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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NUMBER: 000-22575
CONCENTRIC NETWORK CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 65-0257497
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
10590 NORTH TANTAU AVENUE
CUPERTINO, CALIFORNIA 95014
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(408) 342-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days.
YES [X] NO [ ]
The number of issued and outstanding shares of the Registrant's Common Stock,
$0.001 par value, as of September 30, 1998, was 14,895,831.
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CONCENTRIC NETWORK CORPORATION
PART I-FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at September 30, 1998 and December 31, 1997.............. 3
Condensed Consolidated Statements of Operations for the three and nine month periods ended
September 30, 1998 and 1997.................................................................... 4
Condensed Consolidated Statements of Cash Flows for the nine month periods ended
September 30, 1998 and 1997.................................................................... 5
Notes to Unaudited Condensed Consolidated Financial Statements................................. 6-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 11-20
PART II-OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 21
Item 2. Changes in Securities and Use of Proceeds...................................................... 21
Item 3. Defaults Upon Senior Securities................................................................ 21
Item 4. Submission of Matters to a Vote of Security Holders............................................ 21
Item 5. Other Information.............................................................................. 21
Item 6. Exhibits and Reports on Form 8-K............................................................... 22
Signatures.................................................................................................. 23
</TABLE>
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PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONCENTRIC NETWORK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents........................................................ $ 152,110 $ 119,959
Short term investments........................................................... 17,251 --
Current portion of restricted cash............................................... 19,125 19,125
Accounts receivable, net......................................................... 10,253 4,549
Goodwill and other intangible assets............................................. 5,565 --
Other current assets............................................................. 5,611 5,139
--------- ---------
Total current assets........................................................... 209,915 148,772
Property and equipment, net....................................................... 58,014 53,710
Restricted cash, net of current portion........................................... 26,087 33,400
Goodwill and other intangible assets, net of current portion...................... 16,190 --
Other assets...................................................................... 5,365 8,607
--------- ---------
Total assets...................................................................... $ 315,571 $ 244,489
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................................. $ 21,157 $ 10,144
Accrued compensation and other employee benefits................................. 1,548 1,577
Other current liabilities........................................................ 9,750 4,917
Current portion of capital lease obligations..................................... 6,961 15,326
Deferred revenue................................................................. 2,770 1,435
--------- ---------
Total current liabilities...................................................... 42,186 33,399
Capital lease obligations, net of current portion................................. 11,204 33,595
Notes payable..................................................................... 145,910 145,577
Commitments
Redeemable exchangeable preferred stock........................................... 150,806 --
Stockholders' equity (deficit):
Common stock..................................................................... 186,389 182,721
Accumulated deficit.............................................................. (219,934) (149,534)
Deferred compensation............................................................ (990) (1,269)
--------- ---------
Total stockholders' equity (deficit).............................................. (34,535) 31,918
--------- ---------
Total liabilities and stockholders' equity (deficit).............................. $ 315,571 $ 244,489
========= =========
</TABLE>
See accompanying notes.
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CONCENTRIC NETWORK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue................................................... $ 21,579 $ 11,824 $ 57,725 $ 31,792
Costs and expenses:
Cost of revenue.......................................... 22,906 14,838 60,834 45,495
Development.............................................. 2,100 1,313 5,405 3,538
Marketing and sales...................................... 11,494 6,459 29,279 17,489
General and administrative............................... 2,547 1,182 6,811 3,369
Amortization of goodwill and other intangible assets..... 1,100 -- 2,449 --
Acquisition related charges.............................. -- -- 1,291 --
Write off of in-process technology....................... -- -- 5,200 --
-------- -------- -------- --------
Total costs and expenses.................................. 40,147 23,792 111,269 69,891
-------- -------- -------- --------
Loss from operations...................................... (18,568) (11,968) (53,544) (38,099)
Net interest expense and other............................ 2,390 2,250 10,885 3,704
-------- -------- -------- --------
Loss before extraordinary item............................ (20,958) (14,218) (64,429) (41,803)
Extraordinary gain on early retirement of debt............ -- -- 3,042 --
-------- -------- -------- --------
Net loss.................................................. (20,958) (14,218) (61,387) (41,803)
Preferred stock dividends and accretion................... (5,279) -- (6,556) --
-------- -------- -------- --------
Net loss attributable to common stockholders.............. $(26,237) $(14,218) $(67,943) $(41,803)
======== ======== ======== ========
Loss per share (historical 1998, pro-forma 1997):
Loss before extraordinary item........................... $ (1.43) $ (1.22) $ (4.47) $ (4.95)
Extraordinary gain....................................... -- -- 0.21 --
-------- -------- -------- --------
Net loss................................................. (1.43) (1.22) (4.26) (4.95)
Preferred stock dividends and accretion.................. (0.36) -- (0.45) --
-------- -------- -------- --------
Net loss attributable to common stockholders............. $ (1.79) $ (1.22) $ (4.71) $ (4.95)
======== ======== ======== ========
Shares used in computing net loss per share:
Historical 1998, pro-forma 1997........................... 14,694 11,651 14,429 8,450
======== ======== ======== ========
</TABLE>
See accompanying notes.
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CONCENTRIC NETWORK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss................................................................................................ $(67,943) $(41,803)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation........................................................................................... 17,618 12,389
Amortization of deferred interest, cost of revenue and marketing and sales related to issuance 912 1,534
of warrants...........................................................................................
