. In addition, the utilization of net
operating losses may be subject to a substantial annual limitation due to the
"change in ownership" provisions of the Internal Revenue Code of 1986 and
similar state provisions. The annual limitation may result in the expiration
of net operating losses before utilization. The Company's above estimates of
the periods of time in which the Company expects to continue to operate at a
net loss, experience negative cash flow and not generate taxable income are
forward-looking statements that involves risks and uncertainties, and actual
results could vary materially as a result of a number of factors, including
those set forth above in this paragraph. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 9 of Notes
to Financial Statements.
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results have fluctuated in the past and may in the
future fluctuate significantly depending upon a variety of factors, including
the timely deployment and implementation of expansion of the Concentric
network and new network architectures, the incurrence of related capital
costs, the receipt of new value-added network services and consumer services
subscriptions and the introduction of new services by the Company and its
competitors. Additional factors that may contribute to variability of
operating results include: the pricing and mix of services offered by the
Company; customer retention rate; market acceptance of new and enhanced
versions of the Company's services; changes in pricing policies by the
Company's competitors; the Company's ability to obtain sufficient supplies of
sole- or limited-source components; user demand for network and Internet
access services; balancing of network usage over a 24-hour period; and general
access services. In response to competitive pressures, the Company may take
certain pricing or marketing actions that could have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, the Company's expense levels are relatively fixed in the short term
and are based, in part, upon the Company's estimates of growth of its
business. As a result, variations in the timing and amounts of revenues could
have a material adverse effect on the Company's quarterly operating results.
Due to the foregoing factors, the Company believes that period-to-period
comparisons of its operating results are not necessarily meaningful and that
such comparisons cannot be relied upon as indicators of future performance. In
the event that the Company's operating results in any future period fall below
the expectations of securities analysts and investors, the trading price of
the Company's Common Stock would likely be materially and adversely affected.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
11
<PAGE>
CUSTOMER CONCENTRATION
The Company currently derives a substantial portion of its total revenue
from a single customer. For the years ended December 31, 1996 and 1997,
revenue from WebTV represented approximately 10.1% and 33.4%, respectively, of
the Company's revenue. The Company's current agreement to provide services to
WebTV is terminable at will after October 1, 1999. While the Company expects
revenue from WebTV to decrease as a percentage of revenue in future periods,
the Company believes that revenue derived from a limited number of current and
future customers may continue to represent a significant portion of its
revenue. As a result, the loss of one or more of the Company's major customers
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, there can be no assurance
that revenue from customers that have accounted for significant revenue in
past periods, individually or as a group, will continue, or if continued, will
reach or exceed historical levels in any future period. See Note 1 of Notes to
Financial Statements.
MANAGEMENT OF POTENTIAL GROWTH AND EXPANSION
As of December 31, 1995, the Company had 96 employees and 47 independent
contractors, as of December 31, 1996, the Company had 246 employees and 46
independent contractors, and as of February 23, 1998, the Company had 387
employees and 75 independent contractors. The growth and expansion of the
Company's business and its service offerings have placed, and are expected to
continue to place, a significant strain on the Company's management,
operational and financial resources. The Company has recently expanded and
upgraded its network to use an ATM backbone. The Company plans to continue to
substantially expand its network in the future. There can be no assurance that
the Company will be able to add services at the rate or according to the
schedule presently planned by the Company. To manage its growth, the Company
must, among other things, (i) continue to implement and improve its
operational, financial and management information systems, including its
billing, accounts receivable and payable tracking, fixed assets and other
financial management systems; (ii) hire and train additional qualified
personnel; and (iii) continue to expand and upgrade its network
infrastructure. Demands on the Company's network infrastructure and technical
support resources have grown rapidly with the Company's expanding customer
base, and the Company may in the future experience difficulties meeting the
demand for its access services and technical support. There can be no
assurance that the Company's technical support or other resources will be
sufficient to facilitate the Company's growth. As the Company strives to
increase total network utilization and to optimize this utilization by
targeting both business and consumer users to balance the network's usage
throughout a 24-hour period, there will be additional demands on the Company's
customer support, sales and marketing resources. Any failure of the Company to
manage its growth effectively could have a material adverse effect on the
Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH ACQUISITIONS
The Company completed the InterNex Acquisition in February 1998 and may seek
to acquire additional assets or businesses complementary to its operations.
The InterNex Acquisition has been and any subsequent acquisitions would be
accompanied by the risks commonly encountered in acquisitions of companies.
Such risks include, among other things, the difficulty of assimilating the
operations and personnel of InterNex or such other acquired companies, the
additional financial resources that may need to be applied to fund the
operations of InterNex or such other acquired companies, the potential
disruption of the Company's business, the inability of the Company's
management to maximize the financial and strategic position of the Company by
the incorporation of acquired technology or business such as the InterNex
network into the Company's service offerings, the difficulty of maintaining
uniform standards, controls, procedures and policies, the potential loss of
key employees of acquired companies, and the impairment of relationships with
employees and customers as a result of changes in management. No assurance can
be given that InterNex will be successfully integrated in the Company's
operations. Likewise, no assurance can be given that any other acquisitions by
the Company will or will not occur, that if an acquisition does occur it will
not materially and adversely affect the Company or that any such acquisition
will be successful in enhancing the Company's business. If the Company
proceeds with additional significant acquisitions in which the consideration
consists of cash, a substantial portion of the
12
<PAGE>
Company's available cash could be used to consummate the acquisitions. If the
Company were to consummate one or more acquisitions in which the consideration
consisted of stock, stockholders of the Company could suffer significant
dilution of their interests in the Company. Many business acquisitions,
including the InterNex acquisition, must be accounted for as a purchase for
financial reporting purposes. Most of the businesses that might become
attractive acquisition candidates for the Company are likely to have
significant goodwill and intangible assets, like InterNex, and acquisition of
these businesses, if accounted for as a purchase, would typically result in
substantial amortization of goodwill charges to the Company. This is the case
with the InterNex Acquisition which will result in significant amortization of
goodwill charges to the Company beginning in the first quarter of 1998. There
can be no assurance that any benefit from an acquisition will be sufficient to
offset any such charges. See "Business--The Concentric Network."
DEPENDENCE UPON NEW AND UNCERTAIN MARKETS
The markets for tailored, value-added network services for businesses and
consumers offered by the Company, including Internet access, are in the early
stages of development. Since these markets are relatively new and because
current and future competitors are likely to introduce competing services or
products, it is difficult to predict the rate at which the market will grow,
if at all, or whether new or increased competition will result in market
saturation. Certain critical issues concerning commercial use of tailored
value-added services and Internet services, including security, reliability,
ease and cost of access and quality of service, remain unresolved and may
impact the growth of such services. If the markets for the services offered by
the Company, including Internet access, fail to grow, grow more slowly than
anticipated, or become saturated with competitors, the Company's business,
financial condition and results of operations would be materially adversely
affected. See "--Competition," "--Dependence Upon New and Enhanced Services,"
and "--Risks of Technological Change and Evolving Industry Standards."
DEPENDENCE UPON NEW AND ENHANCED SERVICES
The Company has recently introduced new enterprise service offerings,
including the introduction of value-added, IP-based communication services to
enterprises and a new line of DSL services in limited areas. The failure of
these services to gain market acceptance in a timely manner or at all or, the
failure of the DSL Service in particular, to achieve significant market
coverage, could have a material adverse effect on the business, financial
condition and results of operations of the Company. Introduction by the
Company of new or enhanced services with reliability, quality or compatibility
problems could significantly delay or hinder market acceptance of such
services, which could adversely affect the Company's ability to attract new
customers and subscribers. The Company's services may contain undetected
errors or defects when first introduced or as enhancements are introduced.
There can be no assurance that, despite testing by the Company or its
customers, errors will not be found in new services after commencement of
commercial deployment, resulting in additional development costs, loss of, or
delays in, market acceptance, diversion of technical and other resources from
the Company's other development efforts and the loss of credibility with the
Company's customers and subscribers. Any such event could have a material
adverse effect on the Company's business, financial condition and results of
operations. Additionally, if the Company is unable to achieve balanced network
utilization over a 24-hour period, the Concentric network could become
overburdened at certain periods during the day, which could adversely affect
the quality of service provided by the Company. Conversely, due to the high
fixed cost nature of Concentric's infrastructure, under-utilization of the
Concentric network during certain periods of the day could adversely affect
the Company's ability to provide cost-efficient services at other times. The
failure of the Company to achieve balanced network utilization, because of
either over- or under-utilization could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Services."
DEPENDENCE UPON SUPPLIERS; SOLE AND LIMITED SOURCES OF SUPPLY
The Company relies on other companies to supply certain key components of
its network infrastructure, including telecommunications services and
networking equipment, which, in the quantities and quality demanded by the
Company, are available only from sole or limited sources. AT&T Corporation
("AT&T"), WorldCom,
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Inc. ("WorldCom"), MCI Telecommunications, Inc. ("MCI"), which is being
acquired by WorldCom, and PacWest Telecomm, Inc. are the primary providers to
the Company of data communications facilities and capacity. AT&T is currently
the sole provider of the frame relay backbone of the Concentric network, and
MCI is currently the sole provider of the ATM backbone of the Concentric
network. The Company is also dependent upon local exchange carriers ("LECs")
to provide telecommunications services to the Company and its customers. The
Company from time to time has experienced delays in receiving
telecommunications services, and there can be no assurance that the Company
will be able to obtain such services on the scale and within the time frames
required by the Company at an affordable cost, or at all. Any failure to
obtain such services on a timely basis at an affordable cost would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The routers, switches and modems the Company uses are supplied by Bay
Networks, Inc. through Racal. In addition, Racal acts as a systems integrator.
The servers primarily used in the Company's network infrastructure are
supplied solely by Sun Microsystems, Inc. The Company purchases these
components pursuant to purchase orders placed from time to time, does not
carry significant inventories of these components and has no guaranteed supply
arrangements for such components. The Company's suppliers also sell products
to the Company's competitors and may in the future themselves become
competitors of the Company. There can be no assurance that the Company's
suppliers will not enter into exclusive arrangements with the Company's
competitors or stop selling their products or components to the Company at
commercially reasonable prices or at all.
Expansion of network infrastructures by the Company and others is placing,
and will continue to place, a significant demand on the Company's suppliers,
some of which have limited resources and production capacity. In addition,
certain of the Company's suppliers, in turn, rely on sole or limited sources
of supply of components included in their products. Failure of the Company's
suppliers to adjust to meet such increasing demand may prevent them from
continuing to supply components and products in the quantities and quality and
at the times required by the Company, or at all. The Company's inability to
obtain sufficient quantities of sole- or limited-source components or to
develop alternative sources if required could result in delays and increased
costs in expanding, and overburdening of, the Company's network
infrastructure, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company also is dependent on its suppliers' ability to provide necessary
products and components that comply with various Internet and
telecommunications standards and that interoperate with products and
components from other vendors. Any failure of the Company's sole- or limited-
source suppliers to provide products or components that comply with Internet
standards or that interoperate with other products or components used by the
Company in its network infrastructure could have a material adverse effect on
the Company's business, financial condition and results of operations.
Certain of the Company's suppliers, including the regional Bell operating
companies ("RBOCs") and other LECs, currently are subject to tariff controls
and other price constraints that in the future may be changed. In addition,
regulatory proposals are pending that may affect the prices charged by the
RBOCs and other LECs to the Company. Any such regulatory changes could result
in increased prices of products and services, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "--Dependence Upon New and Enhanced Services" and "--Risks of
Technological Change and Evolving Industry Standards."
DEPENDENCE UPON NETWORK INFRASTRUCTURE
The Company's success will depend upon the capacity, reliability and
security of its network infrastructure. The Company currently derives a
significant portion of its revenue from customer subscriptions. The Company
expects that a substantial portion of its future revenues will be derived from
the provision of tailored value-added network services to its customers. The
Company must continue to expand and adapt its network infrastructure as the
number of users and the amount of information they wish to transfer increase,
and as customer requirements change. The Company's current projections of
utilization of the Concentric network require rapid expansion of
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the capacity of the network to avoid capacity constraints that would adversely
affect the performance of the system. The expansion and adaptation of the
Company's network infrastructure will require substantial financial,
operational and management resources. There can be no assurance that the
Company will be able to expand or adapt its network infrastructure to meet
additional demand of its customers' changing requirements on a timely basis,
at a commercially reasonable cost, or at all. In addition, if demand for usage
of the Concentric network were to increase faster than projected or were to
exceed the Company's current forecasts, the network could experience capacity
constraints, which would adversely affect the performance of the system. Any
failure of the Company to expand its network infrastructure on a timely basis
or adapt it to either changing customer requirements or evolving industry
standards, or capacity constraints experienced by the Concentric network for
any reason, could have a material adverse effect on the Company's business,
financial condition and results of operations. Currently, the Company has a
transit agreement with network MCI, Inc. to support the exchange of traffic
between the Concentric network and the Internet. With the acquisition of
InterNex, the Company is expanding its Internet connectivity to include not
only private transit with MCI, Sprint and UUNet, but also private peering with
other network providers as well as public peering with multiple smaller
internet service providers. The Company is still in the process of integrating
the InterNex network resources, including the Sprint and UUNet private transit
and public peering arrangements, and has yet to determine if it can
successfully execute its private/public Internet connection strategy. The
failure of the networks with which Concentric has public peering, private
peering or private transit, or the failure of any of the Company's data
centers, or any other link in the delivery chain, or the inability of the
Company to successfully integrate the InterNex network resources into the
Company's existing infrastructure, and resulting interruption in the Company's
operations would have a material adverse effect on the Company's business,
financial condition and results of operations. See "--Risks Associated with
Acquisition," "--Risk of System Failure" and "Business--The Concentric
Network."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company currently anticipates that its available cash resources,
including existing lease and credit facilities, and funds from operations will
be sufficient to meet its anticipated working capital and capital expenditure
requirements through at least the end of 1998. However, there can be no
assurance that such resources will be sufficient for its anticipated working
capital and capital expenditure requirements. The Company may need to raise
additional funds through public or private debt or equity financings in order
to take advantage of unanticipated opportunities, including more rapid
international expansion or acquisitions of complementary businesses or
technologies, or to develop new products or otherwise respond to unanticipated
competitive pressures. The Company may also raise additional funds through
public or private debt or equity financings if such financings become
available on favorable terms. If additional funds are raised, there can be no
assurance that additional financing will be available on terms favorable to
the Company, or at all. If adequate funds are not available or are not
available on acceptable terms, the Company may not be able to take advantage
of unanticipated opportunities, develop new products or otherwise respond to
unanticipated competitive pressures. Such inability could have a material
adverse effect on the Company's business, results of operations and financial
condition. The Company's forecast of the period of time through which its
financial resources will be adequate to support its operations is a forward
looking statement that involves risks and uncertainties, and actual results
could vary materially as a result of a number of factors, including those set
forth above in this paragraph. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
COMPETITION
The market for tailored value-added network services is extremely
competitive. There are no substantial barriers to entry, and the Company
expects that competition will intensify in the future. The Company believes
that its ability to compete successfully depends upon a number of factors,
including market presence; the capacity, reliability, low latency and security
of its network infrastructure; technical expertise and functionality,
performance and quality of services; customization; ease of access to and
navigation of the Internet; the pricing
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policies of its competitors and suppliers; the variety of services; the timing
of introductions of new services by the Company and its competitors; customer
support; the Company's ability to support industry standards; and industry and
general economic trends.
The Company's current and prospective competitors generally may be divided
into the following five groups: (i) telecommunications companies, such as
AT&T, MCI, Sprint, Inc., WorldCom, the RBOCs and other LEC's and various cable
companies; (ii) online services providers, such as America Online, Inc.
("America Online"), CompuServe Incorporated ("CompuServe"), the Microsoft
Network ("MSN") of Microsoft, and Prodigy Services Company ("Prodigy"); (iii)
Internet service providers ("ISPs"), such as BBN Corporation ("BBN"), a
subsidiary of GTE, NETCOM On-Line Communications Services, Inc. ("NETCOM"), a
subsidiary of ICG Communications, Inc., PSINet, Inc. ("PSI"), and other
national and regional providers; (iv) nonprofit or educational Internet
connectivity providers; and (v) Web server farms such as Internet Direct and
Exodus. Many of these competitors have greater market presence, engineering
and marketing capabilities, and financial, technological and personnel
resources than those available to the Company. As a result, they may be able
to develop and expand their communications and network infrastructures more
quickly, adapt more swiftly to new or emerging technologies and changes in
customer requirements, take advantage of acquisition and other opportunities
more readily, and devote greater resources to the marketing and sale of their
products and services than can the Company. In addition to the companies named
above, various organizations have entered into or are forming joint ventures
or consortiums to provide services similar to those of the Company.
The Company believes that new competitors, including large computer
hardware, software, media and other technology and telecommunications
companies, will enter the tailored value-added network services market,
resulting in even greater competition for the Company. Certain of such
telecommunications companies and online services providers are currently
offering or have announced plans to offer Internet or online services or to
expand their network services. Certain companies, including America Online,
BBN and PSI, have also obtained or expanded their Internet access products and
services as a result of acquisitions. Such acquisitions may permit the
Company's competitors to devote greater resources to the development and
marketing of new competitive products and services and the marketing of
existing competitive products and services. In addition, the ability of some
of the Company's competitors to bundle other services and products with
virtual private network services or Internet access services could place the
Company at a competitive disadvantage. Certain companies are also exploring
the possibility of providing or are currently providing high-speed data
services using alternative delivery methods such as over the cable television
infrastructure, through direct broadcast satellites and over wireless cable.
As a result of increased competition and vertical and horizontal integration
in the industry, the Company could encounter significant pricing pressure,
which in turn could result in significant reductions in the average selling
price of the Company's services. For example, certain of the Company's
competitors that are telecommunications companies may be able to provide
customers with reduced communications costs in connection with their Internet
access services or private network services, reducing the overall cost of
their solutions and significantly increasing price pressures on the Company.
There can be no assurance that the Company will be able to offset the effects
of any such price reductions with an increase in the number of its customers,
higher revenue from enhanced services, cost reductions or otherwise. In
addition, the Company believes that the Internet access and online services
businesses are likely to encounter consolidation in the near future, which
could result in increased price and other competition in these industries and,
potentially, the virtual private networks industry. Increased price or other
competition could result in erosion of the Company's market share and could
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that the Company will
have the financial resources, technical expertise or marketing and support
capabilities to continue to compete successfully. See "--Management of
Potential Growth and Expansion" and "Business--Competition."
DEPENDENCE UPON THIRD-PARTY MARKETING, DISTRIBUTION AND ENGINEERING
RELATIONSHIPS
An important element of the Company's strategy is to develop relationships
with leading companies to enhance Concentric's engineering, marketing and
distribution efforts. The Company has OEM agreements with
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Netscape and Microsoft pursuant to which the Company is entitled to distribute
and modify these companies' browsers. The customization of browsers by the
Company is an integral part of its current tailored VPN offerings. The
Netscape agreement expires in December 1998 and the Microsoft agreement
expires in March 1999. The Company has an agreement with Intuit for the
development, operation and maintenance of a VPN that is the integrated access,
dial-up network and infrastructure used by purchasers of Quicken, Turbo Tax
and other Intuit software products to access the Quicken Financial Network
Website and upgrade to full Internet access. The Intuit contract may be
terminated at the election of Intuit upon six months prior notice of an
election to terminate. The Company relies on these relationships for
acquisition of consumer customers. The termination of or failure to renew any
of these agreements or the inability of the Company to enter into similar
relationships with others could have a material adverse effect on the
Company's business, financial condition and results of operation. The Company
has an outsourcing agreement with Critical Technologies Incorporated ("CTI"),
a subsidiary of Williams Communications Group, Inc., that enables the Company
to use CTI employees for the operational support of the Concentric network.
The Company's use of CTI employees and CTI engineering expertise were integral
to its development of the Concentric network and continue to be integral to
ongoing operation of the Company's network operations center. Pursuant to the
agreement with CTI, all of the CTI employees currently working for Concentric
will become employees of Concentric at the termination of the agreement in
December 2000. Termination of any of these agreements or the failure of the
Company to renew any of the agreements upon termination on terms acceptable to
the Company could result in a material adverse affect on the Company's
business, financial condition and results of operations. See "Business--Key
Business Alliances."
RISKS OF TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY STANDARDS
The markets for the Company's services are characterized by rapidly changing
technology, evolving industry standards, changes in customer needs, emerging
competition and frequent new product and service introductions. The Company's
future success will depend, in part, on its ability to effectively use leading
technologies; to continue to develop its technical expertise; to enhance its
current networking services; to develop new services that meet changing
customer needs; to advertise and market its services; and to influence and
respond to emerging industry standards and other technological changes in a
timely and cost-effective basis. There can be no assurance that the Company
will be successful in effectively using new technologies, developing new
services or enhancing its existing services on a timely basis, or that such
new technologies or enhancements will achieve market acceptance. The Company's
pursuit of necessary technological advances may require substantial time and
expense, and there can be no assurance that the Company will succeed in
adapting its network service business to alternate access devices and
conduits. An integral part of the Company's strategy is to design its network
in order to meet the requirements of emerging standards such as 56.6 Kbps
modems and applications such as IP-based interactive video and voice
conferencing communications. Failure of the Company, for technological or
other reasons, to develop and introduce new or enhanced services that are
compatible with industry standards and that satisfy customer requirements
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--The Concentric Network."
The Company believes that its ability to compete successfully is also
dependent upon the continued compatibility and interoperability of its
services with products and architectures offered by various vendors. Although
the Company intends to support emerging standards in the market for Internet
access, there can be no assurance that industry standards will be established
or, if they become established, that the Company will be able to conform to
these new standards in a timely fashion and maintain a competitive position in
the market. Specifically, the Company's services rely on the continued
widespread commercial use of TCP/IP. Alternative open protocol and proprietary
protocol standards have been or are being developed. If any of these
alternative protocols become widely adopted, there may be a reduction in the
use of TCP/IP, which could render the Company's services obsolete and
unmarketable. Additionally, two of the leading modem manufacturers, Rockwell
and US Robotics, a subsidiary of 3Com Incorporated, have proposed different,
incompatible standards for 56.6 Kbps modems and cable modems. The Company
currently plans to accommodate both standards to the extent it can do so cost
effectively. The failure of the Company to anticipate the prevailing standard,
or the failure of a common standard to emerge could have a material adverse
effect on the Company's business and results of
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operations. In addition, there can be no assurance that services or
technologies developed by others will not render the Company's services or
technology uncompetitive or obsolete.
The Company faces the risk of fundamental changes in the way Internet access
is delivered. Currently, Internet services are accessed primarily by computers
connected by telephone lines. Recently, several companies announced the
development and planned sale of cable television modems, wireless modems and
satellite modems to provide access to the Internet. Cable television,
satellite and wireless modems have the ability to transmit data at
substantially faster speeds than the modems the Company and its subscribers
currently use. In addition, wireless modems have the potential to reduce the
cost of network services. As the Internet becomes accessible through these
cable television, wireless and satellite modems and by screen-based
telephones, television or other consumer electronic devices, or subscriber
requirements change the way Internet access is provided, the Company will have
to develop new technology or modify its existing technology to accommodate
these developments. The Company's pursuit of these technological advances may
require substantial time and expense, and there can be no assurance that the
Company will succeed in adapting its Internet access business to alternate
access devices and conduits.
RISK OF SYSTEM FAILURE
As the Company expands its network and usage grows, increased stress will be
placed upon network hardware and traffic management systems. While the
Company's network has been designed with redundant backbone circuits to allow
traffic re-routing, there can be no assurance that the Company will not
experience failures relating to individual network points of presence ("POPs")
or even catastrophic failure of the entire network. Moreover, the Company's
operations are dependent upon its ability to protect its network
infrastructure against damage from fire, earthquakes, floods, mudslides, power
loss, telecommunications failures and similar events. A significant portion of
the Company's computer equipment, including critical equipment dedicated to
its Internet access services, is located at its facilities in Bay City,
Michigan, and Cupertino, California. In addition, the Company's modems and
routers that serve large areas of the United States are located in such
cities. The Company's network operations center, which manages the entire
network, is in St. Louis, Missouri. Despite precautions taken by the Company,
the occurrence of a natural disaster or other unanticipated problems at the
Company's network operations center, at its hubs (sites at which the Company
has located routers, switches and other computer equipment that make up the
backbone of the Company's network infrastructure) or at a number of the
Company's POPs has from time to time in the past caused, and in the future
could cause, interruptions in the services provided by the Company. In
addition, failure of the Company's telecommunications providers to provide the
data communications capacity in the time frame required by the Company as a
result of a natural disaster or operational disruption or for any other reason
could cause interruptions in the services provided by the Company. Any damage
or failure that causes interruptions in the Company's operations could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--The Concentric Network."
SYSTEM SECURITY RISKS
Despite the implementation of network security measures, the core of the
Company's network infrastructure is vulnerable to computer viruses, break-ins
and similar disruptive problems caused by its customers or Internet users.
Computer viruses, break-ins or other problems caused by third parties could
lead to interruptions, delays or cessation in service to the Company's
customers and subscribers. Furthermore, such inappropriate use of the network
by third parties could also potentially jeopardize the security of
confidential information stored in the computer systems of the Company and its
customers, which may result in liability to the Company and also may deter
potential subscribers. Although the Company intends to continue to implement
industry-standard security measures, such measures occasionally have been
circumvented in the past, and there can be no assurance that measures
implemented by the Company will not be circumvented in the future. The costs
and resources required to eliminate computer viruses and alleviate other
security problems may result in interruptions, delays or cessation of service
to the Company's customers that could have a material adverse effect on the
Company's business, financial condition and results of operations. See "--
Management of Potential Growth and
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Expansion," "--Dependence upon New and Enhanced Services," "--Risks of
Technological Change and Evolving Industry Standards," "Use of Proceeds" and
"Business--Services."
DEPENDENCE UPON KEY PERSONNEL; ABILITY TO HIRE ADDITIONAL QUALIFIED PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of its executive management team, including Henry R. Nothhaft,
the Company's Chairman, President and Chief Executive Officer, and John K.
Peters, the Company's Executive Vice President and General Manager, Network
Services Division. The loss of the services of Messrs. Nothhaft or Peters
could have a material adverse effect on the Company. The Company does not have
employment agreements with any of its senior officers, including Messrs.
Nothhaft or Peters. Nor does the Company carry key man life insurance on the
life of any such persons. The Company's success will also depend upon the
continued service of the other members of its senior management team and
technical, marketing and sales personnel. The Company's employees may
voluntarily terminate their employment with the Company at any time, and
competition for qualified employees is intense. The Company's success also
depends upon its ability to attract and retain additional highly qualified
management, technical, sales and marketing and customer support personnel. The
process of locating such personnel with the combination of skills and
attributes required to carry out the Company's strategy is often lengthy. The
loss of the services of key personnel, or the inability to attract additional
qualified personnel, could have a material adverse effect upon the Company's
results of operations, development efforts and ability to complete the
expansion of its network infrastructure. Any such event could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "--Management of Potential Growth and Expansion" and
"Management."
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
A key component of the Company's strategy is its planned expansion into
international markets. In particular, the Company has entered into an
agreement with TMI, to establish an international network based on
Concentric's network technology and expertise and TMI's existing
telecommunications infrastructure to deliver a range of compatible network
services worldwide. If the companies are not able to successfully deploy
Concentric's technology over TMI's infrastructure, or if Concentric is
unsuccessful in transferring its knowledge to TMI employees, the Company's
international strategy may be delayed and the Company's business, results of
operation or financial condition could be materially adversely affected. To
date, the Company has only limited experience in working with TMI to develop
versions of its products and marketing and distributing its products
internationally. Additionally, the Company entered into a roaming services
agreement in June 1997 with NTT PC. The roaming services agreement allows
Concentric customers to use the NTT PC network to access their internet
accounts in Japan and allows members of the NTT PC network to access their
internet accounts in the United States and Canada. Additionally, the Company
acquired Web hosting facilities in Stockholm, Sweden, Tokyo, Japan and Hong
Kong in February 1998. There can be no assurance that the Company will be able
to successfully market, sell and deliver its products in these markets. In
addition to the uncertainty as to the Company's ability to expand its
international presence, there are certain risks inherent in doing business on
an international level, such as unexpected changes in regulatory requirements,
export restrictions, export controls relating to encryption technology,
tariffs and other trade barriers, difficulties in staffing and managing
foreign operations, longer payment cycles, problems in collecting accounts
receivable, political instability, fluctuations in currency exchange rates,
seasonal reductions in business activity during the summer months in Europe
and certain other parts of the world and potentially adverse tax consequences
that could adversely impact the success of the Company's international
operations. There can be no assurance that one or more of such factors will
not have a material adverse effect on the Company's future international
operations and, consequently, on the Company's business, financial condition
and results of operations.
GOVERNMENT REGULATION
The FCC currently does not regulate value-added network software or computer
equipment related services that transport data or voice messages over
telecommunication facilities. The Company provides value-added
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IP-based network services, in part, through data transmissions over public
telephone lines. These transmissions are governed by regulatory policies
establishing charges and terms for wireline communications. Operators of these
types of value-added networks that provide access to regulated transmission
facilities only as part of a data services package currently are excluded from
regulations that applies to "telecommunications carrier" and as such the
Company is not currently subject to direct regulation by the FCC or any other
governmental agency, other than regulations applicable to businesses
generally. However, in the future the Company could become subject to
regulation by the FCC or another regulatory agency as a provider of basic
telecommunications services.
Currently, the FCC is reviewing its regulatory positions and could seek to
impose common carrier regulation on the network transport and communications
facilities aspects of an enhanced or information service package. Further, the
FCC could conclude that the Company's protocol conversions, computer
processing, and interaction with customer-supplied information are
insufficient to afford the Company the benefits of the enhanced or information
service classification, and thereby may seek to regulate some segments of the
Company's activities as basic telecommunications services. While state public
utility commissions generally have declined to regulate enhanced or
information services, some states have continued to regulate particular
aspects of enhanced services in limited circumstances, such as where they are
provided by LECs. Moreover, the public service commissions of certain states
continue to review potential regulation of such services. There can be no
assurance that regulatory authorities of states within which Concentric makes
its Internet access, Intranet and VPN services available will not seek to
regulate aspects of these activities as telecommunications services. Changes
in the regulatory environment relating to the Internet connectivity market,
including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood or scope of competition
from the RBOCs or other telecommunications companies, could affect the prices
at which the Company may sell its services. The Company cannot predict the
impact, if any, that future regulation or regulatory changes may have on its
business and there can be no assurance that such future regulation or
regulatory changes will not have a material adverse effect on the Company's
business, results of operations and financial condition.
DEPENDENCE ON TECHNOLOGY; PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon its
technology, although the Company believes that its success is more dependent
upon its technical expertise than its proprietary rights. The Company
principally relies upon a combination of copyright, trademark and trade secret
laws and contractual restrictions to protect its proprietary technology. It
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization or to develop similar
technology independently, and there can be no assurance that such measures
have been, or will be, adequate to protect the Company's proprietary
technology or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. The Company operates a material portion of its business over the
Internet, which is subject to a variety of risks. Such risks include but are
not limited to the substantial uncertainties that exist regarding the system
for assigning domain names and the status of private rules for resolution of
disputes regarding rights to domain names. There can be no assurance that the
Company will continue to be able to employ its current domain names in the
future or that the loss of rights to one or more domain names will not have a
material adverse effect on the Company's business and results of operations.
Although the Company does not believe that it infringes the proprietary
rights of any third parties, there can be no assurance that third parties will
not assert such claims against the Company in the future or that such claims
will not be successful. The Company could incur substantial costs and
diversion of management resources with respect to the defense of any claims
relating to proprietary rights, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Furthermore, parties making such claims could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief that
could effectively block the Company's ability to license its products in the
United States or abroad. Such a judgment would have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, the Company is obligated under certain agreements to indemnify the
other party in connection with
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infringement by the Company of the proprietary rights of third parties. In the
event the Company is required to indemnify parties under these agreements, it
could have a material adverse effect on the business, financial condition and
results of operations of the Company. In the event a claim relating to
proprietary technology or information is asserted against the Company, the
Company may seek licenses to such intellectual property. There can be no
assurance, however, that licenses could be obtained on commercially reasonable
terms, if at all, or that the terms of any offered licenses would be
acceptable to the Company. The failure to obtain the necessary licenses or
other rights could have a material adverse effect on the Company's business,
financial condition and results of operations.
POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH NETWORK
The law relating to the liability of online service providers, private
network operators and Internet service providers for information carried on or
disseminated through the facilities of their networks is currently unsettled.
Several lawsuits seeking a judgment of such liability are pending. In one case
brought against an Internet service provider, Religious Technology Center v.
Netcom On-Line Communication Services, Inc., the United States District Court
for the Northern District of California ruled in a preliminary phase that
under certain circumstances Internet service providers could be held liable
for copyright infringement. The case has not reached final judgment. Such
claims have been asserted against the Company in the past, and there can be no
assurance that such claims will not be asserted in the future, or if asserted,
will not be successful. The Telecommunications Act of 1996 prohibits and
imposes criminal penalties and civil liability for using an interactive
computer service for transmitting certain types of information and content,
such as obscene communications. Numerous states have adopted or are currently
considering similar types of legislation. The imposition upon the Company,
Internet service providers or Web server hosts of potential liability for
materials carried on or disseminated through their systems could require the
Company to implement measures to reduce its exposure to such liability, which
may require the expenditure of substantial resources or the discontinuation of
certain product or service offerings. Further, the costs incurred in defending
against any such claims and potential adverse outcomes of such claims could
have a material adverse effect on the Company's financial condition and
results of operations. The Company believes that it is currently unsettled
whether the Telecommunications Act of 1996 prohibits and imposes liability for
any services provided by the Company should the content of information
transmitted be subject to the statute.
LEGAL PROCEEDINGS
In late April and early May, 1997, three putative securities class action
complaints were filed in the United States District Court, Central District by
certain stockholders of Diana Corporation ("Diana"), the parent corporation of
Sattel Communications LLC ("Sattel"), alleging securities fraud related to
plaintiffs' purchase of shares of Diana Common Stock in reliance upon
allegedly misleading statements made by defendants, Diana, Sattel and certain
of their respective affiliates, officers and directors. Concentric was named
as a defendant in the complaint in connection with certain statements made by
Diana and officers of Diana related to Concentric's purchase of network
switching equipment from Diana's Sattel subsidiary. The plaintiffs seek
unspecified compensatory damages. A trial date has yet to be determined.
While the ultimate outcome of such litigation is uncertain, the Company
believes it has meritorious defenses to the claims and intends to conduct a
vigorous defense. An unfavorable outcome in this matter could have a material
adverse effect on the Company's financial condition. In addition, even if the
ultimate outcome is resolved in favor of the Company, the defense of such
litigation could entail considerable cost and the diversion of efforts of
management, either of which could have a material adverse effect on the
Company's results of operations. See "Business--Legal Proceedings" and Note 11
of Notes to Financial Statements.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Notes will be
entitled to require the Company to purchase any or all of the Notes held by
such holder at the prices stated herein. However, the Company's
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ability to repurchase the Notes upon a Change of Control may be limited by the
terms of then existing contractual obligations of the Company and its
subsidiaries. In addition, the Company may not have adequate financial
resources to effect such a purchase, and there can be no assurance that the
Company would be able to obtain such resources through a refinancing of the
Notes to be purchased or otherwise. If the Company fails to repurchase all of
the Notes tendered for purchase upon the occurrence of a Change of Control,
such failure will constitute an Event of Default under the Indenture.
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 such 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 certain circumstance there may be a
degree of uncertainty in ascertaining 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
protection in the event of a highly leveraged transaction, including a
reorganization, restructuring, merger or other similar transaction involving
the Company that may adversely affect the Holders, because such 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 the Notes--Change of Control," the Indenture
does not contain provisions that permit the Holders of the Notes to require
the Company to repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
BANKRUPTCY RELATED TO ESCROW AMOUNT
The right of the Trustee (as defined) under the Indenture and the Escrow
Agreement (as defined) to foreclose upon and sell Escrow Collateral (as
defined) upon the occurrence of an Event of Default on the Notes is likely to
be significantly impaired by applicable bankruptcy law if a bankruptcy or
reorganization case were to be commenced by or against the Issuer or one or
more of its subsidiaries. Under applicable bankruptcy law, secured creditors
such as the Holders of the Notes are prohibited from foreclosing upon or
disposing of a debtor's property without prior bankruptcy court approval. See
"Description of Notes--Escrow Account."
DISCRETIONARY AUTHORITY OVER USE OF NET PROCEEDS
Approximately $52.5 million of the net proceeds from the issuance of the
Existing Notes have been invested in U.S. Government Securities to be held in
an escrow account for the benefit of the Holders of the Notes to fund, when
due, the first six scheduled interest payments on the Notes. As of the date of
this Prospectus, the Company has no other specific allocations for the net
proceeds of the Existing Notes Offering. Consequently, management retains a
significant amount of discretion over the application of the proceeds from the
Existing Notes Offering. Because of the number and variability of factors that
determine the Company's use of the net proceeds of the Existing Notes
Offering, there can be no assurance that such applications will not vary
substantially from the Company's current intentions. Pending such uses, the
Company intends to invest the net proceeds of the Existing Notes Offering in
short-term U.S. investment grade and government securities. See "Use of
Proceeds."
SUBSTANTIAL CONTROL BY OFFICERS AND DIRECTORS AND THEIR AFFILIATES
As of December 31, 1997, the Company's officers and directors and their
affiliates or the principal stockholders whom they represent beneficially
owned or controlled approximately 47% of the outstanding shares of Common
Stock. As a result, the Company's officers, directors and their affiliates
will have the ability to significantly influence the election of the Company's
Board of Directors and the outcome of corporate actions requiring stockholder
approval. See "Principal Stockholders."
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RESTRICTIONS ON RESALE; ABSENCE OF PUBLIC MARKET FOR THE EXISTING NOTES
The Existing Notes are currently owned by a relatively small number of
beneficial owners. The Existing Notes have not been registered under the
Securities Act or any state securities laws and, unless so registered and to
the extent not exchanged for the Exchange Notes, may not be offered or sold
except pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and applicable state
securities laws. Any Existing Notes tendered and exchanged in the Exchange
Offer will reduce the aggregate principal amount of Existing Notes
outstanding. Following the consummation of the Exchange Offer, Existing
Holders who did not tender their Existing Notes generally will not have any
further registration rights under the Registration Rights Agreement, and such
Existing Notes will continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market for such Existing Notes
could be adversely affected. The Existing Notes are currently eligible for
sale pursuant to Rule144A through The Portal Market of the National
Association of Securities Dealers, Inc. ("PORTAL"). Because the Company
anticipates that most Existing Holders will elect to exchange such Existing
Notes for Exchange Notes due to the absence of restrictions on the resale of
Exchange Notes under the Securities Act, the Company anticipates that the
liquidity of the market for any Existing Notes remaining after the
consummation of the Exchange Offer may be substantially limited.
The Exchange Notes will constitute a new issue of securities for which there
is currently no active trading market. If the Exchange Notes are traded after
their initial issuance, they may trade at a discount from their initial
offering price, depending upon prevailing interest rates, the market for
similar securities and other factors including general economic conditions and
the current financial condition, results of operations and business prospects
of the Company. Although the Exchange Notes will generally be permitted to be
resold or otherwise transferred by non-affiliates of the Company without
compliance with the registration and prospectus delivery requirements of the
Securities Act, the Company does not intend to apply for a listing or
quotation of the Exchange Notes on any securities exchange or stock market.
The Initial Purchasers are not obligated to engage in market-making activities
with respect to the Exchange Notes, and any such market-making undertaken by
the Initial Purchasers may be discontinued at any time without notice. In
addition, any market-making activity in the Notes by the Initial Purchasers
will be subject to the limits imposed under the Exchange Act. Accordingly,
there can be no assurance as to the development, liquidity or maintenance of
any market for the Exchange Notes, or, in the case of non-tendering Existing
Holders, the trading market for the Existing Notes following the Exchange
Offer. If no trading market develops or is maintained, New Holders may
experience difficulty in reselling Exchange Notes or may be unable to sell
them.
The liquidity of, and trading market for, the Existing Notes or the Exchange
Notes also may be adversely affected by general declines in the market for
similar securities. Such a decline may adversely affect such liquidity and
trading markets independent of the financial performance of, and prospects
for, the Company.
CONSEQUENCES OF FAILURE TO EXCHANGE
Any Existing Notes tendered and exchanged in the Exchange Offer will reduce
the aggregate principal amount of Existing Notes outstanding. Following the
consummation of the Exchange Offer, Existing Holders who did not tender their
Existing Notes generally will not have any further registration rights under
the Registration Rights Agreement, and such Existing Notes will continue to be
subject to certain restrictions on transfer. Accordingly, the liquidity of the
market for such Existing Notes could be adversely affected. The Existing Notes
are currently eligible for sale pursuant to Rule144A through PORTAL. Because
the Company anticipates that most Existing Holders will elect to exchange such
Existing Notes for Exchange Notes due to the absence of restrictions on the
resale of Exchange Notes (except for applicable restrictions on any New Holder
who is an affiliate of the Company or is a broker-dealer which acquired the
Existing Notes directly from the Company) under the Securities Act, the
Company anticipates that the liquidity of the market for any Existing Notes
remaining after the consummation of the Exchange Offer may be substantially
limited.
As a result of the making of this Exchange Offer, the Company will have
fulfilled certain of its obligations under the Registration Rights Agreement,
and Existing Holders who do not tender their Existing Notes, except
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for certain instances involving the Existing Holders who are not eligible to
participate in the Exchange Offer, will not have any further registration
rights under the Registration Rights Agreement or otherwise or rights to
receive Liquidated Damages (as defined) for failure to register. Accordingly,
any Existing Holder that does not exchange that Holder's Existing Notes for
Exchange Notes will continue to hold the untendered Existing Notes and will be
entitled to all the rights and subject to all the limitations applicable
thereto under the Indenture, except to the extent that such rights or
limitations, by their terms, terminate or cease to have further effectiveness
as a result of the Exchange Offer.
The Existing Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Existing
Notes may be resold only (i) to the Company or any of its subsidiaries, (ii)
inside the United States to a QIB in a transaction complying with Rule 144A,
(iii) inside the United States to an institutional "accredited investor" (as
defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) an
"Accredited Investor" that, prior to such transfer, furnishes (or has
furnished on its behalf by a U.S. broker-dealer) to the Trustee a signed
letter containing certain representations and agreements relating to the
restrictions on transfer of the Securities (the form of which letter can be
obtained from such Trustee), (iv)outside the United States in compliance with
Rule 904 under the Securities Act, (v) pursuant to the exemption from
registration provided by Rule 144 under the Securities Act (if available), or
(vi) pursuant to an effective registration statement under the Securities Act.
Each Accredited Investor that is not a QIB and that is an original purchaser
of any of the Securities from the Initial Purchasers will be required to sign
a letter confirming that such person is an Accredited Investor under the
Securities Act and that such person acknowledges the transfer restrictions
summarized herein.
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USE OF PROCEEDS
EXCHANGE OFFER
The net proceeds from the Existing Notes Offering, after deducting the
Initial Purchasers' discount and estimated offering expenses, were
approximately $145.0 million. Approximately $52.5 million of such net proceeds
have been invested in U.S. Government Securities held in an Escrow Account for
the benefit of the Holders of the Notes to fund when due the first six
scheduled interest payments on the Notes.
The Company currently plans to use the net proceeds from the Existing Notes
Offering to fund operating losses and for working capital requirements or for
other general corporate purposes. Proceeds from the Existing Notes Offering
also may be used to acquire assets, technologies, or businesses complementary
to the Company's value-added enterprise network service strategy. Pending such
uses, the proceeds will be invested in short-term U.S. investment grade and
government securities. The Company paid approximately $15.5 million in cash
for all of the outstanding shares of capital stock of InterNex as part of the
InterNex Acquisition in February 1998.
The Company will not receive any cash proceeds from the Exchange Offer. In
consideration for issuing the Exchange Notes in exchange for Existing Notes as
described in this Prospectus, the Company will receive Existing Notes in like
principal amount. The Existing Notes surrendered in exchange for the Exchange
Notes will be retired and canceled.
DIVIDEND POLICY
The Company has not paid and does not anticipate paying any cash dividends
on the Common Stock in the foreseeable future. The Company intends to retain
its earnings, if any, for use in the Company's growth and ongoing operations.
In addition, the terms of the Indenture will restrict the ability of the
Company to pay dividends on the Common Stock. See "Description of Notes--
Certain Covenants; Restricted Payments."
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THE EXCHANGE OFFER
The following discussion sets forth or summarizes the material terms of the
Exchange Offer, including those set forth in the Letter of Transmittal
distributed with this Prospectus. This summary is qualified in its entirety by
reference to the full text of the documents underlying the Exchange Offer
(including the Indenture and the Registration Rights Agreement), which are
exhibits to the Exchange Offer Registration Statement.
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Existing Notes were sold by the Company to the Initial Purchasers on
December 15, 1997, and were subsequently resold to qualified institutional
buyers pursuant to Rule 144A under the Securities Act. In connection with the
Existing Notes Offering, the Company entered into the Registration Rights
Agreement, which requires, among other things, that within 45 days following
December 15, 1997 (the "Issue Date") (i.e. on or before January 29, 1998) the
Company (i) file with the Commission a registration statement under the
Securities Act with respect to an issue of Exchange Notes of the Company
identical in all material respects (other than transfer restrictions,
registration rights and the requirement, under certain circumstances, to pay
Liquidated Damages) to the Existing Notes (which obligation has been satisfied
by the filing of the Exchange Offer Registration Statement), (ii) use their
best efforts to cause such registration statement to become effective under
the Securities Act by the date which is 105 days after the Issue Date (the
"Target Effectiveness Date") and (iii) to consummate the Exchange Offer within
30 days after the Target Effectiveness Date, and offer to the Existing Holders
the opportunity to exchange their Existing Notes for a like principal amount
of Exchange Notes, which would be issued without a restrictive legend and may
generally be reoffered and resold by the New Holder without restrictions or
limitations under the Securities Act, subject to the terms and conditions of
the Exxon Capital, Morgan Stanley and Shearman & Sterling No-Action Letters.
See Outside Front Cover, "Prospectus Summary--The Exchange Offer", and "--
Resale of Exchange Notes."
Any Existing Notes tendered and exchanged in the Exchange Offer will reduce
the aggregate principal amount of Existing Notes outstanding. Following the
consummation of the Exchange Offer, Existing Holders who did not tender their
Existing Notes generally will not have any further registration rights under
the Registration Rights Agreement, and such Existing Notes will continue to be
subject to certain restrictions on transfer. Accordingly, the liquidity of the
market for such Existing Notes could be adversely affected. The Existing Notes
are currently eligible for sale pursuant to Rule 144A through PORTAL. Because
the Company anticipates that most Existing Holders will elect to exchange such
Existing Notes for Exchange Notes due to the absence of restrictions on the
resale of Exchange Notes under the Securities Act, the Company anticipates
that the liquidity of the market for any Existing Notes remaining after the
consummation of the Exchange Offer may be substantially limited.
As a result of the making of this Exchange Offer, the Company will have
fulfilled certain of its obligations under the Registration Rights Agreement,
and Existing Holders who do not tender such Existing Notes, except for certain
instances involving the Initial Purchasers or Existing Holders who are not
eligible to participate in the Exchange Offer, will not have any further
registration rights under the Registration Rights Agreement or otherwise or
rights to receive Liquidated Damages for failure to register. Accordingly, any
Existing Holder that does not exchange that Holder's Existing Notes for
Exchange Notes will continue to hold the untendered Existing Notes and will be
entitled to all the rights and subject to all the limitations applicable
thereto under the Indenture, except to the extent that such rights or
limitations, by their terms, terminate or cease to have further effectiveness
as a result of the Exchange Offer.
The Existing Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Existing
Notes may be resold only (i) to the Company or any of its subsidiaries, (ii)
inside the United States to a QIB in a transaction complying with Rule 144A,
(iii) inside the United States to an institutional "accredited investor" (as
defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) an
"Accredited Investor" that, prior to such transfer, furnishes (or has
furnished on its behalf by a U.S. broker-dealer) to the Trustee a signed
letter containing certain representations and agreements relating to
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the restrictions on transfer of the Securities (the form of which letter can
be obtained from such Trustee), (iv) outside the United States in compliance
with Rule 904 under the Securities Act, (v) pursuant to the exemption from
registration provided by Rule 144 under the Securities Act (if available), or
(vi) pursuant to an effective registration statement under the Securities Act.
Each Accredited Investor that is not a QIB and that is an original purchaser
of any of the Securities from the Initial Purchasers will be required to sign
a letter confirming that such person is an Accredited Investor under the
Securities Act and that such person acknowledges the transfer restrictions
summarized herein.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Existing
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time on the Expiration Date. The Company will issue $1,000 principal amount of
Exchange Notes in exchange for each $1,000 principal amount of outstanding
Existing Notes accepted in the Exchange Offer. Existing Holders may tender
some or all of their Existing Notes pursuant to the Exchange Offer. However,
Existing Notes may be tendered only in integral multiples of $1,000. The form
and terms of the Exchange Notes are the same as the form and terms of the
Existing Notes except that (i) the Exchange Notes have been registered under
the Securities Act and hence will not bear legends restricting the transfer
thereof and (ii) New Holders generally will not be entitled to certain rights
under the Registration Rights Agreement or Liquidated Damages, which rights
generally will terminate upon consummation of the Exchange Offer. The Exchange
Notes will evidence the same debt as the Existing Notes and will be entitled
to the benefits of the Indenture.
Existing Holders do not have any appraisal or dissenters' rights under the
Delaware General Corporation Law or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder, including Rule 14e-1.
The Company shall be deemed to have accepted validly tendered Existing Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering
Existing Holders for the purpose of receiving the Exchange Notes from the
Company.
If any tendered Existing Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Existing Notes will be
returned, without expense, to the tendering Existing Holder thereof as
promptly as practicable after the Expiration Date.
Existing Holders who tender Existing Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions
in the Letter of Transmittal, transfer taxes with respect to the exchange of
Existing Notes pursuant to the Exchange Offer. The Company will pay all
charges and expenses, other than transfer taxes in certain circumstances, in
connection with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
April 27, 1998 unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
To extend the Exchange Offer, the Company will notify the Exchange Agent of
any extension by oral or written notice, followed by a public announcement
thereof no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date. In no event will the
Expiration Date be extended to a date more than 30 business days after
effectiveness of the Exchange Offer Registration Statement.
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The Company reserves the right, in its reasonable judgment, (i) to delay
accepting any Existing Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "--Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of
the Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by a
public announcement thereof.
INTEREST ON EXCHANGE NOTES
Each Exchange Note will bear interest from the most recent date to which
interest has been paid or duly provided for on the Existing Note surrendered
in exchange for such Exchange Note or, if no such interest has been paid or
duly provided for on such Existing Note, from December 15, 1997. Holders of
the Existing Notes whose Existing Notes are accepted for exchange will not
receive accrued interest on such Existing Notes for any period from and after
the last Interest Payment Date to which interest has been paid or duly
provided for on such Existing Notes prior to the original issue date of the
Exchange Notes or, if no such interest has been paid or duly provided for,
will not receive any accrued interest on such Existing Notes, and will be
deemed to have waived the right to receive any interest on such Existing Notes
accrued from and after such Interest Payment Date or, if no such interest has
been paid or duly provided for, from and after December 15, 1997. Interest on
the Notes will be payable semi-annually in arrears on each June 15 and
December 15, commencing on June 15, 1998.
PROCEDURES FOR TENDERING
Only Existing Holders may tender such Existing Notes in the Exchange Offer.
To tender in the Exchange Offer, an Existing Holder must complete, sign and
date the Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal or such facsimile, together with
the Existing Notes and any other required documents, to the Exchange Agent so
as to be received by the Exchange Agent at the address set forth below prior
to 5:00 p.m., New York City time, on the Expiration Date. Delivery of the
Existing Notes may be made by book-entry transfer in accordance with the
procedures described below. Confirmation of such book-entry transfer must be
received by the Exchange Agent prior to the Expiration Date.
By executing the Letter of Transmittal, each Existing Holder will make to
the Company the representation set forth below in the second paragraph under
the heading "--Resale of Exchange Notes."
The tender by an Existing Holder and the acceptance thereof by the Company
will constitute an agreement between such Existing Holder and the Company in
accordance with the terms and subject to the conditions set forth herein and
in the Letter of Transmittal.
THE METHOD OF DELIVERY OF EXISTING NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES
OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Existing Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Existing Holder promptly and instruct
such registered Existing Holder to tender on such beneficial owner's behalf.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Existing Notes tendered pursuant thereto (i) are signed by the
registered Existing Holder, unless such Existing Holder has completed the box
entitled "Special Exchange
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Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
or (ii) are tendered for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be by a member
firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States, or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange
Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
Existing Holder of any Existing Notes listed therein, such Existing Notes must
be endorsed or accompanied by a properly completed bond power, signed by such
registered Existing Holder as such registered Existing Holder's name appears
on such Existing Notes, with the signature thereon guaranteed by an Eligible
Institution.
If the Letter of Transmittal or any Existing Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act
must be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Existing Notes and withdrawal of tendered
Existing Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Existing Notes not properly tendered or any
Existing Notes the Company's acceptance of which would, in the opinion of
counsel for the Company, be unlawful. The Company also reserves the right to
waive any defects, irregularities or conditions of tender as to particular
Existing Notes. The Company's interpretation of the terms and conditions of
the Exchange Offer (including the instructions in the Letter of Transmittal)
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Existing Notes must be cured
within such time as the Company shall determine. Although the Company intends
to notify Existing Holders of defects or irregularities with respect to
tenders of Existing Notes, none of the Company, the Exchange Agent or any
other person shall incur any liability for failure to give such notification.
Tenders of Existing Notes will not be deemed to have been made until such
defects or irregularities have been cured or waived. Any Existing Notes
received by the Exchange Agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived will be returned
by the Exchange Agent to the tendering Existing Holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
TENDER OF EXISTING NOTES HELD THROUGH DTC
The Exchange Agent and DTC have confirmed that the Exchange Offer is
eligible for ATOP, the DTC Automated Tender Offer Program. Accordingly, DTC
participants may, in lieu of physically completing and signing the applicable
Letter of Transmittal and delivering it to the Exchange Agent, electronically
transmit their acceptance of the Exchange Offer by causing DTC to transfer
Existing Notes to the Exchange Agent in accordance with DTC's ATOP procedures
for transfer. DTC will then send an Agent's Message to the Exchange Agent.
The term "Agent's Message" means a message transmitted by DTC, received by
the Exchange Agent and forming part of the Book-Entry Confirmation, which
states that DTC has received an expressed acknowledgment from a participant in
DTC that is tendering Existing Notes which are the subject of such Book-Entry
Confirmation, that such participant has received and agrees to be bound by the
terms of the applicable Letter of Transmittal (or, in the case of an Agent's
Message relating to guaranteed delivery, that such participant has received
and agrees to be bound by the applicable Notice of Guaranteed Delivery), and
that the Company may enforce such agreement against such participant.
BOOK-ENTRY DELIVERY PROCEDURES
Within two business days after the date hereof, the Exchange Agent will
establish accounts with respect to the Existing Notes at DTC (the "Book-Entry
Transfer Facility") for purposes of the Exchange Offer. Any
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financial institution that is a participant in the Book-Entry Transfer
Facility systems may make book-entry delivery of the Existing Notes by causing
DTC to transfer such Existing Notes into the Exchange Agent's account at such
Book-Entry Transfer Facility in accordance with such Book-Entry Transfer
Facility's procedures for such transfer. Timely book-entry delivery of
Existing Notes pursuant to the Exchange Offer, however, requires receipt of a
Book-Entry Confirmation prior to the Expiration Date. In addition, although
delivery of Existing Notes may be effected through book-entry transfer into
the Exchange Agent's account at the Book-Entry Transfer Facility, the Letter
of Transmittal (or a manually signed facsimile thereof), together with any
required signature guarantees and any other required documents, or an Agent's
Message in connection with a book-entry transfer, must, in any case, be
delivered or transmitted to and received by the Exchange Agent at its address
set forth on the back cover page of this Prospectus prior to the Expiration
Date to receive Exchange Notes for tendered Existing Notes, or the guaranteed
delivery procedure described below must be complied with. Tender will not be
deemed made until such documents are received by the Exchange Agent. Delivery
of documents to the Book-Entry Transfer Facility does not constitute delivery
to the Exchange Agent.
GUARANTEED DELIVERY PROCEDURES
Existing Holders who wish to tender their Existing Notes and (i) whose
Existing Notes are not immediately available, (ii) who cannot deliver their
Existing Notes, the Letter of Transmittal or any other required documents to
the Exchange Agent or (iii) who cannot complete the procedures for book-entry
transfer, prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Existing Holder, the certificate
number(s) of such Existing Notes and the principal amount of Existing Notes
tendered, stating that the tender is being made thereby and guaranteeing
that, within three New York Stock Exchange trading days after the
Expiration Date, the Letter of Transmittal (or facsimile thereof), together
with the certificate(s) representing the Existing Notes (or a confirmation
of book-entry transfer of such Existing Notes into the Exchange Agent's
account at DTC) and any other documents required by the Letter of
Transmittal, will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Existing Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Existing Notes into the Exchange Agent's account at DTC)
and all other documents required by the Letter of Transmittal, are received
by the Exchange Agent within three New York Stock Exchange trading days
after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Existing Holders who wish to tender their Existing Notes according to
the guaranteed delivery procedures set forth above.
WITHDRAWALS OF TENDERS
Except as otherwise provided herein, tenders of Existing 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 Existing Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at the address set forth herein prior to 5:00 p.m., New York City time,
on the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Existing Notes to be withdrawn (the
"Depositor"), (ii) identify the Existing Notes to be withdrawn (including the
certificate number(s) and principal amount of such Existing Notes, or, in the
case of Existing Notes transferred by book-entry transfer, the name and number
of the account at DTC to be credited), (iii) be signed by the Existing Holder
in the same manner as the original signature on the Letter of Transmittal by
which such Existing Notes were tendered (including any required signature
guarantees) or be accompanied by documents of
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transfer sufficient to have the Trustee register the transfer of such Existing
Notes into the name of the person withdrawing the tender and (iv) specify the
name in which any such Existing Notes are to be registered, if different from
that of the Depositor. All questions as to the validity, form and eligibility
(including time or receipt) of such notices will be determined by the Company,
whose determination shall be final and binding on all parties. Any Existing
Notes so withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer and no Exchange Notes will be issued with
respect thereto unless the Existing Notes so withdrawn are validly retendered.
Any Existing Notes which have been tendered but which are not accepted for
exchange will be returned to such Existing Holder without cost to such
Existing Holder as soon as practicable after withdrawal, rejection of tender
or termination of the Exchange Offer. Properly withdrawn Existing Notes may be
retendered by following one of the procedures described above under "--
Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or to Exchange Notes for any Existing
Notes, and may terminate or amend the Exchange Offer as provided herein before
the acceptance of such Existing Notes, if:
(a) in the opinion of counsel to the Company, the Exchange Offer or any
part thereof contemplated herein violates any applicable law or
interpretation of the Staff;
(b) any action or proceeding shall have been instituted or threatened in
any court or by any governmental agency which might materially impair the
ability of the Company to proceed with the Exchange Offer or any material
adverse development shall have occurred in any existing action or
proceeding with respect to the Company;
(c) any governmental approval has not been obtained, which approval the
Company shall deem necessary for the consummation of the Exchange Offer as
contemplated hereby;
(d) any cessation of trading on the Nasdaq Stock Market or any exchange,
or any banking moratorium, shall have occurred, as a result of which the
Company is unable to proceed with the Exchange Offer; or
(e) a stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Exchange Offer
Registration Statement or proceedings shall have been initiated or, to the
knowledge of the Company, threatened for that purpose.
If the Company determines in its reasonable judgment that any of the
foregoing conditions are not satisfied, the Company may (i) refuse to accept
any Existing Notes and return all tendered Existing Notes to the tendering
Existing Holders, (ii) extend the Exchange Offer and retain all Existing Notes
tendered prior to the expiration of the Exchange Offer, subject, however, to
the rights of Existing Holders to withdraw such Existing Notes (see "--
Withdrawals of Tenders") or (iii) waive such unsatisfied conditions with
respect to the Exchange Offer and accept all properly tendered Existing Notes
which have not been withdrawn.
EXCHANGE AGENT
Chase Manhattan Bank and Trust Company, National Association will act as
Exchange Agent for the Exchange Offer with respect to the Existing Notes.
Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal for the Existing Notes and
requests for copies of the Notice of Guaranteed Delivery should be directed to
the Exchange Agent, addressed as follows:
By Hand, Overnight Courier Chase Manhattan Bank and Trust
or Mail: Company, National Association
101 California Street
Suite 2725
San Francisco, CA 94111
By Facsimile: 415-693-8850
Confirm by Telephone: 415-954-9526
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FEES AND EXPENSES
The expenses of soliciting Existing Notes for exchange will be borne by the
Company. The principal solicitation is being made by mail by the Exchange
Agent. However, additional solicitation may be made by telephone, facsimile or
in person by officers and regular employees of the Company and its affiliates
and by persons so engaged by the Exchange Agent.
The Company 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 and pay other registration expenses, including fees
and expenses of the Trustee (as defined), filing fees, blue sky fees and
printing and distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Existing Notes pursuant to the Exchange Offer. If, however,
certificates representing the Exchange Notes or the Existing Notes for
principal amounts not tendered or accepted for exchange are to be delivered
to, or are to be issued in the name of, any person other than the registered
Holder of the Existing Notes tendered, or if tendered Existing Notes are
registered in the name of any person other than the person signing the Letter
of Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of the Existing Notes pursuant to the Exchange Offer, then the amount
of any such transfer taxes (whether imposed on the registered Existing Holder
or any other person) will be payable by the tendering Existing Holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Existing Notes, which is the aggregate principal amount of the Existing Notes
adjusted for the fair value allocated to the Warrants, as reflected in the
Company's accounting records on the date of exchange. Accordingly, no gain or
loss for accounting purposes will be recognized in connection with the
Exchange Offer. The expenses of the Exchange Offer will be amortized over the
term of the Exchange Notes.
RESALE OF EXCHANGE NOTES
The Company is making the Exchange Offer in reliance on the position of the
staff of the Staff of the Commission as set forth in the Staff's Exxon Capital
No-Action Letter, Morgan Stanley & Co. Incorporated No-Action Letter, Shearman
& Sterling No-Action Letter, and other interpretive letters addressed to third
parties in other transactions. However, the Company has not sought its own
interpretive letter addressing such matters and there can be no assurance that
the Staff would make a similar determination with respect to the Exchange
Offer as it has in such interpretive letters to third parties. Based on these
interpretations by the Staff, and subject to the two immediately following
sentences, the Company believes that Exchange Notes issued pursuant to this
Exchange Offer in exchange for Existing Notes may be offered for resale,
resold and otherwise transferred by a such New Holder (other than a New Holder
who is a broker-dealer) without further compliance with the registration and
prospectus delivery requirements of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such New Holder's
business and that such New Holder is not participating, and has no arrangement
or understanding with any person to participate, in a distribution (within the
meaning of the Securities Act) of such Exchange Notes. However, any Existing
Holder who (i) is an "affiliate" of the Company (within the meaning of Rule
405 under the Securities Act), (ii) does not acquire such Exchange Notes in
the ordinary course of its business, (iii) intends to participate in the
Exchange Offer for the purpose of distributing Exchange Notes, or (iv) is a
broker-dealer who purchased such Existing Notes directly from the Company, (a)
will not be able to rely on the interpretations of the Staff set forth in the
above-mentioned interpretive letters, (b) will not be permitted or entitled to
tender such Existing Notes in the Exchange Offer and (c) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or other transfer of such Existing Notes unless such
sale is made pursuant to an exemption from such requirements. In addition, as
described below, if any broker-dealer holds Existing Notes acquired for its
own account a Participating Broker-Dealer, then such Participating Broker-
Dealer may be deemed a statutory "underwriter" within the meaning of the
Securities Act and must deliver a prospectus meeting the requirements of the
Securities Act in connection with any resales of such Exchange Notes.
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Each Existing Holder who wishes to exchange Existing Notes for Exchange
Notes in the Exchange Offer will be required to represent that (i) it is not
an affiliate of the Company, (ii) any Exchange Notes to be received by it are
being acquired in the ordinary course of its business, and (iii) it has no
arrangement or understanding with any person to participate in a distribution
(within the meaning of the Securities Act) of such Exchange Notes. Each
broker-dealer that receives Exchange Notes for its own account pursuant to the
Exchange Offer must acknowledge that it acquired the Existing Notes for its
own account as a result of market-making activities or other trading
activities (and not directly from the Company) and must agree that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, such a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. Based on the position
taken by the Staff in the interpretive letters referred to above, the Company
believes that Participating Broker-Dealers may fulfill their prospectus
delivery requirements with respect to the Exchange Notes received upon
exchange of such Existing Notes with a prospectus meeting the requirements of
the Securities Act, which may be the prospectus prepared for an exchange offer
so long as it contains a description of the plan of distribution with respect
to the resale of such Exchange Notes. Accordingly, this Prospectus, as it may
be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer during the period referred to below in connection with resales
of Exchange Notes received in exchange for Existing Notes where such Existing
Notes were acquired by such Participating Broker-Dealer for its own account as
a result of market-making or other trading activities. Subject to certain
provisions set forth in the Registration Rights Agreement, the Company shall
use its best efforts to keep the Exchange Offer Registration Statement
continuously effective, supplemented and amended to the extent necessary to
ensure that it is available for sales of Exchange Notes by Participating
Broker-Dealers, and to ensure that the Exchange Offer Registration Statement
conforms with the requirements of the Act and the policies, rules and
regulations of the Commission as announced from time to time, for a period
expiring approximately 180 days from the date on which the Exchange Offer
Registration Statement is declared effective. See "Plan of Distribution." Any
Participating Broker-Dealer who is an affiliate of the Company may not rely on
such interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. See "The Exchange Offer--Resales of Exchange Notes."
In that regard, each Participating Broker-Dealer who surrenders Existing
Notes pursuant to the Exchange Offer will be deemed to have agreed, by
execution of the Letter of Transmittal, that, upon receipt of notice from the
Company of the occurrence of any event or the discovery of any fact which
makes any statement contained or incorporated by reference in this Prospectus
untrue in any material respect or which causes this Prospectus to omit to
state a material fact necessary in order to make the statements contained or
incorporated by reference herein, in light of the circumstances under which
they were made, not misleading or of the occurrence of certain other events
specified in the Registration Rights Agreement, such Participating Broker-
Dealer will suspend the sale of Exchange Notes pursuant to this Prospectus
until the Company has amended or supplemented this Prospectus to correct such
misstatement or omission and has furnished copies of the amended or
supplemented Prospectus to such Participating Broker-Dealer or the Company has
given notice that the sale of the Exchange Notes may be resumed, as the case
may be.
CONSEQUENCES OF FAILURE TO EXCHANGE
Any Existing Notes tendered and exchanged in the Exchange Offer will reduce
the aggregate principal amount of Existing Notes outstanding. Following the
consummation of the Exchange Offer, Existing Holders who did not tender their
Existing Notes generally will not have any further registration rights under
the Registration Rights Agreement, and such Existing Notes will continue to be
subject to certain restrictions on transfer. Accordingly, the liquidity of the
market for such Existing Notes could be adversely affected. The Existing Notes
are currently eligible for sale pursuant to Rule 144A through PORTAL. Because
the Company anticipates that most Existing Holders will elect to exchange such
Existing Notes for Exchange Notes due to the absence of restrictions on the
resale of Exchange Notes (except for applicable restrictions on any New Holder
who is an affiliate of the Company or is a broker-dealer which acquired the
Existing Notes directly from the
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Company) under the Securities Act, the Company anticipates that the liquidity
of the market for any Existing Notes remaining after the consummation of the
Exchange Offer may be substantially limited.
As a result of the making of this Exchange Offer, the Company will have
fulfilled certain of its obligations under the Registration Rights Agreement,
and Existing Holders who do not tender their Existing Notes, except for
certain instances involving the Initial Purchasers or Existing Holders who are
not eligible to participate in the Exchange Offer, will not have any further
registration rights under the Registration Rights Agreement or otherwise or
rights to receive Liquidated Damages (as defined) for failure to register.
Accordingly, any Existing Holder that does not exchange that Holder's Existing
Notes for Exchange Notes will continue to hold the untendered Existing Notes
and will be entitled to all the rights and subject to all the limitations
applicable thereto under the Indenture, except to the extent that such rights
or limitations, by their terms, terminate or cease to have further
effectiveness as a result of the Exchange Offer.
The Existing Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Existing
Notes may be resold only (i) to the Company or any of its subsidiaries, (ii)
inside the United States to a QIB in a transaction complying with Rule 144A,
(iii) inside the United States to an institutional "accredited investor" (as
defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) an
"Accredited Investor" that, prior to such transfer, furnishes (or has
furnished on its behalf by a U.S. broker-dealer) to the Trustee a signed
letter containing certain representations and agreements relating to the
restrictions on transfer of the Securities (the form of which letter can be
obtained from such Trustee), (iv) outside the United States in compliance with
Rule 904 under the Securities Act, (v) pursuant to the exemption from
registration provided by Rule 144 under the Securities Act (if available), or
(vi) pursuant to an effective registration statement under the Securities Act.
Each Accredited Investor that is not a QIB and that is an original purchaser
of any of the Securities from the Initial Purchasers will be required to sign
a letter confirming that such person is an Accredited Investor under the
Securities Act and that such person acknowledges the transfer restrictions
summarized herein.
OTHER
Participation in the Exchange Offer is voluntary and Existing Holders should
carefully consider whether to accept. Existing Holders are urged to consult
their financial and tax advisors in making their own decision on what action
to take.
The Company may in the future seek to acquire untendered Existing Notes in
open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Company has no present plans to acquire any Existing
Notes that are not tendered in the Exchange Offer or to file a registration
statement to permit resales of any untendered Existing Notes.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material United States federal
income tax considerations relevant to the Exchange Offer and the ownership and
disposition of the Exchange Notes. The tax consequences of these transactions
are uncertain. The discussion set forth below is based upon the Internal
Revenue Code of 1986, as amended (the "Code"), and judicial decisions and
administrative interpretations thereunder, as of the date hereof, and such
authorities may be repealed, revoked, modified or otherwise interpreted or
applied so as to result in federal income tax consequences different from
those discussed below. There can be no assurance that the Internal Revenue
Service (the "IRS") will not challenge one or more of the tax positions
described herein, and the Company has not obtained, nor does it intend to
obtain, a ruling from the IRS or an opinion of counsel with respect to the
U.S. federal income tax consequences of acquiring or holding Exchange Notes.
The discussion below pertains only to Holders that are (i) citizens or
residents (within the meaning of Section 7701(b) of the Code) of the United
States, (ii) corporations, partnerships or other entities created in or under
the laws of the United States or any political subdivision thereof, (iii)
estates, the income of which is subject to United States
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<PAGE>
federal income taxation regardless of its source, and (iv) trusts subject to
the primary supervision of a court within the United States and the control of
one or more United States persons as described in Section 7701(a)(30) of the
Code.
This discussion does not purport to deal with all aspects of U.S. federal
income taxation that may be relevant to a particular Holder in light of the
Holder's circumstances (for example, persons subject to the alternative
minimum tax provisions of the Code). Also, it is not intended to be wholly
applicable to all categories of investors, some of which (such as dealers in
securities, banks, insurance companies, tax-exempt organizations, and persons
holding Exchange Notes as part of a hedging or conversion transaction or
straddle or persons deemed to sell Exchange Notes under the constructive sale
provisions of the Code) may be subject to special rules. The discussion below
is premised upon the assumption that the Exchange Notes and Existing Notes
constitute indebtedness for U.S. federal income tax purposes, and that the
Existing Notes and Exchange Notes are held (or would be held if acquired) as
capital assets within the meaning of Section 1221 of the Code. This summary
does not discuss the tax considerations applicable to subsequent purchasers.
The discussion also does not discuss any aspect of state, local or foreign
law.
EACH PROSPECTIVE HOLDER AND, SUBSEQUENT TO THE EXCHANGE OFFER, EACH HOLDER
OF EXCHANGE NOTES IS STRONGLY URGED TO CONSULT ITS OWN TAX ADVISOR INCLUDING
WITH RESPECT TO ITS PARTICULAR TAX SITUATION THE TAX EFFECTS OF ANY STATE,
LOCAL, FOREIGN OR OTHER TAX LAWS AND POSSIBLE CHANGES IN THE TAX LAWS.
EXCHANGE OF NOTES
The exchange of Existing Notes for Exchange Notes pursuant to the Exchange
Offer should not be a taxable exchange for U.S. federal income tax purposes.
Accordingly, a Holder should have the same adjusted issue price, adjusted
basis and holding period in the Exchange Notes as it had in the Existing Notes
immediately before the exchange.
INTEREST AND ORIGINAL ISSUE DISCOUNT
Holders of Exchange Notes will be required to include payments of "qualified
stated interest" received thereon in taxable income in accordance with their
respective methods of accounting for federal income tax purposes. Stated
interest on the Exchange Notes will be treated as qualified stated interest.
In addition, the Exchange Notes will be issued with "original issue
discount" for federal income tax purposes. A holder generally is required to
include original issue discount in gross income as it accrues, regardless of
the holder's method of accounting for federal income tax purposes.
Accordingly, each holder will be required to include amounts in gross income
without regard to when the cash or other payments to which such income is
attributable are received. The Exchange Notes will be treated as issued with
original issue discount because the "issue price" of the Existing Notes was
less than their "stated redemption price at maturity" by more than a de
minimis amount. The Existing Notes were issued as part of an "investment
unit," and the issue price of each investment unit was allocated between the
Existing Note and the Warrant constituting an investment unit, based on their
respective fair market values on the issue date. The Company allocated an
issue price of $1,000 to each Existing Note. Although the Company's allocation
is not binding on the IRS, a Holder of an Existing Note must use the Company's
allocation unless the Holder discloses on its federal income tax return for
the year in which the Existing Note was acquired that it plans to use an
allocation that is inconsistent with the Company's allocation.
Each holder of an Exchange Note will be required to include in gross income
for federal income tax purposes an amount equal to the sum of the "daily
portions" of the original issue discount of the Exchange Note for all days
during each taxable year in which the holder holds the Exchange Note. The
daily portions of original issue discount will be determined on a constant
interest rate basis by allocating to each day in an accrual period a pro rata
portion of the original issue discount thereon that is attributable to the
accrual period in which such day is included. The amount of the original issue
discount attributable to each full accrual period will be
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the product of the "adjusted issue price" of the Exchange Note at the
beginning of an accrual period and the "yield to maturity" of the Exchange
Note (adjusted to reflect the length of the accrual period). The adjusted
issue price of an Exchange Note at the beginning of an accrual period is the
original issue price of the Exchange Note plus the aggregate amount of
original issue discount that has accrued in all prior accrual periods, less
any cash payments on the Exchange Note other than qualified stated interest on
or before the first day of such accrual period. The yield to maturity is the
discount rate that, when used in computing the present value of all principal
and interest payments to be made on the Exchange Note, produces an amount
equal to the issue price. Under these rules, holders will have to include
increasingly greater amounts of original issue discount in each successive
accrual period. Each payment made under an Exchange Note (except of payments
of qualified stated interest) will be treated first as a payment of original
issue discount (which was previously includable in income) to the extent of
original issue discount that has accrued as of the date of payment and has not
been allocated to prior payments and second as a payment of principal (which
is not includable in income).
The accrual period generally is the six-month period ending on the date in
each calendar year corresponding to the day before the maturity date of the
Exchange Note or the date six months before such date.
The Company is required to furnish certain information to the IRS, and will
furnish annually to record holders of an Exchange Note, information with
respect to original issue discount accruing during the calendar year. That
information will be based upon the adjusted issue price of the Exchange Note
as if the holder were the original holder of the Exchange Note.
There are several circumstances under which the Company could make a payment
on an Exchange Note which would affect the yield to maturity of a Note,
including (as described in the "Description of Exchange Notes"), the optional
redemption of Notes, or the repurchase of Notes. The Company intends to report
on the basis that the likelihood of a change in the interest rate on the Notes
is remote and will not affect the yield to maturity of the Notes. The Company
further intends to report on the basis that the exercise of the Company's
optional redemption right will not lower the yield of the Notes to the
Company.
MARKET DISCOUNT ON THE EXCHANGE NOTES
A Holder that acquired an Existing Note for an amount less than the adjusted
issue price of the Existing Note will have market discount with respect to
such Existing Note. To the extent a Holder had market discount with respect to
an Existing Note, the Holder generally will have market discount with respect
to an Exchange Note. Any principal payment or gain realized by a Holder on
disposition or retirement of an Exchange Note will be treated as ordinary
income to the extent that there is accrued market discount on the Exchange
Note. Unless a Holder elects to accrue under a constant-interest method,
accrued market discount is the total market discount multiplied by a fraction,
the numerator of which is the number of days the Holder has held the
obligation and the denominator of which is the number of days from the date
the Holder acquired the obligation under its maturity. A Holder may be
required to defer a portion of its interest deductions for the taxable year
attributable to any indebtedness incurred or continued to purchase or carry an
Exchange Note purchased with market discount. Any such deferred interest
expense would not exceed the market discount that accrues during such taxable
year and is, in general, allowed as a deduction not later than the year in
which such market discount is includable in income. If the Holder elects to
include market discount in income currently as it accrues on all market
discount instruments acquired by the Holder in that taxable year or
thereafter, the interest deferral ruledescribed above will not apply.
ACQUISITION PREMIUM
A Holder that acquired an Existing Note for an amount in excess of the
adjusted issue price of such Existing Note will have acquisition premium with
respect to such Existing Note. To the extent a Holder had acquisition premium
with respect to an Existing Note, the Holder generally will have acquisition
premium with respect to an Exchange Note. A Holder will reduce the original
issue discount otherwise includable for each accrual period
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by an amount equal to the product of (i) the amount of such original issue
discount otherwise includable for such period, and (ii) a fraction, the
numerator of which is the acquisition premium and the denominator of which is
the excess of the amounts payable on the Exchange Note after the purchase date
over the adjusted issue price.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT
A Holder may elect to treat all "interest" on an Exchange Note as original
issue discount and calculate the amount includable in gross income under the
method described above. For this purpose, "interest" includes stated and
unstated interest, original issue discount, acquisition discount, market
discount and de minimis market discount, as adjusted by any acquisition
premium. The election is to be made for the taxable year in which the Holder
acquired the Exchange Note and may not be revoked without the consent of the
IRS.
SALES OR RETIREMENT OF A NOTE
In general, a holder of an Exchange Note will recognize gain or loss upon
the sale, retirement, redemption or other taxable disposition of such Exchange
Note in an amount equal to the difference between (a) the amount of cash and
the fair market value of other property received in exchange therefor (other
than amounts attributable to accrued but unpaid stated interest) and (b) the
holder's adjusted tax basis in such Exchange Note.
A holder's tax basis in an Exchange Note generally will be equal to the
price paid for such Exchange Note (or Existing Note exchanged therefor),
increased by the amount of original issue discount, if any, includable in
gross income prior to the date of disposition, and decreased by the amount of
any payment on such Note other than qualified stated interest prior to
disposition. The maximum rate of tax on long-term capital gains on most
capital assets held by an individual for more than 18 months is 20%, and gain
on most capital assets held by an individual for more than one year and up to
18 months is subject to tax at a maximum rate of tax of 28%. Holders are urged
to consult their tax advisor with respect to these capital gains rates.
Any gain or loss recognized on the sale, retirement, redemption or other
taxable disposition of an Exchange Note generally will be capital gain or
loss. Such capital gain or loss generally will be long-term capital gain or
loss if the Note has been held by the holder for more than one year and
otherwise will be a short term capital gain or loss.
BACKUP WITHHOLDING
A Holder of Exchange Notes may be subject to backup withholding at a rate of
31% with respect to interest and original issue discount paid or accrued on,
and gross proceeds upon sale or retirement of an Exchange Note unless such
Holder (i) is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact or (ii) provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A Holder of the Exchange Notes who does not provide the
Company with such Holder's correct taxpayer identification number may be
subject to penalties imposed by the IRS.
Amounts withheld under the backup withholding rules may be credited against
a Holder's tax liability, and a Holder may obtain a refund of any excess
amounts withheld under the backup withholding rules by filing the appropriate
claim for refund with the IRS.
The Company will report to the Holders of the Exchange Notes and to the IRS
the amount of any "reportable payments" and any amount withheld with respect
to the Existing Notes and Exchange Notes during the calendar year.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH HOLDER OF
THE EXISTING NOTES SHOULD CONSULT SUCH HOLDER'S OWN TAX ADVISOR WITH RESPECT
TO THE TAX CONSEQUENCES TO SUCH HOLDER OF THE ACQUISITION, OWNERSHIP AND
DISPOSITION OF THE EXCHANGE NOTES INCLUDING THE APPLICABILITY AND EFFECT OF
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
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APPLICABLE HIGH-YIELD DISCOUNT OBLIGATIONS
The Exchange Notes will have "significant original issue discount" and the
yield of the Exchange Notes will be at least five percentage points above the
applicable federal rate. As a result, it is expected that the Company will not
be able to deduct for tax purposes any original issue discount accruing with
respect thereto until such interest is actually paid. In addition, if the
yield of the Exchange Notes is more than six percentage points above the
applicable rate, then (i) a portion of such interest corresponding to the
yield in excess of six percentage points above the applicable federal rate
will not be deductible at any time, and (ii) a corporate holder may be
entitled to treat the original issue discount that is not deductible as a
dividend to the extent of the earnings and profits of the company, which may
then qualify for the dividends received deduction. Corporate holders should
consult their tax advisers concerning the availability of the dividends
received deduction.
38
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected financial data should be read in conjunction with the
Financial Statements and Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
herein. The statement of operations data for each of the three years in the
period ended December 31, 1997 and balance sheet data as of December 31, 1997
and 1996 are derived from financial statements of the Company which have been
audited by Ernst & Young LLP, independent auditors, and are included elsewhere
herein. The statement of operations data for the year ended December 31, 1994
and the balance sheet data as of December 31, 1995 and 1994 are derived from
audited financial statements which are not included herein. The statement of
operations data for the year ended December 31, 1993 and the balance sheet
data as of December 31, 1994 and 1993 are derived from unaudited financial
statements not included herein. The unaudited financial statements include all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and
results of operations for these periods. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................... $ 23 $ 442 $ 2,483 $ 15,648 $ 45,457
Costs and operating ex-
penses:
Cost of revenue.......... 130 2,891 16,168 47,945 61,439
Network equipment write-
off(1).................. -- -- -- 8,321 --
Development.............. 349 534 837 2,449 4,850
Marketing and sales...... 131 639 3,899 16,609 24,622
General and administra-
tive.................... 634 611 2,866 3,445 4,790
Amortization of good-
will.................... -- -- -- -- --
-------- -------- --------- --------- ---------
Total costs and operating
expenses................ 1,244 4,675 23,770 78,769 95,701
-------- -------- --------- --------- ---------
Loss from operations...... (1,221) (4,233) (21,287) (63,121) (50,244)
Interest and other in-
come..................... -- -- -- -- 1,233
Net interest expense...... (24) (57) (721) (3,260) (6,571)
-------- -------- --------- --------- ---------
Net loss.................. $ (1,245) $ (4,290) $ (22,008) $ (66,381) $ (55,582)
======== ======== ========= ========= =========
OTHER FINANCIAL DATA:
EBITDA(2)................. $ (1,080) $ (4,064) $ (19,091) $ (53,651) $ (27,346)
Capital expenditures(3)... 817 718 17,176 39,093 5,783
Ratio of Earnings to Fixed
Charges(4)............... N/A N/A N/A N/A N/A
Deficiency of Earnings
Available to Cover Fixed
Charges(4)............... (1,221) (4,309) (22,145) (66,995) (58,032)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------
1992 1993 1994 1995 1996 1997
---- ------ ------ ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ...... $-- $ 55 $ 63 $19,054 $17,657 $119,959
Property and equipment, net..... -- 675 1,303 16,289 47,927 53,710
Total assets.................... -- 783 1,798 37,235 70,722 244,489
Long-term debt, convertible
debentures and capital lease
obligations, net of current
portion........................ -- 1,251 1,648 11,047 30,551 179,172
Common stock subject to rescis-
sion........................... -- -- 2,812 5,080 5,150 --
Total stockholders' equity (def-
icit).......................... (28) (1,172) (4,203) 9,763 2,925 31,918
</TABLE>
- --------
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 2 of Notes to Financial Statements.
(2) EBITDA is loss from operations before interest, taxes, depreciation and
amortization. EBITDA is included herein because management believes that
certain investors find it to be a useful tool for measuring a company's
ability to service its debt; however, EBITDA does not represent cash flow
from operations, as defined by generally accepted accounting principles,
should not be considered as a substitute for net loss as an indicator of
the Company's operating performance or cash flow as a measure of
liquidity, and should be examined in conjunction with the Financial
Statements and Notes thereto of the Company included elsewhere in this
Prospectus.
(3) Capital expenditures include assets acquired through capital lease
financing and other debt.
(4) For purposes of this computation, the ratio of earnings to fixed charges
has been calculated by dividing fixed charges into loss before income
taxes, fixed charges and other income. Fixed charges consist of interest
on expense and a portion of lease rental charges considered to represent
interest cost.
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with financial
statements and related notes included elsewhere in this Prospectus. The
results shown herein are not necessarily indicative of the results to be
expected in any future periods. This discussion contains forward-looking
statements based on current expectations which involve risks and
uncertainties. Actual results and the timing of certain events may differ
significantly from those projected in such forward-looking statements due to a
number of factors, including those set forth in the section entitled "Risk
Factors" and elsewhere in this Prospectus.
OVERVIEW
The Company was founded in 1991. From 1991 to mid-1993, the Company
conducted development and network services planning activities and realized no
revenues. Initially, the Company was focused on providing consumers with
direct dial-up connectivity to bulletin board services. On-line gaming and
entertainment services for consumers were commenced in July 1993 through the
utilization of a third party network infrastructure. The Company commenced
operation of its own network in late 1994. In May 1995, new management led by
Henry R. Nothhaft redefined and broadened the Company's strategy to provide a
range of Internet and tailored, value-added Internet Protocol-based network
services to consumers and businesses.
The Company's revenue prior to 1996 has been primarily generated from
providing Internet access to consumers. The Company's current focus is on
developing and deploying VPN's and providing dedicated access and Web hosting
services for enterprise customers. Contracts with enterprise customers
typically have a term ranging from one to three years. The Company expects
enterprise-related revenue to represent an increasing portion of total revenue
in future periods. The foregoing expectation is a forward-looking statement
that involves risks and uncertainties, and actual results could vary as a
result of a number of factors including the Company's operating results, the
results and timing of the Company's launch of new products and services,
governmental or regulatory changes, the ability of the Company to meet product
and project demands, the success of the Company's marketing efforts,
competition and acquisitions of complementary businesses, technologies or
products.
In February 1998, the company acquired InterNex Information Services, Inc.,
a California corporation ("InterNex") pursuant to a Share Acquisition
Agreement between the Company, InterNex and the sole shareholder of InterNex
(the "InterNex Acquisition"). See "--Liquidity and Capital Resources" and
"Factors Affecting Operating Results--Risks Associated with Acquisitions."
The Company has incurred net losses and experienced negative cash flow from
operations since inception and expects to continue to operate at a net loss
and experience negative cash flow at least through 1998. The Company's ability
to achieve profitability and positive cash flow from operations is dependent
upon the Company's ability to substantially grow its revenue base and achieve
other operating efficiencies. The Company experienced net losses of
approximately $22.0 million, $66.4 million and $55.6 million for the years
ended December 31, 1995, 1996 and 1997, respectively. There can be no
assurance that the Company will be able to achieve or sustain revenue growth,
profitability or positive cash flow on either a quarterly or an annual basis.
At December 31, 1997, the Company had approximately $58.0 million of gross
deferred tax assets comprised primarily of net operating loss carryforwards.
The Company believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability
of the deferred tax assets such that a full valuation allowance has been
recorded. These factors include the Company's history of net losses since its
inception and the fact that the market in which the Company competes is
intensely competitive and characterized by rapidly changing technology. The
Company believes that, based on the current available evidence, it is more
likely than not that the Company will not generate taxable income through
1999, and possibly beyond, and accordingly will not realize the Company's
deferred tax assets through 1999, and possibly beyond. The Company will
continue to assess the realizability of the deferred tax assets based on
actual and forecasted operating results. In addition, the utilization of net
operating losses may be subject to a substantial
40
<PAGE>
annual limitation due to the "change in ownership" provisions of the Internal
Revenue Code of 1986 and similar state provisions. The annual limitation may
result in the expiration of net operating losses before utilization. See Note
9 of Notes to Financial Statements.
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.
Revenue. Revenue for the year ended December 31, 1997 totaled approximately
$45.5 million, an increase of $29.9 million over revenue of $15.6 million for
the year ended December 31, 1996. This increased revenue reflects growth in
revenue from the Company's broadened product offerings to its enterprise
customers and through the Company's leveraged marketing arrangements with its
strategic partners, as well as continued growth in revenue derived from
Internet access customers. WebTV accounted for approximately 33.4% of total
revenue for the year ended December 31, 1997. The Company expects revenue from
WebTV to decrease as a percentage of revenue. The foregoing expectation is a
forward looking statement that involves risks and uncertainties and the actual
results could vary materially as a result of a number of factors including
those set forth under the caption "Factors Affecting Operating Results--
Customer Concentration."
Cost of Revenue. Cost of revenue consists primarily of personnel costs to
maintain and operate the Company's network, access charges from local exchange
carriers, backbone and Internet access costs, depreciation of network
equipment and amortization of related assets. Cost of revenue for the year
ended December 31, 1997 totaled approximately $61.4 million compared with
$47.9 million for the year ended December 31, 1996. This increase is
attributable to the overall growth in the size of the network. As a percentage
of revenue, costs declined to 135.2% of revenue in the year ended December 31,
1997 from 306.4% of revenue in the year earlier period due to increased
network utilization associated with the Company's revenue growth and lower per
port costs of the Company's SuperPOP network architecture deployed in the
second half of 1996. The Company expects its cost of revenue to continue to
increase in dollar amount, while declining as a percentage of revenue as the
Company expands its customer base. The foregoing expectation is a forward
looking statement that involves risks and uncertainties and the actual results
could vary materially as a result of a number of factors, including those set
forth under the caption "Factors Affecting Operating Results--Limited
Operating History; Continuing Operating Losses," "--Management of Potential
Growth and Expansion" and "--Dependence Upon Key Personnel; Ability to Hire
Additional Personnel" and "--Dependence Upon New and Uncertain Markets."
Development. Development expense consists primarily of personnel and
equipment related expenses associated with the development of products and
services of the Company. Development expense for the year ending December 31,
1997 and 1996 was approximately $4.9 million and $2.4 million, respectively.
This higher level of development expense reflects an overall increase in
personnel to develop new product offerings and to manage the overall growth in
the network. As a percent of revenue, development expense declined to 10.7%
for the year ended December 31, 1997 from 15.7% for the year ended December
31, 1996, as a result of the Company's increased revenue. The Company expects
its development spending to continue to increase in dollar amount, but to
decline as a percentage of revenue. The foregoing expectation is a forward
looking statement that involves risks and uncertainties and the actual results
could vary materially as a result of a number of factors, including those set
forth under the caption "Factors Affecting Operating Results--Limited
Operating History; Continuing Operating Losses" and "--Dependence Upon New and
Enhanced Services."
Marketing and Sales. Marketing and sales expense consists primarily of
personnel expenses, including salary and commissions, costs of marketing
programs and the cost of 800 number circuits utilized by the Company for
customer support functions. For the year ended December 31, 1997 and 1996,
marketing and sales expense was approximately $24.6 million and $16.6 million,
respectively. The $8.0 million increase in 1997 reflects a substantial
investment in the customer support, marketing and sales organizations
necessary to support the Company's expanded customer base. This increase also
reflects a growth in subscriber acquisition costs, related to both increased
direct marketing efforts as well as commissions paid to distribution partners.
41
<PAGE>
Additionally, the increase reflects the ramp-up of marketing efforts related
to the introduction of enterprise products and services. Marketing and sales
expense as a percentage of revenue declined to 54.2% for the year ended
December 31, 1997 from 106.1% in the year earlier period as a result of the
Company's increased revenue. The Company expects marketing and sales
expenditures to continue to increase in dollar amount, but to decline as a
percentage of revenue. The foregoing expectation is a forward looking
statement that involves risks and uncertainties and the actual results could
vary materially as a result of a number of factors including those set forth
under "Factors Affecting Operating Results--Dependence Upon New and Uncertain
Markets," "--Management of Potential Growth and Expansion" and "--Dependence
Upon Key Personnel; Ability to Hire Additional Personnel."
General and Administrative. General and administrative expense consists
primarily of personnel expense and professional fees. For the year ended
December 31, 1997 and 1996, general and administrative expenses were
approximately $4.8 million and $3.4 million, respectively. This higher level
of expense reflects an increase in personnel and professional fees necessary
to manage the financial, legal and administrative aspects of the business. For
the year ended December 31, 1997, general and administrative expense declined
to 10.5% from 22.0% for the year ended December 31, 1996 as a result of the
Company's increased revenue. The Company expects general and administrative
expense to increase in dollar amount, reflecting its growth in operations and
costs associated with being a publicly held entity, but to decline as a
percentage of revenue. The foregoing expectation is a forward looking
statement that involves risks and uncertainties and the actual results could
vary materially as a result of a number of factors including those set forth
under "Factors Affecting Operating Results--Dependence Upon New and Uncertain
Markets," "--Management of Potential Growth and Expansion" and "--Dependence
Upon Key Personnel; Ability to Hire Additional Personnel." The Company
believes that InterNex had significant goodwill and intangible assets at the
time of the acquisition and as a result, the InterNex Acquisition will result
in significant amortization of goodwill charges to the Company beginning in
the first quarter of 1998. See "Factors Affecting Operating Results--Risks
Associated with Acquisitions."
Net Interest Expense. Net interest expense was approximately $6.6 million
and $3.3 million for the years ended December 31, 1997 and 1996, respectively.
The increase is primarily due to a cost of financing charge of $930,000 in the
year ended December 31, 1997 associated with the value of warrants issued in
connection with $5.0 million of bridge loans received in June 1997, and
$744,000 associated with the Units Offering (as defined below). Additionally,
the principal amount of capitalized lease obligations increased $7.0 million
from December 31, 1996 to December 31, 1997. The year ended December 31, 1996
included approximately $330,000 associated with the value of warrants issued
in connection with bridge loan financing.
Other (Income) Expense. During the year ended December 31, 1997, upon
settlement of the Sattel litigation, the Company recorded $970,000 of other
income related to the reversal of previously established reserves.
Additionally, the Company recorded $425,000 of other income related to the re-
negotiation of a third party services agreement.
Net Loss. For the year ended December 31, 1997 the net loss totaled $55.6
million as compared to $66.4 million for the year ended December 31, 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue. Revenue totaled approximately $15.6 million for the year ended
December 31, 1996, an increase of $13.1 million over 1995 revenue of
approximately $2.5 million. This increase reflects continued growth in revenue
derived from Internet access customers, as well as revenue from the Company's
broadened enterprise product offerings and through the Company's leveraged
marketing arrangements with its strategic partners. The average selling prices
of the Company's offerings for consumer Internet access services decreased by
approximately 33% beginning in April 1996 due to industry-wide adoption of
flat monthly rates for unlimited Internet access.
Cost of Revenue. Cost of revenue for the year ended December 31, 1996 was
approximately $47.9 million, an increase of $31.7 million from 1995 cost of
revenue of approximately $16.2 million. The largest component
42
<PAGE>
of this increase was the cost of providing virtual local access ("VLA")
service over 800 circuits. VLA service was an interim solution for providing
nationwide coverage, while the Company's SuperPOP network architecture was
being deployed. This deployment was substantially completed in December 1996.
Costs associated with VLA service are expected to be immaterial in amount in
1997. The remainder of the increase in 1996 cost of revenue is primarily
attributable to the overall growth in the size of the network.
Network Equipment Write-off. In 1996, the Company took a charge of
approximately $8.3 million related to the cost of certain network equipment.
The Company decided not to deploy the equipment in the network because of
concerns that the equipment would not provide the functionality and
reliability required by the Company and concerns that the equipment provider
would be unable to provide timely maintenance and support. See Note 2 of Notes
to Financial Statements.
Development. Development expense for the year ended December 31, 1996 was
approximately $2.4 million, an increase of $1.6 million over 1995 expenditures
of approximately $837,000. This higher level of development expense in 1996
primarily reflects an overall increase in personnel to develop new product
offerings and to manage the overall growth in the network.
Marketing and Sales. Marketing and sales expense for 1996 was approximately
$16.6 million, an increase of $12.7 million over 1995 expenditures of
approximately $3.9 million. This increase in marketing and sales expense
reflects a substantial investment in the customer support, marketing and sales
organizations required to support the Company's expanded customer base. This
increase also reflects a growth in subscriber acquisition costs, related to
both increased direct marketing efforts as well as commissions paid to
distribution partners. Additionally, the increase reflects the ramp-up of
marketing efforts related to the introduction of enterprise products and
services.
General and Administrative. General and administrative expense for 1996 was
approximately $3.4 million, an increase of $500,000 over 1995 expenditures of
approximately $2.9 million. This increase reflects an increase in personnel
and professional fees necessary to manage the financial, legal and
administrative aspects of the business.
Net Interest Expense. Net interest expense for 1996 was approximately $3.3
million as compared to approximately $721,000 for 1995. The increase of $2.6
million is primarily due to an increase of $27.6 million in principal amount
of the capitalized lease obligations from December 31, 1995 to December 31,
1996. This increase in interest expense was partially offset by greater
interest income from higher average cash balances resulting from equity
financings completed in late 1995 and in August1996. See Notes 3 and 6 of
Notes to Financial Statements.
Net Loss. The Company's net loss increased to approximately $66.4 million in
1996 from approximately $22.0 million in 1995.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenue. Revenue totaled approximately $2.5 million for 1995, an increase of
$2.1 million, over 1994 revenue of approximately $400,000. The Company's
revenue in 1995 reflects its first full year of providing network services.
The Company's revenue in both of these years was derived entirely from the
sale of Internet access services to consumers.
Cost of Revenue. Cost of revenue for 1995 was approximately $16.2 million,
an increase of $13.3 million over 1994 cost of revenue of approximately $2.9
million. The increase in cost of revenue from 1994 to 1995 reflected overall
higher costs associated with deploying and managing the Company's own network
infrastructure. Prior to late 1994, the Company had leased third party network
facilities and thus had not incurred significant network deployment and
maintenance expenses.
43
<PAGE>
Development. Development expense for 1995 was approximately $837,000, an
increase of $303,000 over 1994 expenditures of approximately $534,000. This
higher level of development expense primarily reflected an overall increase in
personnel required to develop new products and support network growth.
Marketing and Sales. Marketing and sales expense for 1995 was approximately
$3.9 million, an increase of $3.3 million over 1994 expenditures of
approximately $639,000. This higher level of spending in 1995 reflected the
Company's new market focus on providing IP-based network services. In
connection with this new focus, the Company incurred increased expenses
related to direct subscriber acquisition, formation of a telesales group,
development of strategic relationships and marketing communications. With the
growth in subscribers, the Company added personnel to its customer support
organization.
General and Administrative. General and administrative expense for 1995 was
$2.9 million, an increase of $2.3 million over 1994 expenditures of
approximately $600,000. This increase generally reflects an increase in
personnel and professional fees necessary to manage the financial, legal and
administrative aspects of the business.
Net Interest Expense. Net interest expense for 1995 was approximately
$721,000 as compared with approximately $57,000 for 1994. This increase in net
interest expense resulted from the Company's deployment of network equipment
for its own network infrastructure beginning in late 1994 which equipment
purchases were primarily financed under capital leases. Capital lease
obligations at December 31, 1995 were $14.2 million, compared with no such
obligations at December 31, 1994.
Net Loss. The Company's net loss increased to approximately $22.0 million in
1995 from a net loss of $4.3 million in 1994.
QUARTERLY RESULTS OF OPERATIONS
The Company's quarterly operating results can fluctuate from period-to-
period depending upon factors such as the success of the Company's efforts to
expand its subscriber and third party partnership base, changes in, and the
timing of, expenses relating to development and sales and marketing and
changes in pricing policies by the Company or its competitors. Management
believes that period-to-period comparisons of its financial results should not
be relied upon as an indication of future performance. The Company may
experience significant period-to-period fluctuations in operating results.
44
<PAGE>
The following tables set forth the statement of operations data for each of
the eight quarters through December 31, 1997, as well as the percentage of the
Company's revenue. This information has been derived from the Company's
unaudited financial statements. In the opinion of management, the unaudited
information set forth below has been prepared on the same basis as the audited
financial statements contained herein and includes all adjustments, consisting
only of normal recurring adjustments, except for the write-off of network
equipment in the three months ended December 31, 1996, necessary to present
fairly the information set forth herein. The operating results for any quarter
are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------
1996 1997
-------------------------------------- --------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31,
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $ 1,533 $ 2,489 $ 4,193 $ 7,433 $ 9,154 $ 10,814 $ 11,824 $ 13,665
Costs and operating
expenses:
Cost of revenue........ 7,256 11,782 11,913 16,994 15,744 14,913 14,838 15,944
Network equipment
write-off............. -- -- -- 8,321 -- -- -- --
Development............ 340 571 692 846 1,025 1,200 1,313 1,312
Marketing and sales.... 3,120 3,868 4,045 5,576 4,936 6,094 6,459 7,133
General and
administrative........ 736 1,036 72 946 1,060 1,127 1,182 1,421
-------- -------- -------- -------- -------- -------- -------- --------
Total operating costs
and expenses.......... 11,452 17,257 17,377 32,683 22,765 23,334 23,792 25,810
-------- -------- -------- -------- -------- -------- -------- --------
Loss from operations.... (9,919) (14,768) (13,184) (25,250) (13,611) (12,520) (11,968) (12,145)
Other (income) expense.. -- -- -- -- -- 1,395 (162) --
Net interest expense.... (461) (652) (1,289) (858) (1,070) (1,779) (2,088) (1,634)
-------- -------- -------- -------- -------- -------- -------- --------
Net loss................ $(10,380) $(15,420) $(14,473) $(26,108) $(14,681) $(12,904) $(14,218) $(13,779)
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------
1996 1997
-------------------------------------- --------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31,
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and operating
expenses:
Cost of revenue........ 473.3 473.4 284.1 228.6 172.0 137.9 125.5 116.7
Network equipment
write-off............. -- -- -- 112.0 -- -- -- --
Development............ 22.2 22.9 16.5 11.4 11.2 11.1 11.1 9.6
Marketing and sales.... 203.5 155.4 96.5 75.0 53.9 56.4 54.6 52.2
General and
administrative......... 48.0 41.6 17.3 12.7 11.6 10.4 10.0 10.4
------ ------ ------ ------ ------ ------ ------ ------
Total operating costs
and expenses.......... 747.0 693.3 414.4 439.7 248.7 215.8 201.2 188.9
------ ------ ------ ------ ------ ------ ------ ------
Loss from operations.... (647.0) (593.3) (314.4) (339.7) (148.7) (115.8) (101.2) (88.9)
Other income (expense).. -- -- -- -- -- 12.9 (1.4) --
Net interest expense.... (30.1) (26.2) (30.8) (11.5) (11.7) (16.4) (17.7) (12.0)
------ ------ ------ ------ ------ ------ ------ ------
Net loss................ (677.1)% (619.5)% (345.2)% (351.2)% (160.4)% (119.3)% (120.3)% (100.9)%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The Company's quarterly operating results have fluctuated and will continue
to fluctuate from period to period depending upon factors such as the timely
deployment and implementation of expansion of the Concentric network and new
network architectures, the incurrence of related capital costs, the receipt of
new value-added network services and consumer services subscriptions and the
introduction of new services by the Company and its competitors. Additional
factors that may contribute to variability of operating results include: the
payment of statutory interest related to the rescission offer; the pricing and
mix of services offered by the Company; customer retention rate; market
acceptance of new and enhanced versions of the Company's services; changes in
pricing policies by the Company's competitors; the Company's ability to obtain
sufficient supplies of sole- or limited-
45
<PAGE>
source components; user demand for network and Internet access services;
balancing of network usage over a 24-hour period; and general access services.
In view of the significant growth of the Company's operations, the Company
believes that period-to-period comparisons of its financial results should not
be relied upon as an indication of future performance and that the Company may
experience in the future significant period-to-period fluctuations in
operating results. The Company expects to focus in the near term on building
and increasing its revenue base, which will require it to significantly
increase its expenses for personnel, marketing, network infrastructure and the
development of new services, and may adversely impact short term operating
results. As a result, there can be no assurance that the Company will be
profitable on a quarterly basis in the future and the Company believes that it
will incur losses in the near term.
The Company expects to focus in the near term on building and increasing its
revenue base, which will require it to significantly increase its expenses for
personnel, marketing, network infrastructure and the development of new
services, and may adversely impact short term operating results. As a result,
the Company believes that it will incur losses in the near term and there can
be no assurance that the Company will be profitable on a quarterly basis in
the future.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has satisfied its cash requirements primarily through
capitalized lease financings, the sale of capital stock and the sale of the
Units (as defined below). The Company's principal uses of cash are to fund
working capital requirements and capital expenditures and to service its
capital lease financing obligations. Net cash used in operating activities for
the years ended December 31, 1997 and 1996 was approximately $45.9 million and
$42.1 million, respectively. Included in the amount for the year ended
December 31, 1997 is $4.4 million of cash paid in settlement of a dispute with
Sattel. Cash used in operating activities in both periods was primarily
affected by the net losses, caused by increased costs relating to the
expansion of the Company's network and organizational infrastructure.
Net cash used in investing activities for the years ended December 31, 1997
and 1996 was approximately $6.5 million and $7.3 million, respectively.
Investing activities were primarily comprised of $6.1 million in purchases of
capital equipment to support the growing infrastructure.
For the year ended December 31, 1997 net cash of approximately $154.7
million was generated from financing activities, of which $74.0 million, net
of issuance costs, was derived from the issuance of stocks and warrants and
$145.0 million, net of issuance costs, was derived from the issuances of the
Units, net of $52.5 million investment in U.S. Government treasury strips held
as restricted cash in accordance with the terms of the Units (as defined
below). On August 1, 1997, the Company effected its IPO. The IPO consisted of
4,300,000 shares of Common Stock issued to the public at $12.00 per share.
Concurrent with the closing of the IPO, certain strategic investors purchased
directly from the Company 1,499,236 shares of Common Stock having an aggregate
purchase price of approximately $18 million (including the cancellation of
approximately $3 million in indebtedness) (the "Direct Placements"). In
September the underwriters exercised an option to purchase an additional
645,000 shares of Common Stock at the IPO price of $12.00 per share to cover
over-allotments in connection with the IPO.
The Company also received $5.0 million in debt financing in June 1997, of
which $2.0 million was repaid and $3.0 million was converted into Common
Stock, respectively, upon closing of the Company's IPO. Concurrent with the
closing of the IPO, the Company repurchased $2.2 million of Common Stock from
certain stockholders. The remainder of financing activities for the year ended
December 31, 1997 is comprised of $11.6 million used for repayment of capital
lease obligations. For the year ended December 31, 1996 cash of approximately
$48.1 million was generated from financing activities, which reflects receipt
of $48.5 million, net of issuance costs, for Series D Convertible Preferred
Stock. Also reflected is a $5.0 million bridge loan which
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was later converted into Series D Convertible Preferred Stock. Repayment of
capital lease obligations for the year ended December 31, 1996 was
approximately $5.4 million.
In December 1997, the Company completed a $150.0 million debt financing (the
"Units Offering") wherein the Company issued and sold 150,000 units (the
"Units") to certain qualified investors. The Units issued by the Company in
the Units Offering consisted of 12 3/4% Notes due 2007 and warrants to
purchase an aggregate of 951,108 shares of common stock of the Company at
$10.8625 per share. See "Factors Affecting Operating Results--Substantial
Indebtedness; Ability to Service Debt." and Note 4 of Notes to Financial
Statements.
The net cash increase for the year ended December 31, 1997 was $102.3
million as compared to a net cash decrease for the year ended December 31,
1996 of $1.4 million. At December 31, 1997, the Company had cash and cash
equivalents of approximately $120.0 million, restricted cash of $52.5 million
and working capital of $115.4 million.
For the year ended December 31, 1997, the Company added approximately $23.0
million of network equipment through additional capital lease obligations
under its network equipment financing arrangement. The Company expects to make
additional capital expenditures of approximately $20.0 million in 1998. The
foregoing expectation with respect to additional capital investments is a
forward-looking statement that involves risks and uncertainties and the actual
amount of capital investment could vary materially as a result of a number of
factors. See "Factors Affecting Operating Results--Dependence on Network
Infrastructure," "--Risk Associated with International Expansion," and "--
Fluctuations in Operating Results."
The Company paid approximately $15.5 million in cash for all of the
outstanding shares of capital stock of InterNex as part of the InterNex
Acquisition in February 1998. InterNex is a provider of network services,
colocation services and web-hosting facilities to enterprise customers. See
"Factors Affecting Operating Results--Risks Associated with Acquisitions."
The Company expects to incur additional operating losses and will rely
primarily on the net proceeds from the Units Offering, the IPO and the Direct
Placements and financing available under a network equipment lease agreement
that currently has no maximum borrowing limit. The Company believes that such
financing will be sufficient to meet its anticipated cash needs for working
capital and for the acquisition of capital equipment through at least the end
of 1998. However, there can be no assurance that the Company will not require
additional financing within this time frame. The Company's forecast of the
period of time through which its financial resources will be adequate to
support its operations is a forward-looking statement that involves risks and
uncertainties, and actual results could vary materially as a result of a
number of factors, including those set forth below under the caption "Factors
Affecting Operating Results--Future Capital Needs; Uncertainty of Additional
Financing." The Company may be required to raise additional funds through
public or private financing, strategic relationships or other arrangements.
There can be no assurance that such additional funding, if needed, will be
available on terms attractive to the Company, or at all.
IMPACT OF ADOPTION OF NEW ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" ("FAS 128"). FAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
restated to conform to the FAS 128 requirements and the SEC's SAB 98 related
thereto.
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("FAS 130"), and Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131"). The Company is required to adopt these Statements in fiscal 1998. FAS
130 establishes new standards for reporting and displaying comprehensive
income and its components. FAS 131
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requires disclosure of certain information regarding operating segments,
products and services, geographic areas of operation and major customers.
Adoption of these Statements is expected to have no material impact on the
Company's financial position, results of operations or cash flows.
IMPACT OF THE YEAR 2000 ISSUE
Many installed computer systems and software products are coded to accept
only two digit entries in the date code field. Beginning in the year 2000,
these code fields will need to accept four digit entries to distinguish 21st
century dates from 20th century or earlier dates. As a result, in less than
two years, computer systems and/or software products used by many companies
may need to be upgraded to comply with such year 2000 requirements. The
Company believes it is currently expending sufficient resources to review its
products and services, as well as its internal management information systems
in order to identify and modify those products, services and systems that are
not year 2000 compliant. The Company expects such modifications will be made
on a timely basis and does not believe that the cost of such modifications
will have a material effect on the Company's operating results. There can be
no assurance, however, that the Company will be able to modify timely and
successfully such products, services and systems to comply with year 2000
requirements, which could have a material adverse effect on the Company's
operating results. Based on the Company's assessment to date, most newly
introduced products and services of the Company are year 2000 compliant,
however some of the Company's customers are running product versions that are
not year 2000 compliant. The Company has been encouraging such customers to
migrate to current product versions. In addition, the Company faces risks to
the extent that suppliers of products, services and systems purchased by the
Company and others with whom the Company transacts business on a worldwide
basis do not have business systems or products that comply with the year 2000
requirements. In the event any such third parties cannot timely provide the
Company with products, services or systems that meet the year 2000
requirements, the Company's operating results could be materially adversely
affected. Furthermore, there can be no assurance that these or other factors
relating to the year 2000 compliance issues, including litigation, will not
have a material adverse effect on the Company's business, operating results or
financial condition.
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BUSINESS
Concentric provides tailored, value-added Internet Protocol ("IP") based
network services for businesses and consumers. To provide these services, the
Company utilizes its low/fixed latency, high-throughput network, employing its
advanced network architecture and the Internet. Concentric's service offerings
for enterprises include virtual private networks ("VPNs"), dedicated access
facilities ("DAFs"), remote access services and Web hosting services. These
services enable enterprises to take advantage of standard Internet tools such
as browsers and high-performance servers for customized data communications
within an enterprise and between an enterprise and its suppliers, partners and
customers. These services combine the cost advantages, nationwide access and
standard protocols of public networks with the customization, high
performance, reliability and security of private networks. Among the current
enterprise customers are Acer America Corporation, Inc., Intuit, Inc.
("Intuit"), Netscape Communications Corporation ("Netscape"), Microsoft
Corporation ("Microsoft") and WebTV Networks, Inc., a subsidiary of Microsoft
("WebTV"). Concentric's service offerings for consumers and small office/home
office customers include local Internet dial-up access and applications
hosting services.
INDUSTRY BACKGROUND
Development of Private Networks
Historically, the data communications services offered by public carriers
had limited security features, were expensive and did not adequately ensure
accurate and reliable transmission. As a result, many corporations established
and maintained their own private wide-area networks ("WANs") to provide
network-based services, such as transaction processing, to their customers and
to coordinate operations between employees, suppliers and business partners.
Such private WANs were frequently customized to specific applications,
business practices and user communities. As a result, these private WANs had
the capability of providing organizations and users with tailored performance
and features, security, reliability and private-label branding.
The demand for WANs has grown as a result of today's competitive business
environment. Factors stimulating the higher demand include the need to provide
broader and more responsive customer service, to operate faster and more
effectively between operating units, suppliers and other business partners,
and the need to take advantage of new business opportunities for network-based
offerings in a timely fashion. In addition, as businesses become more global
in nature, the ability to access business information across the enterprise
has become a competitive necessity.
Despite the attractive capabilities of private networks, limitations of many
private WANs have impeded or reduced the effectiveness of their use. These
networks, which traditionally have required the use of leased telephone lines
with bandwidth dedicated solely to this purpose and the purchase of vendor-
specific networking equipment, are inherently expensive to set up, operate and
maintain. Private WANs often require the development and maintenance of
proprietary software and lack cost-effective access. These aspects of
developing, deploying and maintaining such private WANs have conflicted with
the increased focus of many businesses on their core competencies, which has
prompted the outsourcing of many noncore functions. The Company believes that
many businesses have viewed as unacceptable the costs of maintaining a private
WAN infrastructure and the risks of investing in new technologies in the
absence of a single technological standard.
Emergence of the Internet
The emergence of the Internet and the widespread adoption of IP as a data
transmission standard in the 1990s, combined with deregulation of the
telecommunications industry and advances in telecommunications technology have
significantly increased the attractiveness of providing data communication
applications and services over public networks. At the same time, growth in
client/server computing, multimedia personal computers and online computing
services and the proliferation of networking technologies have resulted in a
large and growing group of people who are accustomed to using networked
computers for a variety of purposes, including e-mail, electronic file
transfers, online computing and electronic financial transactions. These
trends
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have led businesses increasingly to explore opportunities to provide IP-based
applications and services within their organization, and to customers and
business partners outside the enterprise.
Need for IP-Based Private Networks
The ubiquitous nature and relatively low cost of the Internet have resulted
in its widespread usage for certain applications, most notably Web access and
e-mail. However, usage of the Internet for mission-critical business
applications has been impeded by the limited security and unreliable
performance inherent in the structure and management of the Internet.
Additionally, emerging applications such as IP-based voice and video
applications, multiplayer gaming and certain multimedia applications require a
network that has high performance characteristics, including low and/or fixed
latency (response time) and high throughput, as well as the ability to
customize features for specific user requirements. On the Internet, latency is
frequently relatively high and variable, making it suboptimal for these
emerging applications. Although private networks are capable of offering lower
and more stable latency levels, providers of these emerging applications also
desire a network that will offer their customers full access to the Internet.
As a result, these businesses and applications providers require a network
that combines the best features of the Internet, such as openness, ease of
access and low cost made possible by the IP standard, with the advantages of a
private network, such as high security, low/fixed latency and customized
features.
Industry analysts expect the market size for both value-added IP data
networking services and Internet access to grow rapidly as businesses and
consumers increase their use of the Internet, intranets and privately managed
IP networks. The total market for these services is projected to grow from
$1.2 billion in 1996 to approximately $22.7 billion in the year 2000, with
approximately $10.4 billion in the enterprise market segment and $12.3 billion
in the consumer market segment.
THE CONCENTRIC SOLUTION
Concentric provides tailored, value-added IP-based network services for
businesses and consumers. To provide these services, the Company employs a
low/fixed latency, high-throughput network based on its advanced,
geographically dispersed ATM and frame relay backbone and the Internet.
Concentric allows enterprises to create virtual private networks providing
tailored network access, content and services to enterprise-defined end users
with higher reliability and more security than is available over the Internet.
Concentric's VPN solutions also provide the ease of access and flexibility of
public networks at a lower cost than private WANs without sacrificing
reliability or security.
The Concentric network employs an advanced, geographically dispersed ATM and
frame relay backbone, SuperPOPs in 16 major metropolitan areas and 139
secondary and tertiary POPs in other cities, allowing dial-up network access
in the U.S. and Canada. In addition, the Company can provide analog dial-up,
frame relay, fractional T-1, T-1 and DS3 access to the network. The Concentric
network is engineered and managed to provide superior quality of service,
balancing several key performance criteria. The Company provides guaranteed
levels of service for dedicated access facilities to enterprise customers, and
targets performance benchmarks for connection success rates, latency levels
and throughput for all of its service offerings.
In addition to strong network performance capabilities, the Company believes
that several factors distinguish its ability to provide value-added network
services. These factors include: (i) excellent service quality; (ii) rapid
development time and flexibility in meeting custom applications requirements;
(iii) responsive customer support and effective account management, available
24 hours per day, seven days per week through the Company's 163 customer
service personnel; and (iv) the Company's technical expertise in devising
cost-effective network solutions for customers.
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BUSINESS STRATEGY
The Company's objective is to become the leading supplier of value-added,
IP-based network services worldwide. In order to achieve this goal, the
Company is implementing a business strategy focused on the following key
principles:
Rapidly Provide Cost-Effective, Tailored Network Solutions. The Company
intends to capitalize on its expertise in developing tailored VPNs to
establish a leadership position in rapidly developing, deploying and
maintaining a range of value-added network services to meet the specific needs
of its customers. The Company utilizes a set of software and hardware
technology modules as "building blocks" to offer a variety of tailored network
services on an IP-based network architecture with minimal additional
investment in engineering and rapid time to market for businesses and
consumers. These building blocks include modules for client and system
software, dedicated and remote network connectivity, tracking and billing, Web
hosting, customer support and security.
Optimize Network Utilization. Given the fixed cost nature of Concentric's
network infrastructure, the Company strives to increase total network
utilization and to optimize this utilization by targeting both daytime
business and evening-intensive consumer users to balance the network's usage
throughout a 24-hour period. Accordingly, while the Company's current
strategic focus is on providing value-added IP-based communications services
to enterprises, the Company intends to continue partnering with multichannel
distributors to acquire and maintain a base of consumer subscribers who access
the Concentric network predominantly during non-business hours.
Acquire Complementary Assets or Businesses. The Company is actively seeking
to identify and acquire assets, technologies or businesses complementary to
the Company's value-added enterprise network service strategy. Such
acquisition efforts are targeted at businesses that offer the potential to
expand the Company's revenue base, increase the scalability of the Company's
network infrastructure and value-added service offerings, as well as optimize
the utilization of the Company's network.
Employ Leveraged Marketing Through Strategic Partners. The Company actively
seeks to form alliances with certain software developers and
telecommunications service and equipment suppliers that have substantially
greater marketing, distribution and sales resources than does the Company and
that have a large installed customer base. These alliances facilitate the
cost-effective acquisition of consumer and business customers and increase
Concentric's network utilization. These marketing relationships are developed
and enhanced through the bundling of Concentric's IP-based network services
with the products and services offered by the strategic partners. These
relationships may involve customized browsers, registration services and
specialized pricing, commissions and billing programs. To date, Concentric has
established such strategic relationships with a number of companies, including
Acer America Corporation, Bay Networks, Inc., Intuit, Microsoft, Netscape,
PictureTel Corporation, Racal Datacom, Inc. ("Racal"), TMI Telemedia
International, Ltd. ("TMI") and WebTV. See "Sales and Marketing."
Offer Next Generation Network Services. In addition to its core VPN service
offerings, the Company is continuing to expand the value-added network
services that it makes available to its customers. Towards this end, the
Company has recently introduced video conferencing and is in early stage
trials of IP-based telephony services that require the low/fixed latency
characteristics afforded by the Concentric network.