Amortization of goodwill and other intangible assets................................................... 2,450 --
Amortization of deferred financing costs related to Senior Notes....................................... 392 --
Amortization of other deferred assets.................................................................. 2,538 --
Amortization of deferred compensation.................................................................. 280 129
Preferred stock dividends and accretion................................................................ 6,556 --
Loss on disposal of equipment.......................................................................... -- 162
Gain on retirement of debt............................................................................. (3,042) --
Write-off of in-process technology..................................................................... 5,200 --
Changes in current assets and liabilities:
Accounts receivable.................................................................................... (3,679) (2,546)
Other current assets................................................................................... 629 (1,100)
Prepaid expenses....................................................................................... (333) (3,028)
Accounts payable....................................................................................... 2,222 (7,022)
Accrued compensation and other employee benefits....................................................... (791) 305
Deferred revenue....................................................................................... 175 171
Other current liabilities.............................................................................. 3,616 1,440
-------- --------
Net cash used in operating activities................................................................... (33,200) (39,369)
INVESTING ACTIVITIES
Additions of property and equipment..................................................................... (11,288) (5,065)
Net change in restricted cash........................................................................... 7,313 --
Increase in short term investments...................................................................... (17,251) --
Proceeds from sale of property and equipment............................................................ -- 18
Cash investment in network services businesses.......................................................... (25,077) --
-------- --------
Net cash used in investing activities................................................................... (46,303) (5,047)
FINANCING ACTIVITIES
Proceeds from notes payable............................................................................. -- 5,000
Repayment of notes payable.............................................................................. (1,960) (2,000)
Repayment of lease obligations to a related party....................................................... (3,079) (7,092)
Repayment of lease obligations to a related party-early retirement of debt.............................. (24,750) --
Repayment of lease obligations.......................................................................... (5,015) (1,245)
Proceeds from issuances of stock and warrants........................................................... 2,528 73,951
Repurchase of common stock.............................................................................. -- (2,217)
Proceeds from issuances of redeemable exchangeable preferred stock...................................... 144,250 --
Deferred financing costs................................................................................ (320) --
-------- --------
Net cash provided by financing activities............................................................... 111,654 66,397
-------- --------
Increase in cash and cash equivalents................................................................... 32,151 21,981
Cash and cash equivalents at beginning of period........................................................ 119,959 17,657
-------- --------
Cash and cash equivalents at end of period.............................................................. $152,110 $ 39,638
======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Stock exchanged for notes payable, including accrued interest........................................... $ -- $ 3,041
Capital lease obligations incurred with a related party................................................. $ 1,285 $ 15,873
Capital lease obligations incurred...................................................................... $ 4,485 $ --
Reduction of accounts payable through capital lease obligations incurred................................ $ -- $ 2,000
Issuance of warrants.................................................................................... $ -- $ 1,245
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid........................................................................................... $ 12,499 $ 3,885
</TABLE>
See accompanying notes.
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CONCENTRIC NETWORK CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These unaudited condensed consolidated financial statements and the related
footnote information have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of the Company's
management, the accompanying unaudited interim condensed financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the information for the periods presented.
The results for the interim period ended September 30, 1998 are not necessarily
indicative of results to be expected for the entire year ending December 31,
1998 or future operating periods.
2. NET LOSS PER SHARE, HISTORICAL AND PRO FORMA
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. Common stock equivalent
shares from convertible preferred stock and from stock options and warrants are
not included for loss periods 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.
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 stock that automatically converted upon the closing of the Company's
initial public offering (using the as-if-converted method).
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CONCENTRIC NETWORK CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The following table sets forth the computation of basic and diluted loss
per share, on an historical and pro forma basis (in thousands except per share
amounts.)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ------------------------
1998 1997 1998 1997
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
NUMERATOR:
Net loss before extraordinary item................................. $ (20,958) $ (14,218) $ (64,429) $ (41,803)
Extraordinary gain on early retirement of debt..................... -- -- 3,042 --
----------- ----------- ----------- ----------
Net loss........................................................... (20,958) (14,218) (61,387) (41,803)
=========== =========== =========== ==========
Preferred stock dividends and accretion............................ (5,279) -- (6,556) --
----------- ----------- ----------- ----------
Numerator for basic and diluted loss per share..................... $ (26,237) $ (14,218) $ (67,943) $ (41,803)
=========== =========== =========== ==========
DENOMINATOR:
Denominator for basic and diluted earnings per share - weighted
average shares (historical)...................................... 14,694,000 9,733,000 14,429,000 4,174,000
=========== =========== =========== ==========
Adjustments to reflect the effect of the assumed conversion of
convertible preferred stock from the date of issuance............ 1,918,000 4,276,000
=========== ==========
Denominator for basic and diluted earnings per share - weighted
average shares (pro forma)....................................... 11,651,000 8,450,000
=========== ==========
Basic and diluted net loss per share (historical):
Loss before extraordinary item................................ $ (1.43) $ (1.46) $ (4.47) $ (10.02)
----------- ----------- ----------- ----------
Extraordinary gain............................................ -- -- 0.21 --
----------- ----------- ----------- ----------
Net loss...................................................... $ (1.43) $ (1.46) $ (4.26) $ (10.02)
=========== =========== =========== ==========
Preferred stock dividends and accretion....................... (0.36) -- (0.45) --
----------- ----------- ----------- ----------
Net loss attributable to common stockholders.................. $ (1.79) $ (1.46) $ (4.71) $ (10.02)
=========== =========== =========== ==========
Basic and diluted net loss per share (pro forma)................... $ -- $ (1.22) $ -- $ (4.95)
=========== =========== =========== ==========
</TABLE>
3. BUSINESS COMBINATIONS
In February 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>
<S> <C>
Current and other assets...................................... $ 1,348
Computer and telecommunications equipment..................... 4,784
Goodwill...................................................... 9,496
Other intangible assets....................................... 3,080
Write-off of in process technology............................ 5,200
-------
Total purchase price allocation............................ $23,908
=======
</TABLE>
In May 1998, the Company acquired Delta Internet Services, Inc.
("DeltaNet") in a transaction that was accounted for as a pooling of interests.
The Company issued approximately 226,000 shares of its common stock to DeltaNet
shareholders in exchange for all outstanding DeltaNet shares. The Company also
assumed outstanding DeltaNet options and warrants which were converted to
options and warrants to purchase approximately 98,000 and
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7,000 shares, respectively, of the Company's common stock. The results of
operations of DeltaNet for the six month period ended September 30, 1998 are
included in the consolidated results of operations. The Company's historical
consolidated financial statements prior to the combination have not been
restated to reflect the financial results of DeltaNet as these results are not
material. The consolidated results of operations for the nine month period ended
September 30, 1998 include an acquisition related charge of $1.3 million
primarily related to severance costs, redundant facilities and assets and
professional fees related to the acquisition.