Deploy Network Services Internationally. The Company believes that its
enterprise customers increasingly will require their network solutions
providers to offer network services on a global basis. Pursuant to an
agreement with TMI, entered into in August 1996, the Company is working to
establish an international network based on Concentric's network technology
and expertise and TMI's existing telecommunications infrastructure to deliver
a range of compatible network services worldwide. TMI currently has a
telecommunications network deployed in over 40 countries worldwide.
Additionally, the Company entered into a roaming services agreement in June
1997 with NTT PC, a leading provider of IP services in Japan. The roaming
services agreement allows Concentric customers to use the NTT PC network to
access their internet accounts in Japan and allows members
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of the NTT PC network to access their internet accounts in the United States
and Canada. Additionally, the Company acquired Web hosting facilities in
Stockholm, Sweden, Tokyo, Japan and Hong Kong in February 1998. While the
Company does not expect to generate significant revenue from deployment of
international network services until at least 1999, the Company believes that
the ability to deliver network solutions globally will be a key competitive
factor in its industry. The foregoing expectation is a forward-looking
statement that involves risks and uncertainties and the actual results could
vary materially as a result of a number of factors including those set forth
in "Factors Affecting Operating Results--Risks Associated with International
Expansion."
SERVICES
Concentric provides tailored, value-added IP-based network services for
businesses and consumers. To provide these services, the Company employs a
low/fixed latency high-throughput network based on an advanced, geographically
dispersed ATM and frame relay backbone and the Internet.
Enterprise Solutions
For businesses, the Company has developed a set of enterprise services
including VPNs, dedicated access facilities ("DAF"), digital subscriber line
("DSL") services and Web hosting services.
Virtual Private Network Services. Concentric's custom VPN solutions enable
its customers to deploy tailored, IP-based mission-critical business
applications for internal enterprise, business-to-business and business-to-
customer data communications on the Concentric network while also affording
high-speed access to the Internet. Concentric offers its customers a secure
network on which to communicate and access information between an
organization's geographically dispersed locations; collaborate with external
groups or individuals, including customers, suppliers, and other business
partners and use the Web to access information on the Internet and communicate
with other Web users.
The Company's VPN solutions allow the enterprise customer to tailor the type
of access, services and information that various users of the VPN are afforded
according to the specific needs of the enterprise. Key benefits include rapid
implementation time, lower operating and maintenance costs, minimal capital
investment, higher quality of service overall and 24-hour network and customer
support. For example, starting in October 1995 the Company created and now
maintains the VPN used by Intuit customers using a customized version of the
Netscape Navigator browser bundled with Quicken for Windows, Quickbooks,
ProTax and TurboTax. The bundled software allows a Quicken customer to click
on an icon that launches Netscape, and takes the user directly to Quicken
Financial Network Website. On the Web page Quicken customers will find useful
financial advice, information from Intuit's bank and financial institution
partners, answers to commonly asked technical questions and tips on how to tap
the full potential of Intuit's financial products.
In addition to the custom VPNs that Concentric has developed and delivered,
the following three distinct VPN products are now offered by the Company:
Concentric CustomLink. Concentric CustomLink provides a complete, private
labeled dial-up VPN service for customers. CustomLink includes dial-up
network access, customized and customer-branded client software, and
private labeled help desk services. The dial-up network access offerings
include local access, toll-free 800 number access, and a unique connection
service, PremierConnect, which provides important customers with
connectivity to the VPN, even if local access numbers are busy. In
addition, CustomLink permits the customer to segment their users, and apply
various levels of services, such as Web access, e-mail, and file transfer
protocol ("FTP") to each customer group. The services that access
restrictions in the form of filters can also be applied to groups of
customers.
Enterprise VPN. The Company's Enterprise VPN service includes security
hardware and software, high speed network access, network connectivity,
customer premise routing equipment and customer support services.
Installation support for the customer premise located routing and security
equipment is
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also provided. Concentric can also optionally provide management services
for firewall and packet encryption equipment if desired by the customer.
The Enterprise VPN service is targeted at customers seeking to create a
secure, outsourced WAN for intranet and extranet applications.
Concentric RemoteLink. The Company's remote access service, marketed as
Concentric RemoteLink, is targeted at businesses that have employees in
remote locations. RemoteLink enables an enterprise's salespeople and other
mobile employees, telecommuters and business partners to dial into an
enterprise's corporate network resources and use them as if they were
connected locally, thus increasing potential productivity and allowing for
information to be available on a real-time basis across the enterprise.
Concentric's RemoteLink is designed to be highly customizable and provides
the ability to interface with existing company network infrastructure.
RemoteLink offers customers the potential to significantly reduce the high
costs of telecommunications charges and user support associated with
building, deploying, and maintaining an internal remote access
infrastructure.
Concentric also performs around-the-clock monitoring of network performance
and enables its customers to monitor their network as well through the
Company's proprietary ConcentricView software. ConcentricView is a Web-based
network management tool which allows a customer to monitor usage on a call-by-
call basis and performance of that portion of the Concentric network bandwidth
supporting the customer's applications.
Dedicated Access Facilities. In January 1997, the Company began offering
DAFs as a stand-alone product targeted at businesses that desire single or
multipoint high-speed, dial-up and/or dedicated connections to distributed
locations such as regional offices, warehouses, manufacturing facilities
and/or to the Internet. DAF products are primarily targeted at providing
intranet connectivity amongst distributed enterprise locations with the
additional benefit of Internet access if desired by the customer. The Company
provides a full range of connectivity options, allowing the customer to order
the appropriate amount of bandwidth to meet its networking requirements. In
addition, Concentric offers its DAF customers a guarantee on the quality of
service and performance of these facilities. Furthermore, Concentric believes
it is the only network service provider to bill customers based on average
usage levels rather than peak usage levels.
Concentric has six offerings in its dedicated access product line:
FullChannel T-1, FullChannel T-1 Protected, FlexChannel and LECFrame Relay, as
well as FullChannel and FlexChannel offerings at DS3 (T-3) bandwidth options
which support up to 45 Mbps.
FullChannel T-1 and DS3 (T-3) pricing is based on a one time set-up fee and
average utilization pricing. The customer's usage is measured at five-minute
intervals throughout the month, and the average of all of those measurements
is used to determine the customer's bill at the end of the month. The one time
set-up fee for FullChannel T-1 service is $3,000 and and the monthly fee
ranges from $1,095 to $2,695 depending on usage. The one time set-up fee for
FullChannel T-3 service is $5,000 and and the monthly fee ranges from $6,000
to $40,500 depending on usage. FullChannel T-1 and T-3 pricing is the
appropriate choice for those customers who have fluctuating and/or uncertain
bandwidth consumption patterns.
FullChannel T-1 Protected gives a customer a fixed price for a full 1.5
megabits of bandwidth. The one time set-up fee is $3,000 and the monthly fee
is set at $2,095. This is an economical choice for those customers who
recognize in advance that their bandwidth throughput requirements will equal
T-1 levels.
FlexChannel gives a customer the opportunity to purchase a fractional
portion of a T-1 or T-3 for a fixed monthly fee. The set up fee is the same as
for FullChannel pricing but the monthly fee ranges from $895 to $1,895 for
FlexChannel T-1 service and from $6,000 to 25,500 for FlexChannel T-3 pricing.
FlexChannel T-1 and T-3 pricing is the appropriate choice for the customers
who know that their bandwidth requirements are going to be consistently less
than a full T-1 or T-3.
LECFrame Relay is based on various LECs' Frame Relay facilities. Although
Concentric does not offer service level guarantees over LECFrame Relay,
Concentric does guarantee the committed information rate. This offering gives
a lower cost, lower performance network service for those customers for whom
performance is
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less imperative. Concentric charges a one time set-up fee of $2,000 for
LECFrame Relay services and monthly fees ranging from $395 to $1,095 depending
on usage.
Digital Subscriber Lines. In December 1997, Concentric began offering
Internet and intranet connectivity using DSL technology. DSL and its variants
are a new dedicated access technology being deployed by telephone companies
that allows high speed digital service over regular telephone lines. The
Company has formed relationships with PacBell and a number of Competitive
Local Exchange Carriers ("CLECs") to expand its DSL service area. Concentric's
DSL service offerings are currently available in Northern California through
such CLEC relationships. The Company's DSL service offerings include a wide
range of dedicated access speeds, from 144Kbps to 1.1Mbps symmetric DSL, as
well as 1.5Mbps/384Kbps asymmetric DSL
Concentric DSL services are targeted at the consumer, telecommuter, and
small-to-medium sized business markets. The "dedicated access feature" of DSL
services combined with its high speed and low flat rate pricing are designed
to appeal to the large installed base of ISDN users. Pricing for the service
is low relative to traditional dedicated access services, making it attractive
to medium sized businesses, while at the same time broadening the market to
reach small businesses who previously could not justify the expense of
dedicated Internet service.
Pricing is based on the bandwidth of the DSL circuit, and is a flat rate
monthly fee ranging from $149 to $399 depending on the service speed.
Concentric provides complete installation services including all the customer
premise equipment necessary to provide the DSL service at fees ranging from
$325 to $725.
Web Hosting Services. The Company's Web hosting services were introduced in
March 1997, and are targeted at businesses that are implementing high-
performance intranet, Web, e-mail, gaming, chat or other types of services.
Concentric offers a wide range of hosting solutions structured to meet the
needs of small businesses to very large enterprises. The Company's high-end
hosting capabilities were enhanced by the acquisition of five domestic data
centers and three international hosting facilities in February 1998. By
outsourcing its Web hosting requirements to Concentric, an enterprise can
reduce costs while increasing reliability and performance of its servers.
Web hosting consists of providing and/or managing the necessary equipment to
allow companies to operate Web sites. The components of Web hosting are the
server; a workstation or PC that runs the Website; the facility to host the
server; high speed Internet access for hosted servers; server and power backup
to ensure 24 hour functionality; and maintenance to ensure ongoing operation
of the server. Concentric also bundles Web hosting software and network
services to provide businesses with complete Internet presence solutions.
In February 1998 Concentric announced the availability of ConcentricHost
Server Solutions, a line of Web hosting services designed for companies who
require outsourced maintenance, management, bandwidth and housing for their
internet or extranet Web servers. Unlike colocation services that simply
supply rack space and bandwidth, ConcentricHost Server Solutions provide high-
performance Internet access from state-of-the-art data centers, skilled
technicians and maintenance programs that monitor servers 24 hours a day,
seven days a week and scalability to address the growing networking needs of
businesses of all sizes.
For reliable, high-performance flow of traffic between customer's Web
servers and worldwide networks, Concentric has combined public peering and
private peering arrangements to provide improved performance to users.
Concentric Network currently operates data centers in Santa Clara, Cupertino,
San Francisco and Los Angeles, California, Chicago, Illinois and Washington,
D.C., along with hosting facilities in Stockholm, Sweden, Hong Kong and Tokyo,
Japan. Each Concentric Network data center is connected via multiple DS3
(45Mbps) or OC3 (155Mbps) high-speed links to geographically dispersed points
in its private ATM backbone. This network architecture provides diversity and
redundancy to user's network systems while minimizing user cost. See "--The
Concentric Network."
In addition to state-of-the-art hosting facilities, Concentric provides
industry-leading server management tools. ConcentricHost Server Solutions
offer a suite of advanced server support and management services, called
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Remote Hands, to monitor performance of users business-critical applications.
Specific Remote Hands features include: power cycling equipment; running
diagnostic equipment; providing diagnostic displays; upgrading equipment; file
system back-up; and upgrading drive capacity.
ConcentricHost Server Solutions range in price from $550 to $4,400 a month,
depending on required bandwidth and rack space. Remote Hands options range in
price from basic services included at no cost with colocation service to more
advanced services ranging in price from $195 to $250 an hour. A range of
Remote Hands fixed-fee service packages, based on specific customer needs, are
also available with pricing options starting at $1,250 a month.
In February 1998, Concentric announced an extension of its ConcentricHost
line of hosting products, adding four new service packages that offer small
and mid-sized businesses flexible, tailored solutions to meet their Web
hosting needs. ConcentricHost Internet Suite(TM) is a complete, easy-to-use
service designed to cost effectively provide for all of the Internet needs of
a business in one account. Packages range from $59.95 to $199.95 a month
depending on the range of e-mail accounts, disk space and bandwidth provided
to the customer. These packages also offer the user shared security and full
domain names and are managed from a user-friendly Web interface. Other
features include 24 hours a day, seven days a week customer support and built-
in self-administration tools that allow the user to change options and analyze
activity on-line in near real time. For instance, users can increase bandwidth
allotments, create and delete e-mail accounts, and add Web space on-line. The
administration system also notifies users via e-mail of potential resource
consumption problems, such as being low on disk space or near the monthly
allocation of Internet bandwidth, allowing modifications to be made on-demand.
In addition to the new Internet Suite packages, two existing ConcentricHost
products have received a name change to ConcentricHost Personal Web(TM). The
basic service, formerly ConcentricHost Home Office, is $29.95 per month and
includes five e-mail accounts, one dial-up account, 5 MB of disk space, 300 MB
of bandwidth and a sub-domain name. The enhanced service offering for $39.95 a
month, formerly named ConcentricHost Small Business, includes the same
features as the basic package with five additional MB of disk space and the
option for a full domain name. These services are targeted at individuals,
families and the small office/home office segment.
Netscape Virtual Office by Concentric. Pursuant to a Co-Marketing Services
Agreement, a Trademark License Agreement and a Software License Agreement
executed in June 1997 (the "Agreements"), the Company entered into a strategic
business arrangement with Netscape to design, develop and operate Netscape
Virtual Office by Concentric, to offer customers hosted private Intranet
services that can be accessed from anywhere on the Internet. The service has
been adapted from Concentric's ConcentricHost product and uses Netscape's
SuiteSpot software features. These services are designed to give an individual
or small business with an Internet connection the ability to establish a
"Virtual Office" that is accessible through Netscape's Internet site. The
Company launched the service in September 1997. The Agreements have an initial
term of two years, which may be renewed for up to two additional one year
terms. Pursuant to the Agreements, the service features hosting, both public
and private, multiple e-mail accounts and Internet dial-up service. The
Company has jointly designed the service with Netscape which has been
developed and is hosted by the Company.
Netscape Virtual Office by Concentric has been designed to give individual
professionals, small business and project groups a private on-line presence
that can be shared with co-workers or other specified users. This on-line
service serves as a user's entry point to a wide variety of on-line
information services, such as e-mail, internal and external Web sites, private
discussion groups and project collaboration without the cost of extensive
hardware, software and technical personnel. To take advantage of these
services, the user only needs an Internet access and Netscape Communicator
client software. In order to create "Virtual Office," the user signs up for
the monthly service on the Netscape Internet site. The user initially
specifies basic information, project parameters, a list of people who can
access the Virtual Office, and credit card information for payment. Once all
the information is specified, the user's Virtual Office is automatically
configured.
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Consumer Services
Concentric provides its individual and small office/home office ("SOHO")
customers with a broad range of Internet access options and Web hosting, e-
mail, chat, FTP, Gopher and online shareware services. Users can choose from
local and long distance direct dial 800-number and telnet services. Concentric
offers the Microsoft Internet Explorer or the Netscape Navigator, upon
request, to its users when they sign up for dial-up or 800-number service.
INTERNET ACCESS PRICING
<TABLE>
<CAPTION>
MONTHLY
PLAN FEE ADDITIONAL TIME
---- ------- ------------------------------------------------
<S> <C> <C>
Starter Plan............ $ 7.95 $1.95/hr after 5 hours
Standard Plan........... $19.95 No charges for additional time. Unlimited active
access for one monthly fee.
800-number Plan......... $10.00 $5/hr after 2 hours
Inbound Internet Plan... $10.00 No charges for additional time. Unlimited active
access for one monthly fee.
</TABLE>
The Company also offers consumers value-added services, including a
collection of premium products targeted to vertical segments such as the
family and SOHO market. This includes the upselling of discounted products and
services in such areas as retail products, software, hardware and telephony
services with such partners as Amazon.com, Inc., QuadraCom, LLC, TuneUp.com,
Connected OnLine Backup and Classifieds 2000. Such arrangements not only
provide an additional monthly revenue stream but also increase customer
satisfaction and retention. Additional value-added products and services being
reviewed by the Company for potential introduction include premium service,
customer support, education research, virus protection, and faxing services.
CUSTOMERS
The following is a representative list of the Company's customers during the
last 12 months.
<TABLE>
<S> <C>
Acer America Corporation Microsoft Corporation
Ameritech Services, Inc. Netscape Communications Corporation
AT&T Corporation On Command Corporation
Bascom Global Internet Oracle Corporation
Services, Inc. OzeMail Interline Pty, Ltd.
Bay Networks, Inc. NTT PC Communications, Inc.
Bloomberg, L.P. Peapod L.P.
Corel Corporation Philips Mobile Computing
Connected Corporation PictureTel Corporation
Electronic Data Systems PointCast, Inc.
Corporation Rosemount Inc.
Excite, Inc. SCP Communications
Fiberlane Communications, SMC Communications LLC
Inc. Scopus Technology, Inc.
Fishking Processors, Inc. Sega of America, Incorporated
First Data Corporation Tachyon Technology Corporation
Graybar Electric Company, 3Com, Inc.
Inc. Toshiba America Information Systems
Hewlett-Packard Company USWeb Corporation
Imagesoft Technologies, Inc. WebTV Networks, Inc.
Infogear Technology WorldCom, Inc.
Corporation You Bet! On-Line Entertainment
Intuit, Inc. Ziff-Davis Publishing Co.
Investools, Inc.
Iomega Corporation
Kleiner, Perkins Caufield, &
Byers
Lycos, Inc.
Network Associates Inc.
</TABLE>
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During the years ended December 31, 1996 and 1997, revenue from WebTV
accounted for 10.1% and 33.4%, respectively, of the Company's revenue. See
"Factors Affecting Operating Results--Customer Concentration."
The Company aggressively pursues business alliances with a variety of
companies. Through these partners, the Company seeks to expand its enterprise
and consumer customer base and increase the 24 hour utilization of the
Concentric network. The following is a summary of selected strategic
relationships:
Intuit. Intuit, a financial software and Web-based services company, is a
market leader in personal and small business financial software. Intuit views
its Websites as a key channel for communicating with its customers, and as a
vehicle to provide personal finance, investment and tax related financial
information. Concentric and Intuit partnered in October 1995 to launch
integrated Internet access to the Quicken Financial Network and the Internet.
The Internet access capability included both a virtual private network service
designed to provide Intuit customers subsidized access to select Intuit Web
sites and the ability to upgrade to full access to the Internet. Intuit has
bundled tailored versions of the Netscape Navigator browser in its fiscal year
1996 and 1997 releases of Quicken, TurboTax, ProTax and Quickbooks. Concentric
designed and implemented tailored registration and network access software to
provide Intuit customers with seamless, subsidized access to select Intuit Web
sites. Concentric provides an easy, Web-based upgrade process for customers
desiring full Internet access and e-mail services. Customers are billed for
network time through Concentric's billing systems. In addition, Concentric
provides private-labeled customer service to Intuit customers with full
network access on a twenty-four hour a day, seven day a week basis. Most
recently, Intuit provided subsidized full access Internet accounts in the 1998
releases of Quicken, Quickbooks, TurboTax and ProTax, along with the option
for customers to upgrade to other full Internet access plans. Intuit uses
Concentric's high performance network to enable customers to send electronic
tax filings and software product registration.
WebTV Networks Inc. WebTV provides the world's first high-quality Internet
solution for television. In the fall of 1996, WebTV's licensees, Sony
Electronics, Inc. and Philips Electronics introduced a plug-and-play set-top
box that enables Internet browsing from a television. As part of the WebTV
service, Concentric and WebTV jointly designed and implemented a national
virtual private dial-up network solution to connect WebTV Network(TM) users to
the Internet, utilizing Concentric's network. The WebTV(TM) Internet terminal,
combined with the virtual private network, allows anyone to browse the
Internet from the comfort of their living room.
PictureTel Corporation. PictureTel, a leading provider of video conferencing
products, and Concentric have signed a joint development agreement which
specifies both parties' intent to jointly develop products and services to
enable PictureTel desktop and room video conferencing systems to communicate
over the Concentric network. Both Concentric and PictureTel currently have
trial systems installed and operating over the Concentric network. Preliminary
results demonstrate that the low/fixed latency and high throughput of the
Concentric network delivers superior quality for both desktop and room video
conferencing over IP-routed networks.
OnCommand Corp. OnCommand provides in-room TV services to guests at hotels
worldwide. OnCommand replaced its low-speed private-line network with a
Concentric Enterprise Virtual Private Network ("EVPN") that links its 12
regional offices with the San Jose, California headquarters. The EVPN allows
OnCommand to provide faster service to hotels, enabling agents to have instant
access to technical data, database information, contracts and customer
inquiries.
THE CONCENTRIC NETWORK
The Concentric network employs an advanced, geographically dispersed ATM and
frame relay backbone, 16 SuperPOPs in many major metropolitan areas plus a
total of 139 secondary and tertiary POPs in other cities, allowing local dial-
up access to the network to users in the U.S. and Canada. In addition, the
Company can provide analog dial-up, frame relay, fractional T-1, T-1 and DS3
access to the network. The Concentric network supports 28.8 Kbps (V.34) modems
and Concentric currently plans to deploy 56 Kbps modem access in the first
quarter of 1998. This planned deployment is a forward looking statement and is
subject to a number of risks and
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uncertainties and the actual results could differ materially as a result of a
number of factors including those set forth under the caption "Factors
Affecting Operating Results--Dependence on New an Enhanced Services" and "--
Dependence on Network Infrastructure."
The Concentric network is managed via a centralized network control center
in St. Louis, Missouri. Two data centers (located in Bay City, Michigan and
Cupertino, California) house the servers that support logon/authentication,
billing, e-mail, Internet access, Web services and other network services. In
February 1998, the Company acquired InterNex Information Services, Inc.
("InterNex"), a provider of network services, colocation services and Web-
hosting facilities to enterprise customers. With the acquisition of InterNex,
the Company has expanded its Internet connectivity strategy to include not
only private transit with MCI, Sprint and UUNet, but also private peering with
other network providers as well as public peering with multiple smaller
internet service providers. The Company's new hybrid private/public Internet
connectivity strategy is designed to allow Concentric to offer superior
Internet connectivity performance by avoiding congestion (packet loss) when
connecting to certain network providers at many public peering points. In
connection with the InterNex transaction, the Company acquired new data
centers in Santa Clara, California, San Francisco, California, Los Angeles,
California, Chicago, Illinois and Washington, D.C., and new hosting facilities
in Stockholm, Sweden, Tokyo, Japan and Hong Kong. See "Factors Affecting
Operating Results--Risks Associated With Acquisitions" and "--Dependence on
Network Infrastructure."
The Concentric SuperPOPs are designed to support both dial-up and dedicated
access services within a broad geographic region. Typically, a SuperPOP will
utilize one or more CLECs and LECs to aggregate dial traffic within a 50-200
mile radius of the SuperPOP and terminate it at the SuperPOP. This strategy
allows Concentric to offer users local call coverage within the SuperPOP
region without having to deploy individual POPs in each local calling area.
All the calls are terminated at the modem equipment at the regional SuperPOP.
This results in broader call coverage, lower costs due to the typically lower
rates from CLECs and economies of scale from larger modem installations, lower
maintenance costs, and easier capacity upgrades since equipment is located in
a single location within a region.
DAFs and DSLs from customer locations in a region are terminated in the
SuperPOP as well. Typically, Fractional T-1, T-1, and T-3 circuits are
terminated directly into SuperPOP router equipment (via CSU/DSUs) or via a
channelized DS3 connected to a competitive access provider. Frame access is
terminated via aggregated LEC Frame Access circuit(s). DSL is terminated via a
multiplexed DS-3 connection to a LEC/CLEC metropolitan area DSL network. Both
dial-up and dedicated traffic is then aggregated by the routers/switches in
the SuperPOP and directed to the Concentric ATM backbone via one or more T-3
ATM links.
Some applications, such as Web browsing and file transfer require high
throughput, but can tolerate moderate and variable latency, while others, such
as mission-critical business applications and voice and video conferencing,
require low/fixed latency. Still others, such as transaction processing may
require high levels of security and are indifferent to latency levels.
Traditional static network access technologies and backbone architectures
cannot cost-effectively manage these varied requirements in a single network.
The Concentric network has been designed to solve this problem by
incorporating software intelligence in both its access and backbone
technologies to adapt the network's connection setup, security and data
transfer properties to the nature of the user's application requirements on a
call-by-call or service-by-service basis.
The Concentric network also offers its customers the security, reliability
and management features that companies require in their own private networks.
Varying layers of security and encryption are supported and tailored to
specific customer requirements. The network design includes a standard
security layer and is compatible with most types of custom security
applications. Further, security is provided at both the edge of the network
and internally based on embedded firewall and encryption techniques. The
Concentric network features colocation of network access and switching
equipment in "hardened" facilities, direct connections to carrier facilities,
a resilient ATM/frame relay backbone, dual data processing centers, and
redundancy within data centers to substantially enhance its uptime
performance.
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Network managers, customer service, and technical support staff require near
real-time access to information about the performance and quality of their
networks. In traditional private networks, this information is provided by
network management, trouble reporting/tracking, and management information
systems. Customers usually sacrifice a great deal of control and have access
to less information when using a public network instead of a private network.
It has been difficult for public network providers to provide their major
customers with information regarding network performance that relates to that
customer's usage without either compromising other customers' proprietary
information or compromising the integrity of the network itself. Concentric
has developed a set of non-intrusive software tools and reporting mechanisms,
distributed to enterprise customers to allow a customer's network manager to
monitor network performance and quality and to adequately support inquiries
for help from their users. Web browsers and file transfer tools are used to
provide access to much of this information. In some cases, custom integration
of Concentric's network management and trouble tracking/reporting systems will
be provided to customers.
RELATIONSHIP WITH WILLIAMS COMMUNICATIONS, INC.
Concurrent with the closing of the Company's initial public offering of
common stock in August 1997 (the "IPO"), the Company entered into a strategic
relationship with Williams Communications Group, Inc., a subsidiary of the
Williams Companies, Inc. (together, "Williams"). Williams provides a full
range of enterprise network solutions, communications services and advanced
applications to businesses, including equipment and services for data, voice
and video; international satellite and fiber-optic transmission services;
telemarketing services; and, multipoint video- and audio-conferencing. The
relationship with Williams includes an equity investment in the Company by
Williams of approximately $15.0 million which closed in August 1997, and the
execution of a number of strategic business agreements. In exchange for the
approximately $15.0 million investment by Williams, the Company issued and
sold 1,249,236 shares of common stock to Williams at the initial per share
price of $12.00 in the Company's IPO.
As part of the strategic business relationship, Williams has made available,
and the Company has agreed to purchase from Williams, a total of $21.2 million
in telecommunications equipment and services through the five year period
ending in 2002. At the election of Williams, $2.0 million of the minimum
purchase commitment may be paid by the issuance of Common Stock by the Company
at the then-current fair market value. Additionally, Williams and the Company
have entered into a reseller agreement and an agency agreement through which
Williams is able to sell the Company's products and services for an initial
term of two years. The agreements with Williams provide that, in the event of
a change of control of the Company, Williams will have a right to purchase a
nonexclusive, perpetual license to use, distribute and modify all of the
intellectual property of the Company, including any copyright, patent,
license, trademark or trade secret which the Company has or obtains the right
to transfer. Finally, the parties also agreed to amend and restate the
Employee Services and Staffing Agreement between the Company and CTI, a
wholly-owned subsidiary of Williams, and to amend the Co-location Services
Agreement between the Company and CTI, to among other things, extend the terms
of such agreements to December 31, 2000 and to forego a $1.1 million
acquisition fee to be paid by CTI to the Company as a result of the
acquisition of CTI by Williams in 1996. In exchange for the waiver of the
acquisition fee, Williams agreed to issue $1.1 million in telecommunications
services credits to the Company.
SALES AND MARKETING
The Company focuses on marketing its services to two distinct market
segments: enterprise and consumer. By attracting enterprise customers who use
the network primarily during the daytime, and consumer customers who use the
network primarily at night, the Company is able to more fully utilize its
network infrastructure by having some customers online during the day and the
others, using the same modem pools, online during the evening. The Company has
developed a multi-tiered sales strategy consisting of leveraged third party
distribution channels, inbound and outbound telesales, value-added resellers
and direct sales. As of February 23, 1998, the Company employed 111 persons in
sales and marketing.
Leveraged Third Party Distribution. The Company has positioned itself as a
key network services provider for companies that bundle network access in
their products or services. For example, the Company's
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<PAGE>
network service is bundled with Intuit's Quicken, TurboTax and Quickbooks
products, Microsoft Office 97 and with WebTV and Sega Saturn Internet access
devices. Additionally, the Company is one of the Internet services providers
listed on the Netscape Navigator and Microsoft Internet Explorer browser
registration servers.
Telesales. The Company uses an inbound telesales group to answer calls from
potential consumers/ subscribers and to sign up customers. Inbound telesales
representatives also proactively upsell premium products and services. The
Company also uses an outbound telesales group to sell DAFs and high-end
hosting products to small and medium-sized businesses. Both the inbound and
outbound telesales groups forward leads to the direct sales force when
appropriate.
Value-Added Resellers. The Company has also begun to establish sales
channels through value-added resellers. These resellers are companies that
sell equipment or other components for full-service network solutions to
medium and large businesses. Value-added resellers such as Racal, which
employs more than 500 direct sales, sales-support and network services people,
are compensated for selling Concentric's enterprise service offerings in
conjunction with their other products. These relationships enable the VARs to
provide more comprehensive solutions to their customers while affording the
Company the benefit of the VAR's large sales force without incurring the costs
of maintaining a large sales force of its own.
Direct Sales Force. For large and complex enterprise solutions and to
acquire, support and retain distribution channel partners, the Company employs
22 direct sales people located in Cupertino and Orange County, California,
Dallas, Texas, Washington, D.C., the New York metropolitan area, Atlanta,
Georgia, Chicago, Illinois and Boston, Massachusetts to provide national
direct sales coverage. The Company's direct sales force is supported by inside
sales/account managers and systems engineers.
Concentric markets its enterprise services to information service ("IS")
professionals. In addition, the Company uses print advertising in targeted
industry publications to build awareness and acquire leads for its VARs and
its direct sales team.
In the consumer market, the Company focuses on direct mail to targeted
audiences; establishment of customer referral programs; and co-marketing such
as packaging literature with MasterCard mailers and Intuit software. In
addition, the Company has implemented on-line programs, such as a Website
"home" where they can learn how to use the service, how to use the Internet,
and how to find information quickly, designed to increase customer retention.
The Company is also implementing programs to sell additional products and
services to its consumer customers. Additionally, the Company is generating
advertising revenue on its growing Website traffic in direct ad banner
placements as well as in shared revenue relationships with content partners
such as Excite, Inc., Lycos, Inc., and Classifieds 2000, Inc.
The Company employs public relations personnel in-house and works with an
outside public relations agency to provide broad coverage in network computer
and vertical industry publications. The Company participates in industry trade
shows based on the size and vertical makeup of the trade show audience. Shows
attended in 1997 include E3 and NetWorld + InterOp. The Company also
participates in trade shows with its strategic marketing partners to promote
the sale of Concentric products and services.
CUSTOMER SUPPORT
Concentric believes that a high level of customer support is critical to
attracting and retaining its enterprise and consumer customers. The Company
maintains a customer support call center at its Saginaw, Michigan facility.
Concentric offers several levels of customer support all of which are
available 24 hours per day, seven days per week. The basic level of customer
support includes support for customers on installing and using their software,
customer communications and customer training. Premier level service programs
guarantee an exceptional performance standard, offer supplemental support
training, and provide monthly reports on operations. Private label support
gives businesses a premier level of support provided by their own customer
service team who answer calls with that customer's company name. Customer
support is provided by e-mail, telephone, Website and online chat. As of
February 23, 1998, the Company employed 163 persons in customer support.
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COMPETITION
The market for tailored value-added network services is extremely
competitive. There are no substantial barriers to entry, and the Company
expects that competition will intensify in the future. The Company believes
that its ability to compete successfully depends upon a number of factors,
including market presence; the capacity, reliability, low latency and security
of network infrastructure; technical expertise and functionality, performance
and quality of services; customization; ease of access to and navigation of
the Internet; the pricing policies of its competitors; the variety of
services; the timing of introductions of new services by the Company and its
competitors; customer support; the Company's ability to support industry
standards; and industry and general economic trends.
The Company's current and prospective competitors generally may be divided
into the following five groups: (i) telecommunications companies, such as
AT&T, Sprint, Inc., WorldCom, MCI, RBOCs and various cable companies; (ii)
online services providers, such as America Online, CompuServe, Microsoft's
MSN, and Prodigy; (iii) ISPs, such as BBN, which has been acquired by GTE,
NETCOM, which is being acquired by ICG Communications, Inc., PSI Net, and
other national and regional providers; (iv) nonprofit or education Internet
connectivity providers; and (v) Web server farms such as Internet Direct and
Exodus. Many of these competitors have greater market presence, engineering
and marketing capabilities, and financial, technological and personnel
resources than those available to the Company. As a result, they may be able
to develop and expand their communications and network infrastructures more
quickly, adapt more swiftly to new or emerging technologies and changes in
customer requirements, take advantage of acquisition and other opportunities
more readily, and devote greater resources to the marketing and sale of their
products than can the Company. In addition, various organizations, including
certain of those identified above, have entered into or are forming joint
ventures or consortiums to provide services similar to those of the Company.
The Company believes that new competitors, including large computer
hardware, software, media and other technology and telecommunications
companies will enter the value added network services markets, resulting in
even greater competition for the Company. Certain of such telecommunications
companies and online services providers are currently offering or have
announced plans to offer Internet or online services or to expand their
Internet access services. Certain companies, including America Online, BBN and
PSI, have also obtained or expanded their Internet access products and
services as a result of acquisitions. Such acquisitions may permit the
Company's competitors to devote greater resources to the development and
marketing of new competitive products and services and the marketing of
existing competitive products and services. In addition, the ability of some
of the Company's competitors to bundle other services and products with VPN
and consumer network services could place the Company at a competitive
disadvantage. Certain companies are also exploring the possibility of
providing high-speed data services using alternative delivery methods such as
over the cable television infrastructure, through direct broadcast satellite
technology and by wireless cable.
As a result of increased competition in the industry and vertical and
horizontal integration in the industry, the Company could encounter
significant pricing pressure, which in turn could result in significant
reductions in the average selling price of the Company's services. For
example, certain of the Company's competitors that are telecommunications
companies may be able to provide customers with reduced communications costs
in connection with their Internet access services or private network services,
reducing the overall cost of their solutions and significantly increasing
price pressures on the Company. There can be no assurance that the Company
will be able to offset the effects of any such price reductions with an
increase in the number of its customers, higher revenue from enhanced
services, cost reductions or otherwise. In addition, the Company believes that
the Internet access and online services businesses are likely to encounter
consolidation in the near future, which could result in increased price and
other competition in these industries and, potentially, the virtual private
networks industry. Increased price or other competition could result in
erosion of the Company's market share and could have a material adverse effect
on the Company's business, financial condition and results of operations.
There can be no assurance that the Company will have the financial resources,
technical expertise or marketing and support capabilities to continue to
compete successfully. See "Factors Affecting Operating Results--Competition,"
"--Risks of Growth and Expansion," "--Future Capital Needs; Uncertainty of
Additional Financing" and "Business--Competition."
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GOVERNMENT REGULATION
The Federal Communications Commission ("FCC") currently does not regulate
value-added network software or computer equipment related services that
transport data or voice messages over telecommunication facilities. The
Company provides value-added IP-based network services, in part, through data
transmissions over public telephone lines. These transmissions are governed by
regulatory policies establishing charges and terms for wireline
communications. Operators of these types of value-added networks that provide
access to regulated transmission facilities only as part of a data services
package are currently excluded from regulations that apply to
"telecommunications carrier" and as such the Company is not currently subject
to direct regulation by the FCC or any other governmental agency, other than
regulations applicable to businesses generally. However, in the future the
Company could become subject to regulation by the FCC or another regulatory
agency as a provider of basic telecommunications services.
Currently, the FCC is reviewing its regulatory positions and could seek to
impose common carrier regulation on the network transport and communications
facilities aspects of an enhanced or information service package. Further, the
FCC could conclude that the Company's protocol conversions, computer
processing, and interaction with customer-supplied information are
insufficient to afford the Company the benefits of the enhanced or information
service classification, and thereby may seek to regulate some segments of the
Company's activities as basic telecommunications services. While state public
utility commissions generally have declined to regulate enhanced or
information services, some states have continued to regulate particular
aspects of enhanced services in limited circumstances, such as where they are
provided by LECs. Moreover, the public service commissions of certain states
continue to review potential regulation of such services. There can be no
assurance that regulatory authorities of states within which Concentric makes
its Internet access, Intranet and VPN services available will not seek to
regulate aspects of these activities as telecommunications services. Changes
in the regulatory environment relating to the Internet connectivity market,
including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood or scope of competition
from the RBOCs or other telecommunications companies, could affect the prices
at which the Company may sell its services. The Company cannot predict the
impact, if any, that future regulation or regulatory changes may have on its
business and there can be no assurance that such future regulation or
regulatory changes will not have a material adverse effect on the Company's
business, results of operations and financial condition.
PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon its
technology, although the Company believes that its success is more dependent
upon its technical expertise than its proprietary rights. The Company
principally relies upon a combination of copyright, trademark and trade secret
laws and contractual restrictions to protect its proprietary technology. It
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization or to develop similar
technology independently, and there can be no assurance that such measures
have been, or will be, adequate to protect the Company's proprietary
technology or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. The Company operates a material portion of its business over the
Internet, which is subject to a variety of risks. Such risks include but are
not limited to the substantial uncertainties that exist regarding the system
for assigning domain names and the status of private rules for resolution of
disputes regarding rights to domain names. There can be no assurance that the
Company will continue to be able to employ its current domain names in the
future or that the loss of rights to one or more domain names will not have a
material adverse effect on the Company's business and results of operations.
Although the Company does not believe that it infringes the proprietary
rights of any third parties, there can be no assurance that third parties will
not assert such claims against the Company in the future or that such claims
will not be successful. In addition, participants in the Company's industry
also rely upon trade secret law. The Company could incur substantial costs and
diversion of management resources with respect to the defense of any claims
relating to proprietary rights which could have a material adverse effect on
the Company's business,
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financial condition and results of operations. Furthermore, parties making
such claims could secure a judgment awarding substantial damages, as well as
injunctive or other equitable relief which could effectively block the
Company's ability to license its products in the United States or abroad. Such
a judgment would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company is
obligated under certain agreements to indemnify the other party in connection
with infringement by the Company of the proprietary rights of third parties.
In the event a claim relating to proprietary technology or information is
asserted against the Company, the Company may seek licenses to such
intellectual property. There can be no assurance, however, that licenses could
be obtained on commercially reasonable terms, if at all, or that the terms of
any offered licenses will be acceptable to the Company. The failure to obtain
the necessary licenses or other rights could have a material adverse effect on
the Company's business, financial condition and results of operations.
EMPLOYEES
As of February 23, 1998, Concentric had 387 employees and 75 independent
contractors, including 111 persons in sales and marketing, 142 persons in
network operations and development, 163 in customer support and 46 in finance
and administrative functions. The Company believes that its future success
will depend in part on its continued ability to attract, hire and retain
qualified personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will be able to identify, attract, and retain
such personnel in the future. None of the Company's employees is represented
by a labor union, and management believes its employee relations are good.
PROPERTIES
The Company's executive offices are located in Cupertino, California, under
a lease that expires in April 1998. The Company is currently negotiating for
an extension of the lease. The Company also leases network operations and
customer support facilities in Bay City, Michigan, and Santa Clara,
California, under leases expiring in December 1998 and May 2000, respectively,
and a customer support facility in Saginaw, Michigan, under a lease that
expires in December 2001.
LEGAL PROCEEDINGS
In late April and early May, 1997, three putative securities class action
complaints were filed in the United States District Court, Central District by
certain stockholders of Diana, the parent corporation of Sattel, alleging
securities fraud related to plaintiffs' purchase of shares of Diana Common
Stock in reliance upon allegedly misleading statements made by defendants,
Diana, Sattel and certain of their respective affiliates, officers and
directors. Concentric was named as a defendant in the complaint in connection
with certain statements made by Diana and officers of Diana related to
Concentric's purchase of network switching equipment from Diana's Sattel
subsidiary. The plaintiffs seek unspecified compensatory damages. A trial date
has not yet been determined.
While the ultimate outcome of such litigation is uncertain, the Company
believes it has meritorious defenses to the claims and intends to conduct a
vigorous defense. An unfavorable outcome in this matter could have a material
adverse effect on the Company's financial condition. In addition, even if the
ultimate outcome is resolved in favor of the Company, the defense of such
litigation could entail considerable cost and the diversion of efforts of
management, either or which could have a material adverse effect on the
Company's results of operations. See "Risk Factors--Legal Proceedings" and
Note 11 of Notes to Financial Statements.
63
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth certain information as of February 28, 1998,
with respect to the executive officers and directors of the Company, as well
as certain members of its senior management.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- ---------------------------------------------------------
<S> <C> <C>
Henry R. Nothhaft....... 53 Chairman, President, Chief Executive Officer and Director
John K. Peters.......... 50 Executive Vice President and General Manager, Network
Services Division
Michael F. Anthofer..... 45 Senior Vice President and Chief Financial Officer
Mark W. Fisher.......... 37 Vice President of Corporate Marketing
William C. Etheredge.... 51 Senior Vice President of Sales
Eileen A. Curtis........ 49 Vice President of Customer Relations
George D. Carr.......... 53 Vice President of Field Sales
James L. Isaacs......... 37 Vice President of Business Development
Warren A. Smith......... 47 Vice President of Software Engineering
Scott G. Eagle.......... 39 Vice President of Consumer Marketing
Donald C. Schutt........ 52 Vice President of International Services
Louis P. Bender, 50 Director
III(1).................
Vinod Khosla(2)......... 43 Director
Gordon Martin........... 37 Director
Franco Regis(1)......... 41 Director
Gary E. Rieschel(2)..... 41 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Henry R. Nothhaft joined the Company as President and Chief Executive
Officer in May 1995 and became a Director of the Company in August 1995 and
Chairman in February 1998. From 1989 to August 1994, Mr. Nothhaft was
President, Chief Executive Officer and a Director of David Systems, Inc.
("David Systems"), a networking company. From 1983 to 1989, Mr. Nothhaft held
various positions with DSC Communications Corporation ("DSC"), including
Senior Vice President of Marketing, President of the Digital Switch
Corporation subsidiary, President of the Business Network Systems Group and a
Corporate Director of DSC. From 1979 to 1983, Mr. Nothhaft was Vice President
of Domestic Marketing and Vice President of Sales for GTE Telenet
Communications Corporation (now Sprint). Mr. Nothhaft has an M.B.A. in
Information Systems Technology from George Washington University and a B.S.
degree from the U.S. Naval Academy.
John K. Peters joined the Company in May 1995 as an independent consultant.
Mr. Peters was named Executive Vice President and General Manager, Network
Services Division of the Company in June 1995. From 1993 to August 1995, Mr.
Peters served as President of Venture Development Consulting, a consulting
firm specializing in new communications, information services and software
businesses. From 1988 to 1993, Mr. Peters was Vice President and Chief
Operating Officer of Pacific Bell Information Services, Inc. Prior to that,
Mr. Peters spent three years as Vice President of Application Services for
Telestream Corporation. In 1981, Mr. Peters co-founded Integrated Office
Systems, Inc., a communications and information systems company. From 1976 to
1980, Mr. Peters was Vice President of Advanced Network Services for GTE
Telenet Communications Corporation. Mr. Peters has an M.B.A. from Stanford
Graduate School of Business and a B.S. degree in Statistics from Stanford
University.
Michael F. Anthofer joined the Company in January 1996 as Vice President and
Chief Financial Officer and became a Senior Vice President in November 1996.
From January 1991 to December 1995, Mr. Anthofer
64
<PAGE>
served as an Executive Vice President and Chief Financial Officer of Shared
Resource Exchange, Inc., a privately held digital switching platform and PBX
supplier. Prior to 1991, Mr. Anthofer held various executive positions,
including Vice President, Corporate Business Planning, Vice President,
Business Network Group and Vice President, Network Products Group, at DSC. Mr.
Anthofer has an M.B.A. and a B.S. degree from the University of California,
Berkeley.
Mark W. Fisher joined the Company in June 1997 as Vice President of
Corporate Marketing. From July 1996 to June 1997, Mr. Fisher was General
Manager and Vice President, Marketing of Pacific Bell Internet Services, a
wholly owned subsidiary of Pacific Bell. From June 1995 to August 1996, Mr.
Fisher was Vice President, Marketing of Pacific Bell Internet Services. From
1989 to May 1995, Mr. Fisher held various data product marketing and data
center operations positions at Pacific Bell. Mr. Fisher has an M.B.A. from the
University of California at Berkeley and a B.S. in mechanical engineering from
the U.S. Naval Academy.
William C. Etheredge joined the Company in March 1997 as the Senior Vice
President of Sales. From May 1991 to March 1997, Mr. Etheredge served first as
Vice President of Sales and Marketing and then as Vice President of Sales for
Meridian Data, Inc., a provider of networked CD-ROM database creation and
retrieval software and network servers. From July 1990 to May 1991, he served
as Vice President of Strategic Accounts for Maxtor Corporation. From June 1985
to June 1990, he served first as Vice President US Sales and Marketing and
then Vice President Western Region for Memorex-Telex Corporation. Mr.
Etheredge has an M.B.A. degree from Bowling Green University and a B.A. degree
from Westminster College.
Eileen A. Curtis joined the Company in November 1994 as an independent
consultant. She became Customer Relations Manager in January 1995, Director of
Customer Relations in September 1995 and Vice President, Customer Relations in
November 1996. From August 1987 to July 1993, Ms. Curtis was employed by Cox
Communications Saginaw, Inc. and served in various positions including
Marketing and Public Relations Manager, Administrative Manager and Customer
Service Manager. Ms. Curtis has a B.S. degree from Central Michigan
University.
George D. Carr joined the Company in June 1995 as an independent consultant.
In September 1995 Mr. Carr became Vice President of Sales. From June 1993 to
June 1995, Mr. Carr was Vice President of Sales and Marketing of David
Systems/ChipCom. From June 1989 to June 1993, Mr. Carr was VP of Operations
and International Sales of David Systems. From December 1983 to June 1989, Mr.
Carr was VP of Operations and Service of David Systems. Mr. Carr has a B.A.
degree from Loyola Marymount.
James L. Isaacs joined the Company in October 1995 as the Director of
Product Management. In March 1997, he became Vice President of Product
Management and in November 1997 he was appointed Vice President of Business
Development. From July 1988 to October 1995, Mr. Isaacs held various positions
at Apple Computer, including Group Manager Product Marketing, Apple On Line
Services Division and Business Development Manager of Apple On Line Services
Division. Mr. Isaacs has an M.B.A. degree from the University of California,
Berkeley and an A.B. degree from Stanford University.
Warren A. Smith joined the Company in April 1996 as Vice President, Software
Engineering. From October 1992 to April 1996, Mr. Smith was the Director of
Engineering at NetManage, Inc., a software company. From July 1987 to July
1992, Mr. Smith was the Director of Distributed Computing Technology for Sun
Microsystems, Inc. From March 1983 to July 1987, Mr. Smith was the Western
Regional Manager of SEI Information Technology an engineering consulting firm.
Mr. Smith has a B.S. degree from California State University, Sacramento.
Scott G. Eagle joined the Company in March 1996 as Vice President of
Consumer Marketing. From November 1993 to February 1996, Mr. Eagle was the
Vice President, Strategic Marketing Development for MFS Intelenet, Inc., a
start-up division of MFS Communications Company, Inc. From February 1989 to
November 1993, Mr. Eagle was the Vice President of Marketing for the
Woodbridge Group, a marketer of consumer package goods. Prior to February
1989, Mr. Eagle served in various marketing management positions with The
65
<PAGE>
Procter & Gamble Company. Mr. Eagle has a B.S. degree from the University of
Pennsylvania, Wharton School of Business.
Donald C. Schutt joined the Company in February 1994 as Vice President of
Sales and Marketing and was appointed Chief Operations Officer later that
year. Mr. Schutt was named Vice President and General Manager, Bay City
Operations in August 1995. His title was changed to Vice President of Michigan
Operations in March 1996 and to Vice President of International Services in
November 1997. From 1964 to 1985, Mr. Schutt held various management positions
with General Motors, after which Mr. Schutt served until 1989 as Vice
President for Sales and Marketing for Gentex Corporation. From 1989 to 1993,
Mr. Schutt was President and Chief Executive Officer of AMPM, Inc., a full-
service advertising agency, and retains a 54 percent interest in such entity.
Mr. Schutt has a B.S. degree in Marketing from Ferris University.
Louis P. Bender, III has been a Director of the Company since June, 1997.
Since November 1996 he has been President, Americas Region of Racal Data
Group. Prior to such time, Mr. Bender served as Vice President, Business
Development at Bull Electronics, a business unit of Group Bull in Angers,
France. Prior to Bull Electronics, Mr. Bender held the position of Vice
President, Worldwide Sales at AVEX Electronics. Mr. Bender has bachelor's
degrees in Electrical Engineering and Business Administration from the State
University of New York and Monroe College, respectively.
Vinod Khosla has been a Director of the Company since April 1995. Mr. Khosla
has been a General Partner with the venture capital firm of Kleiner Perkins
Caufield & Byers from February 1986 to the present. Mr. Khosla was a co-
founder of Daisy Systems and the founding Chief Executive Officer of Sun
Microsystems, Inc. Mr. Khosla also serves on the boards of Excite, Inc. and
Spectrum Holobyte. He has a B.S.E. from the Indian Institute of Technology in
New Delhi, an M.S.E. from Carnegie Mellon University, and an M.B.A. from the
Stanford Graduate School of Business.
Gordon Martin has been a director of the Company since October 1997. Mr.
Martin is vice president of strategic marketing for Williams Communications
Group, Inc., a subsidiary of the Williams Companies, Inc. Mr. Martin joined
Williams Communications Group, Inc. in October 1987 as manager of
interexchange carrier sales for the network division. He was promoted to
director of product marketing in January 1993. From February 1995 to May 1995,
he served as General Manager of Digital Frontiers LLC, a division of Williams.
In June 1995, he returned to Williams as Vice President, Marketing until he
was promoted to his current position in January 1997. Mr. Martin has a
bachelor's degree in accounting and an M.B.A. from Oral Roberts University.
Franco Regis has been a Director of the Company since October 1996. Since
1994, Mr. Regis has been a Director of Business Development and Strategic
Planning at Telecom Italia, SpA, the telephone operating company of Italy.
From 1992 to 1994, Mr. Regis was a Director of Budget and Control for the
business division of Telecom Italia. Mr. Regis has an engineering degree from
the Rome State University.
Gary E. Rieschel has been a Director of the Company since October 1996. Mr.
Rieschel is a Senior Vice President at SOFTBANK Holdings, having joined that
company in January 1996. Mr. Rieschel was Vice President for N-Cube
Corporation from August 1994 through December 1995. He was Sales Director at
Cisco Systems, Inc. from July 1993 through October 1994. Prior to this, Mr.
Rieschel was a General Manager and Sales Director at Sequent Computer for over
nine years. Mr. Rieschel has an M.B.A. from Harvard Graduate School of
Business and a B.A. in biology from Reed College.
Classified Board of Directors
The Company's Certificate of Incorporation provides that, so long as the
Board of Directors consists of more than two directors, the Board of Directors
will be divided into three classes of directors serving staggered three-year
terms. As a result, one-third of the Company's Board of Directors will be
elected each year.
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<PAGE>
Director Compensation
Directors are reimbursed for certain reasonable expenses incurred in
attending Board or committee meetings. Officers of the Company are elected
annually by the Board of Directors and serve at its discretion. The Company
has entered into indemnification agreements with each member of the Board of
Directors and certain of its officers providing for the indemnification of
such person to the fullest extent authorized, permitted or allowed by law.
Compensation Committee
The Company's Board of Directors currently has a Compensation Committee that
reviews and approves the compensation and benefits to be provided to the
officers, directors, employees, and consultants of the Company, administers
the Company's 1993 Incentive Stock Option Plan, 1995 Stock Incentive Plan for
Employees and Consultants, and Amended and Restated 1996 Stock Plan, and the
1997 Stock Plan and 1997 Employee Stock Purchase Plan. The Compensation
Committee currently consists of Messrs. Khosla and Rieschel.
Audit Committee
The Company's Board of Directors currently has an Audit Committee that
monitors the corporate financial reporting and the external audits of the
Company, reviews and approves material accounting policy changes, monitors
internal accounting controls, recommends engagement of independent auditors,
reviews related-party transactions and performs other duties as prescribed by
the Board of Directors. The Audit Committee currently consists of Messrs.
Bender and Regis.
Governance Agreement
Pursuant to a Governance Agreement entered into among GSCP, the Kleiner
Entities, Intuit, Mr. Marc Collins-Rector, Chad Shackley and the Company (the
"Government Agreement"), Mr. Collins-Rector and Mr. Shackley are jointly
enabled to designate one member of the Company's Board of Directors. The
Governance Agreement also obligates the Company to use reasonable efforts to
maintain such designee on the Board of Directors until the earlier to occur of
(i) one year after the closing of the Company's IPO, (ii) the expiration or
full release of Mr. Collins-Rector and Mr. Shackley from any lock-up
restrictions granted to the underwriters in connection with such IPO, or (iii)
the sale of all or substantially all of the assets of the Company or the
merger, acquisition or other reorganization of the Company in which more than
50% of the voting power of the Company is disposed of. Currently, no person
has been designated to serve on the Board pursuant to this Agreement.
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<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth in summary form the
compensation earned by the Company's Chief Executive Officer, and the four
most highly compensated executive officers (the "Named Officers") during 1997.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------- ------------
SECURITIES ALL OTHER
OTHER ANNUAL UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) ($) (3)
- --------------------------- ---- ---------- --------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Henry R. Nothhaft........ 1997 214,231 -- -- 124,666(4) 2,162
President and Chief 1996 184,808 -- -- -- 3,105
Executive Officer
John K. Peters........... 1997 201,346 -- -- 103,466(4) --
Executive Vice President 1996 184,273 -- -- -- 3,076
and General Manager,
Network Services
Division
Michael F. Anthofer...... 1997 185,500 -- -- 73,333 1,027
Senior Vice President 1996 136,336 20,000 155,212(2) 43,333(5) 1,545
and Chief Financial
Officer
George D. Carr........... 1997 117,115 41,904(1) -- 26,666 1,055
Vice President of Field 1996 105,000 25,897(1) -- 6,666(5) 1,761
Sales
Scott G. Eagle........... 1997 150,716 -- -- 5,833 328
Vice President of 1996 114,337 -- 82,396(2) 30,000(5) 1,347
Marketing
</TABLE>
- --------
(1) Reflects sales commissions.
(2) Reflects relocation expense payments.
(3) Reflects Company contributions to an employee 401(k) plan and term life
insurance premiums paid by the Company.
(4) Includes certain options that were granted at higher fair market values
earlier in February 1997 and repriced by amendment in July 1997 to reflect
fair market values at that time.
(5) Includes certain options that were granted at higher fair market values
earlier in 1996 and repriced by amendment in April 1996 to reflect lower
fair market values at that time.
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<PAGE>
Option Grants During 1997. The following table sets forth for each of the
Named Officers certain information concerning stock options granted during
1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------
POTENTIAL
REALIZABLE
MARKET VALUE OF ASSUMED
PERCENT OF PRICE OF ANNUAL RATES OF
NUMBER OF TOTAL SECURITIES STOCK PRICE
SECURITIES OPTIONS EXERCISE UNDERLYING APPRECIATION FOR
UNDERLYING GRANTED TO PRICE OPTIONS ON OPTIONS TERM (2)
OPTIONS EMPLOYEES PER DATE OF EXPIRATION -----------------
NAME GRANTED(1) IN 1997 SHARE GRANT DATE 5% ($) 10% ($)
- ---- ---------- ---------- -------- ---------- ---------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Henry R. Nothhaft....... 74,666 5.07% $ 6.00(3) $ 6.00 07/07/07 282,238 712,375
50,000 3.40% $11.25 $11.25 10/29/07 354,375 894,375
John K. Peters.......... 63,466 4.31% $ 6.00(3) $ 6.00 07/07/07 239,902 605,466
40,000 2.72% $11.25 $11.25 10/29/07 283,500 715,500
Michael F. Anthofer..... 43,333 2.94% $ 6.00 $ 6.00 03/15/07 163,799 212,625
30,000 2.04% $11.25 $11.25 10/29/07 413,397 536,625
George D. Carr.......... 16,666 1.13% $ 6.00 $ 6.00 03/15/07 62,998 95,400
10,000 .68% $11.25 $11.25 10/29/07 118,120 178,875
Scott G. Eagle.......... 3,333 .23% $ 6.00 $ 6.00 03/15/07 12,599 23,850
2,500 .17% $11.25 $11.25 10/29/07 23,623 44,688
</TABLE>
- --------
(1) Options vest with respect to 25% of the shares on the first anniversary
date of grant and the remaining 75% vests monthly over the succeeding
three years.
(2) Potential Realizable Value is based on the assumption that the Common
Stock of the Company appreciates at the annual rate shown (compounded
annually) from the date of grant until the expiration of the option term.
These numbers are calculated based on the requirements promulgated by the
Securities and Exchange Commission and do not reflect the Company's
estimate of future stock price growth.
(3) These options were granted at an exercise price determined by the Board of
Directors to be equal to the fair market value of the Company's shares on
the date of grant. The Company's Common Stock was not traded publicly at
the time of the option grants to the Named Officers. The options were
granted at higher fair market values earlier in February 1997 and repriced
by amendment in July 1997 to reflect fair market values at that time.
Aggregate Option Exercises in 1997 and Year-End Option Values. The following
table sets forth for each of the Named Officers certain information concerning
the number of shares subject to both exercisable and unexercisable stock
options as of December 31, 1997. Also reported are values for "in-the-money"
options that represent the positive spread between the respective exercise
prices of outstanding options and the fair market value of the Company's
Common Stock as of December 31, 1997. No Named Officer exercised options
during 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT 12/31/97 (#) 12/31/97 ($)(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Henry R. Nothhaft........... 107,042 166,957 $548,592 $431,404
John K. Peters.............. 88,590 141,809 $454,023 $378,972
Michael F. Anthofer......... 18,472 98,194 $ 94,669 $251,995
George D. Carr.............. 7,778 35,554 $ 39,859 $ 93,468
Scott G. Eagle.............. 17,125 22,708 $ 67,266 $ 96,067
</TABLE>
- --------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the option at December 31, 1997 ($8.875 per
share) and the exercise price of the Named Officer's option.
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<PAGE>
EMPLOYEE STOCK PLANS
1995 Stock Incentive Plan for Employees and Consultants. The Company's 1995
Stock Incentive Plan for Employees and Consultants (the "1995 Plan") provides
for the granting to employees of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
for the granting to employees and consultants of nonstatutory stock options,
stock appreciation rights ("SARs") and restricted stock awards ("RSAs"). No
SARs or RSAs have been granted under the 1995 Plan. The 1995 Plan was approved
by the Board of Directors in September 1995 and Stockholders in September
1995, and an amendment decreasing the number of shares thereunder from 840,000
to 762,600 was approved by the Board of Directors in February 1996. The 1995
Plan was terminated effective October 4, 1996, and no further grants are being
made thereunder. A total of 762,600 shares of Common Stock are reserved for
issuance pursuant to the 1995 Plan. As of December 31, 1997, options to
purchase 332,130 shares of Common Stock at a weighted exercise price of $3.75
per share were outstanding under the 1995 plan.
The 1995 Plan is administered by a committee of the Board of Directors,
which committee is required, once the Company's Common Stock becomes publicly
traded, to be constituted to comply with Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended, and applicable laws. The
administrator has the power to determine the terms of the options granted,
including the exercise price, the number of shares subject to the option and
the exercisability thereof, and the form of consideration payable upon
exercise. Options granted under the 1995 Plan are not generally transferable
by the optionee, and each option is exercisable during the lifetime of the
optionee only by such optionee. Incentive stock options granted under the 1995
Plan must generally be exercised within three months of the end of an
optionee's status as an employee or consultant of the Company, or within 12
months after such optionee's termination by death or disability, but in no
event later than the expiration of the option's term, which may not exceed ten
years. The exercise price of all options granted under the 1995 Plan must be
at least equal to the fair market value of the Common Stock on the date of
grant. With respect to any participant who owns stock possessing more than 10%
of the voting power of all classes of the Company's outstanding capital stock,
the exercise price of any option must equal at least 110% of the fair market
value on the grant date and the term of the option must not exceed five years.