In August 1998, the Company acquired all of the outstanding stock of
AnaServe, Inc. ("AnaServe"). The transaction was accounted for using the
purchase method of accounting. The total purchase price of approximately $13.0
million consisted of a $9.9 million cash payment upon closing and the assumption
of approximately $3.1 million of AnaServe's liabilities (including acquisition
costs).
A summary of the purchase price allocation is as follows (in thousands):
<TABLE>
<S> <C>
Current and other assets...................................... $ 467
Computer and telecommunications equipment..................... 497
Goodwill...................................................... 11,630
Other intangible assets....................................... 416
-------
Total purchase price allocation............................ $13,010
=======
</TABLE>
Goodwill is being amortized over five years. Other intangible assets
include developed technology, assembled workforce, customer lists and employee
retention costs and are being amortized over their useful lives ranging from
one to four years.
4. EARLY RETIREMENT OF DEBT
In March 1998 the Company retired a portion of debt in the form of capital
lease obligations to a related party. The Company paid $24.8 million for
extinguishment of debt. The Company recognized an extraordinary gain of $3.0
million in connection with this transaction.
5. REDEEMABLE EXCHANGEABLE PREFERRED STOCK
In June 1998 the Company completed a $150 million private placement of 13
1/2% Series A Senior Redeemable Exchangeable Preferred Stock due 2010 ("Series A
Preferred"). In September 1998, the Company issued 4,657 shares of Series A
Preferred, in lieu of cash, with an aggregate liquidation preference of
$4,657,000 as payment of the required quarterly dividends. In September 1998
the Company issued 154,657 shares of its 13 1/2% Series B Senior Redeemable
Exchangeable Preferred Stock due 2010 ("Series B Preferred") in exchange for all
outstanding shares of the Series A Preferred pursuant to a registered exchange
offer. Each share of Series B Preferred has a liquidation preference of $1,000
per share. Dividends on the Series B Preferred accrue at a rate of 13 1/2% per
annum of the liquidation preference thereof and are payable quarterly in arrears
commencing on September 1, 1998. Dividends are payable in cash, except that on
each dividend payment date occurring on or prior to June 1, 2003, dividends may
be paid, at the Company's option, by the issuance of additional shares of Series
B Preferred having an aggregate liquidation preference equal to the amount of
such dividends.
The Series B Preferred is redeemable at the option of the Company, in whole
or in part, at any time on or after June 1, 2003, at redemption rates (expressed
as a percentage of the liquidation preference) commencing with 106.75% on June
1, 2003 and declining to 100% on June 1, 2008, plus accumulated and unpaid
dividends to the date of redemption. In addition, prior to June 1, 2001, the
Company may, at its option, redeem up to a maximum of 35% of the initially
issued Series B Preferred from the net proceeds of one or more public equity
offerings or the sale of common stock to a strategic investor. The Series B
Preferred is subject to mandatory redemption at its liquidation preference, plus
accumulated and unpaid dividends on June 1, 2010.
The Company may, at its option, exchange in whole but not in part the then
outstanding shares of Series B Preferred for 13 1/2% Exchange Debentures with a
principal amount equal to the aggregate liquidation preference of the Preferred
Stock. The Exchange Debentures mature on June 1, 2010. Interest on the
Exchange Debentures is payable
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semi-annually in arrears. Interest payable on or prior to June 1, 2003 may be
paid in the form of additional Exchange Debentures valued at the principal
amount thereof.
The Company is accreting the Series B Preferred to its liquidation
preference through the due date of the Series B Preferred. The accretion for
the three month and nine month periods ended September 30, 1998 was
approximately $5,279,000 and $6,556,000, respectively. In connection with the
issuance of Series A Preferred, the Company incurred approximately $5,750,000 of
issuance costs. These costs are being amortized over 12 years and the expense
for the three and nine month periods ended September 30, 1998 was approximately
$120,000 and $160,000.
6. 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"). No provision for income taxes is
expected for 1998 as the Company expects to incur a net loss for the year and
does not meet the criteria for recognizing an income tax benefit under the
provisions of FAS 109.
7. LITIGATION
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 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 these matters could have a material
adverse effect on the Company's financial condition. In addition, even if the
ultimate outcomes are 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.
8. COMMITMENTS
In the quarter ended March 31, 1998, the Company renewed the lease on its
executive offices in Cupertino, California. The lease expires in April 2003. The
average annual rent expense over the term of the lease is approximately $1.2
million per year.
In June 1998, the Company signed an agreement to lease space in a building
in Chicago, Illinois for a data center. The lease expires in June 2008. The
average annual rental expense over the term of the lease is approximately
$177,000 per year.
In July 1998, the Company signed an agreement to lease a building in San
Jose, California, which is intended for the consolidation of all Silicon Valley
employees and data centers. The lease commences in November 1998 and expires in
January 2006. The initial rental expense is $2.4 million per year and the
average annual rental expense over the term of the lease is approximately $2.8
million per year.
In August 1998, the Company signed a service agreement with MCI for the
usage of certain interstate, intrastate and international common carriage
services. The agreement provides for minimum payments to MCI of $6,000,000 per
year over its term, expiring July 2000.
Strategic Relationship with SBC. Pursuant to a Memorandum of Understanding
executed as of October 19, 1998, the Company set forth plans for a strategic
business arrangement with SBC Communications, Inc. ("SBC") to
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integrate Concentric's Internet-based business data services and technology into
SBC's "Online Office" portfolio of data products and services for business
customers. "Online Office" is targeted at medium and small businesses to provide
local area network equipment, installation and network management services and
network-hosted business applications, including desktop office applications, e-
mail, calendaring and e-commerce.
In connection with this arrangement, SBC will acquire 906,679 shares of
Concentric common stock at a price of $24.15 per share, or on the open market.
The Company will also issue a warrant to SBC to purchase an additional 906,679
shares. The warrant will expire three years from the date of issuance and will
be exercisable at $21 per share. The Company is currently assessing the fair
value of the above warrant and will amortize the value over the three year
life of the warrant.
-10-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
interim condensed financial statements and related notes thereto included in
Part 1- Item 1 of this Quarterly Report.
IMPORTANT NOTE ABOUT FORWARD LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Predictions of future events are
inherently uncertain. Actual events could differ materially from those predicted
in the forward looking statements due to a number of factors including but not
limited to the risks set forth in the following discussion, and in particular,
the risks discussed below under the caption "Additional Factors that Could
Affect Operating Results."