The term of all other options granted under the 1995 Plan may not exceed 10
years.
The 1995 Plan provides that in the event of a recapitalization, stock split,
stock dividend, combination or reclassification or other increase or decrease
in the number of issued shares of Common Stock without consideration, the
number of shares subject to each outstanding stock option, as well as the
exercise price are appropriately adjusted as determined by the Committee.
Amended and Restated 1996 Stock Plan. The Company's Amended and Restated
1996 Stock Plan (the "Restated 1996 Plan") provides for the granting to
employees of incentive stock options within the meaning of Section 422 of the
Code, and for the granting to employees, directors and consultants of
nonstatutory stock options and stock purchase rights ("Rights"). The 1996 Plan
was initially approved by the Board of Directors effective as of December
1996. It was amended and restated in May 1997 and approved by the Stockholders
at the 1997 annual meeting. Unless terminated sooner, the Restated 1996 Plan
will terminate automatically in December 2006. A total of 1,100,000 shares of
Common Stock are currently reserved for issuance pursuant to the Restated 1996
Plan. As of December 31, 1997, options to purchase 914,283 shares of Common
Stock at a weighted average exercise price of $6.40 per share were
outstanding, and 185,717 shares of Common Stock remained available for future
grant under the Restated 1996 Stock Plan.
The Restated 1996 Plan may be administered by a committee of the Board of
Directors constituted to comply with applicable laws (the "Committee") or by
the Board itself. The Board or Committee (the "Administrator") has the power
to determine the terms of the options or Rights granted, including the
exercise price, the number of shares subject to each option or Right, the
exercisability thereof, or any vesting acceleration or waiver of forfeiture
conditions. The Administrator may determine the form of payment upon exercise,
including cash, check, promissory note, other shares, cashless exercise or a
combination of the foregoing. The
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<PAGE>
Board has the authority to amend, suspend or terminate the Restated 1996 Plan,
provided that no such action may impair the rights of any optionee or Right
holder without that person's consent.
Options and Rights granted under the Restated 1996 Plan are not generally
transferable by the optionee or Right holder other than by will or the laws of
descent and distribution, and each option and Right is exercisable during the
lifetime of the optionee or Right holder only by such optionee or Right
holder. The form of option agreement currently in use provides that options
generally must be exercised within 90 days of the end of optionee's status as
an employee, director or consultant of the Company. Under the Plan, options
must be exercised within twelve months after such optionee's termination by
death or disability, but in no event later than the expiration of the option's
term. In the case of Rights, unless the Administrator determines otherwise,
the Restricted Stock Purchase Agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's service with the Company for any reason (including death or
disability). The purchase price for shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator but in no case more slowly than 20% per year over five years.
Generally, options vest 25% after one year and 1/36 per month thereafter. The
exercise price of all incentive stock options granted under the Restated 1996
Plan must be at least equal to the fair market value of the Common Stock on
the date of grant. The exercise price of nonstatutory stock options and Rights
must at least be equal to 85% of the fair market value of the Common Stock on
the date of grant. With respect to any participant who owns stock possessing
more than 10% of the voting power of all classes of the Company's outstanding
capital stock, the exercise price of any incentive or nonstatutory stock
option granted must equal at least 110% of the fair market value on the grant
date. The term of an incentive stock option granted to such a 10% Stockholder
must not exceed five years. The term of other options granted under the
Restated 1996 Plan may not exceed ten years.
The Restated 1996 Plan provides that in the event of a merger of the Company
with or into another corporation, a sale of substantially all of the Company's
assets or a like transaction involving the Company, each option shall be
assumed or an equivalent option substituted by the successor corporation. If
the outstanding options are not assumed or substituted as described in the
preceding sentence, the Administrator shall provide for the optionee or Right
holder to have the right to exercise the option or Right as to all of the
optioned stock, including shares as to which it would not otherwise be
exercisable. If the Administrator makes an option or Right exercisable in full
in the event of a merger or sale of assets, the Administrator shall notify the
optionee or Right holder that the option or Right shall be fully exercisable
for a period of fifteen days from the date of such notice, and the option or
Right will terminate upon the expiration of such period. The forms of option
agreement and restricted stock purchase agreement currently in use provide for
a 180-day lockup of the optionee's or Right holder's shares in the event of
the Company's initial public offering. The option exercise notice and the
restricted stock purchase agreement also grant the Company a right of first
refusal (prior to the initial public offering) on the sale or transfer of any
shares purchased pursuant to an option or Right, other than transfers by gift,
operation of law or certain family transfers.
1997 Stock Plan. The Company's 1997 Stock Plan (the "1997 Plan") provides
for the granting to employees of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), and for the granting to employees, directors and consultants
of nonstatutory stock options and stock purchase rights ("Rights"). The 1997
Plan was approved by the Board of Directors on June 6, 1997 and by the
stockholders on June 30, 1997. Unless terminated sooner, the 1997 Plan will
terminate automatically in 2007. A total of 1,500,000 shares of Common Stock
are currently reserved for issuance pursuant to the 1997 Plan. As of December
31, 1997, options to purchase 511,271 shares of Common Stock at a weighted
average exercise price of $11.25 per share were outstanding, and 988,729
shares of Common Stock remained available for future grants under the 1997
plan.
The 1997 Plan may be administered by a committee of the Board of Directors
(the "Committee") or by the Board itself. In the case of options intended to
qualify as "performance-based compensation" within the
71
<PAGE>
meaning of Section 162(m) of the Code, the Committee shall consist of two or
more "outside directors" within the meaning of Section 162(m) of the Code. The
Board or Committee (the "Administrator") has the power to determine the terms
of the options or Rights granted, including the exercise price, the number of
shares subject to each option or Right, the exercisability thereof, and the
form of consideration payable upon such exercise. In addition, the
Administrator has the authority to amend, suspend or terminate the 1997 Plan,
provided that no such action may impair the rights of any optionee or Right
holder without such person's consent under the 1997 Plan.
Except in connection with his or her initial engagement with the Company, no
employee, director or consultant may be granted options or Rights for more
than 500,000 shares in any one fiscal year. Options and Rights granted under
the 1997 Plan are not generally transferable by the optionee or Right holder,
and each option and Right is exercisable during the lifetime of the optionee
or Right holder only by such optionee or Right holder. Options granted under
the 1997 Plan must generally be exercised within three months of the end of
optionee's status as an employee, director or consultant of the Company, or
within twelve months after such optionee's termination by death or disability,
but in no event later than the expiration of the option's term. In the case of
Rights, unless the Administrator determines otherwise, the restricted stock
purchase agreement shall grant the Company a repurchase option exercisable
upon the voluntary or involuntary termination of the purchaser's employment
with the Company for any reason (including death or disability). The purchase
price for shares repurchased pursuant to the restricted stock purchase
agreement shall be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to the Company. The
repurchase option shall lapse at a rate determined by the Administrator. The
exercise price of all incentive stock options granted under the 1997 Plan must
be at least equal to the fair market value of the Common Stock on the date of
grant. The exercise price of nonstatutory stock options and Rights granted
under the 1997 Plan is determined by the Administrator, but with respect to
nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the exercise
price must at least be equal to the fair market value of the Common Stock on
the date of grant. With respect to any participant who owns stock possessing
more than 10% of the voting power of all classes of the Company's outstanding
capital stock, the exercise price of any incentive stock option granted must
equal at least 110% of the fair market value on the grant date and the term of
such incentive stock option must not exceed five years. The term of other
incentive stock options granted under the 1997 Plan may not exceed ten years.
The 1997 Plan provides that in the event of a merger of the Company with or
into another corporation, a sale of substantially all of the Company's assets
or a like transaction involving the Company, each option shall be assumed or
an equivalent option substituted by the successor corporation. If the
outstanding options are not assumed or substituted as described in the
preceding sentence, the Administrator shall provide for the optionee or Right
holder to have the right to exercise the option or Right as to all of the
optioned stock, including shares as to which it would not otherwise be
exercisable. If the Administrator makes an option or Right exercisable in full
in the event of a merger or sale of assets, the Administrator shall notify the
optionee or Right holder that the option or Right shall be fully exercisable
for a period of fifteen days from the date of such notice, and the option or
Right will terminate upon the expiration of such period.
1997 Employee Stock Purchase Plan. The Company's 1997 Employee Stock
Purchase Plan (the "1997 Purchase Plan") was approved by the Board of
Directors on June 6, 1997 and by the stockholders on June 30, 1997. A total of
500,000 shares of Common Stock has been reserved for issuance under the 1997
Purchase Plan. The 1997 Purchase Plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, consists of 24-month offering
periods beginning on the first trading day on or after February 15 and August
15 of each year, except for the first such offering period, which commenced on
August 4, 1997 and ends on February 13, 1998. Each offering period contains
four six-month purchase periods. The 1997 Purchase Plan is administered by the
Board of Directors or by a committee appointed by the Board. Employees are
eligible to participate if they are customarily employed by the Company or any
designated subsidiary for at least 20 hours per week and more than five months
in any calendar year. The 1997 Purchase Plan permits eligible employees to
purchase Common Stock through payroll deductions of up to 10% of an employee's
compensation (excluding overtime,
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<PAGE>
shift premium, and other bonuses and incentive compensation), up to a maximum
of $25,000 for all offering periods ending within the same calendar year. No
employee may purchase more than 25,000 shares in any purchase period. The
price of stock purchased under the 1997 Purchase Plan is 85% of the lower of
the fair market value of the Common Stock at the beginning of the offering
period or at the end of the current purchase period. Employees may end their
participation at any time during an offering period, and they will be paid
their payroll deductions to date. Participation ends automatically upon
termination of employment with the Company.
Rights granted under the 1997 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1997 Purchase Plan. The 1997 Purchase Plan
provides that, in the event of a merger of the Company with or into another
corporation or a sale of substantially all of the Company's assets, each
outstanding option shall be assumed or an equivalent option shall be
substituted for it, or the Board of Directors or its committee shall shorten
the purchase and offering periods then in progress (so that employees' rights
to purchase stock under the Plan are exercised prior to the merger or sale of
assets). The 1997 Purchase Plan will terminate in 2007. The Board of Directors
has the authority to amend or terminate the 1997 Purchase Plan, except that no
such action may adversely affect any outstanding rights to purchase stock
under the 1997 Purchase Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the current members of the Compensation Committee is an executive
officer of the Company.
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<PAGE>
CERTAIN TRANSACTIONS
PREFERRED STOCK ISSUANCES
The Company has sold shares of its Preferred Stock in private financings
from April 1995 through June 1997 as follows (which does not reflect the
conversion of the shares of Preferred Stock into shares of Common Stock that
occurred automatically immediately prior to the closing of the Company's IPO):
906,454 shares of Series A Preferred Stock at an effective price of $11.00 per
share; 433,634 shares of Series B Preferred Stock at an effective price of
$11.00 per share; 928,243 shares of Series C Preferred Stock at an effective
price of $27.30 per share; and 2,933,248 shares of Series D Preferred Stock at
an effective price of $20.40 per share.
<TABLE>
<CAPTION>
DIRECTORS, EXECUTIVE SHARES OF SHARES OF SHARES OF SHARES OF SHARES OF
OFFICERS AND COMMON SERIES A SERIES B SERIES C SERIES D
5% STOCKHOLDERS STOCK PREFERRED PREFERRED PREFERRED PREFERRED WARRANTS
-------------------- --------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
The Goldman Sachs Group,
L.P.(1)................ 167,246 453,227 216,817 123,297 14,706 57,595
Kleiner Perkins Caufield
& Byers entities(2).... 167,246 453,227 216,817 -- 14,706 148,504
TMI Telemedia Interna-
tional, Ltd.(3)........ -- -- -- -- 1,184,642 325,786
SOFTBANK Holdings
Inc.(4)................ -- -- -- -- 980,393 --
Racal Data Group(5)..... -- -- -- -- 490,197 491,631
Henry R. Nothhaft(6).... -- -- -- -- -- 4,902
John K. Peters(7)....... -- -- -- -- -- 2,451
</TABLE>
- --------
(1) Consists of securities held of record by GS Capital Partners, L.P. See
"Principal Stockholders." Includes 90,938 shares of Common Stock issued
upon exercise of warrants in April 1997 at an exercise price of $6.60 per
share, 33,344 shares of Series B Preferred Stock issued upon exercise of
warrants in April 1997 at an exercise price of $6.60 per share, and 14,706
shares of Series D Preferred Stock issued upon exercise of warrants in
April 1997 at an exercise price of $12.24 per share. GS Capital Partners
L.P. exercised such warrants at a discounted exercise price in
consideration of its early exercise. See "Principal Stockholders."
(2) Vinod Khosla, a director of the Company, is a general partner of KPCB VII
Associates, the general partner of Kleiner Perkins Caufield & Byers VII
and KPCB VII Information Sciences Zaibatsu Fund II. Includes 90,938 shares
of Common Stock issued upon exercise of warrants in April 1997 at an
exercise price of $6.60 per share 33,344 shares of Series B Preferred
Stock issued upon exercise of warrants in April 1997 at an exercise price
of $6.60 per share, and 14,706 shares of Series D Preferred Stock issued
upon exercise of warrants in April 1997 at an exercise price of $12.24 per
share. The Kleiner Entities exercised such warrants at a discounted
exercise price in consideration of their early exercise.
(3) Franco Regis, a director of the Company, is Director of Business
Development and Strategic Planning of Telecom Italia, SpA, the parent of
TMI Telemedia International, Ltd. Includes 204,248 shares of Series D
Preferred issued upon exercise of a warrant in April 1997 at an exercise
price of $12.24 per share. TMI exercised such warrants at a discounted
exercise price in consideration of its early exercise.
(4) Gary Rieschel, a director of the Company, is Senior Vice President of
SOFTBANK Holdings Inc. As of October 31, 1996, the shares were transferred
by SOFTBANK Holdings Inc. to its affiliate SOFTBANK Ventures, Inc.
(5) Louis P. Bender III, a director of the Company, is the President, Americas
Region of Racal Data Group of Racal.
(6) Henry R. Nothhaft is the President of the Company. Represents 4,902 shares
of Series D Preferred Stock issuable upon exercise of a warrant at an
exercise price of $20.40 per share. The warrant was granted to Mr.
Nothhaft in July 1996 in consideration of a bridge loan in the amount of
$100,000. The principal and interest on such bridge loan was repaid in
full.
(7) John Peters is the Executive Vice President and General Manager Network
Operations of the Company. Represents 2,451 shares of Series D Preferred
Stock issuable upon exercise of a warrant at an exercise price of $20.40
per share. The warrant was granted to Mr. Peters in July 1996 in
consideration of a bridge loan in the amount of $50,000. The principal and
interest on such bridge loan was repaid in full.
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<PAGE>
The Preferred Stock described above converted into Common Stock upon the
closing of IPO. Holders of the Preferred Stock are entitled to certain
registration rights with respect to the Common Stock issued upon conversion
thereof. In addition, GSCP, the Kleiner Entities and Marc Collins-Rector are
entitled to certain registration rights with respect to shares of Common Stock
held by them, and employees of Critical Technologies, Inc. have certain
piggyback registration rights with respect to shares issuable upon exercise of
certain options issued to them, a portion of which registration rights were
amended in connection with the Existing Notes Offering. See "Description of
Capital Stock--Registration Rights."
SERIES A AGREEMENT
The Preferred Stock and Warrant Purchase Agreement, dated April 20, 1995, as
amended (the "Series A Agreement") by which the Company sold Series A
Preferred Stock and warrants to purchase Common Stock to GSCP, Kleiner Perkins
Caufield & Byers VII and KPCB VII Founders Fund for an aggregate consideration
of approximately $10.0 million, provides that as long as GSCP and its
affiliates beneficially own five percent or more of the outstanding Common
Stock of the Company, Goldman, Sachs & Co. or any of its affiliates have the
right to perform all investment banking services for the Company on customary
terms consistent with an arms'-length transaction. The Series A Agreement,
further obligated the Company to complete by June 30, 1997, a rescission offer
with respect to all Common Stock and Common Stock equivalents issued prior to
April 20, 1995, and to indemnify the GSCP and the Kleiner Entities against
"rescission losses," in excess of the estimated amount of rescission losses
described in the Series A Agreement. The recision offer was completed on
November 15, 1997.
BRIDGE LOANS
In connection with the alliance between Intuit and the Company, GSCP and the
Kleiner Entities made bridge loans totaling $2 million to the Company on
October 16, 1995, which were rolled over into bridge loans totaling $4 million
on November 6, 1995. On November 29, 1995, GSCP made a further bridge loan of
$3 million. In consideration of these loans, GSCP and the Kleiner Entities
received warrants to purchase 181,876 shares of Series B Preferred Stock at an
exercise price of $11.00 per share. Effective as of December 20, 1995, GSCP
and the Kleiner Entities converted the principal and interest due under their
$2 million promissory notes into a total of 366,947 shares of Series B
Preferred Stock at a price of $11.00 per share. In addition, effective as of
February 1996, GSCP converted the entire amount of principal and interest on
its $3 million bridge note into 123,297 Series C Shares at an exercise price
of $24.57 per share.
On July 31, 1996, the Company closed bridge loans from GSCP and KPCB for
$300,000 each, evidenced by convertible promissory notes dated July 29, 1996.
The Company issued GSCP and KPCB each a warrant dated July 31, 1996, to
purchase 14,706 shares of Series D Preferred Stock at an exercise price of
$20.40 per share. The loans were repaid on August 21, 1996. On April 4, 1997,
the Company and GSCP and KPCB entered warrant amendment agreements reducing
the exercise price of the warrants to $12.24 per share, and the warrants were
exercised.
On July 31, 1996, the Company closed bridge loans from Henry Nothhaft, the
Company's President, Chief Executive Officer and a director, and John Peters,
the Company's Executive Vice President and President, Network Services
Division, for $100,000 and $50,000, respectively. The loans were evidenced by
promissory notes dated July 29, 1996. The Company issued Mr. Nothhaft and Mr.
Peters warrants dated July 31, 1996, to purchase 4,902 shares and 2,451
shares, respectively, of Series D Preferred Stock at an exercise price of
$20.40 per share. The loans were repaid on August 21, 1996.
On June 19, 1997, The Company closed a bridge loan with Williams evidenced
by a promissory note for $3,000,000 dated June 19, 1997. The Company issued a
warrant to Williams exercisable for an aggregate of 63,351 shares of Common
Stock. The exercise price per share of the warrant is $6.00.
On June 27, 1997, the Company closed a bridge loan with Kleiner Perkins
Caufield & Byers VII and KPCB Information Sciences Zaibatsu Fund VII for
$1,950,000 and $50,000, respectively, evidenced by promissory
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<PAGE>
notes dated June 27, 1997. The Company issued the noteholders a warrant
exercisable for an aggregate of 83,333 shares of Common Stock. The exercise
price per share for each of the warrants is $6.00. The proceeds from the
bridge loan were used to finance a down-payment payable to Netscape under
agreements entered into between the Company and Netscape on June 23, 1997. See
"Business--Services."
COMMISSIONS
The Company paid commissions totaling $350,000 to Goldman, Sachs & Co. in
August 1996 in connection with the sale of shares of Series D Preferred Stock.
WARRANT EXERCISES
Effective as of April 4, 1997, the Company entered into warrant amendment
agreements with TMI, GSCP, and the Kleiner Entities to reduce the exercise
price of certain of their warrants in return for the immediate exercise of
such warrants. The exercise price of warrants for 181,876 shares of Class A
Common Stock and 66,688 shares of Series B Preferred Stock held by GSCP and
the Kleiner Entities was reduced from $11.00 to $6.60 per share. The exercise
price of warrants for 233,660 shares of Series D Preferred Stock held by GSCP,
KPCB and TMI was reduced from $20.40 per share to $12.24 per share. Also, in
connection with the reduction of the exercise price of the GSCP and Kleiner
Entities' Common Stock warrants, the exercise price of Intuit's $1.5 million
warrant was similarly reduced to $6.60 per share, and the expiration date was
extended to December 31, 2000. On August 5, 1997, Intuit purchased 127,041
shares of Common Stock through a net exercise of its warrants at a per share
price equal to $14.44.
RACAL TRANSACTION
Pursuant to a master lease agreement between the Company and Racal,
effective March 31, 1995, the Company has installed networking equipment under
lease financing. The terms of the leases under the master agreement are 48
months or 60 months, depending on the equipment. In 1996, the Company paid
Racal approximately $8.3 million in lease payments and related charges. As of
December 31, 1997, the current portion of the Company's capital lease
obligations to Racal totaled $13.6 million, and the noncurrent portion totaled
$32.4 million. As security for the lease financing, Racal has a security
interest in all leased equipment.
AMPM TRANSACTIONS
Donald C. Schutt, Vice President of International Services for the Company,
is a majority stockholder of AMPM, Inc., an advertising agency. The Company
incurred marketing fees payable to AMPM, Inc. totaling $2.6 million in 1997.
The Company believes that the fees charged by AMPM for such services are
competitive with those of similar advertising agencies.
EMPLOYMENT AND TERMINATION AGREEMENTS
In February 1996, the Company entered into a termination of services and
indemnification agreement with Marc Collins-Rector and Chad Shackley (the
"Founders"). Pursuant to such agreement Mr.Collins-Rector agreed to resign
from the Board of Directors of the Company and the Founders agreed to resign
as Company employees and to enter into lock-up agreements in the event of the
Company's initial public offering. If asked to do so by the Founders, the
Company agreed it will file a registration statement on Form S-8 or Form S-3
by certain deadlines after it becomes eligible to do so, with respect to
certain shares issuable upon exercise of the Founders' options.
Also in February 1996, the Company entered into an agreement with Randy
Maslow wherein Mr. Maslow agreed to serve as an advisor to the Board of
Directors through October 31, 1996. Mr.Maslow has since resigned from the
Board effective upon the effectiveness of an initial public offering. Mr.
Maslow will be invited to all meetings of the Company's Board of Directors and
committee meetings of the Board for six months after the effective date of the
Company's initial public offering. If asked to do so by Mr. Maslow, the
Company agreed it will file a registration statement on Form S-8 or Form S-3
as soon as practicable after it becomes eligible to do so, with respect to
certain shares issuable upon exercise of Mr. Maslow's options.
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<PAGE>
OPTIONS OF MANAGEMENT AND DIRECTORS
In July 1996, the Company amended the terms of options to purchase 53,341
shares of Common Stock previously issued to Donald C. Schutt, an executive
officer of the Company to decrease the exercise price to $3.75 per share and
remove certain conditions precedent to vesting of such options.
In August 1996, the Board of Directors amended the vesting provisions of
options to purchase 14,000 shares issued to Henry Nothhaft, President, Chief
Executive Officer and a director of the Company, on October 31, 1995, and an
option to purchase 11,900 shares issued to John Peters, Executive Vice
President and General Manager, Network Services Division, on October 31, 1995,
so the options would fully vest as of the closing date of the sale of at least
$29 million of Series D Preferred Stock of the Company, which occurred on
August 21, 1996.
In August 1996, the Company exchanged four options previously issued to
Randy Maslow, a director of the Company, for new options exercisable for an
aggregate of 46,673 shares of Class A Common Stock at $3.75 per share. The
four-year vesting schedule accelerated so that all shares vested immediately
upon the Company's IPO. The options may be exercised through their expiration
date regardless of when Mr. Maslow ceases being an employee or consultant. Mr.
Maslow's employment with the Company ended on October 31, 1996.
In May 1997, the Company amended options to purchase 26,666 shares of Common
Stock previously issued to Marc Collins-Rector, a founder, to remove vesting
conditions.
All future transactions among the Company and its officers, directors,
principal stockholders and their affiliates will be approved by a majority of
the Board of Directors, including a majority of the independent and
disinterested directors.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of February 28, 1998, by: (i) each
person who is known by the Company to own beneficially more than 5% of the
Common Stock; (ii) each director and Named Officer of the Company; and (iii)
all directors and executive officers of the Company as a group. Except as
otherwise noted, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
NAMES AND ADDRESSES SHARES BENEFICIALLY OWNED PERCENT BENEFICIALLY OWNED(1)
- ------------------- ------------------------- -----------------------------
<S> <C> <C>
Williams Communications, Inc.(2)............. 1,604,254 11.0%
One Williams Center
Tulsa, OK 74172
TMI Telemedia International, Ltd.(3)......... 1,580,966 10.9
Viale del Campo, Boario, 56D
00153 Rome, Italy
The Goldman Sachs Group, L.P.(4)............. 1,089,642 7.7
85 Broad Street
New York, NY 10004
Racal-Datacom, Inc.(5)....................... 1,025,347 7.0
1601 North Harrison Parkway
Sunrise, FL 333233-2899
SOFTBANK Ventures, Inc. ..................... 1,026,179 7.2
c/o SOFTBANK Holdings Inc.
10 Langley Road, Suite 403
Newton Center, MA 02159
Kleiner Perkins Caufield & Byers
Entities(6)................................. 1,006,873 7.0
2750 Sand Hill Road
Menlo Park, CA 94025
Henry R. Nothhaft(7)......................... 141,653 1.0
John K. Peters(8)............................ 118,009 *
Michael F. Anthofer(9)....................... 35,625 *
Scott G. Eagle(10)........................... 16,667 *
George D. Carr(11)........................... 14,375 *
Louis P. Bender III(12)...................... -- --
Vinod Khosla(13)............................. 1,006,873 7.0
Gordon Martin................................ -- --
Franco Regis(14)............................. 1,580,966 10.9
Gary E. Rieschel(15)......................... -- --
All current executive officers and directors
as a group (17 persons)(16)................. 6,651,454 46.8
</TABLE>
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<PAGE>
- --------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, based on factors including voting and
investment power with respect to shares, subject to the applicable
community property laws. Shares of Common Stock subject to options or
warrants currently exercisable, or exercisable within 60 days of February
28, 1998, are deemed outstanding for the purpose of computing the
percentage ownership of the person holding such options or warrants, but
are not deemed outstanding for computing the percentage ownership of any
other person.
(2) Includes warrants to purchase 355,018 shares of Common Stock.
(3) Includes warrants to purchase 341,000 shares of Common Stock.
(4) Consists of securities held of record by GS Capital Partners, L.P., an
investment partnership, of which affiliates of The Goldman Sachs Group,
L.P. ("GS Group") are the general partner or investment manager. GS Group
disclaims beneficial ownership of the shares owned by GS Capital
Partners, L.P. to the extent attributable to partnership interests
therein held by persons other than GS Group and its affiliates. GS
Capital Partners, L.P. shares voting and investment power with certain of
its affiliates. Includes warrants to purchase 58,522 shares of Common
Stock.
(5) Includes warrants to purchase 512,258 shares of Common Stock.
(6) Includes shares held by Kleiner Perkins Caufield & Byers VII and KPCB
Information Sciences Zaibatsu Fund II (collectively, the "KPCB
Entities"). Also includes warrants to purchase 141,854 shares of Common
Stock held by the KPCB Entities.
(7) Includes 141,653 shares of Common Stock issuable upon exercise of
outstanding stock options and warrants.
(8) Includes 118,009 shares of Common Stock issuable upon exercise of
outstanding stock options and warrants.
(9) Includes 35,625 shares of Common Stock issuable upon exercise of
outstanding stock options.
(10) Includes 16,667 shares of Common Stock issuable upon exercise of
outstanding stock options.
(11) Includes 14,375 shares of Common Stock issuable upon exercise of
outstanding stock options.
(12) Excludes 1,025,347 shares and exercisable warrants held by Racal-Datacom,
Inc. See note (5). Mr. Bender is the President of Racal-Datacom, Inc.
Mr.Bender disclaims beneficial ownership of such shares.
(13) Represents shares beneficially owned by the KPCB Entities. Mr. Khosla is
an affiliate of such entities. See note (6). Mr. Khosla disclaims
beneficial ownership of such shares, except to the extent of his
pecuniary interest therein.
(14) Includes 1,580,966 shares and exercisable warrants held by TMI Telemedia
International, Ltd. Mr. Regis is the Director of Business Development and
Strategic Planning of Telecom Italia, S.p.A., the parent of TMI Telemedia
International, Ltd. See note (3). Mr. Regis disclaims beneficial
ownership of such shares.
(15) Excludes 1,026,179 shares held by SOFTBANK Ventures Inc. Mr. Rieschel, a
director of the Company, is a Senior Vice President at SOFTBANK Holdings
Inc., an affiliate of SOFTBANK Ventures Inc. Mr. Rieschel disclaims
beneficial ownership of such shares.
(16) Includes shares of Common Stock issuable upon exercise of outstanding
options and warrants, and shares beneficially owned by entities
associated with Messrs. Regis and Khosla, as to which they disclaim
beneficial ownership. See Notes (8)-(15).
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock does not purport to
be complete and is subject to and qualified in its entirety by the Company's
Amended and Restated Certificate of Incorporation and Bylaws and by the
provisions of applicable Delaware law. At February 28, 1998, there were
14,171,847 shares of Common Stock held by 435 holders of record.
The Amended and Restated Certificate of Incorporation and Bylaws contain
certain provisions that are intended to enhance the likelihood of continuity
and stability in the composition of the Board of Directors and which may have
the effect of delaying, deferring, or preventing a future takeover or change
in control of the Company unless such takeover or change in control is
approved by the Board of Directors.
COMMON STOCK
The Company has authorized a total of 100,000,000 shares of Common Stock.
Holders of Common Stock do not have cumulative voting rights, and, therefore,
holders of a majority of the shares voting for the election of directors can
elect all of the directors. In such event, the holders of the remaining shares
will not be able to elect any directors.
Holders of the Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the terms of any existing or future agreements
between the Company and its debtholders. See "Dividend Policy." The Company
has never declared or paid cash dividends on its capital stock, expects to
retain future earnings, if any, for use in the operation and expansion of its
business, and does not anticipate paying any cash dividends in the foreseeable
future. In the event of the liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all
assets legally available for distribution after payment of all debts and other
liabilities and subject to the prior rights of any holders of Preferred Stock
then outstanding. The Common Stock has no preemptive, redemption or
subscription rights.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
Stockholders, to issue up to 10,000,000 shares of Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of
shares constituting any series or the designation of such series, without any
further vote or action by the Stockholders. The issuance of Preferred Stock
could adversely affect the voting power of holders of Common Stock and the
likelihood that such holders will receive dividend payments and payments upon
liquidation and could have the effect of delaying, deferring or preventing a
change in control of the Company. There are no shares of Preferred Stock
outstanding. The Company has no present plan to issue any shares of Preferred
Stock.
WARRANTS
As of February 28, 1998, the following warrants were outstanding:
(i) Warrants to purchase 44,935 shares of Common Stock at an exercise
price of $15.00 per share (subject to adjustment for stock splits, stock
dividends and the like), which expire on September 1, 1998.
(ii) Warrants to purchase 5,000 shares of Common Stock exercisable
through February 15, 2000, at a nominal exercise price.
(iii) Warrants to purchase 25,536 shares of Common Stock at an exercise
price of $7.40 per share (subject to adjustment for stock splits, stock
dividends and the like), which expire on July 20, 1998.
(iv) Warrants to purchase 117,046 shares of Common Stock at an exercise
price of $10.82 per share (subject to adjustment for stock splits, stock
dividends and the like), which expire on December 11, 1998.
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<PAGE>
(v) Warrants to purchase 130,273 shares of Common Stock at an exercise
price of $26.87 per share (subject to adjustment for stock splits, stock
dividends and the like), which expire on December 31, 2000.
(vi) Warrants to purchase 38,482 shares of Common Stock at an exercise
price of $19.49 per share (subject to adjustment for stock splits, stock
dividends and the like), which expires on June 6, 1999. Warrants to
purchase 35,915 shares of Common Stock at an exercise price of $19.49 per
share (subject to adjustment for stock splits, stock dividends and the
like), which expire on July 31, 1999. Warrant to purchase 156,072 shares of
Common Stock at an exercise price of $19.49 per share (subject to
adjustment for stock splits, stock dividends and the like), which expires
on August 21, 1999. Warrants to purchase 462,324 shares of Common Stock at
an exercise price of $19.49 per share (subject to adjustment for stock
splits, stock dividends and the like), which expire on October 31, 1999.
Warrant to purchase 184,930 shares of Common Stock at an exercise price of
$19.49 per share (subject to adjustment for stock splits, stock dividends
and the like), which expires on March 5, 2000.
(vii) Warrants to purchase 63,351 shares of Common Stock at an exercise
price per share equal to $6.00, which expire on June 19, 2002.
(viii) Warrants to purchase 83,333 shares of Common Stock at an exercise
price per share equal to $6.00, which expire on June 27, 2002.
(ix) Warrants to purchase 291,667 shares of Common Stock at an exercise
price per share equal to $6.00, which expire on August 6, 2002.
(x) Warrants to purchase 951,108 shares of Common Stock at an exercise
price per share equal to $10.86, which expire on December 15, 2007.
REGISTRATION RIGHTS
Common Stock. Pursuant to the agreement between the Company and holders of
approximately 7,296,253 shares of Common Stock (the "Equity Holders"), the
Equity Holders are entitled to certain rights with respect to the registration
of such shares under the Securities Act. If the Company proposes to register
any of its securities under the Securities Act, either for its own account or
for the account of other security Equity Holders exercising registration
rights (excluding the Exchange Offer but including any Resale Registrations
(as defined) filed on behalf of the holders of the Warrants), such Equity
Holders are entitled to notice of such registration and are entitled to
include shares of such Common Stock therein. Additionally, Equity Holders of
the Registrable Securities are also entitled to certain demand registration
rights pursuant to which they may require the Company to file a registration
statement under the Securities Act at the Company's expense with respect to
their shares of Common Stock, and the Company is required to use its best
efforts to effect such registration. All of these registration rights are
subject to certain conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares included in such
registration. Additionally, a majority of the Equity Holders have agreed not
to request registration of their registrable securities until the expiration
of certain lock-up restrictions on such Equity Holders in August of 1998.
Additionally, pursuant to an agreement with CTI, certain employees of CTI
who have been granted options to purchase an aggregate of up to 60,000 shares
of the Company's Common Stock are entitled to certain piggyback registration
rights with respect to such shares. Such rights are subject to the right of
the underwriters of an offering to limit the number of shares included in such
registration.
Warrants/Warrant Shares. Pursuant to the Registration Rights Agreement and
the Warrant Registration Rights Agreement, the holders of Existing Notes and
Warrants have certain rights to have the Existing Notes and shares of Common
Stock issued upon conversion of the Warrants registered under the Securities
Act. See "Description of Notes--Registration Rights" and "Description of
Warrants--Registration Rights." Following consummation of the Exchange Offer,
the Company will have no further obligation to the Existing Holders (except
for limited instances involving Existing Holders that are not eligible to
participate in the Exchange Offer) to provide for registration under the
Securities Act of the Existing Notes held by them.
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DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Limitation of Director and Officer Liability
The Company's Certificate of Incorporation and Bylaws contain certain
provisions relating to the limitation of liability and indemnification of
directors and officers. The Company's Certificate of Incorporation provides
that directors of the Company may not be held personally liable to the Company
or its stockholders for monetary damages for a breach of fiduciary duty,
except for liability (i) for any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of the law,
(iii) under Section 174 of the Delaware General Corporation Law, relating to
prohibited dividends, distributions and repurchases or redemptions of stock,
or (iv) for any transaction from which the director derives an improper
personal benefit. However, such limitation does not limit the availability of
non-monetary relief in any action or proceeding against a director. In
addition, the Company's Certificate of Incorporation and Bylaws provide that
the Company shall indemnify its directors and officers to the fullest extent
authorized by Delaware law.
Classified Board of Directors
The Company's Certificate of Incorporation provides that, so long as the
Board of Directors consists of more than two directors, the Board of Directors
will be divided into three classes of directors serving staggered three-year
terms. As a result, one-third of the Company's Board of Directors will be
elected each year.
No Stockholder Action by Written Consent
The Company's Certificate of Incorporation provides that the stockholders
can take action only at a duly called annual or special meeting of
Stockholders. Stockholders of the Company are not able to take action by
written consent in lieu of a meeting. These provisions may have the effect of
deterring hostile takeovers or delaying changes in control or management of
the Company.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services LLC has been appointed as the transfer
agent and registrar for the Company's Common Stock. Its telephone number for
such purposes is (800) 851-9677.
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DESCRIPTION OF UNITS
Each Unit issued in the Existing Notes Offering consists of $1,000 principal
amount at maturity of Existing Notes and one Warrant, each Warrant
representing the right to purchase 6.34 shares of Common Stock. The Existing
Notes and the Warrants will not be separable until the earliest to occur of
(i) June 15, 1998, (ii) a Change in Control, (iii) the occurrence of an Event
of Default, (iv) the effective date of the Exchange Offer Registration
Statement, or (v) such earlier date as may be determined by UBS Securities
(the "Separation Date"). The Warrants issued in connection with the issuance
of Existing Notes shall not be subject to the terms of the Exchange Offer. The
exchange of an Existing Note for an Exchange Note pursuant to the terms of the
Exchange Offer and the Indenture shall not include the exchange of an
unregistered Warrant for a registered Warrant under the Act. The Warrants
issued in connection with the Existing Notes Offering shall remain as
restricted securities and will continue to be subject to certain transfer
restrictions.
DESCRIPTION OF NOTES
The Existing Notes were issued and the Exchange Notes will be issued under
an Indenture dated as of December 18, 1997 (the "Indenture") between the
Company and Chase Manhattan Bank and Trust Company, National Association, as
trustee (the "Trustee"), a copy of the form of which will be made available to
prospective purchasers of the Exchange Notes upon request to the Company.
References to "(Section )" mean the applicable Section of the Indenture.
The following summaries of the material provisions of the Indenture, the
Escrow Agreement, and the Registration Rights Agreement do not purport to be
complete, and where reference is made to particular provisions of the
Indenture, the Escrow Agreement, and the Registration Rights Agreement such
provisions, including the definitions of certain terms, are qualified in their
entirety by reference to all of the provisions of the Indenture and those
terms made a part of the Indenture, the Escrow Agreement, and the Registration
Rights Agreement by the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). The Existing Notes have not been registered under the
Securities Act and are subject to certain transfer restrictions. For
definitions of certain capitalized terms used in the following summary, see
"--Certain Definitions" or "--Registration Rights."
GENERAL
The Notes will mature on December 15, 2007, will be limited to $150.0
million aggregate principal amount, and will be unsecured senior obligations
of the Company. Each Note will bear interest at the rate set forth on the
cover page hereof from December 18, 1997 or from the most recent interest
payment date to which interest has been paid, payable semiannually on June 15
and December 15 in each year, commencing June 15, 1998, to the Person in whose
name the Note (or any predecessor Note) is registered at the close of business
on the June 1 or December 1 immediately preceding such interest payment date.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months. (Sections 202, 301, 309 and 313)
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes will be exchangeable and transferable, at the office or agency
of the Company in The City of New York maintained for such purposes (which
initially will be the corporate trust office of the Trustee); provided,
however, that payment of interest may be made at the option of the Company by
check mailed to the Person entitled thereto as shown on the security register.
(Sections 301, 305 and 1002) The Notes will be issued only in fully registered
form without coupons, in denominations of $1,000 and any integral multiple
thereof. (Section 302) No service charge will be made for any registration of
transfer, exchange or redemption of Notes, except in certain circumstances for
any tax or other governmental charge that may be imposed in connection
therewith. (Section 305)
All payments of principal and interest will be made by the Company in same
day funds. The Notes will trade in the Same-Day Funds Settlement System of The
Depositary Trust Company (the "Depositary" or "DTC") until maturity, and
secondary market trading activity for the Notes will therefore settle in same
day funds.
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When issued, the Exchange Notes will be a new issue of securities with no
established trading market. No assurance can be given as to the liquidity of
the trading market for the Notes. See "Risk Factors--Restrictions on Resale;
Absence of Public Market for the Securities."
ESCROW ACCOUNT
Concurrently with the consummation of the Existing Notes Offering, pursuant
to the Indenture, the Company placed approximately $52.5 million of the net
proceeds of the Existing Notes Offering in an escrow account (the "Escrow
Account") held by the Trustee for the benefit of the Holders in accordance
with an escrow agreement to be entered into between the Company and the
Trustee (the "Escrow Agreement"). The Escrow Agreement provides, among other
things, that funds may be disbursed from the Escrow Account for interest
payments the Company makes on the Notes. The Trustee will be instructed to
cause all funds in the Escrow Account to be invested, pending disbursement, in
U.S. Government Securities.
Under the Escrow Agreement, the Company granted to the Trustee, for the
benefit of the holders, a first priority and exclusive security interest in
the Escrow Account and the proceeds thereof (the "Escrow Collateral"). The
Escrow Agreement provides that the Trustee may foreclose on the Escrow
Collateral upon acceleration of the maturity of the Notes. Under the terms of
the Indenture, the proceeds of the Escrow Collateral will be applied, first,
to amounts owing to the Trustee in respect of fees and expenses of the
Trustee, and second, to the Indenture Obligations of the Company to the
holders under the Notes and the Indenture. The ability of holders to realize
upon the Escrow Collateral may be subject to certain bankruptcy law
limitations in the event of the bankruptcy of the Company.
Upon payment in full of the first six scheduled interest payments (including
any Additional Interest), if no Default has occurred and is continuing, the
Escrow Collateral will be released to the Company.
OPTIONAL REDEMPTION
The Notes will be subject to redemption at any time on or after December 15,
2002, at the option of the Company, in whole or in part, on not less than 30
nor more than 60 days' prior notice in amounts of $1,000 or an integral
multiple thereof at the following redemption prices (expressed as percentages
of the principal amount), if redeemed during the 12-month period beginning of
the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2002........................................................... 106.375%
2003........................................................... 104.250%
2004........................................................... 102.125%
</TABLE>
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest, if any, to the redemption date (subject to the
rights of holders of record on relevant record dates to receive interest due
on an interest payment date).
In addition, at any time prior to December 15, 2000, the Company may, at its
option, use the net proceeds of one or more Public Equity Offerings or the
sale of Common Stock (other than Disqualified Stock) of the Company to a
Strategic Investor in a single transaction or a series of related
transactions, to redeem up to an aggregate of 35% of the aggregate principal
amount of Notes originally issued under the Indenture at a redemption price
equal to 112.750% of the aggregate principal amount thereof, plus accrued and
unpaid interest thereon, if any, to the redemption date; provided that at
least 65% of the initial aggregate principal amount of Notes remains
outstanding immediately after the occurrence of such redemption. In order to
effect the foregoing redemption, the Company must mail a notice of redemption
no later than 45 days after the related Public Equity Offering and must
consummate such redemption within 60 days of the closing of the Public Equity
Offering.
If less than all of the Notes are to be redeemed, the Trustee shall select
the Notes or portions thereof to be redeemed pro rata, by lot or by any other
method the Trustee shall deem fair and reasonable. (Sections 203, 1101 and
1104)
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SINKING FUND
The Notes will not be entitled to the benefit of any sinking fund.
CHANGE OF CONTROL
If a Change of Control shall occur at any time, then each holder of Notes
shall have the right to require that the Company purchase such holder's Notes
in whole or in part in integral multiples of $1,000, at a purchase price (the
"Change of Control Purchase Price") in cash, in an amount equal to 101% of the
principal amount of such Notes or portion thereof, plus accrued and unpaid
interest, if any, to the date of purchase (the "Change of Control Purchase
Date"), pursuant to the offer described below (the "Change of Control Offer")
and in accordance with the other procedures set forth in the Indenture.
Within 30 days of any Change of Control, the Company shall notify the
Trustee thereof and give written notice of such Change of Control to each
holder of Notes, by first-class mail, postage prepaid, at his address
appearing in the security register, stating that a Change of Control has
occurred and the date of such event, the circumstances and relevant facts
regarding such Change of Control; the purchase price and the purchase date
which shall be fixed by the Company on a business day no earlier than 30 days
nor later than 60 days from the date such notice is mailed, or such later date
as is necessary to comply with requirements under the Exchange Act; that any
Note not tendered will continue to accrue interest; that, unless the Company
defaults in the payment of the Change of Control Purchase Price, any Notes
accepted for payment pursuant to the Change of Control Offer shall cease to
accrue interest after the Change of Control Purchase Date; and certain other
procedures that a holder of Notes must follow to accept a Change of Control
Offer or to withdraw such acceptance. (Section 1014)
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Notes that might be delivered by holders of the
Notes seeking to accept the Change of Control Offer. See "Risk Factors--Change
of Control." The failure of the Company to make or consummate the Change of
Control Offer or pay the Change of Control Purchase Price when due will give
the Trustee and the holders of the Notes the rights described under "Events of
Default."
The term "all or substantially all" as used in the definition of "Change of
Control" has not been interpreted under New York law (which is the governing
law of the Indenture) to represent a specific quantitative test. As a
consequence, in the event the holders of the Notes elected to exercise their
rights under the Indenture and the Company elected to contest such election,
there could be no assurance as to how a court interpreting New York law would
interpret the phrase.
The existence of a holder's right to require the Company to repurchase such
holder's Notes upon a Change of Control may deter a third party from acquiring
the Company in a transaction which constitutes a Change of Control.
The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws or
regulations in connection with a Change of Control Offer.
RANKING
The Notes will be unsecured senior obligations of the Company, and the
Indebtedness represented by the Notes and the payment of principal of,
premium, if any, and interest on the Notes will rank pari passu in right of
payment with all other existing and future senior indebtedness of the Company
and senior in right of payment to all existing and future Subordinated
Indebtedness of the Company. The Notes will be effectively subordinated to
secured Indebtedness of the Company as to the assets securing such
Indebtedness. As of December 31, 1997, there was approximately $194.5 million
of indebtedness of the Company outstanding of which $33.6 million was secured
long-term indebtedness to which holders of the Notes would have been
effectively subordinated in right of payment.
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The Notes will not be entitled to any security, except as described under
"--Escrow Account" and will not be entitled to the benefit of any guarantees
except under the circumstances described under "--Certain Covenants--
Limitation on Issuances of Guarantees by Restricted Subsidiaries."
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Indebtedness. (a) The Company shall not, and shall not cause
or permit any Subsidiary to, directly or indirectly, incur any Indebtedness
(other than the Notes); provided, however, that the Company may incur
Indebtedness, and the Company or any Subsidiary may Incur Acquired
Indebtedness, if, at the time of such Incurrence, the Debt to Annualized
Operating Cash Flow Ratio would be less than or equal to 5.5 to 1.0 prior to
December 15, 2000, or less than or equal to 5.0 to 1.0 after December 15,
2000.
(b) The foregoing limitations of paragraph (a) of this covenant will not
apply to any of the following, each of which shall be given independent
effect:
(i) the Incurrence by the Company or any of its Subsidiaries of
Indebtedness (other than Acquired Indebtedness) consisting of Capital Lease
Obligations, Purchase Money Obligations, mortgage financings or other
obligations incurred for the purpose of financing all or any part of the
purchase price, cost of construction or improvement of property, plant or
equipment used in connection with the Telecommunications Business or a
credit facility or a master lease arrangement entered into for the purpose
of providing such financing, provided that such Indebtedness does not
exceed the lesser of Fair Market Value or the purchase price of such
property, plant or equipment at the time of such Incurrence.
(ii) Indebtedness of the Company or any of its Subsidiaries, and any
renewals, extensions, substitutions, refinancings or replacements of such
Indebtedness, so long as the aggregate principal amount of such
Indebtedness shall not exceed $35 million outstanding at any one time in
the aggregate;
(iii) the Incurrence by the Company of Indebtedness (other than secured
Acquired Indebtedness) in an aggregate principal amount not to exceed 2.0
times the sum of the Net Cash Proceeds received by the Company after the
date of the Indenture (other than from the issuance of Disqualified Stock)
in connection with any Public Equity Offerings; provided that such
Indebtedness does not mature prior to the Stated Maturity of the Notes or
has an Average Life to Stated Maturity at least equal to the Notes;
(iv) Indebtedness of the Company or any Subsidiary entered into in the
ordinary course of business (a) pursuant to Interest Rate Agreements
designed to protect the Company or any Subsidiary against fluctuations in
interest rates in respect of Indebtedness of the Company or any Subsidiary
as long as the notional principal amount of such Interest Rate Agreements
do not exceed the aggregate principal amount of such Indebtedness then
outstanding, (b) under any Currency Hedging Arrangements designed to
protect the Company or any Subsidiary against fluctuations in the value of
any currency or (c) under any Commodity Price Protection Agreements
designed to protect the Company or any Subsidiary against fluctuations in
the price of any commodity;
(v) the Incurrence by the Company or any of its Subsidiaries of
Indebtedness in respect of bid, performance or advance payment bonds and
appeal or surety bonds;
(vi) Indebtedness existing on the date of the Indenture;
(vii) the Incurrence of (a) Indebtedness of any Subsidiary owed to and
held by the Company or another Subsidiary and (b) Indebtedness of the
Company owed to and held by any Subsidiary; and
(viii) any renewals, extensions, substitutions, refundings, refinancings
or replacements (collectively, a "refinancing") of any Indebtedness
described in clauses (i), (ii), (iii), (vi) and (vii) of this definition of
"Permitted Indebtedness," including any successive refinancings so long as
the borrower under such refinancing is the Company or, if not the Company,
the same as the borrower of the Indebtedness being refinanced and the
aggregate principal amount of Indebtedness represented thereby is not
increased by such refinancing plus the lesser of (I) the stated amount of
any premium or other payment required to be paid in
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connection with such a refinancing pursuant to the terms of the
Indebtedness being refinanced or (II) the amount of premium or other
payment actually paid at such time to refinance the Indebtedness, plus, in
either case, the amount of expenses of the Company incurred in connection
with such refinancing and, in the case of any refinancing of Indebtedness
that is Subordinated Indebtedness, such new Indebtedness is made
subordinated to the Notes at least to the same extent as the Indebtedness
being refinanced and such refinancing does not reduce the Average Life to
Stated Maturity or the Stated Maturity of such Subordinated Indebtedness.
(c) For purposes of determining any particular amount of Indebtedness under
this covenant, Guarantees, Liens or obligations with respect to letters of
credit supporting Indebtedness otherwise included in the determination of such
particular amount shall not be included; provided, however, that the foregoing
shall not in any way be deemed to limit the provisions of "--Limitations on
Issuances of Guarantees of Indebtedness."
(d) For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness may be Incurred through the first paragraph of
this covenant or by meeting the criteria of one or more of the types of
Indebtedness described in the second paragraph of this covenant (or the
definitions of the terms used therein), the Company, in its sole discretion,
(i) may classify such item of Indebtedness under and comply with either of
such paragraphs (or any of such definitions), as applicable, (ii) may classify
and divide such item of Indebtedness into more than one of such paragraphs (or
definitions), as applicable, and (iii) may elect to comply with such
paragraphs (or definitions), as applicable, in any order. (Section 1008)
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Subsidiary to, directly or indirectly:
(i) declare or pay any dividend on, or make any distribution on any
shares of the Company's Capital Stock (other than dividends or
distributions payable solely in shares of its Qualified Capital Stock or in
options, warrants or other rights to acquire shares of such Qualified
Capital Stock);
(ii) purchase, redeem or otherwise acquire or retire for value, directly
or indirectly, the Company's Capital Stock or any Capital Stock of any
Affiliate of the Company (other than Capital Stock of any Wholly Owned
Subsidiary of the Company) or options, warrants or other rights to acquire
such Capital Stock;
(iii) make any principal payment on, or repurchase, redeem, defease,
retire or otherwise acquire for value, prior to any scheduled principal
payment, sinking fund payment or maturity, any Subordinated Indebtedness;
(iv) declare or pay any dividend or distribution on any Capital Stock of
any Subsidiary to any Person (other than (a) to the Company or any of its
Wholly Owned Subsidiaries or (b) to all holders of Capital Stock of such
Subsidiary on a pro rata basis); or
(v) make any Investment in any Person (other than any Permitted
Investments)
(any of the foregoing actions described in clauses (i) through (v), other than
any such action that is a Permitted Payment (as defined below), collectively,
"Restricted Payments") (the amount of any such Restricted Payment, if other
than cash, as determined by the board of directors of the Company, whose
determination shall be conclusive and evidenced by a board resolution), unless
(1) immediately before and immediately after giving effect to such proposed
Restricted Payment on a pro forma basis, no Default or Event of Default shall
have occurred and be continuing; (2) immediately before and immediately after
giving effect to such Restricted Payment on a pro forma basis, the Company
could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the provisions described under "--Limitation on
Indebtedness;" and (3) after giving effect to the proposed Restricted Payment,
the aggregate amount of all such Restricted Payments declared or made after
the date of the Indenture, does not exceed the sum of the following (the
"Basket"):
(A) (i) the Cumulative Operating Cash Flow determined at the time of such
Restricted Payment less (ii) 150% of cumulative Consolidated Interest
Expense determined for the period (treated as one accounting period)
commencing on the date of the original issue of the Notes and ending on the
last day of the most
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recent fiscal quarter immediately preceding the date of such Restricted
Payment for which consolidated financial information of the Company is
required to be available;
(B) (i) capital contributions to the Company after the date of the
Indenture or (ii) the aggregate Net Cash Proceeds received after the date
of the Indenture by the Company from the issuance or sale (other than to
any of its Subsidiaries) of Qualified Capital Stock of the Company or any
options, warrants or rights to purchase such Qualified Capital Stock of the
Company (except, in each case, to the extent such proceeds are used to
purchase, redeem or otherwise retire Capital Stock or Subordinated
Indebtedness as set forth below in clause (ii) or (iii) of paragraph (b)
below);
(C) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company (other than from any of its Subsidiaries) upon the
exercise of any options, warrants or rights to purchase Qualified Capital
Stock of the Company;
(D) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company from the conversion or exchange, if any, of debt
securities or Redeemable Capital Stock of the Company or its Subsidiaries
into or for Qualified Capital Stock of the Company plus, to the extent such
debt securities or Redeemable Capital Stock were issued after the date of
the Indenture, the aggregate of Net Cash Proceeds from their original
issuance; and
(E) in the case of the disposition or repayment of any Investment
constituting a Restricted Payment, an amount equal to the return of capital
with respect to such Investment and the initial amount of such Investment.
(b) Notwithstanding the foregoing, and in the case of clauses (ii) through
(vi) below, so long as there is no Default or Event of Default continuing, the
foregoing provisions shall not prohibit the following actions (each of clauses
(i) through (vi) being referred to as a "Permitted Payment"):
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment was
permitted by the provisions of paragraph (a) of this Section and such
payment shall have been deemed to have been paid on such date of
declaration and shall not have been deemed a Permitted Payment for purposes
of the calculation required by paragraph (a) of this Section;
(ii) the repurchase, redemption, or other acquisition or retirement for
value of any shares of any class of Capital Stock of the Company in
exchange for (including any such exchange pursuant to the exercise of a
conversion right or privilege in connection with which cash is paid in lieu
of the issuance of fractional shares or scrip), or out of the Net Cash
Proceeds of a substantially concurrent issuance and sale for cash (other
than to a Subsidiary) of, other shares of Qualified Capital Stock of the
Company; provided that the Net Cash Proceeds from the issuance of such
shares of Qualified Capital Stock are excluded from clause (3)(B) of
paragraph (a) of this Section;
(iii) the repurchase, redemption, defeasance, retirement or acquisition
for value or payment of principal of any Subordinated Indebtedness or
Redeemable Capital Stock in exchange for, or in an amount not in excess of
the Net Cash Proceeds of, a substantially concurrent issuance and sale for
cash (other than to any Subsidiary of the Company) of any Qualified Capital
Stock of the Company, provided that the Net Cash Proceeds from the issuance
of such shares of Qualified Capital Stock are excluded from clause (3)(B)
of paragraph (a) of this Section;
(iv) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of principal of any Subordinated
Indebtedness (other than Redeemable Capital Stock) (a "refinancing")
through the substantially concurrent issuance of new Subordinated
Indebtedness of the Company, provided that any such new Subordinated
Indebtedness (1) shall be in a principal amount that does not exceed the
principal amount so refinanced (or, if such Subordinated Indebtedness
provides for an amount less than the principal amount thereof to be due and
payable upon a declaration of acceleration thereof, then such lesser amount
as of the date of determination), plus the lesser of (I) the stated amount
of any premium or other payment required to be paid in connection with such
a refinancing pursuant to the terms of the Indebtedness being refinanced or
(II) the amount of premium or other payment actually paid at such time to
refinance the
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Indebtedness, plus, in either case, the amount of expenses of the Company
incurred in connection with such refinancing; (2) has an Average Life to
Stated Maturity greater than the remaining Average Life to Stated Maturity
of the Notes; (3) has a Stated Maturity for its final scheduled principal
payment later than the Stated Maturity for the final scheduled principal
payment of the Notes; and (4) is expressly subordinated in right of payment
to the Notes at least to the same extent as the Subordinated Indebtedness
to be refinanced;
(v) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of any Redeemable Capital Stock through
the substantially concurrent issuance of new Redeemable Capital Stock of
the Company, provided that any such new Redeemable Capital Stock (1) shall
have an aggregate liquidation preference that does not exceed the aggregate
liquidation preference of the amount so refinanced; (2) has an Average Life
to Stated Maturity greater than the remaining Average Life to Stated
Maturity of the Notes; and (3) has a Stated Maturity later than the Stated
Maturity for the final scheduled principal payment of the Notes; and
(vi) the repurchase of shares of, or options to purchase shares of,
common stock of the Company or any of its Subsidiaries from employees,
former employees, directors or former directors of the Company or any of
its Subsidiaries (or permitted transferees of such employees, former
employees, directors or former directors), pursuant to the terms of the
agreements (including employment agreements) or plans (or amendments
thereto) approved by the Board of Directors under which such individuals
purchase or sell or are granted the option to purchase or sell, shares of
such common stock; provided, however, that the aggregate amount of such
repurchases in any calendar year shall not exceed $1 million and $5 million
in the aggregate. (Section 1009)
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any of its Subsidiaries to, directly or indirectly, enter into any
transaction or series of related transactions (including, without limitation,
the sale, purchase, exchange or lease of assets, property or services) with or
for the benefit of any Affiliate of the Company (other than the Company or a
Wholly Owned Subsidiary) unless such transaction or series of related
transactions is entered into in good faith and in writing and (a) such
transaction or series of related transactions is on terms that are no less
favorable to the Company or such Subsidiary, as the case may be, than those
that would be reasonably expected to be available in a comparable transaction
in arm's-length dealings with an unrelated third party, (b) with respect to
any transaction or series of related transactions involving aggregate value in
excess of $3 million, the Company delivers an officers' certificate to the
Trustee certifying that such transaction or series of related transactions
complies with clause (a) above, and (c) with respect to any transaction or
series of related transactions involving aggregate value in excess of $7
million, either (A) such transaction or series of related transactions has
been approved by a majority of the Disinterested Directors of the Company, or
in the event there is only one Disinterested Director, by such Disinterested
Director, or (B) the Company delivers to the Trustee a written opinion of an
investment banking firm of national standing or other recognized independent
expert with experience appraising the terms and conditions of the type of
transaction or series of related transactions for which an opinion is required
stating that the transactions or series of related transactions is fair to the
Company or such Subsidiary from a financial point of view; provided, however,
that this provision shall not apply to: (a) compensation and employee benefit
arrangements with any officer, director or employee of the Company, including
under any stock option or stock incentive plans, in the ordinary course of
business; (b) any transaction solely between or among the Company and/or any
Subsidiaries, if such transaction is otherwise in compliance with the
Indenture and is on fair and reasonable terms; (c) any transaction otherwise
permitted by the terms of the section of the Indenture described under
"Certain Covenants--Limitations on Restricted Payments;" (d) the execution and
delivery of or payments made under any tax sharing agreement between or among
any of the Company and any Subsidiary; (e) licensing or sublicensing of use of
any intellectual property by the Company or any Subsidiary to any Subsidiary
of the Company; provided that the licensor shall continue to have access to
such intellectual property to the extent necessary for the conduct of its
respective business; (f) arrangements between the Company and any Subsidiary
of the Company for the purpose of providing services or employees to such
Subsidiary; (g) any transaction entered into for the purpose of granting or
altering registration rights with respect to the Capital Stock of the Company;
and (h) any transaction or series of related transactions entered into prior
to the date of the Indenture. (Section 1010)
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Limitation on Liens. The Company will not, and will not permit any
Subsidiary to, directly or indirectly, create, incur or affirm any Lien of any
kind upon any property or assets (including any intercompany notes) of the
Company or any Subsidiary owned on the date of the Indenture or acquired after
the date of the Indenture, or any income or profits therefrom, unless the
Notes are directly secured equally and ratably with (or, in the case of
Subordinated Indebtedness, prior or senior thereto, with the same relative
priority as the Notes shall have with respect to such Subordinated
Indebtedness) the obligation or liability secured by such Lien except for any
Permitted Liens. (Section 1011)
Limitation on Sale of Assets. (a) The Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, consummate an Asset Sale
unless (i) at least 75% of the consideration from such Asset Sale is received
in cash or other comparable consideration (as described below), and (ii) the
Company or such Subsidiary receives consideration at the time of such Asset
Sale at least equal to the Fair Market Value of the shares or assets subject
to such Asset Sale (as determined by the board of directors of the Company and
evidenced in a board resolution). The following types of consideration shall
be deemed "comparable consideration" for the purposes of this covenant: (A)
Cash Equivalents, (B) liabilities (contingent or otherwise) of the Company or
a Subsidiary assumed by the transferee (or its designee) such that the Company
or such Subsidiary has no further liability therefor, and (C) any securities,
notes or other obligations received by the Company or any such Subsidiary from
such transferee that are immediately converted by the Company or such
Subsidiary into cash.