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 Virtual Private Networks and providing dedicated
network 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.,
("InterNex") a California corporation and provider of network services,
colocation services and Web hosting facilities to enterprise customers pursuant
to a Share Acquisition Agreement between the Company, InterNex and the sole
shareholder of InterNex. This acquisition was accounted for using the purchase
method of accounting. Accordingly, the Company's historical financial statements
do not include results of operations, financial position or cash flows of
InterNex prior to its acquisition in February 1998. In addition, as a result of
the acquisition, the Company has incurred charges relating to the cost of
acquired in-process technology of $5.2 million and recorded an aggregate of
$12.5 million of goodwill and other intangible assets during the first nine
months of 1998, which will be amortized on a straight-line basis over their
useful lives ranging from two to five years (see Note 3 of Notes to Financial
Statements).
In May 1998, the Company acquired Delta Internet Services, Inc.
("DeltaNet"), a California corporation located in Anaheim and provider of dial-
up and dedicated access services, Web hosting services and Web application
development and design. This transaction was accounted for as a pooling of
interests. Results of DeltaNet's operations for the six month period ended
September 30, 1998 are included in the consolidated results of operations. The
Company's historical consolidated financial statements prior to the combination
have not been restated to reflect the financial results of DeltaNet as these
results are not material. In addition, as a result of the acquisition, the
Company has incurred charges of approximately $1.3 million in transaction costs
consisting primarily of severance costs, redundant facilities and assets and
professional fees related to the acquisition. (see Note 3 of Notes to Financial
Statements).
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In August 1998, the Company acquired AnaServe, Inc. ("AnaServe"), a
provider of Web hosting services located in Newport Beach, California. This
acquisition was accounted for using the purchase method of accounting. The
Company's historical financial statements do not include results of operations,
financial position or cash flows of AnaServe prior to its acquisition. As a
result of the acquisition, the Company has recorded an aggregate of $12.0
million of goodwill and other intangible assets, which will be amortized on a
straight-line basis over their useful lives ranging from one to five years (see
Note 3 of Notes to Financial Statements).
If the Company were to incur additional charges for acquired in-process
technology, amortization of goodwill and acquisition costs with respect to any
future acquisitions, the Company's business, operating results and financial
condition could be materially and adversely affected. See "Liquidity and Capital
Resources" and "Additional Factors That Could Affect 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 the remainder of 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, and $67.9
million for the nine months ended September 30, 1998. 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.
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 expansion of the Concentric network and new network
architectures, the incurrence of related capital costs, variability and length
of the sales cycle associated with the Company's product and service offerings,
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; the ability to manage potential growth and
expansion; general access services; the ability to identify, acquire and
integrate successfully suitable acquisition candidates; and charges related to
acquisitions. 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. 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.
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.
RESULTS OF OPERATIONS
Revenue. Revenue totaled approximately $21.6 million for the three months
ended September 30, 1998, a $9.8 million increase over revenue of approximately
$11.8 million for the three months ended September 30, 1997. This increased
revenue reflects growth in revenue from the Company's broadened product
offerings to its enterprise customers, continued growth in revenue from Internet
access customers and revenue derived from acquisitions. For the three months
ended September 30, 1998, revenue from WebTV Networks, Inc. ("WNI") declined to
25.9% of the Company's net revenue from 31.3% for the three months ended
September 30, 1997. Revenue for the nine months ended September 30, 1998 was
$57.7 million, an increase of $25.9 million over revenue of $31.8 million for
the nine
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month period ended September 30, 1997. WNI accounted for approximately 27.0% of
net revenue for the nine months ended September 30, 1998 as compared to 33.9%
for the comparable period in 1997. The Company expects revenue from WNI to
increase in dollar amount and as a percentage of revenue through 1998. Over the
long term, the Company expects revenue from WNI to increase in dollar amount and
to decrease as a percentage of revenue. The foregoing expectations regarding
revenues from WNI are forward looking statements that involves risks and
uncertainties and the actual results could vary materially as a result of a
number of factors including those set forth below under the caption "Additional
Factors That Could Affect 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 three month period
ended September 30, 1998 was approximately $22.9 million, an increase of $8.1
million from cost of revenue of $14.8 million in the third quarter of 1997. This
increase is attributable to the overall growth in the size of the network and
costs associated with acquired operations. As a percentage of revenue, such
costs declined to 106.1% of revenue in the three months ended September 30,
1998, down from 125.5% 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 network architecture. Cost of revenue for the nine
months ended September 30, 1998 was approximately $60.8 million compared with
$45.5 million for the nine months ended September 30, 1997. As a percentage of
revenue, costs declined to 105.4% of revenue in the nine months ended September
30, 1998 from 143.1% of revenue in the year earlier period. 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 below under the caption "Additional
Factors That Could Affect Operating Results --Limited Operating History;
Continuing Operating Losses," "--Management of Potential Growth and Expansion"
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 was approximately $2.1 million and
$1.3 million for the three months ended September 30, 1998 and 1997,
respectively. This higher level of development expense reflects an overall
increase in personnel to develop new product offerings, to manage the overall
growth in the network and from acquired operations. Development expense as a
percentage of revenue declined to 9.7% for the three months ended September 30,
1998 from 11.1% in the year earlier period as a result of the Company's
increased revenue. Development expense for the nine month periods ending
September 30, 1998 and 1997 was approximately $5.4 million and $3.5 million,
respectively. As a percentage of revenue, development expense declined to 9.4%
for the nine months ended September 30, 1998 from 11.1% for the nine months
ended September 30, 1997. 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 below under the caption
"Additional Factors that Could Affect Operation 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. Marketing and sales expense was approximately $11.5
million and $6.5 million for the three months ended September 30, 1998 and 1997,
respectively. The $5.0 million increase in 1998 reflects a substantial
investment in the customer support, marketing and sales organizations necessary
to support the Company's expanded and acquired customer base. This increase also
reflects a growth in subscriber acquisition costs and marketing efforts related
to the introduction and expansion of enterprise products and services. Marketing
and sales expense as a percentage of revenue declined to 53.3% for the three
months ended September 30, 1998 from 54.6% in the year earlier period as a
result of the Company's increased revenue. For the nine months ended September
30, 1998 and 1997, marketing and sales expense was approximately $29.3 million
and $17.5 million, representing 50.7% and 55.0% of revenue, respectively. 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 "Additional Factors that Could Affect Operating
Results -- Dependence on New and Uncertain Markets,"and"-- Management of
Potential Growth and Expansion."