(b) The Company or a Subsidiary may, within 365 days of the Asset Sale
invest the Net Cash Proceeds in properties and other assets that will be used
in Telecommunications Businesses or to repay any Pari Passu Indebtedness of
the Company or any Subsidiary (including the repurchase of the Notes). The
amount of such Net Cash Proceeds not used or invested within 365 days of the
Asset Sale as set forth in this paragraph constitutes "Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds exceeds $10 million or
more, the Company will apply the Excess Proceeds to the repayment of the Notes
and any other Pari Passu Indebtedness outstanding with similar provisions
requiring the Company to make an offer to purchase such Indebtedness with the
proceeds from any Asset Sale as follows: (A) the Company will make an offer to
purchase (an "Offer") from all holders of the Notes in accordance with the
procedures set forth in the Indenture in the maximum principal amount
(expressed as a multiple of $1,000) of Notes that may be purchased out of an
amount (the "Note Amount") equal to the product of such Excess Proceeds
multiplied by a fraction, the numerator of which is the outstanding principal
amount of the Notes, and the denominator of which is the sum of the
outstanding principal amount of the Notes and such Pari Passu Indebtedness
(subject to proration in the event such amount is less than the aggregate
Offered Price (as defined herein) of all Notes tendered) and (B) to the extent
required by such Pari Passu Indebtedness to permanently reduce the principal
amount of such Pari Passu Indebtedness, the Company will make an offer to
purchase or otherwise repurchase or redeem Pari Passu Indebtedness (a "Pari
Passu Offer") in an amount (the "Pari Passu Debt Amount") equal to the excess
of the Excess Proceeds over the Note Amount; provided that in no event will
the Company be required to make a Pari Passu Offer in a Pari Passu Debt Amount
exceeding the principal amount of such Pari Passu Indebtedness plus the amount
of any premium required to be paid to repurchase such Pari Passu Indebtedness.
The offer price for the Notes will be payable in cash in an amount equal to
100% of the principal amount of the Notes plus accrued and unpaid interest, if
any, to the date (the "Offer Date") such Offer is consummated (the "Offered
Price"), in accordance with the procedures set forth in the Indenture. To the
extent that the aggregate Offered Price of the Notes tendered pursuant to the
Offer is less than the Note Amount relating thereto or the aggregate amount of
Pari Passu Indebtedness that is purchased in a Pari Passu Offer is less than
the Pari Passu Debt Amount, the Company will use any remaining Excess Proceeds
for general corporate purposes. If the aggregate principal amount of Notes and
Pari Passu Indebtedness surrendered by holders thereof exceeds the amount of
Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro
rata basis. Upon the completion of the purchase of all the Notes tendered
pursuant to an Offer and the completion of a Pari Passu Offer, the amount of
Excess Proceeds, if any, shall be reset at zero.
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(d) The Indenture provides that, if the Company becomes obligated to make an
Offer pursuant to clause (c) above, the Notes and the Pari Passu Indebtedness
shall be purchased by the Company, at the option of the holders thereof, in
whole or in part in integral multiples of $1,000, on a date that is not
earlier than 30 days and not later than 60 days from the date the notice of
the Offer is given to holders, or such later date as may be necessary for the
Company to comply with the requirements under the Exchange Act.
(e) The Indenture provides that the Company will comply with the applicable
tender offer rules, including Rule 14e-1 under the Exchange Act, and any other
applicable securities laws or regulations in connection with an Offer.
(Section 1012)
Limitation on Issuances of Guarantees of Indebtedness. (a) The Company will
not permit any Subsidiary, directly or indirectly, to guarantee, assume or in
any other manner become liable with respect to any Pari Passu Indebtedness or
Subordinated Indebtedness of the Company unless such Subsidiary simultaneously
executes and delivers a supplemental indenture to the Indenture providing for
a Guarantee of the Notes on the same terms as the guarantee of such
Indebtedness except that (A) such guarantee need not be secured unless
required pursuant to "--Limitation on Liens" and (B) if such Indebtedness is
by its terms expressly subordinated to the Notes, any such assumption,
guarantee or other liability of such Subsidiary with respect to such
Indebtedness shall be subordinated to such Subsidiary's Guarantee of the Notes
at least to the same extent as such Indebtedness is subordinated to the Notes;
provided that this paragraph shall not apply to any guarantee or assumption of
liability of Indebtedness permitted under Indenture described in clauses (i),
(ii), (iv), (v), (vii) and (viii) of paragraph (b) of "Certain Covenants--
Limitation on Indebtedness."
(b) Notwithstanding the foregoing, any Guarantee by a Subsidiary of the
Notes shall provide by its terms that it (and all Liens securing the same)
shall be automatically and unconditionally released and discharged upon any
sale, exchange or transfer, to any Person not an Affiliate of the Company, of
all of the Company's Capital Stock in, or all or substantially all the assets
of, such Subsidiary, which transaction is in compliance with the terms of the
Indenture and such Subsidiary is released from its guarantees of other
Indebtedness of the Company or any Subsidiaries. (Section 1013)
Limitation on Sale and Leaseback Transactions. The Company will not, and
will not permit any Subsidiary of the Company to, directly or indirectly,
enter into any sale and leaseback transaction with respect to any property or
assets (whether now owned or hereafter acquired) unless (i) the sale or
transfer of such property or assets to be leased is treated as an Asset Sale
and complies with the "--Limitation on Sale of Assets" covenant and (ii) the
Company or such Subsidiary would be entitled under the "Limitation on
Indebtedness" covenant to incur any Indebtedness (with the lease obligations
being treated as Indebtedness for purposes of ascertaining compliance with
this covenant unless such lease is properly classified as an operating lease
under GAAP) in respect of such sale and leaseback transaction. (Section 1015)
The foregoing restriction does not apply to any sale-leaseback transaction
if: (i) the lease is for a period, including renewal rights, not in excess of
three years; (ii) the transaction is solely between the Company and any Wholly
Owned Subsidiary or any Wholly Owned Subsidiary and any other Wholly Owned
Subsidiary; and (iii) the transaction is consummated within 180 days of the
acquisition by the Company or its Subsidiary of the property or assets subject
to such sale-leaseback or entered into within 180 days after the purchase or
substantial completion of the construction of such property or assets.
Limitation on Subsidiary Capital Stock. The Company will not permit (a) any
Subsidiary of the Company to issue any Capital Stock, except for (i) Capital
Stock issued or sold to, held by or transferred to the Company or a Wholly
Owned Subsidiary, and (ii) Capital Stock issued by a Person prior to the time
(A) such Person becomes a Subsidiary, (B) such Person merges with or into a
Subsidiary or (C) a Subsidiary merges with or into such Person; provided that
such Capital Stock was not issued or incurred by such Person in anticipation
of the type of transaction contemplated by subclause (A), (B) or (C) or (b)
any Person (other than the Company or a Wholly Owned Subsidiary) to acquire
Capital Stock of any Subsidiary from the Company or any Subsidiary, except, in
the case of clause (a) or (b), (1) upon the acquisition of all the outstanding
Capital Stock of such
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Subsidiary in accordance with the terms of the Indenture, (2) if, immediately
after giving effect to such issuance or sale, such Subsidiary would no longer
constitute a Subsidiary, and any Investment in such Person remaining after
giving effect to such issuance or sale would have been permitted to be made
under the provisions of the Indenture described in "Certain Covenants--
Limitations on Restricted Payments" if made on the date of such issuance or
sale, (3) issuances of director's qualifying shares, or sales to foreign
nationals of shares of Capital Stock of foreign Subsidiaries, to the extent
required by applicable law, (4) issuances or sales of common stock of a
Subsidiary, provided that the Company or such Subsidiary applies the Net Cash
Proceeds, if any, in accordance with the provisions of the Indenture to the
extent applicable, (5) issuances after which the Company maintains its direct
or indirect percentage of beneficial and economic ownership of such
Subsidiary, or (6) issuances in connection with Acquisitions for the primary
purpose of minimizing tax liability to the Company, any of its Subsidiaries,
the Acquired Person or any shareholders of the Acquired Person. (Section 1016)
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not permit any of its
Subsidiaries to, directly or indirectly, create any consensual encumbrance or
restriction on the ability of any Subsidiary to (i) pay dividends or make any
other distribution on its Capital Stock, (ii) pay any Indebtedness owed to the
Company or any other Subsidiary, (iii) make any Investment in the Company or
any other Subsidiary or (iv) transfer any of its properties or assets to the
Company or any other Subsidiary, except for: (a) any encumbrance or
restriction, with respect to a Subsidiary that is not a Subsidiary of the
Company on the date of the Indenture, in existence at the time such Person
becomes a Subsidiary of the Company and not incurred in connection with, or in
contemplation of, such Person becoming a Subsidiary; (b) encumbrances or
restrictions (I) by reason of applicable law, or (II) under the Indenture; (c)
customary non-assignment provisions of any contract or lease of any Subsidiary
entered into in the ordinary course of business; (d) encumbrances or
restrictions imposed pursuant to contracts entered into in connection with
Permitted Liens, but solely to the extent such encumbrances or restrictions
affect property or assets subject to such Permitted Lien; (e) any encumbrance
or restriction imposed pursuant to contracts for the sale of assets with
respect to the assets to be sold pursuant to such contract; and (f) any
encumbrance or restriction existing under any agreement that extends, renews,
refinances or replaces the agreements containing the encumbrances or
restrictions in the foregoing clauses (a) through (e), or in this clause (f),
provided that the terms and conditions of any such encumbrances or
restrictions are no more restrictive in any material respect than those under
or pursuant to the agreement evidencing the Indebtedness so extended, renewed,
refinanced or replaced. (Section 1017)
Limitations on Unrestricted Subsidiaries. The Company will not make, and
will not permit its Subsidiaries to make, any Investment in Unrestricted
Subsidiaries if, at the time thereof, the aggregate amount of such Investments
would exceed the amount of Restricted Payments then permitted to be made
pursuant to the "--Limitation on Restricted Payments" covenant. Any
Investments in Unrestricted Subsidiaries permitted to be made pursuant to this
covenant will be treated as a Restricted Payment in calculating the amount of
Restricted Payments made by the Company. (Section 1018)
Provision of Financial Statements. After the earlier to occur of the
consummation of the Exchange Offer and the 150th calendar day following the
date of original issue of the Notes, whether or not the Company is subject to
Section 13(a) or 15(d) of the Exchange Act, the Company will, to the extent
permitted under the Exchange Act, file with the Commission the annual reports,
quarterly reports and other documents which the Company would have been
required to file with the Commission pursuant to Sections 13(a) or 15(d) if
the Company were so subject, such documents to be filed with the Commission on
or prior to the date (the "Required Filing Date") by which the Company would
have been required so to file such documents if the Company were so subject.
The Company will also in any event (x) within 15 days of each Required Filing
Date (i) transmit by mail to all holders, as their names and addresses appear
in the security register, without cost to such holders and (ii) file with the
Trustee copies of the annual reports, quarterly reports and other documents
which the Company would have been required to file with the Commission
pursuant to Sections 13(a) or 15(d) of the Exchange Act if the Company were
subject to either of such Sections and (y) if filing such documents by the
Company with the Commission is not permitted under the Exchange Act, promptly
upon written request and payment of the reasonable cost of duplication and
delivery, supply copies of such documents to any prospective
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holder at the Company's cost. If any Guarantor's financial statements would be
required to be included in the financial statements filed or delivered
pursuant to the Indenture if the Company were subject to Section 13(a) or
15(d) of the Exchange Act, the Company shall include such Guarantor's
financial statements in any filing or delivery pursuant to the Indenture. The
Indenture also provides that, so long as any of the Notes remain outstanding,
the Company will make available to any prospective purchaser of Notes or
beneficial owner of Notes in connection with any sale thereof the information
required by Rule 144A(d)(4) under the Securities Act, until such time as the
Company has either exchanged the Notes for securities identical in all
material respects which have been registered under the Securities Act or until
such time as the holders thereof have disposed of such Notes pursuant to an
effective registration statement under the Securities Act. (Section 1019)
Limitation on Business. The Company will not, and will not permit any of the
Subsidiaries to, engage in a business which is not substantially a
Telecommunications Business. (Section 1022)
Additional Covenants. The Indenture also contains covenants with respect to
the following matters: (i) payment of principal, premium and interest; (ii)
maintenance of an office or agency in The City of New York; (iii) arrangements
regarding the handling of money held in trust; (iv) maintenance of corporate
existence; (v) payment of taxes and other claims; (vi) maintenance of
properties; and (vii) maintenance of insurance.
CONSOLIDATION, MERGER, SALE OF ASSETS
The Company will not, in a single transaction or through a series of related
transactions, consolidate with or merge with or into any other Person or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially
all of its properties and assets to any Person or group of affiliated Persons,
or permit any of its Subsidiaries to enter into any such transaction or series
of related transactions if such transaction or series of related transactions,
in the aggregate, would result in a sale, assignment, conveyance, transfer,
lease or disposition of all or substantially all of the properties and assets
of the Company and its Subsidiaries on a Consolidated basis to any other
Person or group of affiliated Persons, unless at the time and after giving
effect thereto (i) either (a) the Company will be the continuing corporation
in the case of a consolidation or merger involving the Company or (b) the
Person (if other than the Company) formed by such consolidation or into which
the Company is merged or the Person which acquires by sale, assignment,
conveyance, transfer, lease or disposition all or substantially all of the
properties and assets of the Company and its Subsidiaries on a Consolidated
basis (the "Surviving Entity") will be a corporation duly organized and
validly existing under the laws of the United States of America, any state
thereof or the District of Columbia and such Person expressly assumes, by a
supplemental indenture, in a form reasonably satisfactory to the Trustee, all
the obligations of the Company under the Notes, the Indenture, the Escrow
Agreement and the Registration Rights Agreement, as the case may be, and the
Notes, the Indenture, the Escrow Agreement and the Registration Rights
Agreement will remain in full force and effect as so supplemented; (ii)
immediately before and immediately after giving effect to such transaction on
a pro forma basis (and treating any Indebtedness not previously an obligation
of the Company or any of its Subsidiaries which becomes the obligation of the
Company or any of its Subsidiaries as a result of such transaction as having
been incurred at the time of such transaction), no Default or Event of Default
will have occurred and be continuing; (iii) immediately before and immediately
after giving effect to such transaction on a pro forma basis, the Company (or
the Surviving Entity if the Company is not the continuing obligor under the
Indenture) could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the provisions of "--Certain Covenants--Limitation on
Indebtedness;" (iv) at the time of the transaction, each Guarantor, if any,
unless it is the other party to the transactions described above, will have by
supplemental indenture confirmed that its Guarantee shall apply to such
Person's obligations under the Indenture and the Notes; (v) at the time of the
transaction if any of the property or assets of the Company or any of its
Subsidiaries would thereupon become subject to any Lien, the provisions of "--
Certain Covenants--Limitation on Liens" are complied with; and (vi) at the
time of the transaction the Company or the Surviving Entity will have
delivered, or caused to be delivered, to the Trustee, in form and substance
reasonably satisfactory to the Trustee, an officers' certificate and an
opinion of counsel, each to the effect that such consolidation, merger,
transfer, sale, assignment, conveyance, transfer, lease or other transaction
and the supplemental indenture in respect thereof comply with the Indenture.
Notwithstanding the foregoing, the Company (i) may merge or consolidate
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with any of its Subsidiaries, and (ii) the Company may merge or consolidate
into any Person in a transaction designed solely for the purpose of effecting
a change in the jurisdiction of incorporation of the Company within the United
States of America. (Section 801)
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraph in
which the Company is not the Surviving Person, such Surviving Person shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company, and the Company shall be discharged from all obligations and
covenants under the Indenture, the Notes, the Escrow Agreement and the
Registration Rights Agreement. (Section 802)
EVENTS OF DEFAULT
An Event of Default will occur under the Indenture if:
(i) there shall be a default in the payment of any interest on any Note
when it becomes due and payable, and such default shall continue for a
period of 30 days;
(ii) there shall be a default in the payment of the principal of (or
premium, if any, on) any Note at its Maturity (upon acceleration, optional
or mandatory redemption, required repurchase or otherwise);
(iii)(a) there shall be a default in the performance, or breach, of any
covenant or agreement of the Company or any Guarantor under the Indenture,
the Escrow Agreement, the Registration Rights Agreement or any Guarantee
(other than a default in the performance, or breach, of a covenant or
agreement which is specifically dealt with in clause (i), (ii) or in clause
(b), (c) or (d) of this clause (iii)) and such default or breach shall
continue for a period of 30 days after written notice has been given, by
certified mail, (x) to the Company by the Trustee or (y) to the Company and
the Trustee by the holders of at least 25% in aggregate principal amount of
the outstanding Notes; (b) there shall be a default in the performance or
breach of the provisions described in "--Consolidation, Merger, Sale of
Assets;" (c) the Company shall have failed to make or consummate an Offer
in accordance with the provision described in "--Certain Covenants--
Limitation on Sale of Assets;" or (d) the Company shall have failed to make
or consummate a Change of Control Offer in accordance with the provisions
of "Purchase of Notes Upon a Change of Control;"
(iv)(a) any default by the Company or any Subsidiary in the payment of
the principal, premium, if any, or interest has occurred with respect to
amounts in excess of $5 million under any agreement, indenture or
instrument evidencing Indebtedness when the same shall become due and
payable in full and such default shall have continued after any applicable
grace period and shall not have been cured or waived and, if not already
matured at its final maturity in accordance with its terms, the holder of
such Indebtedness shall have the right to accelerate such Indebtedness or
(b) any event of default as defined in any agreement, indenture or
instrument of the Company evidencing Indebtedness in excess of $5 million
shall have occurred and the Indebtedness thereunder, if not already matured
at its final maturity in accordance with its terms, shall have been
accelerated;
(v) any Guarantee shall for any reason cease to be, or shall for any
reason be asserted in writing by any Guarantor or the Company not to be, in
full force and effect and enforceable in accordance with its terms, except
to the extent contemplated by the Indenture and any such Guarantee;
(vi) one or more judgments or orders for the payment of money in excess
of $5 million, either individually or in the aggregate, shall be rendered
against the Company not paid or covered by financially sound third-party
insurers, or any Subsidiary or any of their respective properties and there
shall not be discharged and there shall have been a period of 60
consecutive days during which a stay of enforcement of such judgment or
order, by reason of an appeal or otherwise, shall not be in effect;
(vii) any holder or holders of at least $5 million in aggregate principal
amount of Indebtedness of the Company or any Subsidiary after a default
under such Indebtedness shall notify the Trustee of its commencement of
proceedings to foreclose on any assets of the Company or any Subsidiary
that have been
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pledged to or for the benefit of such holder or holders to secure such
Indebtedness or shall commence proceedings, or take any action (including
by way of set-off), to retain in satisfaction of such Indebtedness or to
collect on, seize, dispose of or apply in satisfaction of Indebtedness,
assets of the Company or any Subsidiary (including funds on deposit or held
pursuant to lock-box and other similar arrangements);
(viii) there shall have been the entry by a court of competent
jurisdiction of (a) a decree or order for relief in respect of the Company
or any Subsidiary in an involuntary case or proceeding under any applicable
Bankruptcy Law or (b) a decree or order adjudging the Company or any
Subsidiary bankrupt or insolvent, or seeking reorganization, arrangement,
adjustment or composition of or in respect of the Company or any Subsidiary
under any applicable federal or state law, or appointing a custodian,
receiver, liquidator, assignee, trustee, sequestrator (or other similar
official) of the Company or any Subsidiary or of any substantial part of
their respective properties, or ordering the winding up or liquidation of
their respective affairs, and any such decree or order for relief shall
continue to be in effect, or any such other decree or order shall be
unstayed and in effect, for a period of 60 consecutive days;
(ix)(a) the Company or any Subsidiary commences a voluntary case or
proceeding under any applicable Bankruptcy Law or any other case or
proceeding to be adjudicated bankrupt or insolvent, (b) the Company or any
Subsidiary consents to the entry of a decree or order for relief in respect
of the Company or such Subsidiary in an involuntary case or proceeding
under any applicable Bankruptcy Law or to the commencement of any
bankruptcy or insolvency case or proceeding against it, (c) the Company or
any Subsidiary files a petition or answer or consent seeking reorganization
or relief under any applicable federal or state law, (d) the Company or any
Subsidiary (I) consents to the filing of such petition or the appointment
of, or taking possession by, a custodian, receiver, liquidator, assignee,
trustee, sequestrator or similar official of the Company or such Subsidiary
or of any substantial part of the Company's Consolidated properties, (II)
makes an assignment for the benefit of creditors or (III) admits in writing
its inability to pay its debts generally as they become due or (e) the
Company or any Subsidiary takes any corporate action in furtherance of any
such actions in this paragraph (ix); or
(x) the Company shall challenge the Lien on the Escrow Collateral under
the Escrow Agreement prior to such time the Escrow Collateral is to be
released to the Company or the Escrow Collateral shall become subject to
any Lien other than the Lien under the Escrow Agreements. (Section 501)
If an Event of Default (other than as specified in clauses (viii) and (ix)
of the prior paragraph) shall occur and be continuing with respect to the
Indenture, the Trustee or the holders of not less than 25% in aggregate
principal amount of the Notes then outstanding may, and the Trustee at the
request of such holders shall, declare all unpaid principal of, premium, if
any, and accrued interest on all Notes to be due and payable, by a notice in
writing to the Company (and to the Trustee if given by the holders of the
Notes) and upon any such declaration, such principal, premium, if any, and
interest shall become due and payable immediately. If an Event of Default
specified in clause (viii) or (ix) of the prior paragraph occurs with respect
to the Company and is continuing, then all the Notes shall ipso facto become
and be due and payable immediately in an amount equal to the principal amount
of the Notes, together with accrued and unpaid interest, if any, to the date
the Notes become due and payable, without any declaration or other act on the
part of the Trustee or any holder. Thereupon, the Trustee may, at its
discretion, proceed to protect and enforce the rights of the holders of Notes
by appropriate judicial proceedings.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the Trustee, the holders of a
majority in aggregate principal amount of Notes outstanding by written notice
to the Company and the Trustee, may rescind and annul such declaration and its
consequences if (a) the Company has paid or deposited with the Trustee a sum
sufficient to pay (i) all sums paid or advanced by the Trustee under the
Indenture and the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel, (ii) all overdue interest on
all Notes then outstanding, (iii) the principal of and premium, if any, on any
Notes then outstanding which have become due otherwise than by such
declaration of acceleration and interest thereon at the rate borne by the
Notes and (iv) to the extent that payment of such interest is lawful, interest
upon overdue interest at the rate borne by the Notes; and (b) all Events of
Default, other than
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the non-payment of principal of the Notes which have become due solely by such
declaration of acceleration, have been cured or waived as provided in the
Indenture. No such rescission shall affect any subsequent default or impair
any right consequent thereon. (Section 502)
The holders of not less than a majority in aggregate principal amount of the
Notes outstanding may on behalf of the holders of all outstanding Notes waive
any past default under the Indenture and its consequences, except a default in
the payment of the principal of, premium, if any, or interest on any Note or
in respect of a covenant or provision which under the Indenture cannot be
modified or amended without the consent of the holder of each Note affected by
such modification or amendment. (Section 513)
The Company is also required to notify the Trustee within thirty business
days of the occurrence of any Default unless such Default shall have been
cured. (Section 602) The Company is required to deliver to the Trustee, on or
before a date not more than 60 days after the end of each fiscal quarter and
not more than 120 days after the end of each fiscal year, a written statement
as to compliance with the Indenture, including whether or not any Default has
occurred that is not cured. (Section 1020)
The Trust Indenture Act contains limitations on the rights of the Trustee,
should it become a creditor of the Company or any Guarantor, if any, to obtain
payment of claims in certain cases or to realize on certain property received
by it in respect of any such claims, as security or otherwise. The Trustee is
permitted to engage in other transactions, provided that if it acquires any
conflicting interest it must eliminate such conflict upon the occurrence of an
Event of Default or else resign.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company, any Guarantor and any other obligor upon the Notes
discharged with respect to the outstanding Notes ("defeasance"). Such
defeasance means that the Company, any such Guarantor and any other obligor
under the Indenture shall be deemed to have paid and discharged the entire
Indebtedness represented by the outstanding Notes, except for (i) the rights
of holders of such outstanding Notes to receive payments in respect of the
principal of, premium, if any, and interest on such Notes when such payments
are due, (ii) the Company's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or
stolen Notes, and the maintenance of an office or agency for payment and money
for security payments held in trust, (iii) the rights, powers, trusts, duties
and immunities of the Trustee and (iv) the defeasance provisions of the
Indenture. In addition, the Company may, at its option and at any time, elect
to have the obligations of the Company and any Guarantor released with respect
to certain covenants that are described in the Indenture ("covenant
defeasance") and thereafter any omission to comply with such obligations shall
not constitute a Default or an Event of Default with respect to the Notes. In
the event covenant defeasance occurs, certain events (not including non-
payment, bankruptcy and insolvency events) described under "Events of Default"
will no longer constitute an Event of Default with respect to the Notes.
(Sections 401, 402 and 403)
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the holders of the Notes cash in United States dollars, U.S. Government
Obligations (as defined in the Indenture), or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm
of independent public accountants or a nationally recognized investment
banking firm, to pay and discharge the principal of, premium, if any, and
interest on the outstanding Notes on the Stated Maturity (or on any date after
December 15, 2002 (such date being referred to as the "Defeasance Redemption
Date"), if at or prior to electing either defeasance or covenant defeasance,
the Company has delivered to the Trustee an irrevocable notice to redeem all
of the outstanding Notes on the Defeasance Redemption Date); (ii) in the case
of defeasance, the Company shall have delivered to the Trustee an opinion of
independent counsel in the United States stating that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and
based thereon such
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opinion of independent counsel in the United States shall confirm that, the
holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such defeasance had not occurred; (iii)
in the case of covenant defeasance, the Company shall have delivered to the
Trustee an opinion of independent counsel in the United States to the effect
that the holders of the outstanding Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such covenant defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such covenant
defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit or insofar as clauses
(viii) or (ix) under the first paragraph under--"Events of Default" are
concerned, at any time during the period ending on the 91st day after the date
of deposit; (v) such defeasance or covenant defeasance shall not cause the
Trustee for the Notes to have a conflicting interest for purposes of the Trust
Indenture Act with respect to any securities of the Company or any Guarantor;
(vi) such defeasance or covenant defeasance shall not result in a breach or
violation of, or constitute a Default under, the Indenture or any other
material agreement or instrument to which the Company, any Guarantor or any
Subsidiary is a party or by which it is bound; (vii) such defeasance or
covenant defeasance shall not result in the trust arising from such deposit
constituting an investment company within the meaning of the Investment
Company Act of 1940, as amended, unless such trust shall be registered under
such Act or exempt from registration thereunder; (viii) the Company will have
delivered to the Trustee an opinion of independent counsel in the United
States to the effect that after the 91st day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (ix) the Company shall have delivered to the Trustee an officers'
certificate stating that the deposit was not made by the Company with the
intent of preferring the holders of the Notes or any Guarantee over the other
creditors of the Company or any Guarantor with the intent of defeating,
hindering, delaying or defrauding creditors of the Company, any Guarantor or
others; (x) no event or condition shall exist that would prevent the Company
from making payments of the principal of, premium, if any, and interest on the
Notes on the date of such deposit or at any time ending on the 91st day after
the date of such deposit; and (xi) the Company will have delivered to the
Trustee an officers' certificate and an opinion of independent counsel, each
stating that all conditions precedent provided for relating to either the
defeasance or the covenant defeasance, as the case may be, have been complied
with. (Section 404)
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Notes as expressly provided for in the Indenture) as to all outstanding Notes
under the Indenture when (a) either (i) all such Notes theretofore
authenticated and delivered (except lost, stolen or destroyed Notes which have
been replaced or paid or Notes whose payment has been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the
Company or discharged from such trust as provided for in the Indenture) have
been delivered to the Trustee for cancellation or (ii) all Notes not
theretofore delivered to the Trustee for cancellation (x) have become due and
payable, (y) will become due and payable at their Stated Maturity within one
year, or (z) are to be called for redemption within one year under
arrangements reasonably satisfactory to the Trustee for the giving of notice
of redemption by the Trustee in the name, and at the expense, of the Company;
and the Company or any Guarantor has irrevocably deposited or caused to be
deposited with the Trustee as trust funds in trust an amount in United States
dollars sufficient to pay and discharge the entire indebtedness on the Notes
not theretofore delivered to the Trustee for cancellation, including principal
of, premium, if any, and accrued interest at such Maturity, Stated Maturity or
redemption date; (b) the Company or any Guarantor has paid or caused to be
paid all other sums payable under the Indenture by the Company and any
Guarantor; and (c) the Company has delivered to the Trustee an officers'
certificate and an opinion of independent counsel each stating that (i) all
conditions precedent under the Indenture relating to the satisfaction and
discharge of such Indenture have been complied with and (ii) such satisfaction
and discharge will not result in a breach or violation of, or constitute a
default under, the Indenture or any other material agreement or instrument to
which the Company, any Guarantor or any Subsidiary is a party or by which the
Company, any Guarantor or any Subsidiary is bound. (Section 1301)
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MODIFICATIONS AND AMENDMENTS
Modifications and amendments of the Indenture may be made by the Company,
each Guarantor, if any, and the Trustee with the consent of the holders of at
least a majority in aggregate principal amount of the Notes then outstanding;
provided, however, that no such modification or amendment may, without the
consent of the holder of each outstanding Note affected thereby: (i) change
the Stated Maturity of the principal of, or any installment of interest on, or
change to an earlier date any redemption date of, or waive a default in the
payment of the principal or interest on, any such Note or reduce the principal
amount thereof or the rate of interest thereon or any premium payable upon the
redemption thereof, or change the coin or currency in which the principal of
any such Note or any premium or the interest thereon is payable, or impair the
right to institute suit for the enforcement of any such payment after the
Stated Maturity thereof (or, in the case of redemption, on or after the
redemption date); (ii) amend, change or modify the obligation of the Company
to make and consummate an Offer with respect to any Asset Sale or Asset Sales
in accordance with "Certain Covenants--Limitation on Sale of Assets" or the
obligation of the Company to make and consummate a Change of Control Offer in
the event of a Change of Control in accordance with "Purchase of Notes Upon a
Change of Control," including, in each case, amending, changing or modifying
any definitions relating thereto; (iii) reduce the percentage in principal
amount of such outstanding Notes, the consent of whose holders is required for
any such supplemental indenture, or the consent of whose holders is required
for any waiver or compliance with certain provisions of the Indenture; (iv)
modify any of the provisions relating to supplemental indentures requiring the
consent of holders or relating to the waiver of past defaults or relating to
the waiver of certain covenants, except to increase the percentage of such
outstanding Notes required for such actions or to provide that certain other
provisions of the Indenture cannot be modified or waived without the consent
of the holder of each such Note affected thereby; (v) except as otherwise
permitted under "Consolidation, Merger, Sale of Assets," consent to the
assignment or transfer by the Company or any Guarantor of any of its rights
and obligations under the Indenture; (vi) amend or modify any of the
provisions of the Indenture in any manner which subordinates the Notes issued
thereunder in right of payment to any other Indebtedness of the Company or
which subordinates any Guarantee in right of payment to any other Indebtedness
of the Guarantor issuing any such Guarantee; or (vii) modify the provisions of
the Escrow Agreement or the Indenture relating to the Escrow Collateral in any
manner adverse to the Holders or release any of the Escrow Collateral from the
Lien under the Escrow Agreement or permit any other obligation to be secured
by the Escrow Collateral. (Section 902)
Notwithstanding the foregoing, without the consent of any holders of the
Notes, the Company, any Guarantor and the Trustee may modify or amend the
Indenture: (a) to evidence the succession of another Person to the Company or
a Guarantor, and the assumption by any such successor of the covenants of the
Company or such Guarantor in the Indenture, the Notes, the Registration Rights
Agreement, the Escrow Agreement and in any Guarantee in accordance with "--
Consolidation, Merger, Sale of Assets"; (b) to add to the covenants of the
Company, any Guarantor or any other obligor upon the Notes for the benefit of
the holders of the Notes or to surrender any right or power conferred upon the
Company or any Guarantor or any other obligor upon the Notes, as applicable,
in the Indenture, in the Notes or in any Guarantee; (c) to cure any ambiguity,
or to correct or supplement any provision in the Indenture, the Notes or any
Guarantee which may be defective or inconsistent with any other provision in
the Indenture, the Notes or any Guarantee or make any other provisions with
respect to matters or questions arising under the Indenture, the Notes or any
Guarantee; provided that, in each case, such provisions shall not adversely
affect the interest of the holders of the Notes; (d) to comply with the
requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act; (e) to add a
Guarantor under the Indenture; (f) to evidence and provide the acceptance of
the appointment of a successor Trustee under the Indenture; or (g) to
mortgage, pledge, hypothecate or grant a security interest in favor of the
Trustee for the benefit of the holders of the Notes as additional security for
the payment and performance of the Company's and any Guarantor's obligations
under the Indenture, in any property, or assets, including any of which are
required to be mortgaged, pledged or hypothecated, or in which a security
interest is required to be granted to the Trustee pursuant to the Indenture or
otherwise. (Section 901)
The holders of a majority in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture. (Section 1021)
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GOVERNING LAW
The Indenture, the Notes and any Guarantee will be governed by, and
construed in accordance with, the laws of the State of New York, without
giving effect to the conflicts of law principles thereof.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue as Trustee with such conflict or resign as Trustee.
(Sections 608 and 610)
The holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
occurs (which has not been cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the
Indenture or the Escrow Agreement at the request of any holder of Notes unless
such holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense. (Sections 601 and
603)
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Subsidiary or (ii) assumed in connection with the
acquisition of assets from such Person, in each case, other than Indebtedness
incurred in connection with, or in contemplation of, such Person becoming a
Subsidiary or such acquisition, as the case may be, 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 Subsidiary or such Asset Acquisition shall not constitute
Acquired Indebtedness.
"Acquired Person" means, with respect to any specified Person, any other
Person which merges with or into or becomes a Subsidiary of such specified
Person.
"Acquisition" means (i) any capital contribution (by means of transfers of
cash or other property to others or payments for property or services for the
account or use of others, or otherwise) by the Company or any Subsidiary to
any other Person, or any acquisition or purchase of Capital Stock of any other
Person by the Company or any Subsidiary, in either case pursuant to which such
Person shall become a Subsidiary or shall be consolidated, merged with or into
the Company or any Subsidiary or (ii) any acquisition by the Company or any
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 of the Company or such Subsidiary.
"Additional Interest" has the meaning provided in Section 5 of the
Registration Rights Agreement.
"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For the purposes of this
definition, "control" when used with respect to any specified Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
sale and leaseback transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of: (i) any Capital
Stock of any Subsidiary; (ii) all
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or substantially all of the properties and assets of any division or line of
business of the Company or its Subsidiaries; or (iii) any other properties or
assets of the Company or any Subsidiary other than in the ordinary course of
business. For the purposes of this definition, the term "Asset Sale" shall not
include any transfer of properties and assets (A) that is governed by the
provisions described under "Consolidation, Merger, Sale of Assets," (B) that
is by the Company to any Subsidiary or by any Subsidiary to the Company or any
other Subsidiary in accordance with the terms of the Indenture, (C) that is of
obsolete equipment in the ordinary course of business, (D) the Fair Market
Value of which in the aggregate does not exceed $200,000 in any transaction or
series of related transactions, (E) that is made in accordance with the
provisions described under "Certain Covenants--Limitations on Restricted
Payments," (F) which constitutes the granting of any Permitted Lien and (G)
any transfer of assets that are transferred in exchange for one or more like-
kind assets; provided that if the Fair Market Value of the assets to be
transferred by the Company or such Subsidiary under this clause G, plus the
Fair Market Value of any other consideration paid or credited by the Company
or such Subsidiary exceeds $1 million, such transaction shall require approval
of the Board of Directors of the Company.
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (i) the
sum of the products of (a) the number of years from the date of determination
to the date or dates of each successive scheduled principal payment of such
Indebtedness multiplied by (b) the amount of each such principal payment; by
(ii) the sum of all such principal payments.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as
amended, or any similar United States federal or state law relating to
bankruptcy, insolvency, receivership, winding up, liquidation, reorganization
or relief of debtors or any amendment to, succession to or change in any such
law.
"Capital Lease Obligation" of any Person means any obligation of such Person
and its subsidiaries on a Consolidated basis under any capital lease of real
or personal property which, in accordance with GAAP, has been recorded as a
capital lease obligation.
"Capital Stock" of (i) with respect to any Person that is a corporation, and
all shares, interests, participations or other equivalents (however designated
and whether or not voting) of corporate stock, including each class of common
stock and preferred stock of such Person and (ii) with respect to any Person
that is not a corporation, any and all partnership, membership or other equity
interests of such Person.
"Cash Equivalents" means (i) any evidence of Indebtedness, maturing not more
than one year after the date of acquisition, issued by the United States of
America, or an instrumentality or agency thereof, and guaranteed fully as to
principal, premium, if any, and interest by the United States of America, (ii)
any certificate of deposit, maturing not more than one year after the date of
acquisition, issued by, or time deposit of, a commercial banking institution
that is a member of the Federal Reserve System and that has combined capital
and surplus and undivided profits of not less than $500 million, whose short
term debt has a rating, at the time as of which any investment therein is
made, of "P-1" (or higher) according to Moody's Investors Service, Inc.
("Moody's") or any successor rating agency or "A-1" (or higher) according to
Standard& Poor's Corporation ("S&P") or any successor rating agency, (iii)
commercial paper, maturing not more than 270 days after the date of
acquisition, issued by a corporation (other than an Affiliate or Subsidiary of
the Company) organized and existing under the laws of the United States of
America with a rating, at the time as of which any investment therein is made,
of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to
S&P and (iv) any money market deposit accounts issued or offered by a domestic
commercial bank having capital and surplus in excess of $500 million; provided
that the short term debt of such commercial bank has a rating, at the time of
Investment, of "P-1" (or higher) according to Moody's or "A-1" (or higher)
according to S&P.
"Change of Control" means the occurrence of any of the following events: (i)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act) 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 shares 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
outstanding
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Voting Stock of the Company; (ii) during any period of two consecutive years,
individuals who at the beginning of such period constituted the board of
directors of the Company (together with any new directors whose election to
such board or whose nomination for election by the stockholders of the Company
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 to
constitute a majority of such board of directors then in office; (iii) the
Company consolidates with or merges with or into any Person or conveys,
transfers or leases all or substantially all of its assets to any Person, or
any corporation consolidates with or merges into or with the Company in any
such event pursuant to a transaction in which the outstanding Voting Stock of
the Company is changed into or exchanged for cash, securities or other
property, other than any such transaction where the outstanding Voting Stock
of the Company is not changed or exchanged at all (except to the extent
necessary to reflect a change in the jurisdiction of incorporation of the
Company or where no "person" or "group" owns, immediately after such
transaction, directly or indirectly, more than 50% of the total outstanding
Voting Stock of the surviving corporation); or (iv) the Company is liquidated
or dissolved or adopts a plan of liquidation or dissolution other than in a
transaction which complies with the provisions described under "--
Consolidation, Merger, Sale of Assets."
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or if at any time after the
execution of the Indenture such Commission is not existing and performing the
duties now assigned to it under the Trust Indenture Act then the body
performing such duties at such time.
"Commodity Price Protection Agreement" means any forward contract, commodity
swap, commodity option or other similar financial agreement or arrangement
relating to, or the value which is dependent upon, fluctuations in commodity
prices.
"Company" means Concentric Network Corporation, a corporation incorporated
under the laws of Delaware, until a successor Person shall have become such
pursuant to the applicable provisions of the Indenture, and thereafter
"Company" shall mean such successor Person.
"Consolidated Income Tax Expense" of any Person means, for any period, the
provision for federal, state, local and foreign income taxes of such Person
and its Consolidated subsidiaries for such period as determined in accordance
with GAAP.
"Consolidated Interest Expense" of any Person means, without duplication,
for any period, the sum of (a) the interest expense of such Person and its
subsidiaries for such period, on a Consolidated basis, including, without
limitation, (i) amortization of debt discount, (ii) the net costs associated
with Interest Rate Agreements, Currency Hedging Agreements and Commodity Price
Protection Agreements (including amortization of discounts), (iii) the
interest portion of any deferred payment obligation and (iv) accrued interest,
plus (b)(i) the interest component of the Capital Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by such Person and its
subsidiaries during such period and (ii) all capitalized interest of such
Person and its subsidiaries plus (c) the interest expense actually paid by
such Person under any Guaranteed Debt of such Person and any subsidiary to the
extent not included under clause (a)(iv) above, plus (d) the aggregate amount
for such period of cash or non-cash dividends on any Redeemable Capital Stock
or Preferred Stock of the Company and its Subsidiaries, in each case as
determined on a Consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any period, the net income
of the Company and any Subsidiary for such period determined on a consolidated
basis in accordance with GAAP, adjusted, to the extent included in calculating
such net income, by excluding, without duplication, (a) other than for
purposes of calculating the Basket, all extraordinary gains or losses for such
period, (b) other than for purposes of calculating the Basket, all gains or
losses from the sales or other dispositions of assets out of the ordinary
course of business (net of taxes, fees and expenses relating to the
transaction giving rise thereto) for such period: (c) that portion of such net
income derived from or in respect of investments in Persons other than
Subsidiaries, except to the extent actually received in cash by the Company or
any Subsidiary (subject, in the case of any Subsidiary, to the
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provisions of clause (f) of this definition); (d) the portion of such net
income (or loss) allocable to minority interests in any Person (other than a
Subsidiary) for such period, except to the extent the Company's allocation
portion of such Person's net income for such period is actually received in
cash by the Company or any Subsidiary (subject, in the case of any Subsidiary,
to the provisions of clause (f) of this definition); (e) the net income (or
loss) or any other Person combined with the Company or any Subsidiary on a
"pooling of interests" basis attributable to any period prior to the date of
combination; and (f) the net income of any Subsidiary to the extent that the
declaration of dividends or similar distributions by that Subsidiary of that
income is not at the time (regardless of any waiver) 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 Subsidiary or its Capital Stock holders.
"Consolidated Operating Cash Flow" means, with respect to any period,
Consolidated Net Income for such period increased (without duplication), to
the extent deducted in calculating such Consolidated Net Income, by (a)
Consolidated Income Tax Expense for such period; (b) Consolidated Interest
Expense for such period; and (c) depreciation, amortization and any other non-
cash items for such period (other than any non-cash item which requires the
accrual of, or a reserve for, cash charges for any future period) of the
Company and any Subsidiary, including, without limitation, amortization of
capitalized debt issuance costs for such period, all of the foregoing
determined on a consolidated basis in accordance with GAAP minus non-cash
items to the extent they increase Consolidated Net Income (including the
partial or entire reversal of reserves taken in prior periods) for such
period.
"Cumulative Operating Cash Flow" means, as at any date of determination, the
positive cumulative Consolidated Operating Cash Flow realized during the
period commencing on the original issue date of the Notes and ending on the
last day of the most recent fiscal quarter immediately preceding the date of
determination for which consolidated financial information of the Company is
available or, if such cumulative Consolidated Operating Cash Flow for such
period is negative, the negative amount by which cumulative Consolidated
Operating Cash Flow is less than zero.
"Consolidated" means, consolidated in accordance with GAAP.
"Currency Hedging Arrangements" means one or more of the following
agreements which shall be entered into by one or more financial institutions:
foreign exchange contracts, currency swap agreements or other similar
agreements or arrangements designed to protect against the fluctuations in
currency values.
"Debt to Annualized Operating Cash Flow Ratio" means the ratio of (a) the
Total Consolidated Indebtedness as of the date of calculation (the
"Determination Date") to (b) two times the Consolidated Operating Cash Flow
for the latest two fiscal quarters for which financial information is
available immediately preceding such Determination Date (the "Measurement
Period"). For purposes of calculating Consolidated Operating Cash Flow for the
Measurement Period immediately prior to the relevant Determination Date, (i)
any Person that is a Subsidiary on the Determination Date (or would become a
Subsidiary on such Determination Date in connection with the transaction that
requires the determination of such Consolidated Operating Cash Flow) will be
deemed to have been a Subsidiary at all times during such Measurement Period,
(ii) any Person that is not a Subsidiary on such Determination Date (or would
cease to be a Subsidiary on such Determination Date in connection with the
transaction that requires the determination of such Consolidated Operating
Cash Flow) will be deemed not to have been a Subsidiary at any time during
such Measurement Period, and (iii) if the Company or any Subsidiary shall have
in any manner (x) acquired (through an Acquisition or the commencement of
activities constituting such operating business) or (y) disposed of (by of an
Asset Sale or the termination or discontinuance of activities constituting
such operating business) any operating business during such Measurement Period
or after the end of such period and on or prior to such Determination Date,
such calculation will be made on a pro forma basis in accordance with GAAP as
if, in the case of an Acquisition or the commencement of activities
constituting such operating business, all such transactions had been
consummated prior to the first day of such Measurement Period (it being
understood that in calculating Consolidated Operating Cash Flow the exclusions
set forth in clauses (a) through (f) of the definition of Consolidated Net
Income shall apply to an Acquired Person as if it were a Subsidiary).
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"Default" means any event which is, or after notice or passage of any time
or both would be, an Event of Default.
"Disinterested Director" means, with respect to any transaction or series of
related transactions, a member of the board of directors of the Company who
does not have any material direct or indirect financial interest in or with
respect 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
obligations 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 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 "Limitation on
Sale of Assets" and "Change of Control" described above and such Capital Stock
specifically provides that such person will not repurchase or redeem any such
stock pursuant to such provision prior to the Issuer's repurchase of such
Notes as are required to be repurchased pursuant to the "Limitation on Sale of
Assets" and "Change of Control" provisions described above.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute.
"Exchange Notes" means Notes issued in exchange for Initial Notes pursuant
to the Registration Rights Agreement.
"Existing Notes" means the Notes issued in the Existing Notes Offering.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be reasonably expected to be obtained in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy. Fair Market
Value shall be determined by the board of directors of the Company acting in
good faith and shall be evidenced by a resolution of the board of directors.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied,
which are in effect on the date of the Indenture.
"Guarantee" means the guarantee by any Guarantor of the Company's Indenture
Obligations.
"Guaranteed Debt" of any Person means, without duplication, all Indebtedness
of any other Person guaranteed directly or indirectly in any manner by such
Person, or in effect guaranteed directly or indirectly by such Person through
an agreement (i) to pay or purchase such Indebtedness or to advance or supply
funds for the payment or purchase of such Indebtedness, (ii) to purchase, sell
or lease (as lessee or lessor) property, or to purchase or sell services,
primarily for the purpose of enabling the debtor to make payment of such
Indebtedness or to assure the holder of such Indebtedness against loss, (iii)
to supply funds to, or in any other manner invest in, the debtor (including
any agreement to pay for property or services without requiring that such
property be received or such services be rendered), (iv) to maintain working
capital or equity capital of the debtor, or otherwise to maintain the net
worth, solvency or other financial condition of the debtor or (v) otherwise to
assure a creditor against loss; provided that the term "guarantee" shall not
include endorsements for collection or deposit, in either case in the ordinary
course of business.
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"Guarantor" means any Subsidiary which is a guarantor of the Notes,
including any Person that is required after the date of the Indenture to
execute a guarantee of the Notes pursuant to the "Limitation on Issuance of
Guarantees of Indebtedness" covenant until a successor replaces such party
pursuant to the applicable provisions of the Indenture and, thereafter, shall
mean such successor.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation 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" and "Incurring" shall have
meanings correlative to the foregoing). Indebtedness of a Person existing at
the time such Person becomes a Subsidiary or is merged or consolidated with or
into the Company or any Subsidiary shall be deemed to be Incurred at such
time.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services, excluding any trade payables and other
accrued current liabilities arising in the ordinary course of business, (ii)
all obligations of such Person evidenced by bonds, notes, debentures or other
similar instruments, (iii) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (unless the rights and remedies of the seller or
lender under such agreement in the event of default are limited to
repossession or sale of such property), but excluding trade payables arising
in the ordinary course of business, (iv) all obligations under Interest Rate
Agreements, Currency Hedging Agreements or Commodity Price Protection
Agreements of such Person, (v) all Capital Lease Obligations of such Person,
(vi) all Indebtedness referred to in clauses (i) through (v) above of other
Persons and all dividends of other Persons, the payment of which is secured by
(or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien, upon or with respect to
property (including, without limitation, accounts and contract rights) owned
by such Person, even though such Person has not assumed or become liable for
the payment of such Indebtedness, (vii) all Redeemable Capital Stock issued by
such Person valued at the greater of its voluntary or involuntary maximum
fixed repurchase price plus accrued and unpaid dividends, and (viii) any
amendment, supplement, modification, deferral, renewal, extension, refunding
or refinancing of any liability of the types referred to in clauses (i)
through (vii) above. For purposes hereof, the "maximum fixed repurchase price"
of any Redeemable Capital Stock which does not have a fixed repurchase price
shall be calculated in accordance with the terms of such Redeemable Capital
Stock as if such Redeemable Capital Stock were purchased on any date on which
Indebtedness shall be required to be determined pursuant to the Indenture, and
if such price is based upon, or measured by, the Fair Market Value of such
Redeemable Capital Stock, such Fair Market Value to be determined in good
faith by the board of directors of the issuer of such Redeemable Capital
Stock. In no event shall "Indebtedness" include any trade payable or other
current liabilities arising in the ordinary course of business. The amount of
any item of Indebtedness shall be the amount of such Indebtedness properly
classified as a liability on a balance sheet prepared in accordance with GAAP.
"Indenture Obligations" means the obligations of the Company and any other
obligor under the Indenture or under the Notes including any Guarantor, to pay
principal of, premium, if any, and interest when due and payable, and all
other amounts due or to become due under or in connection with the Indenture,
the Notes and the performance of all other obligations to the Trustee and the
holders under the Indenture and the Notes, according to the respective terms
thereof.
"Interest Rate Agreements" means one or more of the following agreements
which shall be entered into by one or more financial institutions: interest
rate protection agreements (including, without limitation, interest rate
swaps, caps, floors, collars and similar agreements) and/or other types of
interest rate hedging agreements from time to time.
"Investment" means, with respect to any Person, directly or indirectly, any
advance, loan (including guarantees), or other extension of credit or capital
contribution to (by means of any transfer of cash or other property to others
or any payment for property or services for the account or use of others), or
any purchase,
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acquisition or ownership by such Person of any Capital Stock, bonds, notes,
debentures or other securities issued or owned by any other Person and all
other items that would be classified as investments on a balance sheet
prepared in accordance with GAAP.
"Lien" means any mortgage or deed of trust, pledge, lien (statutory or
otherwise), security interest, easement, hypothecation, or other encumbrance
upon or with respect to any property of any kind, real or personal, movable or
immovable, now owned or hereafter acquired. 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, other than any lease
properly classified as an operating lease under GAAP and intellectual property
licensing arrangements.
"Maturity" means, when used with respect to the Notes, the date on which the
principal of the Notes becomes due and payable as therein provided or as
provided in the Indenture, whether at Stated Maturity, the Offer Date or the
redemption date and whether by declaration of acceleration, Offer in respect
of Excess Proceeds, Change of Control Offer in respect of a Change of Control,
call for redemption or otherwise.
"Net Cash Proceeds" means (a) with respect to any Asset Sale by any Person,
the proceeds thereof (without duplication in respect of all Asset Sales) in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of, or stock or other assets
when disposed of for, cash or Cash Equivalents (except to the extent that such
obligations are financed or sold with recourse to the Company or any
Subsidiary) net of (i) brokerage commissions and other reasonable fees and
expenses (including fees and expenses of counsel and investment bankers)
related to such Asset Sale, (ii) provisions for all taxes payable as a result
of such Asset Sale, (iii) payments made to retire Indebtedness where payment
of such Indebtedness is secured by the assets or properties the subject of
such Asset Sale, (iv) amounts required to be paid to any Person (other than
the Company or any Subsidiary) owning a beneficial interest in the assets
subject to the Asset Sale and (v) appropriate amounts to be provided by the
Company or any Subsidiary, as the case may be, as a reserve, in accordance
with GAAP, against any liabilities associated with such Asset Sale and
retained by the Company or any 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
and (b) with respect to any issuance or sale of Capital Stock or options,
warrants or rights to purchase Capital Stock, or debt securities or Capital
Stock that have been converted into or exchanged for Capital Stock as referred
to under "B Certain Covenants B Limitation on Restricted Payments," the
proceeds of such issuance or sale in the form of cash or Cash Equivalents
including payments in respect of deferred payment obligations when received in
the form of, or stock or other assets when disposed of for, cash or Cash
Equivalents (except to the extent that such obligations are financed or sold
with recourse to the Company or any Subsidiary), net of attorney's fees,
accountant's fees and brokerage, consultation, underwriting and other fees and
expenses actually incurred in connection with such issuance or sale (or
conversion in the case of debt securities or Capital Stock that have been
converted) and net of taxes paid or payable as a result thereof.
"Notes" means the Existing Notes and the Exchange Notes issued from time to
time under the Indenture.
"Pari Passu Indebtedness" means (a) any Indebtedness of the Company that is
pari passu in right of payment to the Notes and (b) with respect to any
Guarantee, Indebtedness which ranks pari passu in right of payment to such
Guarantee.
"Permitted Investment" means (i) Investments in any Wholly Owned Subsidiary
or any Person which, as a result of such Investment, (a) becomes a Wholly
Owned Subsidiary or (b) is merged or consolidated with or into, or transfers
or conveys all or substantially all of its assets to, or is liquidated into,
the Company or any Wholly Owned Subsidiary; (ii) Indebtedness of the Company
or a Subsidiary described under clauses (iv) and (vii) of paragraph (b) under
"--Certain Covenants--Limitation on Indebtedness"; (iii) Investments in any of
the Notes; (iv) Investments in Cash Equivalents; (v) Investments acquired by
the Company or any Subsidiary in connection with an Asset Sale permitted under
"--Certain Covenants--Limitation on Sale of Assets" to the
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extent such Investments are non-cash proceeds as permitted under such
covenant; (vi) Investments in existence on the date of the Indenture; (vii)
guarantees of Indebtedness of a Wholly Owned Subsidiary given by the Company
or another Wholly Owned Subsidiary and guarantees of Indebtedness of the
Company given by any Subsidiary, in each case, in accordance with the terms of
the Indenture; (viii) advances to employees or officers of the Company in the
ordinary course of business so long as the aggregate amount of such advances
shall not exceed $1 million outstanding at any one time; (ix) any Investment
in the Company by any Subsidiary of the Company; provided, that any such
Investment in the form of Indebtedness shall be Subordinated Indebtedness; (x)
accounts receivable created or acquired in the ordinary course of business of
the Company or any Subsidiary and Investments arising from transactions by the
Company or any Subsidiary with trade creditors or customers in the ordinary
course of business (including any such Investment received pursuant to any
plan of reorganization or similar arrangement pursuant to the bankruptcy or
insolvency of such trade creditors or customers or otherwise in settlement of
a claim); (xi) loans in the ordinary course of business to employees of the
Company or a Subsidiary to purchase Capital Stock of the Company pursuant to
the terms of employee stock benefit plans; (xii) Investments the consideration
of which is Capital Stock of the Company; (xiii) stock obligations or
securities received in satisfaction of judgments; (xiv) Investments in prepaid
expenses, negotiable instruments held for collection, and lease, utility and
workers' compensation, performance and other similar deposits; and (xv) any
other Investments in an aggregate amount not to exceed $20 million at any one
time outstanding. In connection with any assets or property contributed or
transferred to any Person as an Investment, such property and assets shall be
equal to the Fair Market Value (as determined by the Company's Board of
Directors) at the time of such Investment.
"Permitted Lien" means:
(a) any Lien existing as of the date of the Indenture;
(b) any Lien arising by reason of (1) any judgment, decree or order of
any court, so long as such Lien is adequately bonded and any appropriate
legal proceedings which may have been duly initiated for the review of such
judgment, decree or order shall not have been finally terminated or the
period within which such proceedings may be initiated shall not have
expired; (2) taxes not yet delinquent or which are being contested in good
faith; (3) security for payment of workers' compensation or other insurance
or arising under worker's compensation laws or similar legislation; (4)
good faith deposits in connection with bids, tenders, leases, contracts
(other than contracts evidencing Indebtedness); (5) zoning restrictions,
easements, licenses, reservations, title defects, rights of others for
rights of way, utilities, sewers, electric lines, telephone or telegraph
lines, and other similar purposes, provisions, covenants, conditions,
waivers, restrictions on the use of property or minor irregularities of
title (and with respect to leasehold interests, mortgages, obligations,
liens and other encumbrances incurred, created, assumed or permitted to
exist and arising by, through or under a landlord or owner of the leased
property, with or without consent of the lessee), none of which materially
impairs the use of any parcel of property material to the operation of the
business of the Company or any Subsidiary or the value of such property for
the purpose of such business; (6) deposits to secure public or statutory
obligations, or in lieu of surety or appeal bonds; or (7) operation of law
in favor of landlords, carriers, warehousemen, bankers, mechanics,
materialmen, laborers, employees or suppliers, incurred in the ordinary
course of business for sums which are not yet delinquent or are being
contested in good faith by negotiations or by appropriate proceedings which
suspend the collection thereof;
(c) any Lien to secure the performance bids, trade contracts, leases
(including, without limitation, statutory and common law landlord's liens),
statutory obligations, surety and appeal bonds, letters of credit and other
obligations of a like nature and incurred in the ordinary course of
business of the Company or any Subsidiary;
(d) any Lien securing obligations in connection with Indebtedness
permitted under that section of the Indenture described in clause (i) of
paragraph (b) of "--Limitation on Indebtedness" which are incurred or
assumed in connection with the acquisition, development or construction of
real or personal, moveable or immovable property within 180 days of such
incurrence or assumption; provided that such Liens only extend to such
acquired, developed or constructed property and any accessories,
accessions, additions, replacements and proceeds thereof; and
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(e) any Lien arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default;
(f) any Lien securing obligations in connection with Indebtedness
permitted under that section of the Indenture described in clauses (ii) or
(iii) of paragraph (b) of "--Limitation on Indebtedness;"
(g) any Lien in favor of the Company or any Subsidiary;
(h) any Lien securing obligations in connection with Acquired
Indebtedness; provided that any such Lien does not extend to or cover any
property or assets of the Company or any of its Subsidiaries other than the
property or assets of the Acquired Person covered thereby or the property
assets so acquired;
(i) any Lien in favor of the Trustee for the benefit of the Holders or
the Trustee arising under the provisions in the Indenture or the Escrow
Agreement;
(j) any Lien encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements of the Company
or any Subsidiary if and to the extent arising in the ordinary course of
business, including rights of offset and set-off;
(k) any Lien in favor of customs or revenue authorities to secure payment
of customs duties in connection with the importation of goods in the
ordinary course of business;
(l) leases or subleases granted to third Persons not interfering with the
ordinary course of business of the Company or its Subsidiaries;
(m) any Lien securing any extension, renewal, refinancing or replacement,
in whole or in part, of any obligation or Indebtedness described in the
foregoing clauses (a) through (d) and (f) through (h) so long as no
additional collateral is granted as security thereby.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock" means, with respect to any Person, any Capital Stock of
any class or classes (however designated) which is preferred as to the payment
of dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over the
Capital Stock of any other class in such Person.
"Public Equity Offering" means an underwritten offering of common stock of
the Company with gross proceeds to the Company of at least $25 million
pursuant to a registration statement that has been declared effective by the
Commission pursuant to the Securities Act (other than a registration statement
on Form S-8 or otherwise relating to equity securities issuable under any
employee benefit plan of the Company).
"Purchase Money Obligation" means any Indebtedness secured by a Lien on
assets related to the business of the Company and any additions and accessions
thereto, which are purchased by at any time after the Notes are issued;
provided that (i) the security agreement or conditional sales or other title
retention contract pursuant to which the Lien on such assets is created
(collectively a "Purchase Money Security Agreement") shall be entered into
within 180 days after the purchase or substantial completion of the
construction of such assets and shall at all times be confined solely to the
assets so purchased or acquired, any additions and accessions thereto and any
proceeds therefrom, (ii) at no time shall the aggregate principal amount of
the outstanding Indebtedness secured thereby be increased, except in
connection with the purchase of additions and accessions thereto and except in
respect of fees and other obligations in respect of such Indebtedness and
(iii) (A) the aggregate outstanding principal amount of Indebtedness secured
thereby (determined on a per asset basis is the case of any additions and
accessions) shall not at the time such Purchase Money Security Agreement in
entered into exceed 100% of the purchase price to the Company of the assets
subject thereto or (B) the Indebtedness secured thereby shall be with recourse
solely to the assets so purchased or acquired, any additions and accessions
thereto and any proceeds therefrom.
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"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any Capital Stock that, either by its terms
or by the terms of any security into which it is convertible or exchangeable
or otherwise, is or upon the happening of an event or passage of time would
be, required to be redeemed prior to the Stated Maturity of the principal of
the Notes or is redeemable at the option of the holder thereof at any time
prior to such Stated Maturity, or is convertible into or exchangeable for debt
securities at any time prior to such Stated Maturity at the option of the
holder thereof.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor statute.
"Stated Maturity" means, when used with respect to any Indebtedness or any
installment of interest thereon, the dates specified in such Indebtedness as
the fixed date on which the principal of such Indebtedness or such installment
of interest, as the case may be, is due and payable.
"Strategic Investor" means any Person which is (or a controlled Affiliate of
any Person which is or a controlled Affiliate of which is) engaged principally
in the Telecommunications Business and which has a Total Market Capitalization
of at least $1.0 billion.
"Subordinated Indebtedness" means Indebtedness of the Company or a Guarantor
subordinated in right of payment to the Notes or the Guarantee of such
Guarantor, as the case may be.
"subsidiary" means, with respect to any Person, an corporation, association
or other business entity (i) of which outstanding Capital Stock having at
least the majority of the votes entitled to be cast in the election of
directors is owned, directly or indirectly, by such Person and/or any one or
more subsidiaries of such Person, or (ii) of which at least a majority of
voting interest is owned, directly or indirectly, by such Person and/or one or
more subsidiaries of such Person.
"Subsidiary" means any subsidiary of the Company other than an Unrestricted
Subsidiary.
"Telecommunications Business" means, when used in reference to any Person,
that such Person is engaged primarily in (i) the business of transmitting, or
providing services relating to the transmission of, voice, video or data
through owned or leased transmission facilities, (ii)the business of creating,
developing or marketing communications related network equipment, software and
other devices for use in a Telecommunications Business or (iii) businesses
reasonably related or incidental thereto.
"Total Consolidated Indebtedness" means, as at any date of determination, an
amount equal to the aggregate amount of all Indebtedness of the Company and
any Subsidiary, on a Consolidated basis, outstanding as of such date of
determination, after giving effect to any Incurrence of Indebtedness and the
application of the proceeds therefrom giving rise to such determination.
"Total Market Capitalization" of any Person means, as of any day of
determination, the sum of (a) the consolidated Indebtedness of such Person and
any Subsidiaries on such day, plus (b) the product of (i) the aggregate number
of outstanding shares of common stock of such Person on such day (which shall
not include any options or warrants on, or securities convertible or
exchangeable into, shares of Common Stock of such Person) and (ii) the average
closing price of such common stock over the 10 consecutive Trading Days ending
not earlier than 10 Trading Days immediately prior to such date of
determination, plus (c) the liquidation value of any outstanding shares of
preferred stock of such Person on such day. If no such closing price exists
with respect to shares of any such class, the value of such shares for
purposes of clause (b) of the preceding sentence shall be determined by the
Board in good faith and evidenced by a resolution of the Board filed with the
Trustee. Notwithstanding the foregoing, unless the Person's Common Stock is
listed on any national securities exchange or on the Nasdaq National Market,
the "Total Market Capitalization" of the Person shall mean, as of any day of
determination, the enterprise value (without duplication) of the Person and
any subsidiaries (including the fair
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market value of their debt and equity), as determined by an independent
banking firm of national standing with experience in such valuations and
evidenced by a written opinion in customary form filed with the Trustee;
provided that for purposes of any such determination, the enterprise value of
the Person shall be calculated as if the Person were a publicly held
corporation without a controlling stockholder. For purposes of any such
determination, such banking firm's written opinion may state that such fair
market value is no less than a specified amount and such opinion may be as of
a date no earlier than 90 days prior to the date of such determination.
"Trading Day" with respect to a securities exchange or automated quotation
system means a day on which such exchange or system is open for a full day of
trading.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended, or
any successor statute.
"Unrestricted Subsidiary" means (i) any subsidiary of the Company that at
the time of determination shall be an Unrestricted Subsidiary (as designated
by the Board of Directors of the Company, as provided below) and (ii) any
subsidiary of an Unrestricted Subsidiary. The Board of Directors of the
Company may designate any subsidiary of the Company (including any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary if all
of the following conditions apply: (a) neither the Company nor any of its
Subsidiaries provides credit support for Indebtedness of such subsidiary
(including any undertaking, agreement or instrument evidencing such
Indebtedness), (b) such subsidiary is not liable, directly or indirectly, with
respect to any Indebtedness other than Unrestricted Subsidiary Indebtedness,
(c) any Investment in such subsidiary made as a result of designating such
subsidiary an Unrestricted Subsidiary shall not violate the provisions of the
"--Certain Covenants--Limitation on Unrestricted Subsidiaries" covenant and
such unrestricted subsidiary is not party to any agreement, contract,
arrangement or understanding at such time with the Company or any Subsidiary
of the Company unless the terms of any such agreement, contract, arrangement
or understanding are no less favorable to the Company or such Subsidiary than
those that might be obtained at the time from Persons who are not Affiliates
of the Company; and (v) such Unrestricted Subsidiary does not own any Capital
Stock in any Subsidiary of the Company which is not simultaneously being
designated an Unrestricted Subsidiary. Any such designation by the Board of
Directors of the Company shall be evidenced to the Trustee by filing with the
Trustee a board resolution giving effect to such designation and an officers'
certificate certifying that such designation complies with the foregoing
conditions and shall be deemed a Restricted Payment on the date of designation
in an amount equal to the greater of (1) the net book value of such Investment
or (2) the fair market value of such Investment as determined in good faith by
the Company's Board of Directors. The Board of Directors of the Company may
designate any Unrestricted Subsidiary as a Subsidiary; provided that (i)
immediately after giving effect to such designation, the Company could incur
$1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant
to the restrictions under "--Certain Covenants--Limitation on Indebtedness"
and (ii) all Indebtedness of such Subsidiary shall be deemed to be incurred on
the date such Subsidiary becomes a Subsidiary.
"Unrestricted Subsidiary Indebtedness" of any Unrestricted Subsidiary means
Indebtedness of such Unrestricted Subsidiary (i) as to which neither the
Company nor any Subsidiary is directly or indirectly liable (by virtue of the
Company or any such Subsidiary being the primary obligor on, guarantor of, or
otherwise liable in any respect to, such Indebtedness), except Guaranteed Debt
of the Company or any Subsidiary to any Affiliate, in which case (unless the
incurrence of such Guaranteed Debt resulted in a Restricted Payment at the
time of incurrence) the Company shall be deemed to have made a Restricted
Payment equal to the principal amount of any such Indebtedness to the extent
guaranteed at the time such Affiliate is designated an Unrestricted Subsidiary
and (ii) which, upon the occurrence of a default with respect thereto, does
not result in, or permit any holder of any Indebtedness of the Company or any
Subsidiary to declare, a default on such Indebtedness of the Company or any
Subsidiary or cause the payment thereof to be accelerated or payable prior to
its Stated Maturity.
"U.S. Government Securities" means securities that are direct obligations of
the United States of America, the payment of which its full faith and credit
is pledged.
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"Voting Stock" means Capital Stock of the class or classes pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers or trustees
of a corporation (irrespective of whether or not at the time Capital Stock of
any other class or classes shall have or might have voting power by reason of
the happening of any contingency).
"Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock of which
is owned by the Company or another Wholly Owned Subsidiary. For the purposes
of this definition, any director qualifying shares or investments by foreign
nationals mandated by applicable law shall be disregarded in determining the
ownership of a Subsidiary.
REGISTRATION RIGHTS
The Company and the Initial Purchasers entered into the Registration Rights
Agreement on the Closing Date of the Existing Notes Offering. Pursuant to the
Registration Rights Agreement, the Company agreed to file with the Commission
the Exchange Offer Registration Statement, of which this Prospectus is a part,
on the appropriate form under the Securities Act with respect to the Exchange
Notes. Upon the effectiveness of the Exchange Offer Registration Statement,
the Company will offer to the holders of Transfer Restricted Securities (as
defined) pursuant to the Exchange Offer who are able to make certain
representations the opportunity to exchange their Transfer Restricted
Securities for Exchange Notes. If (i) the Company is not required to file the
Exchange Offer Registration Statement or permitted to consummate the Exchange
Offer because the Exchange Offer is not permitted by applicable law or
Commission policy or (ii) any holder of Transfer Restricted Securities
notifies the Company prior to the 20th day following consummation of the
Exchange Offer that (A) it is prohibited by law or Commission policy from
participating in the Exchange Offer or (B) that it may not resell the Exchange
Notes acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales or (C) that it is a
broker-dealer and owns Notes acquired directly from the Company or an
affiliate of the Company, the Company will file with the Commission a shelf
registration statement (the "Shelf Registration Statement") to cover resales
of the Notes by the holders thereof who satisfy certain conditions relating to
the provision of information in connection with the Shelf Registration
Statement. The Company will use its best efforts to cause the applicable
registration statement to be declared effective as promptly as possible by the
Commission. For purposes of the foregoing, "Transfer Restricted Securities"
means each Existing Note until (i) the date on which such Existing Note has
been exchanged by a person other than a broker-dealer for an Exchange Note in
the Exchange Offer, (ii) following the exchange by a broker-dealer in the
Exchange Offer of a Note for an Exchange Note, the date on which such Exchange
Note is sold to a purchaser who receives from such broker-dealer on or prior
to the date of such sale a copy of the prospectus contained in the Exchange
Offer Registration Statement, (iii) the date on which such Existing Note has
been effectively registered under the Securities Act and disposed of in
accordance with the Shelf Registration Statement or (iv) the date on which
such Existing Note is distributed to the public pursuant to Rule 144 under the
Securities Act.
The Registration Rights Agreement provides that (i) the Company will file an
Exchange Offer Registration Statement with the Commission on or prior to 45
days after the Issue Date, (ii) the Company will use its best efforts to have
the Exchange Offer Registration Statement declared effective by the Commission
on or prior to 105 days after the Issue Date, (iii) unless the Exchange Offer
would not be permitted by applicable law or Commission policy, the Company
will commence the Exchange Offer and use its best efforts to issue on or prior
to 30 days after the date on which the Exchange Offer Registration Statement
was declared effective by the Commission, Exchange Notes in exchange for all
Existing Notes tendered prior thereto in the Exchange Offer and (iv) if
obligated to file the Shelf Registration Statement, the Company will use its
best efforts to file the Shelf Registration Statement with the Commission on
or prior to 45 days after such filing obligation arises and to cause the Shelf
Registration Statement to be declared effective by the Commission on or prior
to 105 days after such obligation arises. If (a) the Company fails to file any
of the Registration Statements required by the Registration Rights Agreement
on or before the date specified for such filing, (b) any of such Registration
Statements is not declared effective by the Commission on or prior to the date
specified for such effectiveness
110
<PAGE>
(the "Target Effectiveness Date"), or (c) the Company fails to consummate the
Exchange Offer within 30 days of the Target Effectiveness Date with respect to
the Exchange Offer Registration Statement, or (d) the Shelf Registration
Statement or the Exchange Offer Registration Statement is declared effective
but thereafter ceases to be effective or usable in connection with resales of
Transfer Restricted Securities during the periods specified in the
Registration Rights Agreement (each such event referred to in clauses (a)
through (d) above a "Registration Default"), the interest rate borne by the
Notes shall be increased by one-half of one percent per annum for the 90-day
period following such Registration Default, which rate will increase by one-
half of one percent per annum with respect to each subsequent 90-day period up
to a maximum of one and one half percent (1.50%) per annum until cured
("Additional Interest"). Following the cure of all Registration Defaults, the
accrual of Additional Interest will cease and the interest rate will revert to
the original rate.
Existing Holders will be required to make certain representations to the
Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information
to be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Registration Rights Agreement in order to have their Notes included in
the Shelf Registration Statement and benefit from the additional interest
provisions set forth above.
111
<PAGE>
DESCRIPTION OF WARRANTS
The Warrants were issued pursuant to a warrant agreement (the "Warrant
Agreement") between the Company and Chase Manhattan Bank and Trust Company,
National Association, as warrant agent (the "Warrant Agent") in a private
transaction that is not subject to the registration requirements of the
Securities Act.
GENERAL
Each Warrant, when exercised, will entitle the holder thereof to receive
6.34 fully paid and non-assessable shares of Common Stock of the Company, par
value $0.001 per share ("Warrant Share"), at an exercise price of $10.8625 per
share, subject to adjustment (the "Exercise Price"). The Exercise Price and
the number of Warrant Shares are both subject to adjustment in certain cases
referred to below. The Warrants will entitle the holders thereof to purchase
in the aggregate 951,108 Warrant Shares, or approximately 5.0% of the
Company's Common Stock on a fully diluted basis as of the closing of the
Offering.
The Warrants will become exercisable after the Separation Date. Unless
exercised, the Warrants will automatically expire on December 15, 2007 (the
"Expiration Date"). The Company will give notice of expiration not less than
90 and not more than 120 days prior to the Expiration Date to the registered
holders of the then outstanding Warrants. If the Company fails to give such
notice, the Warrants will not expire until 90 days after the Company gives
such notice. In no event will holders be entitled to any damages or other
remedy for the Company's failure to give such notice other than any such
extension.
The Warrants may be exercised by surrendering to the Company the warrant
certificates evidencing the Warrants to be exercised with the accompanying
form of election to purchase properly completed and executed, together with
payment of the Exercise Price. Payment of the Exercise Price may be made (A)
by tendering Senior Notes having an aggregate principal amount, plus accrued
and unpaid interest, if any, thereon, to the date of exercise equal to the
Exercise Price, (B) by tendering Warrants having a fair market value (as
determined in good faith by the Company's Board of Directors) equal to the
Exercise Price or (C) by a combination of Senior Notes and Warrants. Upon
surrender of the warrant certificate and payment of the Exercise Price, the
Company will deliver or cause to be delivered, to or upon the written order of
such holder, stock certificates representing the number of whole shares of
Common Stock to which the holder is entitled. If less than all of the Warrants
evidenced by a warrant certificate are to be exercised, a new warrant
certificate will be issued for the remaining number of Warrants.
No fractional shares of Common Stock will be issued upon exercise of the
Warrants. The Company will pay to the holder of the Warrant at the time of
exercise an amount in cash equal to the current market value of any such
fractional share of Common Stock less a corresponding fraction of the Exercise
Price.
Certificates for Warrants will be issued in registered form only, and no
service charge will be made for registration or transfer or exchange upon
surrender of any Warrant certificate at the office of the Warrant Agent
maintained for that purpose. The Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed
in connection with any registration or transfer or exchange of Warrant
certificates.
The holders of the Warrants will have no right to vote on matters submitted
to the stockholders of the Company and will have no right to receive
dividends. The holders of the Warrants will not be entitled to share in the
assets of the Company in the event of liquidation, dissolution or the winding
up of the Company.
ADJUSTMENTS
The number of Warrant Shares purchasable upon the exercise of the Warrants
and the Exercise Price both will be subject to adjustment in certain events
including (i) the payment by the Company of dividends (or other distributions)
on Common Stock of the Company payable in Common Stock of the Company or other
shares of the Company's capital stock, (ii) subdivisions, combinations and
reclassifications of Common Stock of the
112
<PAGE>
Company, (iii) the issuance to all holders of Common Stock of the Company of
rights, options or warrants entitling them to subscribe for Common Stock of
the Company, or for securities convertible into or exchangeable for shares of
Common Stock of the Company, in either case for a consideration per share of
Common Stock which is less than the current market price per share (as defined
in the Warrant Agreement) of Common Stock of the Company, and (iv) the
distribution to all holders of Common Stock of the Company of any of the
Company's assets, debt securities or any rights or warrants to purchase
securities (excluding those rights and warrants referred to in clause (iii)
above and excluding cash dividends or other cash distributions from current or
retained earnings).
No adjustment in the Exercise Price will be required unless such adjustment
would require an increase or decrease of at least one percent (1%) in the
Exercise Price, provided, however, that any adjustment which is not made will
be carried forward and taken into account in any subsequent adjustment.
In the case of certain consolidations or mergers of the Company, or the sale
of all or substantially all of the assets of the Company to another
corporation, each Warrant will thereafter be exercisable for the right to
receive the kind and amount of shares of stock or other securities or property
to which such holder would have been entitled as a result of such
consolidation, merger or sale had the Warrants been exercised immediately
prior thereto.
RESERVATION OF SHARES
The Company has authorized and reserved for issuance and will at all times
reserve and keep available such number of shares of Common Stock as will be
issuable upon the exercise of all outstanding Warrants. Such shares of Common
Stock, when paid for and issued, will be duly and validly issued, fully paid
and non-assessable, free of preemptive rights and free from all taxes, liens,
charges and security interests with respect to the issuance thereof.
AMENDMENT
From time to time, the Company and the Warrant Agent, without the consent of
the holders of the Warrants, may amend or supplement the Warrant Agreement for
certain purposes, including curing defects or inconsistencies or making any
change that does not materially adversely affect the rights of any holder. Any
amendment or supplement to the Warrant Agreement that has a material adverse
effect on the interests of the holders of the Warrants will require the
written consent of the holders of a majority of the then outstanding Warrants
(excluding Warrants held by the Company or any of its Affiliates). The consent
of each holder of the Warrants affected will be required for any amendment
pursuant to which the Exercise Price would be increased or the number of
shares of Common Stock purchasable upon exercise of Warrants would be
decreased (other than pursuant to adjustments provided in the Warrant
Agreement).
REPORTS
Whether or not required by the rules and regulation of the Commission, so
long as any of the Warrants remain outstanding, the Company shall cause copies
of the SEC Reports described under "Description of the Notes-Certain
Covenants-Provision of Financial Statements" to be filed with the Warrant
Agent and mailed to the holders at their addresses appearing in the register
of Warrants maintained by the Warrant Agent.
REGISTRATION RIGHTS
The holders of the Warrants and the Warrant Shares will be entitled to
certain rights with respect to the registration of the Warrant Shares under
the Securities Act as discussed below.
Demand Registration Rights. The holders of the Warrants and the Warrant
Shares may require the Company, after the first anniversary of the date of
issuance of the Warrants, on three occasions, at the Company's sole expense
(excluding underwriter discounts), to prepare and file a registration
statement under the Securities
113
<PAGE>
Act that provides for the public resale by the holders of Warrants and/or
Warrant Shares of all or any portion of their Warrant Shares in an
underwritten public offering or otherwise (the "Resale Registration"). The
Company will be required to use its best efforts to have each such
registration statement declared effective and to remain effective for a period
of six months (or such shorter period as will terminate when all Warrant
Shares covered thereby have been sold). Only holders of at least 25% in
aggregate of the Warrants and the Warrant Shares (singly or collectively) will
be permitted to initiate a demand registration. The Company shall be entitled
to delay the filing of a demand registration statement under certain
circumstances for up to 90 days. In the event the holders of the Warrants and
the Warrant Shares require the Company to effect a Resale Registration,
certain other security holders of the Company will be entitled to include
shares of Common Stock of the Company held by them in such Resale
Registration. All shares of Common Stock included in such Resale Registration
shall, under certain circumstances, be subject to pro rata cut-back
provisions.
Piggyback Registration Rights. If, after the first anniversary of the date
of issuance of the Warrants, the Company proposes to register any of its
Common Stock under the Securities Act for its own account, the holders of the
Warrants and the Warrant Shares will be entitled to notice of the registration
and will be entitled to include, at the Company's sole expense (excluding
underwriter discounts), all or any portion of their Warrant Shares therein,
subject to pro rata cut-back provisions in the event that the managing
underwriter in any underwritten offering determines that the inclusion of the
Warrant Shares and any other securities entitled to piggyback registration
rights would adversely affect the offering being registered. The Company shall
be entitled to delay the filing of a shelf registration statement under
certain circumstances for up to 90 days.
114
<PAGE>
PROVISIONS GENERALLY APPLICABLE TO ALL SECURITIES
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the Existing Notes and the
Warrants were issued in the form of one Global Note (the "Global Note") and
one Global Warrant Certificate (the "Global Warrant Certificate"). Each Global
Note and the Global Warrant Certificate are sometimes each referred to herein
as a "Global Security." Each Global Security was deposited on the date of the
closing of the sale of the Existing Notes (the "Closing Date") with, or on
behalf of, The Depositary Trust Company ( the "Depositary") and registered in
the name of Cede & Co., as nominee of the Depositary (such nominee being
referred to herein as the "Global Security Holder"). As used in this section,
the term "Securities" shall refer to any of the Existing Notes, Exchange Notes
or Warrants, in whatever form held.
Existing Notes that were (i) transferred to institutional "accredited
investors" who are not "qualified institutional buyers" (as such terms are
defined under "Transfer Restrictions" elsewhere herein (the "Non-Global
Purchasers")) or (ii) issued as described below under "Certificated
Securities" were issued in registered, definitive, certificated form (the
"Certificated Securities"). Upon the transfer to a qualified institutional
buyer of any Certificated Security initially issued to a Non-Global Purchaser,
such Certificated Security may, unless a Global Security has previously been
exchanged for Certificated Securities, be exchanged for an interest in a
Global Security representing the principal amount of the Securities being
transferred.
The procedures listed in the prior two paragraphs will also be applicable to
Exchange Notes issued in the Exchange offer.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Depositary's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies,
clearing corporations and certain other organizations. Access to the
Depositary's system is also available to other entities such as banks,
brokers, dealers and trust companies (collectively, the "Indirect
Participants" or the "Depositary's Indirect Participants") that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only through the Depositary's
Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of any Global Security, the Depositary will credit
the accounts of Participants designated by the Initial Purchasers with
portions of the principal amount of any Global Security and (ii) ownership of
the Securities evidenced by each Global Security will be shown on, and the
transfer of ownership thereof will be effected only through, records
maintained by the Depositary (with respect to the interests of the
Depositary's Participants), the Depositary's Participants and the Depositary's
Indirect Participants. Holders are advised that the laws of some states
require that certain persons take physical delivery in definitive form of
securities that they own. Consequently, the ability to own, transfer or pledge
Securities evidenced by any Global Security will be limited to such extent.
For certain other restrictions on the transferability of the Securities, see
"Transfer Restrictions."
So long as the Global Security Holder is the registered owner of any
Securities, the Global Security Holder will be considered the sole holder
under the Indenture of any Securities evidenced by any Global Security.
Beneficial owners of Securities evidenced by any Global Security will not be
considered the owners or holders thereof under the Indenture for any purpose,
including with respect to the giving of any directions, instructions or
approvals to the Trustee thereunder. Neither the Company nor the Trustee will
have any responsibility or liability for any aspect of the records of the
Depositary or for maintaining, supervising or reviewing any records of the
Depositary relating to the Securities.
115
<PAGE>
Payments in respect of the principal of, premium, if any, interest and
Additional Interest, if any, on any Notes registered in the name of the Global
Security Holder on the applicable record date will be payable by the Trustee
to or at the direction of the Global Security Holder in its capacity as the
registered holder under the Indenture. Under the terms of the Indenture, the
Company and the Trustee may treat the person in whose names Notes, including
any Global Security, are registered as the owners thereof for the purpose of
receiving such payments. Consequently, neither the Company nor the Trustee has
or will have any responsibility or liability for the payment of such amounts
to beneficial owners of Securities. The Company believes, however, that it is
currently the policy of the Depositary to immediately credit the accounts of
the relevant Participants with such payments, in amounts proportionate to
their respective holdings of beneficial interests in the relevant security as
shown on the records of the Depositary. Payments by the Depositary's
Participants and the Depositary's Indirect Participants to the beneficial
owners of Securities will be governed by standing instructions and customary
practice and will be the responsibility of the Depositary's Participants or
the Depositary's Indirect Participants.
Certificated Securities
Transferees of Existing Notes who are not "qualified institutional buyers"
as defined in Rule 144A under the Securities Act may hold Existing Notes only
in the form of Certificated Securities. All such Certificated Securities would
be subject to the legend requirements described in the Offering Memorandum
relating to the Existing Notes Offering under "Transfer Restrictions." In
addition, if (i)the Company notifies the Trustee in writing that the
Depositary is no longer willing or able to act as a depositary and the Company
is unable to locate a qualified successor within 90 days or (ii) the Company,
at its option, notifies the Trustee in writing that it elects to change the
issuance of Existing Notes in the form of Certificated Securities under the
Indenture then, upon surrender by the Global Security Holder of any Global
Security, Certificated Securities will be issued to each person that the
Global Security Holder and the Depositary identify as being the beneficial
owner of the related Securities.
Neither the Company nor the Trustee will be liable for any delay by the
Global Security Holder or the Depositary in identifying the beneficial owners
of Existing Notes and the Company and the Trustee may conclusively rely on,
and will be protected in relying on, instructions from the Global Security
Holder or the Depositary for all purposes.
Same-Day Settlement and Payment
The Indenture requires that payments in respect of the Notes represented by
the Global Note (including principal, premium, if any, interest and Additional
Interest, if any) be made by wire transfer of immediately available funds to
the accounts specified by the Global Security Holder. With respect to
Certificated Notes, the Company will make all payments of principal, premium,
if any, interest and Additional Interest, if any, by wire transfer of
immediately available funds to the accounts specified by the holders thereof
or, if no such account is specified, by mailing a check to each such holder's
registered address. Secondary trading in long-term notes and debentures of
corporate issuers is generally settled in clearing-house or next-day funds. In
contrast, the Existing Notes represented by the Global Note have been approved
for trading in the PORTAL market and to trade in the Depositary's Same-Day
Funds Settlement System, and any permitted secondary market trading activity
in such Existing Notes will, therefore, be required by the Depositary to be
settled in immediately available funds. The Company expects that secondary
trading in the Certificated Securities will also be settled in immediately
available funds.
116
<PAGE>
PLAN OF DISTRIBUTION
This Prospectus, as it may be amended or supplemented from time to time, may
be used by Participating Broker-Dealers in connection with resales of Exchange
Notes received in exchange for Existing Notes where such Existing Notes were
acquired as a result of market-making activities or other trading activities.
Each Participating Broker-Dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Company
has agreed that under certain circumstances, the Company shall use its best
efforts to keep the Exchange Offer Registration Statement continuously
effective, supplemented and amended to the extent necessary to ensure that it
is available for sales of Exchange Notes by Participating Broker-Dealers, and
to ensure that the Exchange Offer Registration Statement conforms with the
requirements of the Act and the policies, rules and regulations of the
Commission as announced from time to time, for a period expiring approximately
180 days from the date on which the Exchange Offer Registration Statement is
declared effective.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer or the purchasers of any such Exchange Notes. Any
Participating Broker-dealer that acquired Existing Notes as a result of market
making activities or other trading activities and who resells Exchange Notes
that were received by it pursuant to the Exchange Offer and any broker or
dealer that participates in a distribution of such Exchange Notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of Exchange Notes and any commission or concessions
received by any such persons may be deemed to be underwriting compensation
under the Securities Act. The Letter of Transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Exchange Notes will be
passed upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California.
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1997 and
for each of the three years in the period ended December 31, 1997, appearing
in this Prospectus and Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The financial statements of InterNex Information Services, Inc. as of June
30, 1997 and for the year then ended, included in this Prospectus and
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, dated
January 26, 1998, and are included herein in reliance upon the authority of
said firm as experts in accounting and auditing.
117
<PAGE>
CONCENTRIC NETWORK CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Concentric Network Corporation:
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Balance Sheets........................................................... F-3
Statements of Operations................................................. F-4
Statements of Common Stock Subject to Rescission and Stockholders' Equity
(Deficit)............................................................... F-5
Statements of Cash Flows................................................. F-7
Notes to Financial Statements............................................ F-9
</TABLE>
<TABLE>
<S> <C>
Internex Information Services, Inc.:
</TABLE>
<TABLE>
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants.............. F-24
Balance Sheets............................................................. F-25
Statements of Operations................................................... F-26
Statements of Shareholders' Equity ........................................ F-27
Statements of Cash Flows................................................... F-28
Notes to Financial Statements.............................................. F-29
</TABLE>
<TABLE>
<S> <C>
Selected Unaudited ProForma Condensed Combined Financial Information:
</TABLE>
<TABLE>
<S> <C>
Introduction............................................................. F-34
Balance Sheet............................................................ F-35
Statements of Operations................................................. F-36
Notes to Selected Unaudited Pro Forma Condensed Combined Financial
Information............................................................. F-37
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors Concentric Network Corporation.
We have audited the accompanying balance sheets of Concentric Network
Corporation as of December 31, 1996 and 1997, and the related statements of
operations, common stock subject to rescission and stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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 Concentric Network
Corporation at December 31, 1996 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly
in all material respects the financial information set forth therein.
/s/ Ernst & Young LLP
San Jose, California
January 27, 1998, except for Note
12 as to which the date is
February 5, 1998
F-2
<PAGE>
CONCENTRIC NETWORK CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 17,657 $ 119,959
Current portion of restricted cash....................... -- 19,125
Accounts receivable, net of allowances of $56 in 1996 and
$80 in 1997............................................. 1,849 4,549
Prepaid expenses and other current assets................ 1,722 5,139
-------- ---------
Total current assets.................................... 21,228 148,772
Property and equipment:
Computer and telecommunications equipment................ 55,091 71,942
Software................................................. 583 1,519
Furniture and fixtures and leasehold improvements........ 2,130 2,984
-------- ---------
57,804 76,445
Accumulated depreciation and amortization................ 9,877 22,735
-------- ---------
47,927 53,710
Restricted cash, net of current portion................... -- 33,400
Other assets.............................................. 1,567 8,607
-------- ---------
Total assets.......................................... $ 70,722 $ 244,489
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 16,723 $ 10,144
Accrued compensation and other employee benefits......... 714 1,577
Other current liabilities................................ 2,163 4,917
Current portion of capital lease obligations, including
$10,180 in 1996 and $13,600 in 1997 to a related party.. 11,258 15,326
Deferred revenue......................................... 1,238 1,435
-------- ---------
Total current liabilities............................... 32,096 33,399
Capital lease obligations, including $29,167 in 1996 and
$32,373 in 1997 to a related party, net of current
portion.................................................. 30,551 33,595
Notes payable............................................. -- 145,577
Commitments and contingencies
Class A common stock subject to rescission, $0.001 par
value:
Issued and outstanding shares--455 in 1996 and none in
1997.................................................... 5,150 --
Stockholders' equity:
Preferred stock, $0.001 par value; issuable in series:
Authorized shares--7,333 in 1996 and 10,000 in 1997
Issued and outstanding shares--4,901 in 1996 and none in
1997................................................... 95,215 --
Common stock, $0.001 par value; issuable in classes:
Authorized shares--13,343 in 1996 and 100,000 in 1997
Issued and outstanding shares--1,393 in 1996 and 14,139
in 1997................................................ 1,850 182,721
Accumulated deficit....................................... (93,952) (149,534)
Deferred compensation..................................... (188) (1,269)
-------- ---------
Total stockholders' equity.............................. 2,925 31,918
-------- ---------
Total liabilities and stockholders' equity............ $ 70,722 $ 244,489
======== =========
</TABLE>
See accompanying notes.
F-3
<PAGE>
CONCENTRIC NETWORK CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue.......................................... $ 2,483 $ 15,648 $ 45,457
Costs and expenses:
Cost of revenue................................ 16,168 47,945 61,439
Network equipment write-off.................... -- 8,321 --
Development.................................... 837 2,449 4,850
Marketing and sales, including $920, $2,448 and
$2,600 to a related party for the years ended
December 31, 1995, 1996 and 1997,
respectively.................................. 3,899 16,609 24,622
General and administrative..................... 2,866 3,445 4,790
-------- -------- --------
Total costs and expenses..................... 23,770 78,769 95,701
-------- -------- --------
Loss from operations............................. (21,287) (63,121) (50,244)
Other income..................................... -- -- 1,233
Interest income.................................. 137 614 1,217
Interest expense, including $797, $3,065 and
$6,197 to related parties for the years ended
December 31, 1995, 1996 and 1997, respectively.. (858) (3,874) (7,788)
-------- -------- --------
Net loss......................................... $(22,008) $(66,381) $(55,582)
======== ======== ========
Pro forma net loss per share..................... $ (13.46) $ (5.63)
======== ========
Shares used in computing pro forma net loss per
share........................................... 4,937 9,872
======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
CONCENTRIC NETWORK CORPORATION
STATEMENTS OF COMMON STOCK SUBJECT TO RESCISSION AND
STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK STOCKHOLDERS' EQUITY (DEFICIT)
SUBJECT TO ------------------------------------------ TOTAL
RESCISSION PREFERRED STOCK COMMON STOCK ACCUMU- DEFERRED STOCKHOLDERS'
------------- ---------------- --------------- LATED COMPEN- EQUITY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT SATION (DEFICIT)
------ ------ ------- -------- ------ -------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... 248 2,812 -- -- 1,317 1,361 (5,563) -- (4,202)
Issuance of Series A
preferred stock and
common stock (net of
issuance costs)....... -- -- 906 10,147 62 117 -- -- 10,264
Issuance of Series C
preferred stock (net
of issuance costs).... -- -- 805 20,691 -- -- -- -- 20,691
Conversion of note to
Series B preferred
stock................. -- -- 367 4,035 -- -- -- -- 4,035
Warrants issued to
purchase Series B
preferred stock....... -- -- -- 822 -- -- -- -- 822
Issuance of Class A
common stock.......... 23 690 -- -- -- 1 -- -- 1
Issuance of Class A
common stock for
services.............. -- -- -- -- 2 19 -- -- 19
Conversion of officer's
note payable for Class
B common stock........ -- -- -- -- 7 80 -- -- 80
Warrants issued to
purchase Class A
common stock.......... -- -- -- -- -- 61 -- -- 61
Conversion of
debentures to Class A
common stock.......... 174 1,578 -- -- -- -- -- -- --
Net loss............... -- -- -- -- -- -- (22,008) -- (22,008)
--- ------ ------ -------- ----- -------- --------- ------- --------
Balance at December 31,
1995................... 445 5,080 2,078 35,695 1,388 1,639 (27,571) -- 9,763
Issuance of Class A
common stock.......... -- -- -- -- -- 1 -- -- 1
Conversion of
debentures to Class A
common stock.......... 10 70 -- -- -- -- -- -- --
Exercise of options.... -- -- -- -- 5 22 -- -- 22
Conversion of note to
Series C preferred
stock (net of issuance
costs)................ -- -- 123 2,960 -- -- -- -- 2,960
Issuance of Series D
preferred stock (net
of issuance costs).... -- -- 2,451 48,533 -- -- -- -- 48,533
Conversion of note to
Series D preferred
stock................. -- -- 249 5,072 -- -- -- -- 5,072
Warrants issued to
purchase Series D
preferred stock....... -- -- -- 2,955 -- -- -- -- 2,955
Deferred compensation
resulting from grant
of options............ -- -- -- -- -- 188 -- (188) --
Net loss............... -- -- -- -- -- -- (66,381) -- (66,381)
--- ------ ------ -------- ----- -------- --------- ------- --------
Balance at December 31,
1996................... 455 5,150 4,901 95,215 1,393 1,850 (93,952) (188) 2,925
</TABLE>
See accompanying notes.
F-5
<PAGE>
CONCENTRIC NETWORK CORPORATION
STATEMENTS OF COMMON STOCK SUBJECT TO RESCISSION AND
STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK STOCKHOLDERS' EQUITY (DEFICIT)
SUBJECT TO ----------------------------------------------
RESCISSION PREFERRED STOCK COMMON STOCK ACCUMU- DEFERRED
-------------- ----------------- ---------------- LATED COMPEN-
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT SATION
------ ------- ------- -------- ------ -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Class A common stock for
services .......................... -- $ -- -- $ -- 5 $ 17 $ -- $ --
Conversion of Class B common to
Series A preferred stock .......... -- -- 7 -- (7) -- -- --
Conversion of Series A, B, C and D
preferred to Class A common stock.. -- -- (5,693) (99,604) 5,693 99,604 -- --
Shares issued upon the initial
public offering (net of issuance
costs) ............................ -- -- -- -- 4,945 52,757 -- --
Shares issued in a private
placement.......................... -- -- -- -- 1,246 14,950 -- --
Conversion of note to Class A common
stock ............................. -- -- -- -- 253 3,041 -- --
Repurchase of Class A common stock
in connection with the initial
public offering ................... -- -- -- -- (185) (2,217) -- --
Shares issued subject to dilution
ratios............................. -- -- 484 -- -- -- -- --
Exercise of options to purchase
stock ............................. -- -- -- -- 65 243 -- --
Exercise of warrants to purchase
stock ............................. -- -- 301 3,281 309 1,201 -- --
Warrants issued to purchase stock .. -- -- -- 1,108 -- 5,370 -- --
Deferred compensation resulting from
grant of options .................. -- -- -- -- -- 1,303 -- (1,303)
Amortization of deferred
compensation ...................... -- -- -- -- -- -- -- 222
Expiration of statutes of
limitations on common stock subject
to rescission...................... (422) (4,602) -- -- 422 4,602 -- --
Repurchase of shares for
cancellation in connection with
Recission Offer.................... (33) (548) -- -- -- -- -- --
Net loss ........................... -- -- -- -- -- -- (55,582) --
---- ------- ------- -------- ------ -------- --------- -------
Balance at December 31, 1997 ........ -- $ -- -- $ -- 14,139 $182,721 $(149,534) $(1,269)
- --------------------------------------------------
==== ======= ======= ======== ====== ======== ========= =======
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
Issuance of Class A common stock for
services .......................... $ 17
Conversion of Class B common to
Series A preferred stock .......... --
Conversion of Series A, B, C and D
preferred to Class A common stock.. --
Shares issued upon the initial
public offering (net of issuance
costs) ............................ 52,757
Shares issued in a private
placement.......................... 14,950
Conversion of note to Class A common
stock ............................. 3,041
Repurchase of Class A common stock
in connection with the initial
public offering ................... (2,217)
Shares issued subject to dilution
ratios............................. --
Exercise of options to purchase
stock ............................. 243
Exercise of warrants to purchase
stock ............................. 4,482
Warrants issued to purchase stock .. 6,478
Deferred compensation resulting from
grant of options .................. --
Amortization of deferred
compensation ...................... 222
Expiration of statutes of
limitations on common stock subject
to rescission...................... 4,602
Repurchase of shares for
cancellation in connection with
Recission Offer.................... --
Net loss ........................... (55,582)
-------------
Balance at December 31, 1997 ........ $ 31,918
- --------------------------------------------------
=============
</TABLE>
See accompanying notes.
F-6
<PAGE>
CONCENTRIC NETWORK CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss......................................... $(22,008) $(66,381) $(55,582)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 2,196 7,528 16,852
Amortization of deferred interest and
marketing and sales related to issuance of
warrants.................................... -- 1,942 1,720
Amortization of deferred compensation and
other....................................... -- -- 658
Loss on disposal of equipment................ 29 -- 162
Network equipment write-off.................. -- 8,321 --
Compensation related to stock and option
grants...................................... 883 -- --
Changes in current assets and liabilities:
Prepaid expenses and other current assets.. (818) (57) (3,581)
Accounts receivable........................ (14) (1,734) (2,700)
Accounts payable........................... 3,051 5,129 (7,287)
Accrued compensation and other employee
benefits.................................. 173 484 863
Deferred revenue........................... 141 1,097 197
Other current liabilities.................. 539 1,546 2,795
-------- -------- --------
Net cash used in operating activities............ (15,828) (42,125) (45,903)
INVESTING ACTIVITIES
Additions of property and equipment.............. (1,427) (6,889) (6,130)
Increase in refundable deposits.................. -- (442) --
Decrease (increase) in note receivable........... 255 -- (370)
-------- -------- --------
Net cash used in investing activities............ (1,172) (7,331) (6,500)
FINANCING ACTIVITIES
Proceeds from notes payable...................... 7,000 6,300 155,000
Increase in restricted cash...................... -- -- (52,525)
Repayment of lease obligations to a related
party........................................... (1,609) (4,561) (10,039)
Repayment of lease obligations................... -- (886) (1,517)
Repayment of notes payable....................... (218) (1,300) (2,000)
Repurchase of common stock....................... -- -- (2,765)
Deferred financing costs......................... -- -- (5,006)
Proceeds from issuances of stock................. 30,818 48,506 73,557
-------- -------- --------
Net cash provided by financing activities........ 35,991 48,059 154,705
-------- -------- --------
Increase (decrease) in cash and cash
equivalents..................................... 18,991 (1,397) 102,302
Cash and cash equivalents at beginning of
period.......................................... 63 19,054 17,657
-------- -------- --------
Cash and cash equivalents at end of period....... $ 19,054 $ 17,657 $119,959
======== ======== ========
</TABLE>
See accompanying notes.
F-7
<PAGE>
CONCENTRIC NETWORK CORPORATION
STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Stock exchanged for notes payable, including
accrued interest.................................. $ 4,115 $ 8,082 $ 3,041
Capital lease obligations incurred with a related
party............................................. $ 14,578 $ 30,945 $ 23,042
Capital lease obligations incurred................. $ 1,207 $ 2,136 $ --
Reduction of accounts payable through capital lease
obligations incurred.............................. $ -- $ -- $ 2,000
Convertible debentures exchanged for stock......... $ 1,578 $ 70 $ --
Issuance of warrants............................... $ 883 $ 2,955 $ 5,370
Purchase of property and equipment through accounts
payable........................................... $ -- $ 6,344 $ --
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid...................................... $ 850 $ 2,807 $ 5,728
</TABLE>
See accompanying notes.
F-8
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Concentric Network Corporation (the Company or Concentric) was incorporated
in the state of Florida in 1991 and reincorporated into Delaware in 1997.
Concentric provides tailored, value-added Internet Protocol (IP) based network
services for businesses and consumers. To provide these services, the Company
utilizes its low/fixed latency, high-throughput network, employing its
advanced network architecture and the Internet. Concentric's service offerings
for enterprises include virtual private networks (VPNs), dedicated access
facilities (DAFs), remote access services and Web hosting services. These
services enable enterprises to take advantage of standard Internet tools such
as browsers and high-performance servers for customized data communications
within an enterprise and between an enterprise and its suppliers, partners and
customers. These services combine the cost advantages, nationwide access and
standard protocols of public networks with the customization, high
performance, reliability and security of private networks.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity (at date of purchase) of three months or less to be the equivalent of
cash for the purpose of balance sheet and statement of cash flows
presentation. Cash and cash equivalents consist primarily of money market
funds and United States Government Obligations which are carried at cost which
approximates market value. Cash and cash equivalents are held primarily with
two banks.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of the
related assets as follows: computer and telecommunications equipment: three to
five years; purchased software: three to five years; furniture and fixtures:
eight to ten years; and leasehold improvements: the shorter of the remaining
term of the related leases or the estimated economic useful lives of the
improvements. Equipment under capital leases is amortized over the shorter of
the expected useful life or the related lease term (see Note 3).
Revenue and Customer Receivables
Revenue is recognized over the period in which services are provided,
generally monthly. Payments received in advance of services being provided are
included in deferred revenues. Substantially all end-user subscribers pay for
services with major credit cards for which the Company receives daily
remittances from the credit card carriers.
Commissions and other obligations to strategic partners through marketing
and distribution arrangements are expensed as incurred, at the time the
associated revenue is recognized.
Concentration of Credit Risk
The Company typically offers its enterprise customers credit terms. The
Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses have
historically been insignificant.
Advertising Costs
The Company expenses the costs of advertising as incurred except for direct-
response advertising costs meeting certain specific criteria. To date, no
direct-response advertising costs have been capitalized.
F-9
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
The Company accounts for income taxes using the liability method in
accordance with Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes" (FAS 109).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Basic and Diluted Net Loss Per Share (Historical)
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" (FAS 128). FAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
restated to conform to the FAS 128 requirements.
Except as noted below, net loss per share is computed using the weighted
average number of shares of common stock outstanding excluding common stock
subject to rescission. Common stock equivalent shares from convertible
preferred stock and from stock options and warrants are not included as the
effect is antidilutive. Pursuant to the Securities and Exchange Commission
Staff Accounting Bulletin No. 98 (SAB No. 98) which was issued in February
1998, common and common equivalent shares issued by the Company for nominal
consideration during any of the periods for which a statement of operations
was presented in the Company's initial public offering registration statement
have been included in the calculation of basic and diluted net loss per share
for all such periods in a manner similar to a stock split. The net loss per
share calculations have been restated for all periods presented in accordance
with SAB No. 98 which replaced SAB No. 83. The following table shows basic net
loss per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
------------------------
1995 1996 1997
------- ------- ------
<S> <C> <C> <C>
Basic Net Loss Per Share......................... $(16.53) $(47.72) $(8.34)
======= ======= ======
Shares Used in Computing Basic Net Loss Per
Share........................................... 1,331 1,391 6,665
======= ======= ======
</TABLE>
Pro Forma Net Loss Per Share
Pro forma net loss per share has been computed as described above and also
gives effect, even if antidilutive, to common equivalent shares from
convertible preferred shares that were automatically converted to common
shares upon the closing of the Company's initial public offering (using the
as-if-converted method).
Stock-Based Compensation
The Company accounts for employee stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB Opinion No. 25), and has adopted the "disclosure only"
alternative described in Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS 123).
F-10
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Long-Lived Assets
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," effective January 1, 1996. The Company continually reviews
long-lived assets to assess recoverability based upon undiscounted cash flow
analysis. Impairments, if any, are recognized in operating results in the
period in which a permanent diminution in value is determined (see Note 2).
Customer Concentrations
The Company currently derives a substantial portion of its total revenue
from a single customer. For the years ended December 31, 1996 and 1997,
revenue from WebTV Networks, Inc. represented approximately 10.1% and 33.4%,
respectively, of the Company's total revenue.
Effect of New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" (FAS 130), and Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (FAS
131). The Company is required to adopt these Statements in fiscal 1998. FAS
130 establishes new standards for reporting and displaying comprehensive
income and its components. FAS 131 requires disclosure of certain information
regarding operating segments, products and services, geographic areas of
operation and major customers. Adoption of these Statements is expected to
have no material impact on the Company's financial position, results of
operations or cash flows.
2. NETWORK EQUIPMENT WRITE-OFF
In December 1996, the Company wrote off approximately $8,321,000
representing the net book value and future commitments for certain network
equipment purchased from Sattel Communications LLC (Sattel), a stockholder of
the Company. The Company decided not to deploy the equipment in the network
because of concerns that the equipment would not provide the functionality and
reliability required by the Company and concerns that the equipment provider
would be unable to provide timely maintenance and support. Included in
accounts payable in the accompanying balance sheet at December 31, 1996 and
1997 was $7,517,000 and $0, respectively, related to this equipment (see Note
11).
3. COMMITMENTS
Operating Leases
The Company has an agreement with a related party through which such related
party makes available the premises at which the Company's POP sites throughout
the United States are located. POP sites are locations where certain
telecommunications switching and related equipment are installed. This
agreement expires in December 2000, and the amount of the payments is based,
among other things, on the number of POP sites maintained by the Company,
subject to certain minimums. Expenses of approximately $1,155,000, $1,622,000
and $1,326,000 were incurred during the years ended December 31, 1995, 1996
and 1997, respectively, for these facilities. Additionally, the Company has
agreements with three telecommunications companies to locate POP sites and
certain of such equipment at their facilities. The expiration dates associated
with these agreements range from December 1998 to January 2000.
F-11
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company leases its facilities and certain office equipment under non-
cancelable operating leases which expires at various dates through December
2001. Total rent expense for all operating leases was approximately
$1,291,000, $2,060,000 and $2,418,000 for the years ended December 31, 1995,
1996 and 1997, respectively.
Future minimum lease commitments for all noncancelable operating leases at
December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998.................................................................. $1,710
1999.................................................................. 829
2000.................................................................. 226
2001.................................................................. 216
------
Total................................................................. $2,981
======
</TABLE>
Capital Leases
In August 1994, the Company entered into a master lease agreement under
which a related party began installing networking equipment at the Company's
POP sites and data center. This agreement became effective upon installation
and acceptance by the Company on March 31, 1995. The lease provides for
monthly payments for terms of 48 or 60 months, depending upon the type of
equipment. The Company has continued to install equipment under the terms of
this agreement, resulting in a monthly payment of approximately $896,000 and
$1,443,000 at December 31, 1996 and 1997, respectively.
In September 1995, the Company entered into a master lease agreement with a
third party for an equipment lease line against which the Company has leased
approximately $3,342,000 as of December 31, 1997. The term of the lease is 36
months and provides for monthly payments of approximately $114,000 as of
December 31, 1997. The Company has granted to the third party a security
interest in all equipment leased under this agreement.
Assets capitalized under capital leases totaled approximately $48,856,000,
and $61,927,000 at December 31, 1996 and 1997, respectively, and are included
in computer and telecommunications equipment. Accumulated amortization for
assets capitalized under capital leases totaled approximately $8,306,000 and
$18,542,000 at December 31, 1996 and 1997, respectively. Amortization of
leased assets is included in depreciation and amortization expense. Future
minimum lease payments under capital lease obligations at December 31, 1997
are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................ $20,516
1999................................................................ 16,077
2000................................................................ 12,498
2001................................................................ 8,444
Thereafter.......................................................... 1,587
-------
Total minimum lease payments........................................ 59,121
Less amount representing interest................................... 10,200
-------
Present value of net minimum lease payments......................... 48,921
Less current portion of capital leases.............................. 15,326
-------
Long-term portion of capital leases................................. $33,595
=======
</TABLE>
F-12
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Other
The Company has a noncancelable service agreement with AT&T for the
utilization of its frame relay telecommunications network. The agreement
provides for minimum payments to AT&T of approximately $300,000 per month over
its three-year term, expiring in June 1999.
The Company has a noncancelable service agreement with MCI for the
utilization of its ATM telecommunications network. The agreement provides for
minimum payments to MCI of approximately $1,200,000 per year over its term,
expiring three years after the end of an initial ramp up period but no later
than June 2000. The Company also has a noncancelable telecommunications
service agreement with MCI for other services, including dedicated access and
800 service, that provides for minimum payments of approximately $8,500,000
over the term of the agreement, expiring in June 1998. The Company had
incurred expenses of approximately $3,700,000 and $8,100,000 for the years
ended December 31, 1996 and 1997, respectively, related to these other
services.
In November 1995, the Company entered into a two-year service agreement
under which a third party provided substantially all of the network analysis
and deployment and maintenance of POP sites. In 1997, the third party was
purchased by Williams Communication, Group Inc. (Williams), a stockholder of
the Company and whom also has a seat on the Board of Directors of the Company,
and the agreement was extended to December 31, 2000. The Company will
reimburse the related party for its employee compensation and direct costs for
services provided. At the end of the agreement, Williams is obligated to
transfer to the Company those personnel, resources, and facilities used to
support the Company's network analysis, POP site deployment, and maintenance.
Additionally, as part of the agreement, the Company granted 60,000 options for
its common stock to employees of Williams at an exercise price of $3.75. At
December 31, 1997, all of these options were vested.
In August 1997, the Company entered into a five-year service and equipment
agreement under which Williams, a related party, will provide
telecommunication services and equipment. The agreement provides for minimum
payments as follows: $1.2 million in 1998, $2.5 million in 1999, $7.0 million
in 2000, $6.5 million in 2001 and $4.0 million in 2002. At the election of the
third party, $2.0 million of the minimum payments may be paid by the issuance
of common stock of the Company at the then-current fair market value.
4. CONVERTIBLE DEBENTURES AND NOTES PAYABLE
Bridge Loans
At December 31, 1995, convertible debentures in the amount of $70,000,
representing 9,802 shares of common stock, were outstanding. The conversion of
these debentures into shares of common stock subject to rescission was
completed in March 1996.
In 1995, the Company issued convertible notes totaling $7,000,000 to
shareholders of which $4,000,000, plus accrued interest, was converted into
Series B convertible preferred stock in December 1995. The remaining
$3,000,000 outstanding at December 31, 1995 was converted into Series C
convertible preferred stock in February 1996.
In June 1997, the Company borrowed $3 million from a related party in the
form of a 10% convertible secured promissory note (the Secured Note). The
Secured Note automatically converted into 253,403 shares of common stock upon
the closing of the Public Offering at a per share conversion price equal to
the Public Offering price of $12.00. In connection with the Secured Note, the
Company issued a warrant to purchase 63,351 shares of common stock at an
exercise price of $6.00 per share (see Note 7).
F-13
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In June 1997, the Company borrowed $2 million from a stockholder in the form
of a 10% unsecured promissory note (the Unsecured Note). The Unsecured Note
was repaid in August 1997. In connection with the Unsecured Note, the Company
issued a warrant to purchase 83,333 shares of common stock at an exercise
price of $6.00 per share (see Note 7).
Senior Notes
In December 1997, the Company issued 150,000 units (collectively, the
Units), each consisting of $1,000 principal amount of 12 3/4% Senior Notes
(the Senior Notes) due 2007 and one warrant (a Warrant), each Warrant
entitling the holder thereof to purchase 6.34 shares of common stock at $10.86
per share and such Warrants expire on December 15, 2007 (see Note 7) for
aggregate cash proceeds of $150.0 million. Approximately $52.5 million of the
cash proceeds was placed in a escrow account to fund the first six interest
payments in accordance with the Senior Note agreement.
The Warrants resulted in the right of the holders to purchase 951,108 shares
of the Company's common stock. The Company deemed the fair value of the
warrants, using the Black-Scholes method to be approximately $4,440,000 which
was recorded as a discount on the Senior Notes. The discount is being
amortized as interest expense over the term of the Senior Notes. Amortization
expense was nominal for the year ended December 31, 1997.
The Senior Notes will be redeemable at the option of the Company, in whole
or in part, at any time on or after December 15, 2002, at the redemption
prices set forth within the Senior Note agreement, plus accrued interest to
the date of redemption. In addition, on or prior to December 15, 2000, the
Company may redeem up to 35% of the original aggregate principal amount of
Senior Notes at a redemption price of 112.75% of the principal amount,
together with accrued and unpaid interest to the date of redemption with the
net cash proceeds of one or more public equity offerings or the sale of common
stock to a strategic investor, provided that at least 65% of the original
aggregate principal amount of the Senior Notes remain outstanding.
In connection with the issuance of Senior Notes, the Company incurred
approximately $5,000,000 of debt issuance costs which are classified as other
assets. These costs are being amortized as interest expense over the term of
the Senior Notes. Amortization expense was nominal for the year ended
December 31, 1997.
5. COMMON STOCK SUBJECT TO RESCISSION
In August 1993, the Company commenced sales of convertible debentures and
certain additional shares of its common stock. Through March 31, 1995, sales
of convertible debentures aggregated $4,260,000, and issuance of common stock
aggregated $890,000. The sale of common stock and sale of and/or conversion of
debentures into common stock was not made pursuant to a registration statement
filed under the Securities Act of 1933 (the Act) or any filings pursuant to
the laws of any of the states in which such sales occurred (State Blue Sky
Laws). Although at the time the Company believed the sale and conversion, if
applicable, of these securities was exempt from the provisions of the Act and
applicable State Blue Sky Laws, it appears that the appropriate exemptions may
not have been available. As a result, on September 30, 1997, the Company made
rescission offers (the "Rescission Offer") to certain purchasers of these
securities who are entitled to a return of the consideration paid for their
stock or debentures. As such, these shares have been classified as common
stock subject to rescission in the accompanying financial statements.
Additionally, options issued pursuant to the Company's 1995 Stock Incentive
Plan to Employees and Consultants and non-plan options were issued in various
states for which the Company may not have had an available exemption under
state laws. Such options are potentially subject to rescission and the Company
has included them in the Rescission Offer. As of December 31, 1997, statutes
of limitations under federal and state securities laws applicable to the
shares which may have been issued
F-14
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
without securities laws exemptions have lapsed and the Rescission Offer had
expired. Pursuant to the Rescission Offer, the Company offered to rescind the
issuance of shares and options as to which the applicable statute of
limitations had not run. There can be no assurances that the Company will not
otherwise be subject to additional liabilities with respect to such issuances.
The Company repurchased 32,423 shares of Common Stock subject to the
Rescission Offer for $548,000 and paid related interest charges of $125,000.
Based upon the above, the Company has reclassified the remaining rescission
liability and shares into stockholders' equity.
6. STOCKHOLDERS' EQUITY
On August 5, 1996, the Company amended its Articles of Incorporation to
increase the number of authorized shares of Class A common stock and preferred
stock to 13,333,333 and 7,333,333, respectively. Of the 7,333,333 authorized
shares of preferred stock, 1,000,000, 866,667, 933,333, and 4,533,333 are
designated as Series A, B, C, and D, respectively.
Initial Public Offering and Direct Placements
Effective July 30, 1997, the Company reincorporated under the laws of the
state of Delaware, at which time a one for 15 reverse stock split took effect.
In addition, the Company authorized 100,000,000 shares of its common stock.
Upon closing of the initial public offering (the Public Offering), all
outstanding shares of Series A, B, C, and D convertible preferred stock and
Class B common stock were converted into common stock. All share and per share
data in these financial statements have been retroactively restated to reflect
the reverse stock split.
On August 1, 1997, the Company effected its Public Offering of common stock.
The offering consisted of 4,300,000 shares of common stock issued to the
public at $12.00 per share. Concurrent with the closing of the Public
Offering, certain strategic investors, including Williams, purchased directly
from the Company 1,499,236 shares of common stock having an aggregate purchase
price of approximately $18 million (including the cancellation of
approximately $3 million in indebtedness). Such shares are unregistered shares
and were purchased at the Public Offering price of $12.00 per share.
In connection with the direct purchase, the Company issued warrants to one
of the strategic investors to purchase 291,667 shares of the Company's common
stock at $6.00 per share (see Note 7). In September, the underwriters
exercised an option to purchase an additional 645,000 shares of common stock
at the Public Offering price of $12.00 per share to cover over-allotments in
connection with the Public Offering.
Preferred Stock
Preferred stock at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
SHARES
ISSUED AND PAR LIQUIDATION
AUTHORIZED OUTSTANDING VALUE AMOUNT PREFERENCE
---------- ----------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Series A convertible.... 1,000,000 906,454 $0.001 $10,146,987 $10,000,000
Series B convertible.... 866,667 366,946 $0.001 4,857,130 4,035,130
Series C convertible.... 933,333 928,243 $0.001 23,651,008 20,690,804
Series D convertible.... 4,533,333 2,699,588 $0.001 56,559,871 55,071,586
--------- ----------- -----------
4,901,231 $95,214,996 $89,797,520
========= =========== ===========
</TABLE>
In connection with the Public Offering, all shares of Series A, B, C and D
preferred stock were converted into common stock of the Company.
F-15
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Common Stock
Common stock at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
SHARES ISSUED PAR
AUTHORIZED AND OUTSTANDING VALUE AMOUNT
---------- --------------- ------ ----------
<S> <C> <C> <C> <C>
Class A......................... 13,333,333 1,385,790 $0.001 $1,769,819
Class B......................... 10,024 7,117 $0.001 80,065
---------- --------- ------ ----------
13,343,357 1,392,907 $1,849,884
========== ========= ==========
</TABLE>
In connection with the Public Offering, all shares of Class A and Class B
common stock were converted into common stock of the Company.
Stock Option Plans
1995 Stock Incentive Plan for Employees and Consultants. The Company's 1995
Stock Incentive Plan for Employees and Consultants (the 1995 Plan) provides
for the granting to employees of incentive stock options and for the granting
to employees and consultants of nonstatutory stock options, stock appreciation
rights (SARs) and restricted stock awards (RSAs). No SARs or RSAs have been
granted under the 1995 Plan. The 1995 Plan was approved by the Board of
Directors in September 1995 and Stockholders in September 1995, and an
amendment decreasing the number of shares thereunder from 840,000 to 762,600
was approved by the Board of Directors in February 1996. Incentive stock
options granted under the 1995 Plan must generally be exercised within three
months of the end of an optionee's status as an employee or consultant of the
Company, or within 12 months after such optionee's termination by death or
disability, but in no event later than the expiration of the option's term,
which may not exceed ten years. The exercise price of all options granted
under the 1995 Plan must be at least equal to the fair market value of the
common stock on the date of grant. With respect to any participant who owns
stock possessing more than 10% of the voting power of all classes of the
Company's outstanding capital stock, the exercise price of any option must
equal at least 110% of the fair market value on the grant date and the term of
the option must not exceed five years. The term of all other options granted
under the 1995 Plan may not exceed 10 years. The 1995 Plan was terminated
effective October 4, 1996, and no further grants are being made thereunder. A
total of 762,600 shares of common stock are reserved for issuance pursuant to
the 1995 Plan. As of December 31, 1997, options to purchase 332,130 shares of
common stock at a weighted exercise price of $3.75 per share were outstanding
under the 1995 plan.