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General and Administrative. General and administrative expense consists
primarily of personnel expense and professional fees. General and administrative
expense was approximately $2.5 million and $1.2 million for the three months
ended September 30, 1998 and 1997, 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. General and
administrative expense as a percentage of revenue increased to 11.8% for the
three months ended September 30, 1998 from 10.0% in the year earlier period as a
result of the Company's increased personnel expense and professional fees,
reflecting growth in operations, costs associated with being a publicly held
entity and acquisitions. For the nine months ended September 30, 1998 and 1997,
general and administrative expenses were approximately $6.8 million and $3.4
million, respectively. General and administrative expense as a percentage of
revenue increased to 11.8% in the nine months ended September 30, 1998 as
compared to 10.6% for the comparable period in 1997. The Company expects
general and administrative expense to continue to increase in dollar amount, but
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 "Additional Factors that Could Affect Operating Results --
Dependence on New and Uncertain Markets" and "-- Management of Potential Growth
and Expansion."
Amortization of Goodwill and Other Intangible Assets. During the three
month and nine month periods ended September 30, 1998 the Company recorded
amortization of goodwill and other intangible assets of approximately $1.1
million and $2.4 million, respectively, resulting from the acquisition of
InterNex in February 1998 and AnaServe in August 1998 (see Note 3 of Notes to
Financial Statements).
Acquisition Related Charges. In the nine months ended September 30, 1998
the Company wrote off $1.3 million of costs incurred related to the DeltaNet
acquisition (see Note 3 of Notes to Financial Statements).
Write-off of In-Process Technology. In the nine months ended September 30,
1998 the Company wrote off $5.2 million of in-process technology related to the
InterNex acquisition (see Note 3 of Notes to Financial Statements).
Net Interest Expense and Other. Net interest expense and other expense was
approximately $2.4 million and $2.3 million for the three month periods ending
September 30, 1998 and 1997, respectively. For the nine months ended September
30, 1998 and 1997, net interest expense and other expense was $10.9 million and
$3.7 million, respectively. The increase is primarily due to interest related
to the $150.0 million principal amount of 12 3/4% Senior Notes issued in
December 1997 (the "Senior Notes").
Extraordinary Gain. During the nine months ended September 30, 1998 the
Company realized an extraordinary gain of $3.0 million related to the early
retirement of debt in the form of capital lease obligations (see Note 4 of Notes
to Financial Statements).
Preferred Stock Dividends and Accretions. During the three and nine months
ended September 30, 1998, the Company recorded dividend and stock accretion
costs of $5.3 million and $6.6 million, respectively, related to the Redeemable
Exchangeable Preferred Stock issued in June 1998 (see Note 5 of Notes to
Financial Statements).
Net Loss Attributable to Common Stockholders. The Company's net loss
attributable to common stockholders increased to approximately $26.2 million for
the three months ended September 30, 1998 as compared to approximately $14.2
million for the same period of 1997. For the nine months ended September 30,
1998 the net loss attributable to common stockholders was $67.9 million as
compared to $41.8 million for the nine months ended September 30, 1997. For
comparative purposes, the net loss attributable to common stockholders for the
nine month period ended September 30, 1998 included expenses related to
financing and acquisitions of $1.3 million of acquisition charges resulting from
the acquisition of DeltaNet, $6.6 million of dividends and accretion related to
the Preferred Stock, $14.5 million interest expense and amortization of debt
issuance costs and warrants related to the Senior Notes, $5.2 million write-off
of in-process technology and $2.4 million of amortization of goodwill and other
intangibles relating to the acquisitions of InterNex and AnaServe which were
partially offset by an extraordinary gain of $3.0 million on early retirement of
debt. (see Notes 3, 4 and 5 of Notes to Financial Statements).
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LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has satisfied its cash requirements primarily through
capitalized lease financings, the sale of capital stock and debt financings. The
Company's principal uses of cash are to fund working capital requirements and
capital expenditures, to service its capital lease and debt financing
obligations, to finance and fund acquisitions and to provide for the early
retirement of debt. Net cash used in operating activities for the nine months
ended September 30, 1998 and 1997 was approximately $33.2 million and $39.4
million, respectively. 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 nine months ended September
30, 1998 and 1997 was approximately $46.3 million and $5.0 million,
respectively. Investing activities primarily consisted of release of restricted
cash of $9.6 million for the interest payment due on Senior Notes in June 1998,
$17.3 million used to purchase short term investments during the third quarter
of 1998, cash payments of $15.5 million for the InterNex acquisition and $9.9
million for the AnaServe acquisition in 1998, and purchases of capital equipment
in both periods.
For the nine months ended September 30, 1998, net cash of approximately
$111.7 million was generated from financing activities, of which $144.3 million
was the net proceeds from the issuance of Redeemable Exchangeable Preferred
Stock, $24.8 million was used for the early retirement of capital lease
obligations and $8.1 million was used for repayment of other capital lease
obligations. For the nine months ended September 30, 1997, net cash provided by
financing activities was $66.4 million, principally related to the issuance of
notes payable of $5.0 million and the issuance of common and preferred stock of
$74.0 million.
The net cash increase for the nine month periods ended September 30, 1998
and 1997 was $32.2 million and $22.0 million, respectively. At September 30,
1998 the Company had cash and cash equivalents of $152.1 million, short term
investments of $17.3 million and working capital of $167.7 million.
The Company expects to incur additional operating losses and will rely
primarily on the net proceeds from the Senior Notes and the Redeemable
Exchangeable Preferred Stock to finance its operations. The Company believes
that such capital resources will be sufficient to meet its anticipated cash
needs for working capital, purchases of capital equipment and funding of
acquisitions through 1999. 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
"Additional Factors That Could Affect 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 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 one
year, computer systems and/or software products used by many companies may need
to be upgraded to comply with such year 2000 requirements. The Company is
currently in the process of reviewing 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.