Amended and Restated 1996 Stock Plan. The Company's Amended and Restated
1996 Stock Plan (the Restated 1996 Plan) provides for the granting to
employees of incentive stock options and for the granting to employees,
directors and consultants of nonstatutory stock options and stock purchase
rights (Rights). The 1996 Plan was initially approved by the Board of
Directors effective as of December 1996. It was amended and restated in May
1997 and approved by the Stockholders at the 1997 annual meeting. Unless
terminated sooner, the Restated 1996 Plan will terminate automatically in
December 2006. The form of option agreement currently in use provides that
options generally must be exercised within 90 days of the end of optionee's
status as an employee, director or consultant of the Company. Under the
Restated 1996 Plan, options must be exercised within twelve months after such
optionee's termination by death or disability, but in no event later than the
expiration of the option's term. In the case of Rights, the Restricted Stock
Purchase Agreement issued in connection with the Right shall grant the Company
a repurchase option exercisable upon the voluntary or involuntary termination
of the purchaser's service with the Company. The purchase price for shares
repurchased pursuant to the Restricted Stock Purchase Agreement shall be the
original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to the Company. The repurchase option shall
F-16
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
generally lapse at a rate of 20% per year over five years. Generally, options
vest 25% after one year and 1/36 per month thereafter. The exercise price of
all incentive stock options granted under the Restated 1996 Plan must be at
least equal to the fair market value of the common stock on the date of grant.
The exercise price of nonstatutory stock options and Rights must at least be
equal to 85% of the fair market value of the common stock on the date of
grant. With respect to any participant who owns stock possessing more than 10%
of the voting power of all classes of the Company's outstanding capital stock,
the exercise price of any incentive or nonstatutory stock option granted must
equal at least 110% of the fair market value on the grant date. The term of an
incentive stock option granted to such a 10% stockholder must not exceed five
years. The term of other options granted under the Restated 1996 Plan may not
exceed ten years. A total of 1,100,000 shares of common stock are currently
reserved for issuance pursuant to the Restated 1996 Plan. As of December 31,
1997, options to purchase 914,283 shares of common stock at a weighted average
exercise price of $6.40 per share were outstanding, and 185,717 shares of
common stock remained available for future grant under the Restated 1996 Stock
Plan.
The Restated 1996 Plan provides that in the event of a merger of the Company
with or into another corporation, a sale of substantially all of the Company's
assets or a like transaction involving the Company, each option shall be
assumed or an equivalent option substituted by the successor corporation. If
the outstanding options are not assumed or substituted as described in the
preceding sentence, the Restated 1996 Plan provides the optionee or Right
holder to have the right to exercise the option or Right as to all of the
optioned stock, including shares as to which it would not otherwise be
exercisable.
1997 Stock Plan. The Company's 1997 Stock Plan (the 1997 Plan) provides for
the granting to employees of incentive stock options and for the granting to
employees, directors and consultants of nonstatutory stock options and stock
purchase rights (Rights). The 1997 Plan was approved by the Board of Directors
on June 6, 1997 and by the stockholders on June 30, 1997. Unless terminated
sooner, the 1997 Plan will terminate automatically in 2007. Options granted
under the 1997 Plan must generally be exercised within three months of the end
of optionee's status as an employee, director or consultant of the Company, or
within twelve months after such optionee's termination by death or disability,
but in no event later than the expiration of the option's term. The exercise
price of all incentive stock options granted under the 1997 Plan must be at
least equal to the fair market value of the common stock on the date of grant.
The exercise price of nonstatutory stock options and Rights granted under the
1997 Plan is determined by the 1997 Plan's Compensation Committee, but with
respect to nonstatutory stock options intended to qualify as "performance-
based compensation," the exercise price must at least be equal to the fair
market value of the common stock on the date of grant. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of the Company's outstanding capital stock, the exercise price of any
incentive stock option granted must equal at least 110% of the fair market
value on the grant date and the term of such incentive stock option must not
exceed five years. The term of other incentive stock options granted under the
1997 Plan may not exceed ten years. A total of 1,500,000 shares of common
stock are currently reserved for issuance pursuant to the 1997 Plan. As of
December 31, 1997, options to purchase 511,271 shares of common stock at a
weighted average exercise price of $11.25 per share were outstanding, and
988,729 shares of common stock remained available for future grants under the
1997 plan.
The 1997 Plan provides that in the event of a merger of the Company with or
into another corporation, a sale of substantially all of the Company's assets
or a like transaction involving the Company, each option shall be assumed or
an equivalent option substituted by the successor corporation. If the
outstanding options are not assumed or substituted as described in the
preceding sentence, the 1997 Plan provides for the optionee or Right holder to
have the right to exercise the option or Right as to all of the optioned
stock, including shares as to which it would not otherwise be exercisable.
F-17
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1997 Employee Stock Purchase Plan. The Company's 1997 Employee Stock
Purchase Plan (the 1997 Purchase Plan) was approved by the Board of Directors
on June 6, 1997 and by the stockholders on June 30, 1997. A total of 500,000
shares of common stock has been reserved for issuance under the 1997 Purchase
Plan. The 1997 Purchase Plan, which is intended to qualify under Section 423
of the Internal Revenue Code, consists of 24-month offering periods beginning
on the first trading day on or after February 15 and August 15 of each year,
except for the first such offering period, which commenced on August 4, 1997
and ends on February 13, 1998. Each offering period contains four six-month
purchase periods. Employees are eligible to participate if they are
customarily employed by the Company or any designated subsidiary for at least
20 hours per week and more than five months in any calendar year. The 1997
Purchase Plan permits eligible employees to purchase common stock through
payroll deductions of up to 10% of an employee's compensation (excluding
overtime, shift premium, and other bonuses and incentive compensation), up to
a maximum of $25,000 for all offering periods ending within the same calendar
year. No employee may purchase more than 25,000 shares in any purchase period.
The price of stock purchased under the 1997 Purchase Plan is 85% of the lower
of the fair market value of the common stock at the beginning of the offering
period or at the end of the current purchase period. Employees may end their
participation at any time during an offering period, and they will be paid
their payroll deductions to date. Participation ends automatically upon
termination of employment with the Company.
The 1997 Purchase Plan provides that, in the event of a merger of the
Company with or into another corporation or a sale of substantially all of the
Company's assets, each outstanding option shall be assumed or an equivalent
option shall be substituted for it, or the Board of Directors or its committee
shall shorten the purchase and offering periods then in progress (so that
employees' rights to purchase stock under the Plan are exercised prior to the
merger or sale of assets). The 1997 Purchase Plan will terminate in 2007.
In April 1995, an additional 53,333 options to purchase common stock for
$30.00 per share were issued to two of the Company's executives in connection
with their employment by the Company. These options were fully vested upon
issuance and are exercisable over five years.
In October 1995 and August 1996, the exercise price of options to purchase
182,375 shares and 46,673 shares of common stock, respectively, were repriced
to $3.75 per share, the then fair value of the common stock, as determined by
the Company's Board of Directors.
The Company issued options to purchase 179,300 shares of common stock in
December 1996, 40,267 shares of common stock in January 1997, 216,733 shares
of common stock in June 1997, and repriced 181,473 options in July 1997. The
Company recorded deferred compensation, for financial reporting purposes, of
approximately $188,000 in 1996 and $1,303,000 for the year ended December 31,
1997, with respect to such option grants to reflect the difference between the
exercise price and the deemed fair value for financial reporting purposes of
these shares. Amortization of this deferred compensation was $0 in 1996 and
$222,000 in the year ended December 31, 1997. The amortization of this
deferred compensation will continue over the four year vesting period of the
associated stock options.
F-18
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes stock option activity under all of the Plans:
<TABLE>
<CAPTION>
NUMBER PRICE
OF SHARES PER SHARE
--------- --------------
<S> <C> <C>
Balance at December 31, 1994.......................... 352,456 $3.75--$33.00
Granted.............................................. 642,075 $3.75--$33.00
Exercised............................................ (133) $9.00
Canceled............................................. (187,315) $11.25--$12.45
---------
Balance at December 31, 1995.......................... 807,083 $3.75--$33.00
Granted.............................................. 421,620 $3.75
Exercised............................................ (4,483) $3.75--$ 9.00
Canceled............................................. (95,218) $3.75--$30.00
---------
Balance at December 31, 1996.......................... 1,129,002 $3.75--$33.00
Granted.............................................. 1,472,338 $3.75--$11.25
Exercised............................................ (64,544) $3.75
Canceled............................................. (244,630) $3.75--$11.25
---------
Balance at December 31, 1997.......................... 2,292,166 $3.75--$30.00
=========
</TABLE>
At December 31, 1997, vested options totaled 710,495.
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------------
WEIGHTED AVERAGE NUMBER
NUMBER REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE AND VESTED EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$3.75................... 1,029,579 8.20 $ 3.75 612,161 $ 3.75
$6.00................... 394,638 9.04 $ 6.00 43,336 $ 6.00
$8.85--$9.30............ 301,784 9.46 $ 9.11 -- --
$11.25.................. 511,171 9.83 $11.25 -- --
$12.45--$30.00.......... 54,998 6.80 $12.98 54,998 $12.98
--------- -------
Total................... 2,292,166 710,495
========= =======
</TABLE>
Stock-Based Compensation
Pro forma information regarding results of operations and loss per share is
required by FAS 123 for awards granted after December 31, 1994 as if the
Company had accounted for its stock-based awards to employees under a
valuation method permitted by FAS 123. The value of the Company's stock-based
awards to employees in 1995 and 1996 was estimated using the minimum value
method. Options granted after the Public Offering have been valued using the
Black-Scholes option pricing model. Among other things, the Black-Scholes
model considers the expected volatility of the Company's stock price,
determined in accordance with FAS 123, in arriving at an option valuation. The
minimum value method does not consider stock price volatility. Further,
certain other assumptions necessary to apply the Black-Scholes model may
differ significantly from assumptions used in calculating the value of options
granted in 1995 and 1996 under the minimum value method.
F-19
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The fair value of the Company's stock-based awards to employees was
estimated assuming no expected dividends and the following weighted average
assumptions:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Expected volatility........................................ N/A N/A .250
Expected life of options in years.......................... 4.4 4.0 3.3
Risk-free interest rate.................................... 6.2% 6.3% 6.0%
Expected dividend yield.................................... 0.00% 0.00% 0.00%
</TABLE>
The weighted average minimum value of stock options granted during 1997 was
$1.87. For pro forma purposes, the estimated minimum value of the Company's
stock-based awards to employees is amortized over the options' vesting period.
The results of applying FAS 123 to the Company's option grants in 1995, 1996
and 1997 was not material to the results of operations or loss per share for
those years reported in the accompanying statements of operations. Because FAS
123 is applicable only to awards granted subsequent to December 31, 1994, its
pro forma effect will not be fully reflected until approximately 1998.
7. WARRANTS TO PURCHASE COMMON STOCK
In connection with the Company's Public Offering, all of the outstanding
warrants to purchase preferred stock were converted to warrants to purchase
common stock. The following warrants to purchase shares of the Company's
common stock were outstanding at December 31, 1997:
<TABLE>
<CAPTION>
WARRANTS OUTSTANDING
----------------------------------
NUMBER WEIGHTED AVERAGE YEAR
EXERCISE PRICES OF SHARES EXERCISE PRICE EXPIRES
--------------- --------- ---------------- -------
<S> <C> <C> <C>
$ 7.40-$15.00............................. 187,517 $11.36 1998
$19.49.................................... 692,793 $19.49 1999
$ 3.75-$26.87............................. 320,203 $22.25 2000
$ 6.00.................................... 438,351 $ 6.00 2002
$10.86.................................... 951,108 $10.86 2007
---------
2,589,972
=========
</TABLE>
The above warrants were issued at various times during the three year period
ended December 31, 1997 in connection with a service agreement, a capital
lease agreement, and several debt and equity financings. The Company has
deemed the fair market value of such warrants, using the Black-Scholes method,
to be $822,000, $61,000, $5,700,000 and $2,623,000, respectively. The Company
is amortizing the value of the warrants over the term of the related
agreements which range from one to ten years. Amortization expense for the
years ended December 31, 1995, 1996 and 1997 was $0, $1,942,000 and
$1,720,000, respectively. The Company has reserved the amount of shares
necessary to meet the exercise of these warrants.
8. EMPLOYEE BENEFIT PLANS
Retirement Savings Plan
The Company maintains a contributory 401(k) plan that covers substantially
all employees. The Company contributes $0.30 for every $1.00 contributed by
the participant up to a maximum of 1.5% of the participants' compensation. The
Company contributed $6,000, $45,000 and $158,000 to the plan during the years
ended December 31, 1995, 1996 and 1997, respectively.
F-20
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES
As of December 31, 1997, the Company had federal and state net operating
loss carryforwards of approximately $141,000,000 and $109,000,000,
respectively. The net operating loss carryforwards will expire at various
dates beginning in the years 2003 through 2012, if not utilized.
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes of December 31, 1996 and 1997 are as
follows:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............... $ 32,000,000 $ 55,000,000
Write-off of network equipment 5,000,000 4,000,000
Other, net..................................... 1,000,000 1,000,000
------------ ------------
Total deferred tax assets........................ 38,000,000 60,000,000
------------ ------------
Deferred tax liabilities:
Other, net 1,000,000 2,000,000
------------ ------------
Net deferred tax assets.......................... 37,000,000 58,000,000
Valuation allowance.............................. (37,000,000) (58,000,000)
------------ ------------
$ -- $ --
============ ============
</TABLE>
The Company believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability
of the deferred tax assets such that a full valuation allowance has been
recorded. These factors include the Company's history of net losses since
inception and the fact that the market in which the Company competes is
intensely competitive and characterized by rapidly changing technology. The
Company believes that, based on the currently available evidence, it is more
likely than not that the Company will not generate taxable income through
1999, and possibly beyond, and accordingly will not realize the Company's
deferred tax assets through 1999 and possibly beyond. The Company will
continue to assess the realizability of the deferred tax assets based on
actual and forecasted operating results. In addition, the utilization of net
operating losses may be subject to a substantial annual limitation due to the
"change in ownership" provisions of the Internal Revenue Code of 1986 and
similar state provisions. The annual limitation may result in the expiration
of net operating losses before utilization.
The net valuation allowance increased by approximately $28,000,000 in 1996
and $21,000,000 in 1997.
10. RELATED PARTY TRANSACTIONS--OTHER
An officer of the Company is a majority shareholder of a vendor of the
Company. The Company incurred marketing fees to the vendor totaling $920,000,
$2,448,000 and $2,600,000 in the years ended December 31, 1995, 1996, and
1997, respectively.
F-21
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. CONTINGENCIES
In late April and early May, 1997, three putative securities class action
complaints were filed in the United States District Court, Central District by
certain stockholders of Diana Corporation (Diana), the parent corporation of
Sattel Communications LLC (Sattel), alleging securities fraud related to
plaintiffs' purchase of shares of Diana Common Stock in reliance upon
allegedly misleading statements made by defendants, Diana, Sattel and certain
of their respective affiliates, officers and directors. The Company was named
as a defendant in the complaint in connection with certain statements made by
Diana and officers of Diana related to the Company's purchase of network
switching equipment from Diana's Sattel subsidiary. The plaintiffs seek
unspecified compensatory damages. A trial date has not yet been determined.
While the ultimate outcome of such litigation is uncertain, the Company
believes it has meritorious defenses to the claims and intends to conduct a
vigorous defense. An unfavorable outcome in this matters could have a material
adverse effect on the Company's financial condition. In addition, even if the
ultimate outcomes is resolved in favor of the Company, the defense of such
litigation could entail considerable cost and the diversion of efforts of
management, either or which could have a material adverse effect on the
Company's results of operations.
Sattel Settlement
On April 22, 1997, a complaint was filed in the Los Angeles County,
California Superior Court against the Company and other unnamed defendants by
Sattel Communications LLC (Sattel). Sattel's complaint alleged that the
Company was in breach of an agreement to pay for up to $4.3 million of DSS
Switches from Sattel for use in the Company's network and also sought
unspecified consequential and punitive damages. On July 11, 1997, the Company
settled the complaint with Sattel in the amount of $4.4 million. The Company
also purchased 32,986 shares of the Company's common stock held by Sattel on
the day after the closing of the offering at the Public Offering price. In
August, 1997 the Company made cash payments to Sattel totaling approximately
$4.8 million, to satisfy its obligations pursuant to the settlement agreement
and the repurchase of common stock. Upon the settlement of the Sattel
complaint, the Company recorded $970,000 of other income related to the
reversal of previously established reserves.
12. SUBSEQUENT EVENTS
On February 5, 1998, the Company acquired all of the outstanding stock of
Internex Information Services, Inc. (Internex). The transaction was accounted
for using the purchase method of accounting. The total purchase price of
approximately $23.9 million consisted of a $15.5 million cash payment upon
closing and the assumption of approximately $8.4 million of Internex's
liabilities (including acquisition costs).
A summary of the purchase price allocation is as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Current and other assets............................................ $ 1,348
Computer and telecommunications equipment........................... 4,784
Goodwill............................................................ 12,576
Write-off of in process technology.................................. 5,200
-------
Total purchase price allocation.................................... $23,908
=======
</TABLE>
F-22
<PAGE>
CONCENTRIC NETWORK CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The purchase price allocation has been recorded on a tentative basis, and
any adjustments to the purchase price allocation will be made within one year
of the purchase in accordance with generally accepted accounting principles.
Goodwill arising from the acquisition will be amortized on a straight-line
basis over 5 years.
The following unaudited pro forma information represents the combined
results of operations as if the acquisition of Internex had occurred as of the
beginning of the periods presented and does not purport to be indicative of
what would have occurred had the acquisitions been made as of that date or the
results which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
(IN THOUSANDS,
EXCEPT PER
SHARE AMOUNTS)
--------------
<S> <C>
Pro forma net revenues..................................... $ 55,411
Pro forma net loss......................................... $(83,354)
Pro forma net loss per share............................... $ (8.44)
</TABLE>
The pro forma results include the historical operations of the Company and
the historical operations of the acquired business adjusted to reflect certain
pro forma adjustments, including the amortization of intangible assets,
totaling $2.5 million. In addition, the pro forma results reflect the interest
expense that would have been incurred had the Senior Notes been offered on
January 1, 1997. Finally, interest expense and related charges of bridge
financings have been excluded since such bridge financings would not have
occurred if the Senior Notes been offered on January 1, 1997. The pro forma
results do not include the write-off of purchased research and development of
$5.2 million since it is considered a non-recurring adjustment.
F-23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Internex Information Services, Inc.:
We have audited the accompanying balance sheet of Internex Information
Services, Inc. (a California corporation and a wholly owned subsidiary of
Internex Communications, Inc.) as of June 30, 1997 and the related statements
of operations, shareholder's equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Internex Information
Services, Inc. as of June 30, 1997, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company had an accumulated deficit of approximately
$11.2 million and negative working capital of approximately $2.7 million. In
addition, for the year ended June 30, 1997, the Company had a negative cash
flow from operations and incurred a significant net operating loss.
Management's current projections indicate that the cash flow from operations
will be insufficient to enable the Company to continue to meet its obligations
and fund operating expenses during fiscal 1998. These conditions, among
others, raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Arthur Andersen LLP
San Jose, California
January 26, 1998
F-24
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNT)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1997
-------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash................................................... $ 68 $ 11
Accounts receivable, net of allowance for doubtful
accounts of $339 and $207, respectively............... 1,002 1,403
Inventories............................................ 162 40
Other current assets................................... 113 124
-------- -------
Total current assets.................................. 1,345 1,578
-------- -------
Property And Equipment:
Network and computer equipment......................... 6,310 6,618
Furniture and office equipment......................... 557 565
Leasehold improvements................................. 773 992
-------- -------
7,640 8,175
Less--Accumulated depreciation and amortization........ (1,872) (2,877)
-------- -------
Property and equipment, net............................. 5,768 5,298
-------- -------
Other Assets........................................ 145 144
-------- -------
$ 7,258 $ 7,020
======== =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Current portion of capital lease obligations........... $ 523 $ 523
Notes payable to bank.................................. -- 1,228
Accounts payable....................................... 2,373 2,285
Accrued compensation and other employee benefits....... 165 216
Other current liabilities.............................. 994 1,052
-------- -------
Total current liabilities............................. 4,055 5,304
-------- -------
Capital lease obligations, net of current portion....... 1,115 852
-------- -------
Redeemable Convertible Preferred Stock.................. -- --
-------- -------
Commitments (Note 5)
Shareholder's Equity:
Preferred stock, no par value
Authorized--2,000,000 shares at June 30, 1997
Outstanding--None outstanding......................... -- --
Common stock, no par value
Authorized--30,000,000 shares
Issued and outstanding--7,000,000 at June 30, 1997.... 13,239 15,141
Accumulated deficit.................................... (11,151) (14,277)
-------- -------
Total shareholder's equity............................ 2,088 864
-------- -------
$ 7,258 $ 7,020
======== =======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-25
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
YEAR ENDED ENDED DECEMBER 31,
JUNE 30, -------------------
1997 1996 1997
---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Service revenue............................... $ 8,486 $ 3,801 $4,823
Equipment revenue............................. 1,696 1,397 147
------- -------- ---------
Total revenues.............................. 10,182 5,198 4,970
------- -------- ---------
Operating Costs And Expenses:
Data communications and operations............ 7,563 3,024 4,304
Equipment cost................................ 1,415 1,170 108
Sales and marketing........................... 3,687 1,503 1,807
General and administrative.................... 2,730 1,175 1,308
Research and development...................... 569 258 504
------- -------- ---------
Total operating expenses.................... 15,964 7,130 8,031
------- -------- ---------
Loss from operations............................ (5,782) (1,932) (3,061)
Other income (expense):
Interest expense.............................. (84) (39) (110)
Other income, net............................. -- -- 45
------- -------- ---------
(84) (39) (65)
------- -------- ---------
Net loss........................................ $(5,866) $ (1,971) $ (3,126)
======= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------- ACCUMULATED SHAREHOLDER'S
SHARES AMOUNT DEFICIT EQUITY
------ ------- ----------- -------------
<S> <C> <C> <C> <C>
Balance At June 30, 1996.............. 4,048 $ 6,609 $ (5,285) $ 1,324
Contributed capital received from
Internex Communications, Inc....... -- 6,330 -- 6,330
Conversion of redeemable convertible
preferred stock into common stock.. 2,952 300 -- 300
Net loss............................ -- -- (5,866) (5,866)
----- ------- -------- -------
Balance At June 30, 1997.............. 7,000 13,239 (11,151) 2,088
Contributed capital received from
Internex Communications, Inc.
(unaudited)........................ -- 1,902 -- 1,902
Net loss (unaudited)................ -- -- (3,126) (3,126)
----- ------- -------- -------
Balance At December 31, 1997
(unaudited).......................... 7,000 $15,141 $(14,277) $ 864
===== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED FOR THE SIX MONTHS
JUNE 30, ENDED DECEMBER 31,
---------- --------------------
1997 1996 1997
---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................... $(5,866) $ (1,971) $ (3,126)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............. 1,380 506 1,005
Provision for doubtful accounts........... 563 140 --
Changes in operating assets and
liabilities:
Accounts receivable..................... (30) 304 (401)
Inventories............................. (29) (6) 122
Other assets............................ (190) (317) (10)
Accounts payable........................ 769 (217) (88)
Other current liabilities............... 385 414 109
------- --------- ---------
Net cash used in operating activities......... (3,018) (1,147) (2,389)
------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........... (3,140) (2,819) (535)
------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received from Internex Communications,
Inc.......................................... 6,330 3,947 1,902
Proceeds from bank line of credit............. -- -- 1,228
Principal payments on capital lease
obligations.................................. (268) (28) (263)
------- --------- ---------
Net cash provided by financing activities..... 6,062 3,919 2,867
------- --------- ---------
Net decrease in cash.......................... (96) (47) (57)
Cash, beginning of period..................... 164 164 68
------- --------- ---------
Cash, end of period........................... $ 68 $ 117 $ 11
======= ========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Equipment acquired under capital leases....... $ 1,316 $ -- $ --
======= ========= =========
Conversion of preferred stock into common
stock........................................ $ 300 $ -- $ --
======= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest expense................ $ 84 $ 39 $ 110
======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
1. NATURE OF OPERATIONS, ORGANIZATION AND LIQUIDITY:
Internex Information Services, Inc. ("Internex" or the "Company"), a
California corporation, is a wholly owned subsidiary of Internex
Communications, Inc., a California corporation ("Communications Inc." or the
"Parent Company"). The Company provides Internet access services and products
to both organizations and individuals throughout the United States. The
Company offers a broad spectrum of internet access services ranging from dial-
up services to continuous access services using dedicated high speed telephone
circuits. In addition, the Company offers Web hosting services, training and
consulting services.
The Company was incorporated in August 1993, and commenced commercial
operations in May 1995. On March 17, 1995, the shareholders of Internex
entered into an organization and financing agreement with Communications Inc.,
a California corporation formed for the purpose of acquiring Internex, whereby
the shareholders of Internex converted 4,048,000 shares of common stock,
2,024,000 shares of Series A preferred stock and an $83,000 debenture into
4,275,720 shares of Communications Inc. common stock (see Note 6).
The Company is subject to certain risks and uncertainties including, among
others, the need for additional financing, dependence on key personnel, actual
and prospective competition by entities with greater financial and other
resources, risks associated with the development of the Internet market, risks
associated with consolidation in the industry, acquisitions and international
expansion, limited experience in the market for individual customers and the
software industry, technology and regulatory risks and dependence upon sole
and limited suppliers.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As of June 30, 1997, the Company had
an accumulated deficit of approximately $11.2 million and negative working
capital of approximately $2.7 million. In addition, for the year ended June
30, 1997, the Company had a negative cash flow from operations and incurred a
significant net operating loss. Management's current projections indicate that
the cash flow from operations will be insufficient to enable the Company to
continue to meet its obligations and fund operating expenses during fiscal
1998. The Company has been engaged in several efforts to raise the necessary
working capital through an equity offering to enable the Company to continue
to meet its debt obligations and monthly operating expense requirements,
however, there can be no assurances that the efforts to raise the necessary
working capital will be successful. These conditions, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates in Preparation of Financial Statements
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reporting amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues from services consist primarily of fixed monthly service fees and
hourly amounts based on usage and are recognized as the service is provided.
Payments received in advance of providing services are deferred until the
period such services are provided. Deferred revenue, which was approximately
$354,000 at June 30, 1997, is included in other current liabilities in the
accompanying balance sheet. Revenues from the sale of
F-29
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
equipment, which is provided by third-party equipment manufacturers, is
recognized at the time the installation of the equipment is complete.
Significant Customer
No single customer accounted for more than 10% of the Company's total
revenues during the year ended June 30, 1997.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of accounts receivable. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends related
to past losses and other information. As of June 30, 1997, approximately 47%
of accounts receivable were concentrated with fifteen customers.
Inventories
Inventory consists of equipment purchased from third-party equipment
manufacturers and is stated at the lower of cost or market, using the first-
in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Depreciation, including
depreciation of assets acquired under capital leases, is provided using the
straight-line method over the estimated useful lives of the assets (or over
the lease term, if shorter, for capital leases and leasehold improvements),
which range from three to five years.
The Company leases certain network and computer equipment under non-
cancelable capital leasing arrangements. Total cost of equipment capitalized
under capital leases as of June 30, 1997 was approximately $1.9 million and
related accumulated depreciation was approximately $325,000.
3. RELATED PARTY TRANSACTIONS:
The Company shares its corporate facilities with Internex Communications
Inc., and Tiara Computer Systems, Inc., ("Tiara") a non-operating wholly owned
subsidiary of Internex Communications Inc. that filed Chapter 7 liquidation
bankruptcy in 1996. Reimbursement of general operating expenses from Internex
Communications Inc. and Tiara was not significant during fiscal 1997. As of
June 30, 1997, amounts due to or from either Communications Inc., or Tiara
were not significant, and the total payments received from Tiara during 1997
were not significant.
4. BANK DEBT:
On July 21, 1997, the Company entered into a $200,000 promissory note
payable agreement with a bank which bears interest at the prime rate plus 1.5%
(10% as of January 26, 1998). Principal borrowings and accrued interest under
the promissory note are due by January 31, 1998. As of January 26, 1998,
$200,000 was outstanding under the promissory note.
F-30
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On July 26, 1997 the Company entered into a line of credit agreement (the
"Agreement") with a bank which allows for borrowings of up to $3 million.
Advances under the Agreement will be limited to 80% of eligible accounts
receivable and bears interest at the prime rate plus 2.25% (10.5% as of July
26, 1997). Borrowings outstanding under the Agreement will be secured by
substantially all of the assets of the Company. The Agreement, which expires
on July 26, 1999, requires that the Company maintain a minimum tangible net
worth, including any subordinated debt, of $1.5 million at all times. As of
January 26, 1998, approximately $1.0 million was outstanding under the
Agreement.
5. COMMITMENTS, CONTINGENCIES AND CAPITAL LEASES:
The Company leases its facilities and certain office equipment under non-
cancelable operating leases which expire at various dates through 2005. Total
rental expense for all operating leases was approximately $311,000 for the
year ended June 30, 1997. The Company also leases certain equipment under non-
cancelable capital leasing arrangements with a leasing company. The
obligations under the capital leasing arrangements are at fixed annual
interest rates at approximately 7% and 15% and are collateralized by the
related equipment.
The Company also has certain non-cancelable operating lease agreements with
several telephone companies (the "Connectivity Agreements"). Under the
Connectivity Agreements, the Company leases access to various high-speed
telephone lines and other telecommunication-related services. Total rental
expense for all Connectivity Agreements was approximately $710,000 for the
year ended June 30, 1997.
As of June 30, 1997, future minimum lease payments under all non-cancelable
operating leases, capital leases and Connectivity Agreements were as follows
(in thousands):
<TABLE>
<CAPTION>
CONNECTIVITY OPERATING CAPITAL
YEAR ENDING JUNE 30, TOTAL AGREEMENTS LEASES LEASES
-------------------- ------ ------------ --------- -------
<S> <C> <C> <C> <C>
1998................................. $1,969 $ 899 $ 360 $ 711
1999................................. 2,078 1,030 362 685
2000................................. 1,732 902 343 486
2001................................. 537 381 35 122
2002................................. 136 105 31 --
Thereafter........................... 101 -- 101 --
------ ------ ------ ------
Total minimum lease payments......... $6,553 $3,317 $1,232 2,004
====== ====== ======
Less: Amounts representing interest
on capital leases................... (366)
------
Present value of net minimum capital
lease payments...................... 1,638
Less: Current portion................ (523)
------
Long-term portion.................... $1,115
======
</TABLE>
From time to time, the Company is involved in various disputes which arise
in the ordinary course of business. Management believes that the ultimate
resolution of these disputes will not have a material adverse impact on the
Company's financial position or results of operation.
6. CONVERTIBLE PREFERRED STOCK:
As of June 30, 1996, the Company has authorized the issuance of up to
3,000,000 shares of redeemable convertible preferred stock, of which it has
designated 2,024,000 shares as Series A preferred stock, which were held by
the Parent Company. On May 12, 1997, the Parent Company converted the
outstanding 2,024,000 shares
F-31
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
of redeemable convertible Series A preferred stock it held in the Company into
2,952,000 shares of Internex common stock.
As of June 30, 1997, there were no shares of preferred stock outstanding. In
August 1997, the Company increased the number of authorized preferred shares
to 5,000,000 and designated 2,000,000 shares as Series A preferred stock.
7. COMMON STOCK:
The Company has authorized the issuance of up to 30,000,000 shares of common
stock, of which 7,000,000 are issued and held by the Parent Company as of June
30, 1997.
Stock Plans
In April 1997, the Company adopted the 1997 Stock Option Plan (the "1997
Plan"), whereby 1,500,000 shares of common stock have been reserved for future
issuance to employees, consultants and directors of the Company. As of January
26, 1998, no options have been issued under the 1997 Plan.
Effective March 17, 1995, the Parent Company adopted the 1995 Stock Option
Plan (the "1995 Plan"). Under the 1995 Plan, the Board of Directors of the
Parent Company may grant incentive and nonqualified stock options to
employees, consultants and directors of the Company to purchase common stock
of the Parent Company. The exercise price per share for an incentive stock
option cannot be less than the fair market value of a share of common stock,
as determined by the Board of Directors, on the date of grant. The exercise
price per share for nonqualified stock options cannot be less than 85% of the
fair market value, as determined by the Board of Directors of the Parent
Company, on the date of grant. Options generally expire ten years after the
date of grant and generally vest over a four-year period, not to exceed five
years.
In addition, effective March 17, 1995, the Parent Company adopted the 1995
Stock Purchase Plan (the "Purchase Plan"). Under the Purchase Plan, the Board
of Directors of the Parent Company may grant stock purchase rights to
employees and consultants of the Company to purchase common stock of the
Parent Company. The sale price per share for a stock purchase right cannot be
less than the fair market value of a share of common stock, as determined by
the Board of Directors of the Parent Company, on the date of grant. Stock
purchase rights are subject to repurchase as determined by the Board of
Directors of Communications Inc. As of June 30, 1997, rights to purchase
93,000 shares of common stock of the Parent Company have been granted to
consultants of the Company. The Company has recognized compensation expense of
approximately $25,000 related to these stock purchase rights for the years
ended June 30, 1997.
The following table summarizes option activity under the Option Plans:
<TABLE>
<CAPTION>
OPTIONS EXERCISE
OUTSTANDING PRICE
----------- ---------
<S> <C> <C>
Outstanding at June 30, 1996......................... 3,223,500 $0.08-.60
Granted............................................ 1,547,500 0.50
Exercised.......................................... (157,708) 0.08-.60
Cancelled.......................................... (2,121,042) 0.08-.60
---------- ---------
Outstanding at June 30, 1997......................... 2,492,250 0.08-.60
Exercisable at June 30, 1996......................... 528,000 0.08-.60
========== =========
Exercisable at June 30, 1997......................... 1,046,000 $ .08-.60
========== =========
</TABLE>
F-32
<PAGE>
INTERNEX INFORMATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company accounts for the Option Plan and Purchase Plan (the "Plans")
under APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, compensation expense is generally not recognized. Had
Compensation expense for the Plans been determined consistent with Statement
of Financial Accounting standards (SFAS) No. 123, "Accounting for Stock Based
Compensation," the Company's net loss would not had been materially different.
The weighted average fair values of options granted during fiscal 1997 was
$0.11 per share. The fair value of each stock option grant is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in fiscal 1997: risk-free
interest rates of 6.2%; expected dividend yield of zero percent; expected life
of 4 years; expected volatility of zero percent.
8. INCOME TAXES:
The Parent Company accounts for income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes". This statement 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. Payables
and deferrals of income taxes are allocated to Internex through intercompany
accounts from the Parent Company, as the Parent Company reports income taxes
on a consolidated basis. As of June 30, 1997, the portion of the consolidated
deferred tax asset allocated to Internex was approximately $3.5 million and
consisted of net operating loss carryforwards and cumulative book to tax
temporary differences. The Company believes sufficient uncertainty exists
regarding the realizability of these items, and accordingly, a valuation
allowance for the entire amount has been established.
As of June 30, 1997, the portion of the consolidated net operating loss
carryforwards for Federal and state purposes allocated to Internex was
approximately $10.1 million and $5.5 million, respectively. The net operating
loss carryforwards expire at various dates through 2012. Under current tax
law, utilization of the net operating loss in any given year will be limited
upon the occurrence of certain events, including significant changes in
ownership interests.
9. SUBSEQUENT EVENT (UNAUDITED):
On February 5, 1998, Concentric Network Corporation ("Concentric"), a
Delaware corporation, acquired all of the outstanding capital stock of the
Company from Communications Inc., pursuant to a Share Acquisition Agreement,
dated February 1, 1998, by and among Concentric, the Company and
Communications Inc. Concentric paid approximately $15.5 million in cash to
Communications Inc. as consideration for all of the issued and outstanding
shares of capital stock of the Company. The amount of consideration for the
transaction was determined by arms-length negotiations between the parties.
F-33
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
The selected unaudited pro forma condensed combined financial information
for the Company set forth below gives effect to the acquisition of Internex
Information Services, Inc. ("Internex"). Under the purchase method of
accounting, the following unaudited pro forma combined financial information
presents the Unaudited Pro Forma Condensed Combined Balance Sheet as of
December 31, 1997, giving effect to the acquisition of Internex as if it had
been consummated on that date. Also presented is the Unaudited Pro Forma
Condensed Combined Statement of Operations for the fiscal year ended December
31, 1997, giving effect to the acquisition of Internex as if such acquisition
had been consummated as of the beginning of the period presented. The
Company's fiscal year ends on December 31 and Internex's fiscal year ends on
June 30. The Unaudited Pro Forma Condensed Combined Balance Sheet combines the
respective balance sheets of the Company and Internex as of December 31, 1997.
The Unaudited Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1997 combines the results of the Company for such year
with the results of Internex for the calendar year ended December 31, 1997.
The historical financial information set forth below has been derived from,
and is qualified by reference to, the financial statements of the Company and
Internex and should be read in conjunction with those financial statements and
the notes thereto included elsewhere herein. The selected unaudited pro forma
condensed combined financial information set forth below reflects certain
adjustments, including, among others, adjustments to reflect the amortization
of the excess purchase price in connection with the acquisition of Internex
and the interest expense which would have been incurred had the debt offering
occurred on January 1, 1997.
The pro forma data is based on the historical combined statements of the
Company and Internex giving effect to the Internex acquisition under the
purchase method of accounting, and to the assumptions and adjustments (which
the Company believes to be reasonable) described in the accompanying Notes to
Unaudited Pro Forma Condensed Combined Financial Information. Under the
purchase method of accounting, assets acquired and liabilities assumed will be
recorded at their estimated fair value at the date of acquisition. The pro
forma adjustments set forth in the following unaudited pro forma combined
financial information are estimated and may differ from the actual adjustments
when they become known; however, no material differences are anticipated by
the Company.
The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Financial Statements--the Company and Internex Information
Services, Inc." The selected unaudited pro forma condensed combined financial
information set forth below does not purport to represent what the combined
results of operations or financial condition of the Company would actually
have been if the Internex acquisition and Offering had in fact occurred on
such dates or to project the future combined results of operations or
financial condition of the Company.
F-34
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET AS OF DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PROFORMA
COMPANY AS OF BUSINESS
DECEMBER 31, INTERNEX AS OF COMBINATION PROFORMA
1997 DECEMBER 31, 1997 COMBINED ADJUSTMENTS(A)(1) COMBINED
------------- ----------------- -------- ----------------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 119,959 $ 11 $119,970 $(15,490) $104,480
Current portion of
restricted cash....... 19,125 -- 19,125 -- 19,125
Accounts receivable.... 4,549 1,403 5,952 (130) 5,822
Prepaid expenses and
other current
assets................ 5,139 164 5,303 (100) 5,203
--------- ------- -------- -------- --------
Total current
assets............... 148,772 1,578 150,350 (15,720) 134,630
Property and equipment:
Computer and
telecommunications
equipment............. 71,942 6,618 78,560 (558) 78,002
Software............... 1,519 -- 1,519 -- 1,519
Furniture, fixtures, &
leasehold
improvements.......... 2,984 1,557 4,541 -- 4,541
--------- ------- -------- -------- --------
76,445 8,175 84,620 (558) 84,062
Accumulated
depreciation and
amortization.......... 22,735 2,877 25,612 -- 25,612
--------- ------- -------- -------- --------
53,710 5,298 59,008 (558) 58,450
Restricted cash, net of
current portion....... 33,400 -- 33,400 -- 33,400
Other assets........... 8,607 144 8,751 (100) 8,651
Goodwill............... -- -- -- 12,576 12,576
Customer Lists......... -- -- -- -- --
--------- ------- -------- -------- --------
Total assets......... $ 244,489 $ 7,020 $251,509 $ (3,802) $247,707
========= ======= ======== ======== ========
LIABILITIES &
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....... $ 10,144 $ 2,285 $ 12,429 $ -- $ 12,429
Accrued compensation
and other employee
benefits.............. 1,577 216 1,793 -- 1,793
Other current
liabilities........... 4,917 1,052 5,969 2,262 8,231
Notes payable to
bank.................. -- 1,228 1,228 1,228
Current portion of
capital lease
obligations........... 15,326 523 15,849 -- 15,849
Deferred revenue....... 1,435 -- 1,435 -- 1,435
--------- ------- -------- -------- --------
Total current
liabilities.......... 33,399 5,304 38,703 2,262 40,965
Capital lease
obligations........... 33,595 852 34,447 34,447
Notes payable.......... 145,577 -- 145,577 145,577
Commitments and
contingencies --
Stockholders' Equity: --
Preferred stock........ -- -- -- -- --
Common stock........... 182,721 15,141 197,862 (15,141) 182,721
Accumulated deficit.... (149,534) (14,277) (163,811) 14,277 (154,734)
(5,200)
Deferred compensation.. (1,269) -- (1,269) -- (1,269)
--------- ------- -------- -------- --------
Total stockholders'
equity............... 31,918 864 32,782 (6,064) 26,718
--------- ------- -------- -------- --------
Total liabilities and
stockholders'
equity.............. $ 244,489 $ 7,020 $251,509 $ (3,802) $247,707
========= ======= ======== ======== ========
</TABLE>
See accompanying notes.
F-35
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
INTERNEX FOR PRO FORMA
COMPANY FOR THE YEAR PRO FORMA COMBINED FOR
THE YEAR ENDED ENDED BUSINESS PRO FORMA THE YEAR ENDED
DECEMBER 31, DECEMBER 31, COMBINATION DEBT OFFERING DECEMBER 31,
1997 1997 COMBINED ADJUSTMENTS ADJUSTMENTS 1997
-------------- ------------ -------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $ 45,457 $9,954 $55,411 $ -- $ -- $55,411
Cost and expenses:
Cost of revenue........ 61,439 9,196 70,635 -- -- 70,635
Development............ 4,850 815 5,665 -- -- 5,665
Marketing and sales.... 24,622 3,991 28,613 -- -- 28,613
General and
administrative........ 4,790 2,863 7,653 -- -- 7,653
Amortization of
goodwill.............. -- -- -- 2,515(1) -- 2,515
-------- ------ ------- ------ ------- -------
Total cost and
expenses.............. 95,701 16,865 112,566 2,515 -- 115,081
-------- ------ ------- ------ ------- -------
Loss from operations.... (50,244) (6,911) (57,155) (2,515) -- (59,670)
Other income............ 1,233 45 1,278 -- -- 1,278
Interest income......... 1,217 -- 1,217 -- -- 1,217
Interest expense........ (7,788) (155) (7,943) -- (18,236)(2) (26,179)
-------- ------ ------- ------ ------- -------
Net Loss................ $(55,582) (7,021) (62,603) (2,515) (18,236) (83,354)
======== ====== ======= ====== ======= =======
Pro forma net loss per
share(3)............... (8.44)
=======
Shares used in computing
pro forma loss per
share.................. 9,872
=======
</TABLE>
See accompanying notes.
F-36
<PAGE>
NOTES TO THE SELECTED UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
Pro forma business combination adjustments for the balance sheet as of
December 31, 1997 are as follows:
(A) Adjustment to record the acquisition of Internex under the purchase
method of accounting as if the acquisition occurred on December 31, 1997.
The approximate purchase price of $23.9 million consists of a cash payment
$15.5 million, assumed liabilities of approximately $6.6 million and
transaction costs of approximately $1.8 million. See Note 12 of the
Concentric Network Corporation Financial Statements.
Pro forma business and Offering adjustments for the statement of
operations for the year ended December 31, 1997 are as follows:
(1) Reflects the amortization of the cost over the fair value of net
assets acquired for the Internex acquisition as follows:
<TABLE>
<CAPTION>
COST OVER
THE FAIR VALUE
OF NET AMORTIZATION
ASSETS ACQUIRED PERIOD
--------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Goodwill........................................ 12,576 5 yrs
</TABLE>
The pro forma results do not include the write-off of purchased research
and development of $5.2 million since it is considered a non-recurring
adjustment.
(2) Reflects the interest expense that would have been incurred had the
Offering occurred on January 1, 1997. In addition, interest expense and
related charges of bridge financings have been excluded since such bridge
financings would not have occurred if the Offering was completed on January
1, 1997.
(3) Pro forma net loss per share is computed using the weighted average
number of shares of common stock outstanding plus common equivalent shares
from convertible preferred stock, that was converted upon the Company's
proposed initial public offering (using the if-converted method), have been
included whether dilutive or anti-dilutive pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 98. Such pro forma net
loss per share reflects the impact of the adjustments above.
F-37
<PAGE>
GLOSSARY OF TERMS
56 Kbps...................... Equivalent to a single high-speed telephone
service line; capable of transmitting one voice
call or 56 Kbps of data. Currently in
widespread use by medium and large businesses
primarily for entry level high-speed data and
very low-speed video applications.
ATM.......................... Asynchronous Transfer Mode. A low latency,
fixed delay information transfer standard for
routing traffic. The ATM format can be used by
many different information systems, including
LANs, to deliver traffic at varying rates,
permitting a mix of data, voice and video.
Backbone..................... A centralized high-speed network that
interconnects smaller, independent networks.
Bandwidth.................... The number of bits of information that can move
through a communications medium in given amount
of time; the capacity of a telecommunications
circuit/network to carry voice, data and video
information. Typically measured in Kbps and
Mbps. Bandwidth from public networks is
typically available to business and residential
end-users in increments from 56 Kbps to T-3.
CIR.......................... Committed Information Rate. The rate, usually
expressed as a particular quantitative amount
of Kbps of Mbps of bandwidth, at which data is
guaranteed to be transmitted through a
dedicated lease line network connection.
E-mail....................... An application that allows a user to send or
receive text messages to or from any other user
with an Internet address, commonly termed an E-
mail address.
Firewall..................... A system placed between networks that filters
data passing through it and removes
unauthorized traffic, thereby enhancing the
security of the network.
Frame relay.................. A variable delay information transfer standard
for relaying traffic. Frame relay can be an
economical means to backhaul traffic to an ATM
network.
FTP.......................... File Transfer Protocol. A protocol that allows
file transfer between a host and a remote
computer.
Internet..................... A global collection of interconnected computer
networks which use TCP/IP, a common
communications protocol.
ISDN......................... Integrated Services Digital Network. An
information transfer standard for transmitting
digital voice and data over telephone lines at
speeds up to 128 Kbps.
Kbps......................... Kilobits per second. A transmission rate. One
kilobit equals 1,024 bits of information.
LAN.......................... Local Area Network. A data communications
network designed to interconnect personal
computers, workstations, minicomputers, file
servers and other communications and computing
devices within a localized environment.
G-1
<PAGE>
Latency...................... The time that elapses between the moment when a
command is sent to the time that a response is
received. On a network, latency is due to
delays in routers or switches, congestion
delays on a crowded backbone, and the time
required for electrons to travel a great
distance between nodes on a network.
Leased line.................. Telecommunications line dedicated to a
particular customer along a predetermined
route.
LEC.......................... Local Exchange Carrier. A telecommunications
company that provides telecommunications
services in a geographic area in which calls
generally are transmitted without toll charges.
Mbps......................... Megabits per second.
Modem........................ A device for transmitting digital information
over an analog telephone line.
NAP.......................... Network Access Point. A location at which ISPs
exchange each other's traffic.
Online services.............. Commercial information services that offer a
computer user access to a specified slate of
information, entertainment and communications
menus on what appears to be a single system.
Peering...................... The commercial practice under which nationwide
ISPs exchange each other's traffic without the
payment of settlement charges.
POPs......................... Points-of-presence. Geographic areas within
which the Company provides local access. For
purposes of this Memorandum, POPs include both
physical points of presence as well as VLA.
Router....................... A system placed between networks that relays
data to those networks based upon a destination
address contained in the data packets being
routed.
Server....................... Software that allows a computer to offer a
service to another computer. Other computers
contact the server program by means of matching
client software. In addition, such term means
the computer on which server software runs.
SuperPOP..................... A SuperPOP is a Concentric POP that is directly
connected to the Concentric ATM backbone.
SuperPOPs typically support dial access from
the region surrounding the SuperPOP (typically
within 200 miles of the SuperPOP) using the
services of a CLEC. SuperPOPs also support
dedicated access connections to customer
locations using Local Exchange Carrier and/or
Competitive Access Provider facilities to
connect the customer to the Concentric
SuperPOP.
TCP/IP....................... Transmission Control Protocol/Internet
Protocol. A suite of network protocols that
allow computers with different architectures
and operating system software to communicate
with other computers on the Internet.
T-1.......................... A data communications circuit capable of
transmitting data at 1.5 Mbps.
T-3 or DS3...................
A data communications circuit capable of
transmitting data at 45 Mbps.
G-2
<PAGE>
UNIX......................... A computer operating system frequently found on
workstations and PCs and noted for its
portability and communications functionality.
VLA.......................... Virtual local access call numbers which allow a
subscriber in a location outside the calling
area of a physical POP to place a local call to
a phone number without incurring long distance
or message unit charges.
VPN.......................... Virtual Private Network. A network capable of
providing the tailored services of a private
network (i.e., low latency, high throughput,
security and customization) while maintaining
the benefits of a public network (i.e.,
ubiquity and economies of scale).
Webserver.................... A server connected to the Internet from which
Internet users can obtain information.
World Wide Web or Web........ A system that supports easy access to documents
that have been linked across the Internet. The
documents contain links to each other, hence
the term "Web." Users do not have to know the
locations of particular documents and work
through a user friendly interface.
G-3
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THE
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY EXCHANGE OF EXISTING NOTES FOR EXCHANGE
NOTES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUB-
SEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICATATION IS UNLAWFUL.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 10
Use of Proceeds.......................................................... 25
Dividend Policy.......................................................... 25
The Exchange Offer....................................................... 26
Selected Historical Consolidated Financial and Other Data................ 39
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 40
Business................................................................. 49
Management............................................................... 64
Certain Transactions..................................................... 74
Principal Stockholders................................................... 78
Description of Capital Stock............................................. 80
Description of Units..................................................... 83
Description of Notes..................................................... 83
Description of Warrants.................................................. 112
Provisions Generally Applicable to All Securities........................ 115
Plan of Distribution..................................................... 117
Legal Matters............................................................ 117
Experts.................................................................. 117
Index to Financial Statements............................................ F-1
Glossary of Terms........................................................ G-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$150,000,000
[LOGO OF CONCENTRIC NETWORK]
EXCHANGE OFFER
WITH RESPECT TO
12 3/4% SENIOR
NOTES DUE 2007
----------------
PROSPECTUS
MARCH 24, 1998
----------------
EXCHANGE AGENT:
CHASE MANHATTAN BANK AND TRUST COMPANY, N.A.
101 California Street, Suite 2725
San Francisco, CA 94111
Attention: Paula Oswald
Tel: (415) 954-9526; Fax: (415) 693-8850
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In May 1997, the Registrant entered into indemnification agreements with its
directors and officers providing for limitations on a director's and officer's
liability for judgments, settlements, penalties, fines and expenses of defense
(including attorneys' fees, bonds and costs of investigation) arising out of
or in any way related to acts or omissions as a director or an officer, or in
any other capacity in which services are rendered to the Registrant. The
Registrant believes its indemnification agreements will assist it in
attracting and retaining qualified individuals to serve as directors and
officers. The agreements provide that a director or officer is not entitled to
indemnification under such agreements (i) if the director or officer is not
relieved of liability under applicable law, (ii) for violations of certain
securities laws, or (iii) for certain claims initiated by the officer or
director. Due to the lack of applicable case law, it is not clear whether
indemnification is available in case of a breach of securities laws of the
U.S.
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Second Amended and Restated Certificate of Incorporation includes
a provision that eliminates the personal liability of its directors for
monetary damages for breach or alleged breach of their duty of care. In
addition, as permitted by Section 145 of the Delaware General Corporation Law
the Bylaws, as amended, of the Registrant provide that: the Registrant is
required to indemnify its directors and officers and persons serving in such
capacities in other business enterprises (including, for example, subsidiaries
of the Registrant) at the Registrant's request, to the fullest extent
permitted by Delaware law, including in those circumstances in which
indemnification would otherwise be discretionary; (ii) the Registrant may, in
its discretion, indemnify employees and agents in those circumstances where
indemnification is not required by law; (iii) the Registrant is required to
advance expenses, as incurred, to its directors and officers in connection
with defending a proceeding (except that it is not required to advance
expenses to a person against whom the Registrant brings a claim for breach of
the duty of loyalty, failure to act in good faith, intentional misconduct,
knowing violation of law or deriving an improper personal benefit); (iv) the
rights conferred in the Bylaws, as amended, are not exclusive, and the
Registrant is authorized to enter into indemnification agreements with its
directors, officers and employees; and (v) the Registrant may not
retroactively amend the Bylaw provisions in a way that is adverse to such
directors, officers and employees.
The Registrant's policy is to enter into indemnification agreements with
each of its directors and officers that provide the maximum indemnity allowed
to directors and officers by Section 145 of the Delaware General Corporation
Law and the Bylaws, as amended, as well as certain additional procedural
protections.
The indemnification provisions in the Bylaws, as amended, and the agreements
entered into between the Registrant and its directors and officers may be
sufficiently broad to permit indemnification of the Registrant's directors and
officers for liabilities arising under the Securities Act.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<C> <S>
EXHIBITS
3.2* Form of Amended and Restated Certificate of Incorporation of Registrant.
3.4* Amended and Restated Bylaws of Registrant.
4.2+ Indenture, dated as of December 18, 1997 among the Registrant and Chase
Manhattan Bank and Trust Company, National Association, as trustee.
4.3+ Form of $150,000,000 12 3/4% Senior Note due 2007
4.4+ Form of $150,000,000 new 12 3/4% Senior Notes due 2007.
4.5+ Form of Warrant to purchase Common Stock
5.1+ Opinion of Wilson Sonsini Goodrich& Rosati, Professional Corporation.
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
10.1* Amended and Restated Registration Rights Agreement, as amended and
restated as of August 21, 1996, by and among the Registrant, GS
Capital Partners, L.P., Kleiner Perkins Caufield & Byers VII,
Comdisco, Inc., Intuit, Inc., certain listed holders of Series C
Convertible Preferred Stock, certain listed holders of Common Stock,
certain listed holders of Series D Convertible Preferred Stock, and
Racal-Datacom, Inc.
10.2* Preferred Stock and Warrant Purchase Agreement, dated as of April 20,
1995, by and among the Registrant, GS Capital Partners, L.P., and
Kleiner Perkins Caufield & Byers VII and KPCB Information Sciences
Zaibatsu Fund 11, as amended.
10.3* Form of Director and Officer Indemnification Agreement.
10.4* 1995 Stock Incentive Plan for Employees and Consultants, as amended
February 21, 1996.
10.5* Amended and Restated 1996 Stock Plan.
10.6* 1997 Stock Plan.
10.7* 1997 Employee Stock Purchase Plan.
10.8* Termination of Services and Indemnification Agreement, dated as of
February 15, 1996, by and between the Registrant and Marc Collins-
Rector and Chad Shackley.
10.9* Agreement, dated as of February 15, 1996, by and between the
Registrant and Randy Maslow.
10.10* Governance Agreement, dated May 15, 1997, by and among the Registrant,
Marc Collins--Rector, Chad Shackley, GS Capital Partners, L.P.,
Kleiner Perkins Caufield & Byers VII, KPCB VII Founders Fund, KPCB
Information Sciences Zaibatsu Fund II, and Intuit, Inc.
10.11+* Amended and Restated Employee Services and Staffing Agreement, dated
June 19, 1997, between the Registrant and Critical Technologies, Inc.,
as amended on September 30, 1996, and October 23, 1996, including
Colocation Services Agreement, dated as of November 1, 1994, between
the Registrant and Critical Technologies, Inc. and amendments thereto.
10.12+* Internet-Sign Up Wizard Referral and Microsoft Internet Explorer
License and Distribution Agreement, dated March 28, 1997, between the
Registrant and Microsoft Corporation.
10.13+* OEM License Agreement dated July 27, 1995, between the Registrant and
Netscape Communications Corporation, as amended by First Amendment,
dated January 2, 1996, Second Amendment, effective January 2, 1996,
and Third Amendment, dated May 21, 1996.
10.14+* "Dial up Client" Agreement, dated August 21, 1995, between the
Registrant and Netscape Communications Corporation.
10.15+* "Internet Account Server" Participation Agreement, dated as of January
14, 1997, between the Registrant and Netscape Communications
Corporation.
10.16+* Special Customer Arrangement, dated May 17, 1996, between MCI
Telecommunications Corporation and Sattel Communications LLC, as
amended by First Amendment, dated July 2, 1996; assigned to Registrant
by Assignment and Novation Agreement #2, dated as of August 7, 1996.
10.17+* Master Agreement for MCI Enhanced Services, effective November 1,
1996, between the Registrant and MCI Telecommunications Corporation.
10.18+* Amended and Restated Employee Services and Staffing Agreement.
10.19+* Amendment No. 3 to Internet Access Services Agreement, dated August
23, 1996, between the Registrant and Intuit Inc.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.20+* Contract for Services, dated June 17, 1996, by and between the
Registrant and MFS Telephone, Inc.
10.21+* AT&T Contract Tariff Order, dated June 17, 1996, and Addendum of even
date therewith.
10.22+* Master Lease Agreement Number CON01C Between Concentric Research
Corporation and Racal-Datacom, Inc. ("Racal"), dated August 4, 1994,
as Supplemented by Letter Agreement, dated March 30, 1995, Between the
Corporation and Racal.
10.23+* Lease Agreement Number CON04C between Concentric Network Corporation
and Racal-Datacom, Inc., dated June 26, 1996.
10.24+* Master On-site Maintenance Plan Agreement Number CON02C Between
Concentric Research Corporation and Racal-Datacom, Inc., dated August
24, 1994.
10.25* Lease Agreement, dated November 1, 1996, effective March 11, 1996, by
and between the Registrant and Saginaw Video Associates, d.b.a.
Saginaw Conference Center.
10.26* Amended and Restated Lease Agreement, dated as of October 7, 1996,
between the Registrant and Larry Shackley.
10.27* (Master) Lease, dated January 26, 1988, between Tandem Computers
Incorporated and Spicker-French #130, Limited Partnership, as amended
by Lease Amendment No.1, effective February 5, 1990, and Extension
Agreement, dated March 23, 1993.
10.28* Sublease, dated June 22, 1995, between the Registrant and Tandem
Computers Incorporated.
10.29* Sublease, dated April 25, 1995, between Tandem Computers Incorporated
and Passage Systems, Inc.
10.30* Assignment Agreement, dated December 6, 1996, by and between the
Registrant and Passage Systems, Inc.
10.31+* Internet Access Service Agreement, dated December 11, 1995, effective
as of August 1, 1995, between the Registrant and Intuit, Inc., as
amended.
10.32+* Virtual Private Network Services, dated August 16, 1996, between the
Registrant and WebTV Networks, Inc.
10.33+* Support Services Agreement, dated March 31, 1997, by and between the
Registrant and MCI Telecommunications Corporation.
10.34* Note and Warrant Purchase Agreement, dated June 19, 1997, by and
between the Registrant and Williams Communications Group, Inc. ("WCG")
10.35* Service Credits Letter Agreement, dated June 19, 1997, by and between
the Registrant and WCG.
10.36* $1,100,000 Obligation Letter Agreement, dated June 19, 1997, between
the Registrant and WCG.
10.37* Agency Agreement and Distribution Agreement, dated June 19, 1997,
between the Registrant and WCG.
10.38+* Co-Marketing Service Agreement, dated June 23, 1997 between the
Registrant and Netscape Communications, Inc. ("Netscape")
10.39+* Trademark License Agreement, dated June 23, 1997, between the
Registrant and Netscape.
10.40+* Software License Order Form, dated June 23, 1997, between the
Registrant and Netscape.
10.41* Note and Warrant Purchase Agreement, dated June 23, 1997, between the
Registrant, Kleiner Perkins, Caufield& Byers VII and KPCB Information
Science Zaibatsu Fund VII.