Based on the Company's assessment to date, the Company has determined that
its internally developed software, including much of its operational, financial
and management information systems software, uses either a full century or year
date or uses a binary representation that is an offset from the year 1970. Both
of these methods are year 2000 compliant. The Company's operational, financial
and management information systems software which have not been internally
developed have been certified as year 2000 compliant by the third party vendors
who have supplied the software. The equipment and software that runs the
Company's data centers are supplied by Microsoft Corporation ("Microsoft"), Bay
Networks ("Bay") and Sun Microsystems, Inc. ("Sun"). The Company has
implemented software
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patches supplied by Microsoft so that the Microsoft software in these data
centers no longer contains any material year 2000 deficiencies. The Company
expects to implement similar patches for the software supplied by Sun by the end
of 1998 and to replace the Bay equipment and software by the end of March 1999
with versions which do not contain any material year 2000 deficiencies. 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. Additionally, the Company is continuing to assess
the year 2000 compliance of its products and services. To date, most newly
introduced products and services of the Company do not contain material year
2000 deficiencies, however some of the Company's customers are running earlier
product versions that are not year 2000 compliant. The Company has been
encouraging such customers to migrate to current product versions. The Company
estimates that capital costs associated with the upgrade and conversion of its
existing products, services and systems relating to the year 2000 issue will be
less than $250,000. The Company does not separately track internal costs
incurred to assess and remedy deficiencies related to the year 2000 problem,
however, such costs are principally the payroll costs for its information
systems group.
The Company's expectation that it will be able to upgrade its products,
services and systems to address the year 2000 issue and its expectation
regarding the costs associated with these upgrades are forward-looking
statements subject to a number of risks and uncertainties. Actual results may
vary materially as a result of a number of factors. There can be no assurance
that the Company will be able to timely and successfully modify such products,
services and systems to comply with year 2000 requirements. Any failure to do
so could have a material adverse effect on the Company's operating results. The
Company's products, services and systems operate in complex network environments
and directly and indirectly interact with a number of other hardware and
software systems. 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, including those which form
significant portions of the Company's network and may be sole or limited source
suppliers, do not have business systems or products that comply with year 2000
requirements. Furthermore, despite testing by the Company and its vendors, the
Company's products, services and systems may contain undetected errors or
defects associated with year 2000 date functions. In the event any material
errors or defects are not detected and fixed or 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. Known or unknown errors or defects that affect the operation of the
Company's products, services or systems could result in delay or loss of
revenue, interruption of network services, cancellation of customer contracts,
diversion of development resources, damage to the Company's reputation, and
litigation costs. There can be no assurance that these or other factors
relating to year 2000 compliance issues will not have a material adverse effect
on the Company's business, operating results or financial condition. See
"Additional Factors that Could Affect Operating Results -- Dependence Upon
Suppliers; Sole and Limited Sources of Supply," "-- Dependence Upon Network
Infrastructure" and "-- Management of Potential Growth and Expansion."
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ADDITIONAL FACTORS THAT COULD AFFECT OPERATING RESULTS
The following factors, together with other risk factors discussed in the
"Overview" section of Management's Discussion and Analysis of Financial
Condition and Results of Operations and other information contained elsewhere
herein, should be considered carefully in evaluating the Company and its
business.
Substantial Indebtedness; Ability to Service Debt. The Company is and will
continue to be highly leveraged, with significant debt service requirements. 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.
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.
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 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 1999, 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 and approximately $67.9 million
for the nine month period ended September 30, 1998. At September 30, 1998, the
Company had an accumulated deficit of approximately $219.9 million. The
foregoing expectation regarding negative cash flow is a forward-looking
statement and 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.
Customer Concentration. The Company currently derives a substantial portion
of its total revenue from a single customer. For the nine months ended September
30, 1998 and September 30, 1997, revenue from WebTV Networks, Inc. ("WNI")
represented approximately 27.0% and 33.9%, 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
WNI to decrease as a percentage of revenue after 1998, 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.
Management of Potential Growth and Expansion. 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 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. Currently, the Company is in the process of replacing
and updating its operational, financial and management information systems,
including its billing, accounts receivable and payable tracking, fixed assets
and other financial management systems. Additionally, the Company will be
consolidating its Silicon Valley operations in a new, larger facility over the
course of the fourth quarter of 1998 and the first two quarters of 1999.
Management of the transition of the personnel and the operational equipment to
the new facility is expected to place additional strain on the
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Company's resources. To manage its growth, the Company must, among other things,
(i) continue to implement and improve its operational, financial and management
information systems; (ii) hire and train additional qualified personnel; and
(iii) continue to expand and upgrade its network infrastructure. Further,
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. Any failure of the Company to manage its growth
effectively, including the timely and effective replacement and updating of
its information systems and the pending consolidation of its Silicon Valley
facilities, could have a material adverse effect on the Company's business,
financial condition and results of operations.
Risks Associated With Acquisitions. The Company has completed three
acquisitions to date and may seek to acquire additional assets or businesses
complementary to its operations. The completed acquisitions 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 acquired companies,
the additional financial resources that may need to be applied to fund the
operations of 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 businesses 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 the acquired companies 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 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. In addition, the InterNex and AnaServe acquisitions
have been accounted for using the purchase method of accounting. Because the
acquisitions of companies of the type that the Company is targeting, such as
InterNex and AnaServe, typically involve the purchase of significant amounts of
intangible assets, acquisitions of such businesses also result in goodwill and
potentially significant amortization charges for acquired technology. The
DeltaNet acquisition was accounted for as a pooling of interests and the Company
incurred significant expenses related to this acquisition. If the Company were
to incur additional charges for acquired in-process technology, amortization of
goodwill and acquisition costs with respect to future acquisitions, the
Company's business, operating results and financial condition could be
materially and adversely affected.
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.
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 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
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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.
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. 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. 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 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.
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 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 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 or 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
transit agreements with MCI, Inc., Sprint, UUNet, AOL and other network
providers to support the exchange of traffic between the Concentric network and
the Internet as well as public peering arrangements with multiple smaller
internet service providers. The Company 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 its acquired 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.
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 1999. 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, financial condition and
results of operations. 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.
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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. Many of the
Company's current and prospective 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. 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.
Risks of Technological Change and Evolving Industry Standards. The markets
for the Company's services are characterized by rapidly changing technology,
evolving industry standards, changing 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 3, 1998, the Company issued 150,000 shares of its Series A
Preferred. The aggregate purchase price for the Series A Preferred was
$150,000,000 and the Company paid $5,250,000 in discounts to the initial
purchasers of the Series A Preferred. The securities were offered and sold only
to "qualified institutional buyers" (as defined in Rule 144A of the Securities
Act) in reliance on the exemption from the registration requirements of the
Securities Act provided by Rule 144A. On September 1, 1998 the Company issued
an additional 4,657 shares of Series A Preferred as payment of the quarterly
dividend required by the Company's Certificate of Designation relating to its
Preferred Stock. On September 9, 1998, the Company issued 154,657 shares, with a
liquidation preference of $1,000 per share, of its Series B Preferred in
exchange for all outstanding shares of the Series A Preferred pursuant to an
exchange offer registered with the Securities and Exchange Commission on Form S-
4 pursuant to the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Strategic Relationship with SBC. Pursuant to a Memorandum of
Understanding executed as of October 19, 1998, the Company set forth plans for a
strategic business arrangement with SBC Communications, Inc. ("SBC") to
integrate Concentric's Internet-based business data services and technology into
SBC's "Online Office" portfolio of data products and services for business
customers. "Online Office" is targeted at medium and small businesses to provide
local area network equipment, installation and network management services and
network-hosted business applications, including desktop office applications, e-
mail, calendaring and e-commerce.
In connection with this arrangement, SBC will acquire 906,679 shares of
Concentric common stock at a price of $24.15 per share, or on the open market.
The Company will also issue a warrant to SBC to purchase an additional 906,679
shares. The warrant expires three years from the date of issuance and is
exercisable at $21 per share. The Company is currently assessing the fair
value of the above warrant and will amortize the value over the three year
life of the warrant.
The foregoing description regarding the proposed relationship between
SBC and Concentric and the services they plan to develop and deploy, including
Online Office, are forward-looking statements that are subject to a number of
risks and uncertainties. Actual results may differ materially from those set
forth in such statements as a result of a number of factors including, but not
limited to, the ability of the parties to negotiate, execute and deliver further
agreements setting forth the terms of the relationship and related transactions,
compliance with all regulatory requirements, the progress and timing of
development and launch of the planned new IP services, the costs and timing to
promote such services, consumer acceptance and use of the new services, and the
increasingly competitive nature of the IP services market. See also "Additional
Factors that Could Affect Operating Results -- Dependence on New and Uncertain
Markets" and "-- Dependence on New and Enhanced Services."
Deadline for Receipt of Stockholder Proposals for 1999 Annual Meeting.
Last year's proxy statement for the Company's 1998 Annual Meeting of
Stockholders set forth the deadline and procedure for submitting stockholder
proposals to be included in the proxy statement for the Company's 1999 Annual
Meeting of Stockholders. If a
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<PAGE>
stockholder intends to submit a proposal at the Company's 1999 Annual Meeting of
Stockholders which is not submitted in time to be eligible for inclusion in the
proxy statement relating to that meeting, the stockholder must give notice to
the Company not less than 60 days nor more than 90 days prior to the meeting in
accordance with the requirements set forth in the Securities Exchange Act of
1934, as amended, and the Company's bylaws. If such a stockholder fails to
comply with the foregoing notice provisions, the proposal may not be brought
before the meeting.
ITEM 6. EXHIBITS AND REPORTS ON 8-K
(a) Exhibits
*10.59 Carrier Agreement by and between the Company and MCI
Telecommunications Corporation, dated August 12, 1998.
10.60 Stock Purchase Agreement by and between Concentric Network
Corporation and Southwestern Bell Internet Services, Inc., dated October 19,
1998.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
____________
*Certain information in this exhibit has been omitted and filed
separately with the Securities and Exchange Commission pursuant to a
confidential treatment request under 17 C.F.R. (S)(S)200.80(b)(4), 200.83 and
230.46.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 16, 1998 CONCENTRIC NETWORK CORPORATION
By /s/ HENRY R. NOTHHAFT
-----------------------------
Henry R. Nothhaft,
President, Chief Executive
Officer and Director
By /s/ MICHAEL F. ANTHOFER
-----------------------------
Michael F. Anthofer,
Senior Vice President and
Chief Financial Officer
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<PAGE>
EXHIBIT 10.59
CARRIER AGREEMENT
T E R M S A N D C O N D I T I O N S
This Carrier Agreement (the "Agreement"), is between MCI TELECOMMUNICATIONS
CORPORATION ("MCI"), and CONCENTRIC NETWORK CORPORATION ("Customer"), a resale
common carrier subject to the Communications Act of 1934, as amended.
1. Scope of Agreement.
------------------
1.1 Carrier to Carrier. MCI shall provide to Customer certain specified
------------------
domestic interstate service(s), international services, and intrastate
common carriage services. For domestic interstate and international
services, this Agreement incorporates by reference the terms of MCI Tariff
FCC No. 1 on file with the Federal Communications Commission ("FCC"),
together with any successor to such tariff ("Tariff"), which may be
modified from time to time by MCI in accordance with law and thereby affect
the services furnished Customer under this Agreement, except that the
following terms and conditions shall supplement or, to the extent
inconsistent, supersede Tariff terms and conditions. Subject to amendment
by the parties, the terms and conditions of this Agreement shall remain in
effect throughout the Service Term (as defined herein). For intrastate
services, this Agreement incorporates by reference each applicable state
tariff filed by MCI, which may be modified by MCI from time to time, and
thereby affect the service(s) furnished to Customer. This Agreement is
entered pursuant to Section 211(a) of the Communications Act of 1934, as
amended.
1.2 Definitions. Capitalized terms not otherwise defined in this
-----------
Agreement shall have the meanings assigned to them in the Tariff.
2. Term.
----
2.1 Service Term. Following execution of this Agreement by both
------------
parties in accordance with paragraph 19 herein, the term of this Agreement
("Service Term") shall begin effective as of August 1, 1998 ("Effective
Date") and will continue for a period of twenty-four (24) months therefrom.