10.42** Amendment to Virtual Private Network Services Agreement between the
Registrant and WebTV Networks, Inc., dated November 1, 1997.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.43+ Registration Rights Agreement, dated as of December 18, 1997 between
the Registrant and UBS Securities LLC, Bear Stearns& Co., Inc., and
Wheat First Securities, Inc. (the "Initial Purchasers")
10.44+ Purchase Agreement, dated as of December 15, 1997 between the
Registrant and the Initial Purchasers.
10.45+ Warrant Agreement, dated as of December 18, 1997, between the
Registrant and Chase Manhattan Bank and Trust Company, National
Association, as warrant agent.
10.46+ Warrant Registration Rights Agreement, dated as of December 18, 1997,
between the Registrant and the Initial Purchasers.
10.47+ Escrow Agreement, dated December 18, 1997, between the Registrant and
Chase Manhattan Bank and Trust Company, National Association.
10.48++ Standard Industrial Lease, dated as of February 17, 1995, by and
between Tiara Computer Systems, Inc. and Internex Information
Services, Inc.
10.49++ Standard Industrial Lease, dated as of July 25, 1996, by and between
San Tomas Investors II and Internex Information Service, Inc.
11.1++ Statement re computation of earnings per share.
12.1++ Statement of computation of ratio of earnings to fixed charges.
21.1++ List of Subsidiaries.
23.1+ Consent of Wilson Sonsini Goodrich& Rosati, Professional Corporation
(included in Exhibit 5.1).
23.2 Consent of Ernst & Young, LLP, Independent Auditors.
23.3 Consent of Arthur Andersen LLP, Independent Public Accountants
24.1+ Power of Attorney.
25.1+ Statement of Eligibility on Form T-1 for Chase Manhattan Bank and
Trust Company, National Association, to act as Trustee under the
Indenture.
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
</TABLE>
- --------
* Incorporated by reference from Registrant's Registration Statement on Form
S-1 (File No. 333-27241), as amended, declared effective by the Securities
and Exchange Commission ("SEC") on July 31, 1997.
** Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997, filed with the SEC on November
14, 1997.
+ Certain information in this exhibit was omitted and filed separately with
the Securities and Exchange Commission pursuant to a confidential treatment
request under 17 C.F.R. (s)(5) 200.80(b)(4), 200.83 and 230.46.
+ Previously filed.
++ Incorporated by reference from exhibit to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.
(b) Financial Statement Schedules
None.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes as follows:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an
II-4
<PAGE>
underwriter within the meaning of Rule 145(c), the issuer undertakes that
such reoffering prospectus will contain the information called for by the
applicable registration form with respect to reofferings by persons who may
be deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
(2) That every prospectus (i)that is filed pursuant to paragraph (1)
immediately preceding, or (ii)that purports to meet the requirements of
section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona filed offering thereof.
(b) 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 call mail or other equally
prompt means. This includes information contained in documents filed
subsequent o the effective date of the registration statement through the
date of responding to the request.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the 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.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT ON FORM S-
4 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
THE CITY OF CUPERTINO, STATE OF CALIFORNIA, ON THE 23RD DAY OF MARCH, 1998.
Concentric Network Corporation
/s/ Henry R. Nothhaft
By: _________________________________
HENRY R. NOTHHAFT, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT TO REGISTRATION STATEMENT HAS BEEN SIGNED BELOW ON MARCH 23, 1998,
BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
<TABLE>
<S> <C> <C>
SIGNATURE TITLE DATE
/s/ Henry R. Nothhaft President and Chief
- ------------------------------------- Executive Officer March 23, 1998
HENRY R. NOTHHAFT (Principal Executive
Officer), Director
/s/ Michael F. Anthofer Chief Financial
- ------------------------------------- Officer (Principal March 23, 1998
MICHAEL F. ANTHOFER Financial and
Accounting Officer)
Director
/s/ Vinod Khosla* March 23, 1998
- -------------------------------------
VINOD KHOSLA
Director
/s/ Franco Regis* March 23, 1998
- -------------------------------------
FRANCO REGIS
Director
- -------------------------------------
LOUIS P. BENDER III
Director
/s/ Gary E. Rieschel* March 23, 1998
- -------------------------------------
GARY E. RIESCHEL
Director
- -------------------------------------
GORDON C. MARTIN
*By: /s/ Henry P. Nothhaft
----------------------------------
HENRY P. NOTHHAFT, ATTORNEY IN FACT
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
3.2* Form of Amended and Restated Certificate of Incorporation of
Registrant.
3.4* Amended and Restated Bylaws of Registrant.
4.2+ Indenture, dated as of December 18, 1997 among the Registrant and
Chase Manhattan Bank and Trust Company, National Association, as
trustee.
4.3+ Form of $150,000,000 12 3/4% Senior Note due 2007
4.4+ Form of $150,000,000 new 12 3/4% Senior Notes due 2007.
4.5+ Form of Warrant to purchase Common Stock
5.1+ Opinion of Wilson Sonsini Goodrich& Rosati, Professional Corporation.
10.1* Amended and Restated Registration Rights Agreement, as amended and
restated as of August 21, 1996, by and among the Registrant, GS
Capital Partners, L.P., Kleiner Perkins Caufield & Byers VII,Comdisco,
Inc., Intuit, Inc., certain listed holders of Series C Convertible
Preferred Stock, certain listed holders of Common Stock, certain
listed holders of Series D Convertible Preferred Stock, and Racal-
Datacom, Inc.
10.2* Preferred Stock and Warrant Purchase Agreement, dated as of April 20,
1995, by and among the Registrant, GS Capital Partners, L.P., and
Kleiner Perkins Caufield & Byers VII and KPCB Information Sciences
Zaibatsu Fund 11, as amended.
10.3* Form of Director and Officer Indemnification Agreement.
10.4* 1995 Stock Incentive Plan for Employees and Consultants, as amended
February 21, 1996.
10.5* Amended and Restated 1996 Stock Plan.
10.6* 1997 Stock Plan.
10.7* 1997 Employee Stock Purchase Plan.
10.8* Termination of Services and Indemnification Agreement, dated as of
February 15, 1996, by and between the Registrant and Marc Collins-
Rector and Chad Shackley.
10.9* Agreement, dated as of February 15, 1996, by and between the
Registrant and Randy Maslow.
10.10* Governance Agreement, dated May 15, 1997, by and among the Registrant,
Marc Collins-Rector, Chad Shackley, GS Capital Partners, L.P., Kleiner
Perkins Caufield & Byers VII, KPCB VII Founders Fund, KPCB Information
Sciences Zaibatsu Fund II, and Intuit, Inc.
10.11+* Amended and Restated Employee Services and Staffing Agreement, dated
June 19, 1997, between the Registrant and Critical Technologies, Inc.,
as amended on September 30, 1996, and October 23, 1996, including
Colocation Services Agreement, dated as of November 1, 1994, between
the Registrant and Critical Technologies, Inc. and amendments thereto.
10.12+* Internet-Sign Up Wizard Referral and Microsoft Internet Explorer
License and Distribution Agreement, dated March 28, 1997, between the
Registrant and Microsoft Corporation.
10.13+* OEM License Agreement dated July 27, 1995, between the Registrant and
Netscape Communications Corporation, as amended by First Amendment,
dated January 2, 1996, Second Amendment, effective January 2, 1996,
and Third Amendment, dated May 21, 1996.
10.14+* "Dial up Client" Agreement, dated August 21, 1995, between the
Registrant and Netscape Communications Corporation.
10.15+* "Internet Account Server" Participation Agreement, dated as of January
14, 1997, between the Registrant and Netscape Communications
Corporation.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.16+* Special Customer Arrangement, dated May 17, 1996, between MCI
Telecommunications Corporation and Sattel Communications LLC, as
amended by First Amendment, dated July 2, 1996; assigned to Registrant
by Assignment and Novation Agreement #2, dated as of August 7, 1996.
10.17+* Master Agreement for MCI Enhanced Services, effective November 1,
1996, between the Registrant and MCI Telecommunications Corporation.
10.18+* Amended and Restated Employee Services and Staffing Agreement.
10.19+* Amendment No. 3 to Internet Access Services Agreement, dated August
23, 1996, between the Registrant and Intuit Inc.
10.20+* Contract for Services, dated June 17, 1996, by and between the
Registrant and MFS Telephone, Inc.
10.21+* AT&T Contract Tariff Order, dated June 17, 1996, and Addendum of even
date therewith.
10.22+* Master Lease Agreement Number CON01C Between Concentric Research
Corporation and Racal-Datacom, Inc. ("Racal"), dated August 4, 1994,
as Supplemented by Letter Agreement, dated March 30, 1995, Between the
Corporation and Racal.
10.23+* Lease Agreement Number CON04C between Concentric Network Corporation
and Racal-Datacom, Inc., dated June 26, 1996.
10.24+* Master On-site Maintenance Plan Agreement Number CON02C Between
Concentric Research Corporation and Racal-Datacom, Inc., dated August
24, 1994.
10.25* Lease Agreement, dated November 1, 1996, effective March 11, 1996, by
and between the Registrant and Saginaw Video Associates, d.b.a.
Saginaw Conference Center.
10.26* Amended and Restated Lease Agreement, dated as of October 7, 1996,
between the Registrant and Larry Shackley.
10.27* (Master) Lease, dated January 26, 1988, between Tandem Computers
Incorporated and Spicker-French #130, Limited Partnership, as amended
by Lease Amendment No. 1, effective February 5, 1990, and Extension
Agreement, dated March 23, 1993.
10.28* Sublease, dated June 22, 1995, between the Registrant and Tandem
Computers Incorporated.
10.29* Sublease, dated April 25, 1995, between Tandem Computers Incorporated
and Passage Systems, Inc.
10.30* Assignment Agreement, dated December 6, 1996, by and between the
Registrant and Passage Systems, Inc.
10.31+* Internet Access Service Agreement, dated December 11, 1995, effective
as of August 1, 1995, between the Registrant and Intuit, Inc., as
amended.
10.32+* Virtual Private Network Services, dated August 16, 1996, between the
Registrant and Web TV Networks, Inc.
10.33+* Support Services Agreement, dated March 31, 1997, by and between the
Registrant and MCI Telecommunications Corporation.
10.34* Note and Warrant Purchase Agreement, dated June 19, 1997, by and
between the Registrant and Williams Communications Group, Inc. ("WCG")
10.35* Service Credits Letter Agreement, dated June 19, 1997, by and between
the Registrant and WCG.
10.36* $1,100,000 Obligation Letter Agreement, dated June 19, 1997, between
the Registrant and WCG.
10.37* Agency Agreement and Distribution Agreement, dated June 19, 1997,
between the Registrant and WCG.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.38+* Co-Marketing Service Agreement, dated June 23, 1997 between the
Registrant and Netscape Communications, Inc. ("Netscape")
10.39+* Trademark License Agreement, dated June 23, 1997, between the
Registrant and Netscape.
10.40+* Software License Order Form, dated June 23, 1997, between the
Registrant and Netscape.
10.41* Note and Warrant Purchase Agreement, dated June 23, 1997, between the
Registrant, Kleiner Perkins, Caufield & Byers VII and KPCB Information
Science Zaibatsu Fund VII.
10.42** Amendment to Virtual Private Network Services Agreement between the
Registrant and WebTV Networks, Inc., dated November 1, 1997.
10.43+ Registration Rights Agreement, dated as of December 18, 1997 between
the Registrant and UBS Securities LLC, Bear Stearns & Co., Inc., and
Wheat First Securities, Inc. (the "Initial Purchasers")
10.44+ Purchase Agreement, dated as of December 15, 1997 between the
Registrant and the Initial Purchasers.
10.45+ Warrant Agreement, dated as of December 18, 1997, between the
Registrant and Chase Manhattan Bank and Trust Company, National
Association, as warrant agent.
10.46+ Warrant Registration Rights Agreement, dated as of December 18, 1997,
between the Registrant and the Initial Purchasers.
10.47+ Escrow Agreement, dated December 18, 1997, between the Registrant and
Chase Manhattan Bank and Trust Company, National Association.
10.48++ Standard Industrial Lease, dated as of February 17, 1995, by and
between Tiara Computer Systems, Inc. and Internex Information
Services, Inc.
10.49++ Standard Industrial Lease, dated as of July 25, 1996, by and between
San Tomas Investors II and Internex Information Service, Inc.
11.1++ Statement re computation of earnings per share.
12.1++ Statement of computation of ratio of earnings to fixed charges.
21.1++ List of Subsidiaries.
23.1+ Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5.1).
23.2 Consent of Ernst & Young, LLP, Independent Auditors.
23.3 Consent of Arthur Andersen LLP, Independent Public Accountants
24.1+ Power of Attorney.
25.1+ Statement of Eligibility on Form T-1 for Chase Manhattan Bank and
Trust Company, National Association, to act as Trustee under the
Indenture.
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
</TABLE>
- --------
* Incorporated by reference from Registrant's Registration Statement on Form
S-1 (File No. 333-27241), as amended, declared effective by the Securities
and Exchange Commission ("SEC") on July 31, 1997.
** Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997, filed with the SEC on November
14, 1997.
+ Certain information in this exhibit was omitted and filed separately with
the Securities and Exchange Commission pursuant to a confidential treatment
request under 17 C.F.R. (s)(5) 200.80(b)(4), 200.83 and 230.46.
+ Previously filed.
++ Incorporated by reference from exhibit to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG, LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
"Selected Historical Consolidated Financial and Other Data" and to the use of
our report dated January 27, 1998, except for Note 12 as to which the date is
February 5, 1998, in the Registration Statement (Form S-4) and the related
Prospectus of Concentric Network Corporation for the registration of $150
million of 12 3/4% Senior Notes due 2007.
/s/ Ernst & Young LLP
San Jose, California
March 23, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated January 26, 1998 on the financial statements of Internex
Information Services, Inc. for the year ended June 30, 1997 included in this
Form S-4. It should be noted that we have not audited any financial statements
of Internex Information Services, Inc. for any period subsequent to June 30,
1997 or performed any audit procedures subsequent to the date of our report.
/s/ ARTHUR ANDERSEN LLP
San Jose, California
March 23, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 17,657 2,841 3,464 39,638
<SECURITIES> 0 0 0 0
<RECEIVABLES> 1,769 2,022 1,876 4,395
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 21,228 6,853 13,937 49,946
<PP&E> 37,804 64,328 72,978 74,863
<DEPRECIATION> 9,877 11,101 14,422 18,589
<TOTAL-ASSETS> 70,722 61,438 58,556 110,165
<CURRENT-LIABILITIES> 32,096 31,558 50,562 31,114
<BONDS> 0 0 0 0
5,150 5,150 1,400 1,400
95,215 96,323 99,604 0
<COMMON> 1,850 1,958 8,443 178,139
<OTHER-SE> (94,140) (108,900) (122,376) (137,117)
<TOTAL-LIABILITY-AND-EQUITY> 70,722 61,438 76,367 110,165
<SALES> 0 0 0 0
<TOTAL-REVENUES> 15,648 9,156 19,968 31,792
<CGS> 0 0 0 0
<TOTAL-COSTS> 56,266 15,744 30,657 45,495
<OTHER-EXPENSES> 22,503 7,021 15,442 24,396
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 3,260 1,070 2,849 4,937
<INCOME-PRETAX> (66,381) (14,681) (27,585) (41,803)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (66,381) (14,681) (27,585) (41,803)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (66,381) (14,681) (27,585) (41,803)
<EPS-PRIMARY> (13.45) (2.18) (4.03) (4.94)
<EPS-DILUTED> 0 0 0 0
</TABLE>
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
CONCENTRIC NETWORK CORPORATION
OFFER TO EXCHANGE ITS
NEW 12 3/4% SENIOR NOTES DUE 2007
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
12 3/4% SENIOR NOTES DUE 2007
PURSUANT TO THE PROSPECTUS
DATED MARCH 24, 1998
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME ON APRIL 27, 1998 (UNLESS EXTENDED BY CONCENTRIC NETWORK
CORPORATION IN ITS SOLE DISCRETION) (SUCH TIME AND SUCH DATE, AND AS SUCH
TIME AND DATE MAY BE EXTENDED, THE "EXPIRATION DATE").
If you desire to accept the Exchange Offer (as defined below), this Letter
of Transmittal should be completed, signed, and submitted to:
CHASE MANHATTAN BANK AND TRUST COMPANY, NATIONAL ASSOCIATION
Exchange Agent
BY MAIL, OVERNIGHT DELIVERY OR HAND:
Chase Manhattan Bank and Trust Company, National Association
101 California Street
Suite 2725
San Francisco, CA 94111
Attn: Paula Oswald
(Concentric Network Corporation, 12 3/4% Senior Notes due 2007)
TO CONFIRM BY TELEPHONE OR FOR INFORMATION:
415-954-9526
FACSIMILE TRANSMISSIONS:
415-693-8850
(Originals of all documents sent by facsimile should be sent promptly by
hand, overnight courier or registered or certified mail.)
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A NUMBER
OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS
LETTER OF TRANSMITTAL IS COMPLETED.
Capitalized terms used but not defined herein shall have the same meaning
given them in the Prospectus (as defined below).
1
<PAGE>
This Letter of Transmittal is to be completed by holders of Existing Notes
(as defined below) either if Existing Notes are to be forwarded herewith or if
tenders of Existing Notes are to be made by book-entry transfer to an account
maintained by Chase Manhattan Bank and Trust Company, National Association
(the "Exchange Agent") at The Depository Trust Company ("DTC") pursuant to the
procedures set forth in "The Exchange Offer-Procedures for Tendering Existing
Notes" in the Prospectus.
Holders of Existing Notes whose certificates (the "Certificates") for such
Existing Notes are not immediately available or who cannot deliver their
Certificates and all other required documents to the Exchange Agent on or
prior to the Expiration Date (as defined in the Prospectus) or who cannot
complete the procedures for book-entry transfer on a timely basis, must tender
their Existing Notes according to the guaranteed delivery procedures set forth
in "The Exchange Offer-Procedures for Tendering Existing Notes" in the
Prospectus. See Instruction 1 hereto. DELIVERY OF DOCUMENTS TO DTC DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
2
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to Concentric Network Corporation, a Delaware
corporation (the "Company"), the aggregate principal amount of the Company's
12 3/4% Senior Notes due 2007 (the "Existing Notes") described in Box 1 below,
in exchange for a like aggregate principal amount of the Company's new 12 3/4%
Senior Notes due 2007 (the "Exchange Notes") which have been registered under
the Securities Act of 1933, as amended (the "Securities Act"), upon the terms
and subject to the conditions set forth in the Prospectus dated March 24, 1998
(as the same may be amended or supplemented from time to time, the
"Prospectus"), receipt of which is acknowledged, and in this Letter of
Transmittal (which, together with the Prospectus, constitutes the "Exchange
Offer").
Subject to, and effective upon, the acceptance for exchange of all or any
portion of the Existing Notes tendered herewith in accordance with the terms
and conditions of the Exchange Offer (including, if the Exchange Offer is
extended or amended, the terms and conditions of any such extension or
amendment), the undersigned hereby sells, assigns and transfers to or upon the
order of the Company all right, title and interest in and to such Existing
Notes as are being tendered herewith. The undersigned hereby irrevocably
constitutes and appoints Chase Manhattan Bank and Trust Company, National
Association as the Exchange Agent (the "Exchange Agent") as its agent and
attorney-in-fact (with full knowledge that the Exchange Agent is also acting
as agent of the Company in connection with the Exchange Offer) with respect to
the tendered Existing Notes, with full power of substitution (such power of
attorney being deemed to be an irrevocable power coupled with an interest),
subject only to the right of withdrawal described in the Prospectus, to (i)
deliver Certificates for Existing Notes to the Company together with all
accompanying evidences of transfer and authenticity to, or upon the order of,
the Company, upon receipt by the Exchange Agent, as the undersigned's agent,
of the Exchange Notes to be issued in exchange for such Existing Notes, (ii)
present Certificates for such Existing Notes for transfer, and to transfer the
Existing Notes on the books of the Company, and (iii) receive for the account
of the Company all benefits and otherwise exercise all rights of beneficial
ownership of such Existing Notes, all in accordance with the terms and
conditions of the Exchange Offer.
THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED HAS FULL
POWER AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE
EXISTING NOTES TENDERED HEREBY AND THAT, WHEN THE SAME ARE ACCEPTED FOR
EXCHANGE, THE COMPANY WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE
THERETO, FREE AND CLEAR OF ALL LIENS, RESTRICTIONS, CHARGES AND ENCUMBRANCES,
AND THAT THE EXISTING NOTES TENDERED HEREBY ARE NOT SUBJECT TO ANY ADVERSE
CLAIMS OR PROXIES. THE UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND DELIVER ANY
ADDITIONAL DOCUMENTS DEEMED BY THE COMPANY OR THE EXCHANGE AGENT TO BE
NECESSARY OR DESIRABLE TO COMPLETE THE EXCHANGE, ASSIGNMENT AND TRANSFER OF
THE EXISTING NOTES TENDERED HEREBY, AND THE UNDERSIGNED WILL COMPLY WITH ITS
OBLIGATIONS UNDER THE REGISTRATION RIGHTS AGREEMENT. THE UNDERSIGNED HAS READ
AND AGREES TO ALL OF THE TERMS OF THE EXCHANGE OFFER.
The name(s) and address(es) of the registered holder(s) of the Existing
Notes tendered hereby should be printed in Box 1 below, if they are not
already set forth below, as they appear on the Certificates representing such
Existing Notes. The Certificate number(s) and the Existing Notes that the
undersigned wishes to tender should be indicated in the appropriate box below.
If any tendered Existing Notes are not exchanged pursuant to the Exchange
Offer for any reason, or if Certificates are submitted for more Existing Notes
than are tendered or accepted for exchange, Certificates for such nonexchanged
or nontendered Existing Notes will be returned (or, in the case of Existing
Notes tendered by book-entry transfer, such Existing Notes will be credited to
an account maintained at DTC), without expense to the tendering holder,
promptly following the expiration or termination of the Exchange Offer.
3
<PAGE>
The undersigned understands that tenders of Existing Notes pursuant to any
one of the procedures described in "The Exchange Offer-Procedures for
Tendering Existing Notes" in the Prospectus and in the instructions hereto
will, upon the Company's acceptance for exchange of such tendered Existing
Notes, constitute a binding agreement between the undersigned and the Company
upon the terms and subject to the conditions of the Exchange Offer. The
undersigned recognizes that, under certain circumstances set forth in the
Prospectus, the Company may not be required to accept for exchange any of the
Existing Notes tendered hereby.
Unless otherwise indicated herein in the box entitled "Special Exchange
Instructions" below (Box 7), the undersigned hereby directs that the Exchange
Notes be issued in the name(s) of the undersigned or, in the case of a book-
entry transfer of Existing Notes, that such Exchange Notes be credited to the
account indicated below maintained at DTC. If applicable, substitute
Certificates representing Existing Notes not exchanged or not accepted for
exchange will be issued to the undersigned or, in the case of a book-entry
transfer of Existing Notes, will be credited to the account indicated below
maintained at DTC. Similarly, unless otherwise indicated under "Special
Delivery Instructions" (Box 8), please deliver Exchange Notes to the
undersigned at the address shown below the undersigned's signature.
BY TENDERING EXISTING NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, THE
UNDERSIGNED HEREBY REPRESENTS AND AGREES THAT (i) THE UNDERSIGNED IS NOT AN
"AFFILIATE" OF THE COMPANY, (ii) ANY EXCHANGE NOTES TO BE RECEIVED BY THE
UNDERSIGNED ARE BEING ACQUIRED IN THE ORDINARY COURSE OF ITS BUSINESS, (iii)
THE UNDERSIGNED HAS NO ARRANGEMENT OR UNDERSTANDING WITH ANY PERSON TO
PARTICIPATE IN A DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES ACT) OF
EXCHANGE NOTES TO BE RECEIVED IN THE EXCHANGE OFFER, AND (iv) IF THE
UNDERSIGNED IS NOT A BROKER-DEALER, THE UNDERSIGNED IS NOT ENGAGED IN, AND
DOES NOT INTEND TO ENGAGE IN, A DISTRIBUTION (WITHIN THE MEANING OF THE
SECURITIES ACT) OF SUCH EXCHANGE NOTES. BY TENDERING EXISTING NOTES PURSUANT
TO THE EXCHANGE OFFER AND EXECUTING THIS LETTER OF TRANSMITTAL, A HOLDER OF
EXISTING NOTES WHICH IS A BROKER-DEALER REPRESENTS AND AGREES, CONSISTENT WITH
CERTAIN INTERPRETIVE LETTERS ISSUED BY THE STAFF OF THE DIVISION OF
CORPORATION FINANCE OF THE SECURITIES AND EXCHANGE COMMISSION TO THIRD
PARTIES, THAT SUCH EXISTING NOTES WERE ACQUIRED BY SUCH BROKER-DEALER FOR ITS
OWN ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING
ACTIVITIES (SUCH A BROKER-DEALER WHICH IS TENDERING EXISTING NOTES IS HEREIN
REFERRED TO AS A "PARTICIPATING BROKER-DEALER") AND IT WILL DELIVER THE
PROSPECTUS (AS AMENDED OR SUPPLEMENTED FROM TIME TO TIME) MEETING THE
REQUIREMENTS OF THE SECURITIES ACT IN CONNECTION WITH ANY RESALE OF SUCH
EXCHANGE NOTES (PROVIDED THAT, BY SO ACKNOWLEDGING AND BY DELIVERING A
PROSPECTUS, SUCH PARTICIPATING BROKER-DEALER WILL NOT BE DEEMED TO ADMIT THAT
IT IS AN "UNDERWRITER" WITHIN THE MEANING OF THE SECURITIES ACT).
THE COMPANY HAS AGREED THAT, SUBJECT TO THE PROVISIONS OF THE REGISTRATION
RIGHTS AGREEMENT, THE PROSPECTUS, AS IT MAY BE AMENDED OR SUPPLEMENTED FROM
TIME TO TIME, MAY BE USED BY A PARTICIPATING BROKER-DEALER IN CONNECTION WITH
RESALES OF EXCHANGE NOTES RECEIVED IN EXCHANGE FOR EXISTING NOTES, WHERE SUCH
EXISTING NOTES WERE ACQUIRED BY SUCH PARTICIPATING BROKER-DEALER FOR ITS OWN
ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES,
FOR A PERIOD ENDING 180 DAYS AFTER THE EXPIRATION DATE OR, IF EARLIER, WHEN
ALL SUCH EXCHANGE NOTES HAVE BEEN DISPOSED OF BY SUCH PARTICIPATING BROKER-
DEALER. IN THAT REGARD, EACH PARTICIPATING BROKER-DEALER, BY TENDERING SUCH
EXISTING NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, AGREES THAT, UPON
RECEIPT OF NOTICE FROM THE COMPANY OF THE OCCURRENCE OF ANY EVENT OR THE
DISCOVERY OF ANY FACT WHICH MAKES ANY STATEMENT CONTAINED OR INCORPORATED BY
REFERENCE
4
<PAGE>
IN THE PROSPECTUS UNTRUE IN ANY MATERIAL RESPECT OR WHICH CAUSES THE
PROSPECTUS TO OMIT TO STATE A MATERIAL FACT NECESSARY IN ORDER TO MAKE THE
STATEMENTS CONTAINED THEREIN, IN LIGHT OF THE CIRCUMSTANCES UNDER WHICH THEY
WERE MADE, NOT MISLEADING OR OF THE OCCURRENCE OF CERTAIN OTHER EVENTS
SPECIFIED IN THE REGISTRATION RIGHTS AGREEMENT, SUCH PARTICIPATING BROKER-
DEALER WILL SUSPEND THE SALE OF EXCHANGE NOTES PURSUANT TO THE PROSPECTUS
UNTIL THE COMPANY HAS AMENDED OR SUPPLEMENTED THE PROSPECTUS TO CORRECT SUCH
MISSTATEMENT OR OMISSION AND HAS FURNISHED COPIES OF THE AMENDED OR
SUPPLEMENTED PROSPECTUS TO THE PARTICIPATING BROKER-DEALER OR THE COMPANY HAS
GIVEN NOTICE THAT THE SALE OF THE EXCHANGE NOTES MAY BE RESUMED, AS THE CASE
MAY BE.
Each Exchange Note will bear interest from the most recent date to which
interest has been paid or duly provided for on the Existing Note surrendered
in exchange for such Exchange Note or, if no such interest has been paid or
duly provided for on such Existing Note, from December 15, 1997. Holders of
the Existing Notes whose Existing Notes are accepted for exchange will not
receive accrued interest on such Existing Notes for any period from and after
the last Interest Payment Date to which interest has been paid or duly
provided for on such Existing Notes prior to the original issue date of the
Exchange Notes or, if no such interest has been paid or duly provided for,
will not receive any accrued interest on such Existing Notes, and will be
deemed to have waived the right to receive any interest on such Existing Notes
accrued from and after such Interest Payment Date or, if no such interest has
been paid or duly provided for, from and after December 15, 1997.
All authority herein conferred or agreed to be conferred in this Letter of
Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, personal representatives, trustees in bankruptcy,
legal representatives, successors and assigns of the undersigned. Except
pursuant to the withdrawal rights set forth in the Prospectus, this tender is
irrevocable.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING
THE BOXES BELOW AND FOLLOW THE INSTRUCTIONS BEGINNING ON PAGE 9 HEREOF.
5
<PAGE>
ALL TENDERING HOLDERS COMPLETE THIS BOX 1:
BOX 1
DESCRIPTION OF EXISTING NOTES TENDERED
(ATTACH ADDITIONAL SIGNED PAGES, IF NECESSARY)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
IF BLANK,
PLEASE PRINT
NAME(S) AND
ADDRESS(ES) OF
REGISTERED
HOLDER(S),
EXACTLY AS
NAME(S)
APPEAR(S) ON CERTIFICATE PRINCIPAL AMOUNT
EXISTING NOTE NUMBER(S) OF PRINCIPAL AMOUNT OF EXISTING NOTES
CERTIFICATE(S): EXISTING NOTES* OF EXISTING NOTES TENDERED**
- ----------------------------------------------------------------------
<S> <C> <C> <C>
-----------------------------------------------------
-----------------------------------------------------
-----------------------------------------------------
-----------------------------------------------------
TOTAL PRINCIPAL
TOTAL PRINCIPAL AMOUNT TENDERED
AMOUNT $ $
</TABLE>
- --------------------------------------------------------------------------------
* Need not be completed by book-entry holders.
** Existing Notes may be tendered in whole or in part in denominations of
$1,000 and integral multiples thereof. All Existing Notes held shall be
deemed tendered unless a lesser number is specified in this column. See
Instruction 4.
BOX 2
BOOK-ENTRY TRANSFER
(SEE INSTRUCTION 1 BELOW)
- --------------------------------------------------------------------------------
[_] CHECK HERE IF TENDERED EXISTING NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND
COMPLETE THE FOLLOWING:
Name of Tendering Institution ________________________________________________
DTC Account Number ___________________________________________________________
Transaction Code Number ______________________________________________________
6
<PAGE>
BOX 3
NOTICE OF GUARANTEED DELIVERY
(SEE INSTRUCTION 1 BELOW)
- --------------------------------------------------------------------------------
[_] CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY
IF TENDERED EXISTING NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING:
Name of Registered Holders(s) ________________________________________________
Window Ticket Number (if any) ________________________________________________
Date of Execution of Notice of Guaranteed Delivery ___________________________
Name of Institution which Guaranteed Delivery ________________________________
If Guaranteed Delivery is to be made By Book-Entry Transfer: _________________
Name of Tendering Institution ________________________________________________
DTC Account Number ___________________________________________________________
Transaction Code Number ______________________________________________________
BOX 4
RETURN OF NON-EXCHANGED EXISTING NOTES TENDERED BY BOOK-ENTRY TRANSFER
(SEE INSTRUCTIONS 4 AND 6 BELOW)
- --------------------------------------------------------------------------------
[_] CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED EXISTING
NOTES ARE TO BE RETURNED BY CREDITING THE DTC ACCOUNT NUMBER SET FORTH
ABOVE.
BOX 5
PARTICIPATING BROKER-DEALER
- --------------------------------------------------------------------------------
[_] CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE EXISTING NOTES FOR
ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES (A
"PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE TEN ADDITIONAL COPIES OF
THE PROSPECTUS AND TEN COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name: ________________________________________________________________________
Address: _____________________________________________________________________
7
<PAGE>
BOX 6
TENDERING HOLDER SIGNATURE
- --------------------------------------------------------------------------------
Holder(s) Sign Here __________________________________________________________
(SEE INSTRUCTIONS 2, 5 AND 6 BELOW)
(PLEASE COMPLETE SUBSTITUTE FORM W-9 IN BOX 9 BELOW)
(NOTE: SIGNATURE(S) MUST BE GUARANTEED IF REQUIRED BY INSTRUCTION 2)
Must be signed by registered holder(s) exactly as name(s) appear(s) on
Certificate(s) for the Existing Notes hereby tendered or on a security
position listing, or by a person(s) authorized to become the registered
holder(s) by endorsements and documents transmitted herewith (including such
opinions of counsel, certifications and other information as may be required
by the Company or the Trustee for the Existing Notes to comply with the
restrictions on transfer applicable to the Existing Notes). If signature is
by an attorney-in-fact, executor, administrator, trustee, guardian, officer
of a corporation or another acting in a fiduciary capacity or representative
capacity, please set forth the signer's full title. See Instruction 5 below.
______________________________
(Signature(s) of Holder(s))
Date ________________ , 1998
Name(s) ______________________________________________________________________
(Please Print)
Address ______________________________________________________________________
(Include Zip Code)
Area Code and Telephone Number _______________________________________________
(Tax Identification or Social Security Number(s)) ____________________________
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 1, 2 AND 5 BELOW)
______________________________
Authorized Signature
Name _________________________________________________________________________
(Please Print)
Date _________________, 1998
Capacity or Title ____________________________________________________________
Name of Firm _________________________________________________________________
Address ______________________________________________________________________
(Include Zip Code)
Area Code and Telephone Number _______________________________________________
8
<PAGE>
BOX 7 BOX 8
SPECIAL EXCHANGE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5 AND 6 (SEE INSTRUCTIONS 1, 5 AND 6
BELOW) BELOW)
To be completed ONLY if the Ex- To be completed ONLY if Exchange
change Notes are to be issued in Notes are to be sent to someone
the name of someone other than other than the registered holder
the registered holder of the Ex- of the Existing Notes whose
isting Notes whose name(s) ap- name(s) appear(s) above, or to
pear(s) above. such registered holder(s) at an
address other than that shown
above.
Issue Exchange Notes to:
Name _____________________________ Mail Exchange Notes to:
(Please Print) Name______________________________
Address __________________________ (Please Print)
__________________________________ Address __________________________
(Include Zip Code) __________________________________
__________________________________ (Include Zip Code)
(Tax Identification or Social __________________________________
Security Number) (Tax Identification or Social
Security Number)
9
<PAGE>
BOX 9
SUBSTITUTE FORM W-9
TO BE COMPLETED BY ALL TENDERING SECURITYHOLDERS
(SEE INSTRUCTION 9 BELOW)
SIGN THIS SUBSTITUTE FORM W-9 IN ADDITION TO THE SIGNATURE(S) REQUIRED IN BOX
6
PAYER'S NAME: CHASE MANHATTAN BANK AND TRUST COMPANY, NATIONAL ASSOCIATION
PART I--Please provide your TIN:
SUBSTITUTE TIN (either your social
security number or employer
FORM W-9 identification number) in
the box to the right and
certify by signing and
dating below.
----------------------
--------------------------------------------------------
DEPARTMENT OF PART II--Awaiting TIN [_]
THE TREASURY SIGN THIS FORM AND THE CERTIFICATION OF AWAITING
INTERNAL TAXPAYER IDENTIFICATION NUMBER BELOW.
REVENUE --------------------------------------------------------
SERVICE PART III--EXEMPT [_]
See enclosed Guidelines for additional information
and SIGN THIS FORM.
--------------------------------------------------------
PAYER'S REQUEST Certification--Under penalties of
FOR TAXPAYER perjury, I certify that:
IDENTIFICATION (1) The number shown on this form is my correct
NUMBER (TIN) AND taxpayer identification number (or I am waiting for
CERTIFICATION a number to be issued to me); and
(2) I am not subject to backup withholding because (i) I
am exempt from backup withholding, or (ii) I have
not been notified by the Internal Revenue Service
(IRS) that I am subject to backup withholding as a
result of a failure to report all interest or
dividends, or (iii) the IRS has notified me that I
am no longer subject to backup withholding.
(3) Any other information provided on this form is
true and correct.
--------------------------------------------------------
Certification Instructions--You must cross out item
(iii) in Part (2) above if you have been notified by
the IRS that you are subject to backup withholding
because of underreporting interest or dividends on
your tax return and you are no longer subject to
backup withholding.
Signature: _______________________ Date: __________
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE
IF YOU CHECKED THE BOX IN PART 2 OF THE SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or
(2) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number by the
time of payment, 31% of all payments made to me on account of the Exchange
Notes shall be retained until I provide a taxpayer identification number to
the Exchange Agent and that, if I do not provide my taxpayer identification
number within 60 days, such retained amounts shall be remitted to the
Internal Revenue Service as backup withholding and 31% of all reportable
payments made to me thereafter will be withheld and remitted to the Internal
Revenue Service until I provide a taxpayer identification number.
Signature: ___________________________________________________________________
Date: ________________________________________________________________________
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU. PLEASE REVIEW THE
ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
FOR ADDITIONAL INFORMATION.
10
<PAGE>
INSTRUCTIONS TO LETTER OF TRANSMITTAL
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
GENERAL
Please do not send Certificates for Existing Notes directly to the Company.
Your Existing Note Certificates, together with your signed and completed
Letter of Transmittal and any required supporting documents should be mailed
in the enclosed addressed envelope, or otherwise delivered, to the Exchange
Agent, at either of the addresses indicated on the first page hereof. THE
METHOD OF DELIVERY OF CERTIFICATES, THIS LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING HOLDER AND
THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE
AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED,
PROPERLY INSURED, OR OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED DELIVERY
PROCEDURES
This Letter of Transmittal is to be completed if either (a) Certificates are
to be forwarded herewith or (b) tenders are to be made pursuant to the
procedures for tender by book-entry transfer set forth in "The Exchange
Offer--Procedures for Tendering Existing Notes" in the Prospectus.
Certificates, or timely confirmation of a book-entry transfer of such Existing
Notes into the Exchange Agent's account at DTC, as well as this Letter of
Transmittal (or facsimile thereof), properly completed and duly executed, with
any required signature guarantees, and any other documents required by this
Letter of Transmittal, must be received by the Exchange Agent at its address
set forth herein on or prior to 5:00 p.m., New York City time, on the
Expiration Date. Existing Notes may be tendered in whole or in part in the
principal amount of $1,000 and integral multiples of $1,000.
Holders who wish to tender their Existing Notes and (i) whose Existing Notes
are not immediately available or (ii) who cannot deliver their Existing Notes,
this Letter of Transmittal and all other required documents to the Exchange
Agent on or prior to the Expiration Date or (iii) who cannot complete the
procedures for delivery by book-entry transfer on a timely basis, may tender
their Existing Notes by properly completing and duly executing a Notice of
Guaranteed Delivery pursuant to the guaranteed delivery procedures set forth
in "The Exchange Offer--Procedures for Tendering Existing Notes" in the
Prospectus and by completing Box 3 hereof. Pursuant to such procedures: (i)
such tender must be made by or through an Eligible Institution (as defined
below); (ii) a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form made available by the Company, must be
received by the Exchange Agent on or prior to the Expiration Date; and (iii)
the Certificates (or a book-entry confirmation (as defined in the Prospectus))
representing all tendered Existing Notes, in proper form for transfer,
together with a Letter of Transmittal (or facsimile thereof), properly
completed and duly executed, with any required signature guarantees and any
other documents required by this Letter of Transmittal, must be received by
the Exchange Agent within three New York Stock Exchange trading days after the
date of execution of such Notice of Guaranteed Delivery, all as provided in
"The Exchange Offer--Procedures for Tendering Existing Notes" in the
Prospectus.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted by
facsimile or mail to the Exchange Agent, and must include a guarantee by an
Eligible Institution in the form set forth in such Notice. For Existing Notes
to be properly tendered pursuant to the guaranteed delivery procedure, the
Exchange Agent must receive a Notice of Guaranteed Delivery on or prior to the
Expiration Date. As used herein, "Eligible Institution" means a firm or other
entity identified in Rule 17Ad-15 under the Exchange Act as "an eligible
guarantor institution," including (as such terms are defined therein) (i) a
bank; (ii) a broker, dealer, municipal securities broker or dealer or
government securities broker or dealer; (iii) a credit union; (iv) a national
securities exchange, registered securities association or clearing agency; or
(v) a savings association, that is a participant in the Securities Transfer
Agents Medallion Program, the New York Stock Exchange Medallion Signature
Program or the Stock Exchanges Medallion Program.
11
<PAGE>
The Company will not accept any alternative, conditional or contingent
tenders. Each tendering holder, by execution of a Letter of Transmittal (or
facsimile thereof), waives any right to receive any notice of the acceptance
of such tender.
2. GUARANTEE OF SIGNATURES
No signature guarantee on this Letter of Transmittal is required if:
(i) this Letter of Transmittal is signed by the registered holder (which
term, for purposes of this document, shall include any participant in DTC
whose name appears on a security position listing as the owner of the
Existing Notes) of Existing Notes tendered herewith, unless such holder(s)
has completed either the box entitled "Special Exchange Instructions" (Box
7) or the box entitled "Special Delivery Instructions" (Box 8) above, or
(ii) such Existing Notes are tendered for the account of a firm that is
an Eligible Institution.
In all other cases, an Eligible Institution must guarantee the signature(s)
on this Letter of Transmittal (Box 6). See Instruction 5.
3. INADEQUATE SPACE
If the space provided in the box captioned "Description of Existing Notes"
is inadequate, the Certificate number(s) and/or the principal amount of
Existing Notes and any other required information should be listed on a
separate signed schedule which should be attached to this Letter of
Transmittal.
4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS
Tenders of Existing Notes will be accepted only in the principal amount of
$1,000 and integral multiples thereof. If less than all the Existing Notes
evidenced by any Certificate submitted are to be tendered, fill in the
principal amount of Existing Notes which are to be tendered in Box 1 under the
column "Principal Amount of Existing Notes Tendered". In such case, new
Certificate(s) for the remainder of the Existing Notes that were evidenced by
your Existing Certificate(s) will only be sent to the holder of the Existing
Notes, promptly after the Expiration Date. All Existing Notes represented by
Certificates delivered to the Exchange Agent will be deemed to have been
tendered unless otherwise indicated.
Except as otherwise provided herein, tenders of Existing Notes may be
withdrawn at any time on or prior to the Expiration Date. In order for a
withdrawal to be effective on or prior to that time, a written, telegraphic,
telex or facsimile transmission of such notice of withdrawal must be timely
received by the Exchange Agent at its address set forth above or in the
Prospectus on or prior to the Expiration Date. Any such notice of withdrawal
must specify the name of the person who tendered the Existing Notes to be
withdrawn, the aggregate principal amount of Existing Notes to be withdrawn,
and (if Certificates for such Existing Notes have been tendered) the name of
the registered holder of the Existing Notes as set forth on the Certificate
for the Existing Notes, if different from that of the person who tendered such
Existing Notes. If Certificates for the Existing Notes have been delivered or
otherwise identified to the Exchange Agent, then prior to the physical release
of such Certificates for the Existing Notes, the tendering holder must submit
the serial numbers shown on the particular Certificates for the Existing Notes
to be withdrawn and the signature on the notice of withdrawal must be
guaranteed by an Eligible Institution, except in the case of Existing Notes
tendered for the account of an Eligible Institution. If Existing Notes have
been tendered pursuant to the procedures for book-entry transfer set forth in
"The Exchange Offer--Procedures for Tendering Existing Notes," the notice of
withdrawal must specify the name and number of the account at DTC to be
credited with the withdrawal of Existing Notes, in which case a notice of
withdrawal will be effective if delivered to the Exchange Agent by written,
telegraphic, telex or facsimile transmission. Withdrawals of tenders of
Existing Notes may not be rescinded. Existing Notes properly withdrawn will
not be deemed validly tendered for purposes of the Exchange Offer, but may be
retendered at any subsequent time on or prior to the Expiration Date by
following any of the procedures described in the Prospectus under "The
Exchange Offer--Procedures for Tendering Existing Notes."
12
<PAGE>
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all
parties. Neither the Company, any affiliates or assigns of the Company, the
Exchange Agent nor any other person shall be under any duty to give any
notification of any irregularities in any notice of withdrawal or incur any
liability for failure to give such notification. Any Existing Notes which have
been tendered but which are withdrawn will be returned to the holder thereof
without cost to such holder promptly after withdrawal.
5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS
If this Letter of Transmittal is signed by the registered holder(s) of the
Existing Notes tendered hereby, the signature(s) must correspond exactly with
the name(s) as written on the face of the Certificate(s) without alteration,
enlargement or any change whatsoever.
If any of the Existing Notes tendered hereby are owned of record by two or
more joint owners, all such owners must sign this Letter of Transmittal.
If any tendered Existing Notes are registered in different name(s) on
several Certificates, it will be necessary to complete, sign and submit as
many separate Letters of Transmittal (or facsimiles thereof) as there are
different registrations of Certificates.
If this Letter of Transmittal or any Certificates or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing and, unless waived by the
Company, must submit proper evidence satisfactory to the Company, in its sole
discretion, of such persons' authority to so act.
When this Letter of Transmittal is signed by the registered owner(s) of the
Existing Notes listed and transmitted hereby, no endorsement(s) of
Certificate(s) or separate bond power(s) are required unless Exchange Notes
are to be issued in the name of a person other than the registered holder(s).
However, if Exchange Notes are to be issued in the name of a person other than
the registered holder(s), signature(s) on such Certificate(s) or bond power(s)
must be guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered owner(s) of the Existing Notes listed, the certificates must be
endorsed or accompanied by appropriate bond powers, signed exactly as the name
or names of the registered owner(s) appear(s) on the Certificates, and also
must be accompanied by such opinions of counsel, certifications and other
information as the Company or the Trustee for the Existing Notes may require
in accordance with the restrictions on transfer applicable to the Existing
Notes. Signatures on such Certificates or bond powers must be guaranteed by an
Eligible Institution.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS
If Exchange Notes are to be issued in the name of a person other than the
signer of this Letter of Transmittal, or if Exchange Notes are to be sent to
someone other than the signer of this Letter of Transmittal or to an address
other than that shown above, the appropriate boxes on this Letter of
Transmittal should be completed (Box 7 and 8). Certificates for Existing Notes
not exchanged will be returned by mail or, if tendered by book-entry transfer,
by crediting the account indicated above maintained at DTC. See Instruction 4.
7. DETERMINATION OF VALIDITY
The Company will determine, in its sole discretion, all questions as to the
form of documents, validity, eligibility (including time of receipt) and
acceptance for exchange of any tender of Existing Notes, which determination
shall be final and binding on all parties. The Company reserves the absolute
right to reject any and all tenders determined by it not to be in proper form
or the acceptance of which, or exchange for, may, in the view of counsel to
the Company, be unlawful. The Company also reserves the absolute right,
subject to
13
<PAGE>
applicable law, to waive any of the conditions of the Exchange Offer set forth
in the Prospectus under "The Exchange Offer-Certain Conditions to the Exchange
Offer" or any conditions or irregularity in any tender of Existing Notes of
any particular holder whether or not similar conditions or irregularities are
waived in the case of other holders.
The Company's interpretation of the terms and conditions of the Exchange
Offer (including this Letter of Transmittal and the instructions hereto) will
be final and binding. No tender of Existing Notes will be deemed to have been
validly made until all irregularities with respect to such tender have been
cured or waived. Neither the Company, any affiliates or assigns of the
Company, the Exchange Agent, nor any other person shall be under any duty to
give notification of any irregularities in tenders or incur any liability for
failure to give such notification.
8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES
Questions and requests for assistance may be directed to the Exchange Agent
at its address and telephone number set forth on the front of this Letter of
Transmittal. Additional copies of the Prospectus, the Notice of Guaranteed
Delivery and the Letter of Transmittal may be obtained from the Exchange
Agent.
9. 31% BACKUP WITHHOLDING; SUBSTITUTE FORM W-9
For U.S. Federal income tax purposes, holders are required, unless an
exemption applies, to provide the Exchange Agent with such holder's correct
taxpayer identification number ("TIN") on Substitute Form W-9 of this Letter
of Transmittal (Box 9) and certify, under penalties of perjury, that such
number is correct and he or she is not subject to backup withholding. If the
Exchange Agent is not provided with the correct TIN, the Internal Revenue
Service (the "IRS") may subject the holder or other payee to a $50 penalty. In
addition, payments to such holders or other payees with respect to Existing
Notes exchanged pursuant to the Exchange Offer, or with respect to Exchange
Notes following the Exchange Offer, may be subject to 31% backup withholding.
The box in Part 2 of the Substitute Form W-9 (Box 9) may be checked if the
tendering holder has not been issued a TIN and has applied for a TIN or
intends to apply for a TIN in the near future. If the box in Part 2 is
checked, the holder or other payee must also complete the Certificate of
Awaiting Taxpayer Identification Number below Substitute Form W-9 in order to
avoid backup withholding. Notwithstanding that the box in Part 2 is checked
and the Certificate of Awaiting Taxpayer Identification Number is completed,
the Exchange Agent will withhold 31% of all payments made prior to the time a
properly certified TIN is provided to the Exchange Agent.
The holder is required to give the Exchange Agent the TIN (i.e., social
security number or employer identification number) of the registered owner of
the Existing Notes or of the last transferee appearing on the transfers
attached to, or endorsed on, the Existing Notes. If the Existing Notes are
registered in more than one name or are not in the name of the actual owner,
consult the enclosed "Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9" for additional guidance on which number to
report.
Certain holders (including, among others, corporations, financial
institutions and certain foreign persons) may not be subject to these backup
withholding and reporting requirements. Such holders should nevertheless
complete the attached Substitute Form W-9 below and check the box in Part 3 of
Box 9 for "exempt", to avoid possible erroneous backup withholding. A foreign
person may qualify as an exempt recipient by submitting a properly completed
IRS Form W-8, signed under penalties of perjury, attesting to that holder's
exempt status. Please consult the enclosed "Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9" for additional guidance
on which holders are exempt from backup withholding.
Backup withholding is not an additional U.S. Federal income tax. Rather, the
U.S. Federal income tax liability of a person subject to backup withholding
will be reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
14
<PAGE>
10. LOST, DESTROYED OR STOLEN CERTIFICATES
If any Certificate(s) representing Existing Notes have been lost, destroyed
or stolen, the holder should promptly notify the Exchange Agent. The holder
will then be instructed as to the steps that must be taken in order to replace
the Certificate(s). This Letter of Transmittal and related documents cannot be
processed until the procedures for replacing lost, destroyed or stolen
Certificate(s) have been followed.
11. SECURITY TRANSFER TAXES
Holders who tender their Existing Notes for exchange will not be obligated
to pay any transfer taxes in connection therewith. If, however, Exchange Notes
are to be delivered to, or are to be issued in the name of, any person other
than the registered holder of the Existing Notes tendered, or if a transfer
tax is imposed for any reason other than the exchange of Existing Notes in
connection with the Exchange Offer, then the amount of any such transfer tax
(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 therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
holder.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) AND ALL OTHER
REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE
EXPIRATION DATE.
15
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
A. TIN--The Taxpayer Identification Number for most individuals is their
social security number. Refer to the following chart to determine the
appropriate number:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
GIVE THE GIVE THE EMPLOYER
SOCIAL SECURITY IDENTIFICATION
FOR THIS TYPE OF ACCOUNT: NUMBER OF-- FOR THIS TYPE OF ACCOUNT: NUMBER OF--
- -------------------------------------------------------------------------------------------
<S> <C> <S> <C>
1. individual The individual 6. Sole proprietorship The owner(3)
2. Two or more individuals The actual owner 7. A valid trust, estate Legal entity(4)
(joint account) of the account or pension trust
or, if combined 8. Corporate The corporation
funds, the first 9. Association, club, The organization
individual on religious, charitable,
the account(1) educational or other
3. Custodian account of a The minor(2) tax-exempt
minor (Uniform Gift to organization
Minors Act) 10. Partnership The partnership
4.a The usual revocable The grantor- 11. A broker or registered The broker or
savings trust (grantor trustee(1) nominee nominee
is also trustee) 12. Account with the The public
b So-called trust account The actual Department of entity
that is not a legal or owner(1) Agriculture
valid trust under State
law
5. Sole proprietorship The owner(3)
- -------------------------------------------------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's name and social security
number.
(3) Show the individual's name. You may also enter your business name or
"doing business as" name. You may use either your Social Security number
or your employer identification number.
(4) List first and circle the name of the legal trust, estate, or pension
trust.
NOTE: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
B. EXEMPT PAYEES--The following lists exempt payees. If you are exempt, you
must nonetheless complete the form and provide your TIN in order to establish
that you are exempt. Check the box in Part 3 of the form, sign and date the
form.
For this purpose, Exempt Payees include: (1) A corporation; (2) An
organization exempt from tax under section 501(a), or an individual retirement
plan (IRA) or a custodial account under section 403(b)(7); (3) The United
States or any of its agencies or instrumentalities; (4) A state, the District
of Columbia, a possession of the United States, or any of their political
subdivisions or instrumentalities; (5) A foreign government or any of its
political subdivisions, agencies or instrumentalities; (6) An international
organization or any of its agencies or instrumentalities; (7) A foreign
central bank of issue; (8) A dealer in securities or commodities required to
register in the U.S. or a possession of the U.S.; (9) A real estate investment
trust; (10) An entity or person registered at all times during the tax year
under the Investment Company Act of 1940; (11) A common trust fund operated by
a bank under section 584(a); (12) A financial institution.
C. OBTAINING A NUMBER
If you do not have a taxpayer identification number or you do not know your
number, obtain Form SS-5, application for a Social Security Number, or Form
SS-4, Application for Employer Identification Number, at the local office of
the Social Security Administration or the Internal Revenue Service and apply
for a number.
D. PRIVACY ACT NOTICE
Section 6109 requires most recipients of dividend, interest or other
payments to give taxpayer identification numbers to payers who must report the
payments to the IRS. The IRS uses the numbers for identification purposes.
Payers must be
16
<PAGE>
given the numbers whether or not payees are required to file tax returns.
Payers must generally withhold 31% of taxable interest, dividend, and certain
other payments to a payee who does not furnish a taxpayer identification
number. Certain penalties may also apply.
E. PENALTIES
(1) Penalty for Failure to Furnish Taxpayer Identification Number. If you
fail to furnish your taxpayer identification number to a payer, you are
subject to a penalty of $50 for each such failure unless your failure is due
to reasonable cause and not to willful neglect.
(2) Failure to Report Certain Dividend and Interest Payments. If you fail to
include any portion of an includible payment for interest, dividends, or
patronage dividends in gross income, such failure will be treated as being due
to negligence and will be subject to a penalty of 5% on any portion of an
under-payment attributable to that failure unless there is clear and
convincing evidence to the contrary.
(3) Civil Penalty for False Information with Respect to Withholding. If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(4) Criminal Penalty for Falsifying Information. Falsifying certifications
or affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL
REVENUE SERVICE.
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<PAGE>
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
FOR TENDER OF
12 3/4% SENIOR NOTES DUE 2007
OF
CONCENTRIC NETWORK CORPORATION
THIS NOTICE OF GUARANTEED DELIVERY, OR ONE SUBSTANTIALLY EQUIVALENT TO THIS
FORM, MUST BE USED TO ACCEPT THE EXCHANGE OFFER (AS DEFINED BELOW) IF (I)
CERTIFICATES FOR THE COMPANY'S (AS DEFINED BELOW) 12 3/4% SENIOR NOTES DUE
2007 (THE "EXISTING NOTES") ARE NOT IMMEDIATELY AVAILABLE, (II) THE EXISTING
NOTES, THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS CANNOT BE
DELIVERED TO CHASE MANHATTAN BANK AND TRUST COMPANY, NATIONAL ASSOCIATION (THE
"EXCHANGE AGENT") ON OR PRIOR TO THE EXPIRATION DATE (AS DEFINED IN THE
PROSPECTUS REFERRED TO BELOW) OR (III) THE PROCEDURES FOR DELIVERY BY BOOK-
ENTRY TRANSFER CANNOT BE COMPLETED ON A TIMELY BASIS. THIS NOTICE OF
GUARANTEED DELIVERY MAY BE DELIVERED BY HAND, OVERNIGHT COURIER OR MAIL, OR
TRANSMITTED BY FACSIMILE TRANSMISSION, TO THE EXCHANGE AGENT. SEE "THE
EXCHANGE OFFER PROCEDURES FOR TENDERING EXISTING NOTES" IN THE PROSPECTUS.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
CHASE MANHATTAN BANK AND TRUST COMPANY, NATIONAL ASSOCIATION
BY MAIL, OVERNIGHT DELIVERY OR HAND:
CHASE MANHATTAN BANK AND TRUST COMPANY, NATIONAL ASSOCIATION
101 CALIFORNIA STREET, SUITE 2725
SAN FRANCISCO, CA 94111
ATTN: PAULA OSWALD
TRUST DEPARTMENT
(CONCENTRIC NETWORK CORPORATION, 12 3/4% SENIOR NOTES DUE 2007)
TO CONFIRM BY TELEPHONE OR FOR INFORMATION:
415-954-9526
FACSIMILE TRANSMISSIONS:
415-693-8850
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY VIA
FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE
SIGNATURE BOX ON THE LETTER OF TRANSMITTAL.
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<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to Concentric Network Corporation, a Delaware
corporation (the "Company"), upon the terms and subject to the conditions set
forth in the Prospectus dated March 24, 1998 (as the same may be amended or
supplemented from time to time, the "Prospectus") and the related Letter of
Transmittal (which together constitute the "Exchange Offer"), receipt of which
is hereby acknowledged, the aggregate principal amount of Existing Notes set
forth below pursuant to the guaranteed delivery procedures set forth in the
Prospectus under the caption "The Exchange Offer-Procedures for Tendering
Existing Notes."
DESCRIPTION OF EXISTING NOTES TENDERED
Name(s), Address(es) and Area Code(s) and Telephone
Number(s) of Registered Holder(s): Certificate Number(s) (if available):
Aggregate Principal Amount Tendered: $
Signature(s):
If Existing Notes will be tendered by book-entry transfer, please provide the
following information:
Name of Tendering Institution:
DTC Account Number:
Date:
Transaction Code Number:
THE GUARANTEE BELOW MUST BE COMPLETED
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm or other entity identified in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended, as an "eligible guarantor
institution," including (as such terms are defined therein) (i)a bank; (ii)a
broker, dealer, municipal securities broker or dealer or government securities
broker or dealer; (iii)a credit union; (iv)a national securities exchange,
registered securities association or clearing agency; or (v)a savings
association, that is a participant in the Securities Transfer Agents Medallion
Program, the New York Stock Exchange Medallion Signature Program or the Stock
Exchanges Medallion Program (each of the foregoing being referred to as an
"Eligible Institution"), hereby guarantees to deliver to the Exchange Agent,
at its address set forth above, either the Existing Notes tendered hereby in
proper form for transfer, or confirmation of the book-entry transfer of such
Existing Notes to the Exchange Agent's account at The Depository Trust Company
("DTC"), pursuant to the procedures for book-entry transfer set forth in the
Prospectus, in either case together with one or more properly completed and
duly executed Letter(s) of Transmittal (or facsimile thereof) and any other
required documents within three New York Stock Exchange trading days after the
date of execution of this Notice of Guaranteed Delivery.
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<PAGE>
The undersigned acknowledges that it must deliver the Letter(s) of
Transmittal and the Existing Notes tendered hereby to the Exchange Agent
within the time period set forth above and that failure to do so could result
in a financial loss to the undersigned.
Name of Firm: Authorized Signature:
Address: Name (Please Print):
Capacity or Title:
Area Code and Telephone Number: Date:
NOTE: DO NOT SEND EXISTING NOTES WITH THIS NOTICE OF GUARANTEED DELIVERY.
ACTUAL SURRENDER OF EXISTING NOTES MUST BE MADE PURSUANT TO, AND BE
ACCOMPANIED BY, A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL
AND ANY OTHER REQUIRED DOCUMENTS.
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
the Prospectus, and, if given or made, such other information or
representations must not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus nor any exchange of Existing
Notes for Exchange Notes made hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company
since the date hereof or that the information contained herein is correct as
of any time subsequent to its date. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any securities other than
the securities to which it relates. This Prospectus does not constitute an
offer to sell or the solicitation of an offer to buy such securities in any
circumstances in which such offer or solicitation is unlawful.
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