2.2 Expiration of Service Term. Unless extended pursuant to
--------------------------
Paragraph 2.3 herein, this Agreement shall automatically terminate upon
expiration of the Service Term, and Customer shall be fully subject to all
the terms and conditions, including standard tariff rates, set forth in the
Tariff and respective state tariffs for MCI Services received by Customer
after such expiration.
2.3 Extension of Service Term. Upon expiration of the Service Term,
-------------------------
Customer shall have the option to renew the Agreement on a month-to-month
basis for up to a period of twelve (12) months, provided Customer has
satisfied its Monthly Commitment pursuant to Paragraph 3 herein. After the
twelfth month following expiration of the Agreement, and upon no less than
thirty (30) days written notice from Customer to MCI before the end of the
twelfth month, Customer shall notify MCI of its desire to renew the
Agreement for an additional one-year term (the "Notification Date"). MCI
may refuse to renew the Agreement for an additional one year term by giving
Customer written notice within thirty (30) days of the Notification Date.
________________
[*] Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
MCI CONFIDENTIAL
<PAGE>
3. Monthly Usage; Monthly Commitment.
---------------------------------
3.1 Monthly Usage. As used herein, "Monthly Usage" shall mean the amount
-------------
of Customer's usage of MCI Services during each monthly billing period of
the Service Term, calculated in accordance with the following:
3.1.1 Domestic interstate and international MCI services
(hereinafter "Interstate Services" and "International Services") shall
be calculated at the rates set forth in Attachment 1, after
application of all discounts and credits;
3.1.2 Domestic intrastate MCI services shall be calculated at
standard tariff rates (hereinafter "Intrastate Services'); and
3.1.3 Monthly Usage excludes: (i) charges for tariffed MCI products
and services not set forth herein; (ii) charges for any non-Tariffed
products or services; (iii) access or egress (or related) charges,
including without limitation, tariffed access charges and access
charges imposed by third parties, except to the extent any rates
herein expressly include such charges; (iv) standard Tariffed non-
recurring charges; (v) installation charges; (vi) charges for
equipment and collocation; (vii) taxes, tax-related surcharges or tax-
like surcharges; (vii) and other MCI tariffed charges or surcharges,
including without limitation, Universal Service fund charges,
Presubscribed Interexchange Carrier charges, National Access Fees and
payphone use charges; any of which, to the extent applicable, are
payable by Customer in addition to Monthly Usage charges.
3.1.4 "MCI Services" shall include only those Interstate Services,
International Services and Intrastate Services provided by MCI
pursuant to the terms of this Agreement and specifically described
herein.
3.2 Monthly Commitment. During each monthly billing period of the Service
------------------
Term, Customer's Monthly Usage shall equal or exceed the following:
("Monthly Commitment")
Months Monthly Commitment
------ ------------------
1 through 24 $500,000
3.2.1 Customer may satisfy up to thirty percent (30%) of its Monthly
Commitment through the use of MCI provided Local Loop revenue.
3.2.2 Revenue from the IOC's associated with MCI OC-3 or OC-12 point
to point Private Line circuits provided to Customer under this Agreement
will count towards satisfying Customer's Monthly Commitment.
3.3 Underutilization. During any month of the Service Term in which
----------------
Customer's Monthly Usage is less than the Monthly Commitment, for that
month, Customer will pay, in addition to all other applicable charges,
Customer's Usage Charges (as hereinafter defined), plus an underutilization
charge (which Customer agrees is reasonable) equal to the difference
between Customer's Usage Charges and the Monthly Commitment
("Underutilization Charge"). In no event, however, shall Customer be
obligated pursuant to this Paragraph to pay more in any month than
Customer's Monthly Commitment for that month.
MCI CONFIDENTIAL
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<PAGE>
4. Rates and Additional Terms.
--------------------------
4.1 Rates. Customer shall pay the rates and charges for MCI Services set
-----
forth in the Attachments and Exhibits to this Agreement and agrees to the
additional terms and conditions set forth in such Attachments and Exhibits.
Except as expressly provided to the contrary, the rates set forth in the
Attachments and Exhibits are in lieu of, and not in addition to, any other
discount, promotion, and/or credit (tariffed or otherwise). The rates for
all other MCI products and services not explicitly referenced within this
Agreement shall be governed by the applicable MCI tariff.
The rates set forth in this Agreement do not include the following:
charges for MCI Services other than those set forth herein; non-Tariffed
products; access or egress (or related) charges, including without
limitation, tariffed access charges and access charges imposed by third
parties; standard Tariffed non-recurring charges; installation; taxes, tax-
related surcharges, or tax-like surcharges; and other tariffed charges,
including without limitation, universal service fund charges, presubscribed
interexchange carrier charges, national access fees and payphone use
charges; which, to the extent applicable, are additional. Except as
expressly provided to the contrary, the rates set forth herein are in lieu
of, and not in addition to, any other discounts, promotions, and/or credits
(tariffed or otherwise).
4.2 Program Review. MCI retains the right to review and revise the
--------------
rates, terms and/or composition of the MCI Prism I and MCI Toll Free DAL
LEC Groups provided herein, including without limitation, the rates and
charges, credits and discounts and/or the composition of the aforementioned
LEC Groups set forth in the Attachments and Exhibits to this Agreement,
upon not less than thirty (30) days prior written notice to Customer,
stating the effective date and terms of the revision, in accordance with
the following ("Program Review"):
4.2.1 If Customer demonstrates to MCI that the Program Review results
in (i) an average rate increase, for an individual MCI product, of
more than [*]* above the rates in effect immediately prior to the
effectiveness of the Program Review changes, or (ii) a rate increase
to any LEC Group that affects more than [*] of Customer's total MCI
Prisim I or MCI Toll Free DAL traffic measured at the rates in effect
at the time of the adjustment with each MCI product calculated
independently, Customer will have the option to move traffic affected
by the Program Review to another carrier.
4.2.2 If Customer elects to move such traffic to another carrier, MCI
will reduce Customer's Monthly Commitment by an amount equal to the
"Monthly Commitment Adjustment." The Monthly Commitment Adjustment
shall be calculated by obtaining Customer's monthly average usage of
the traffic affected by the Program Review during the three (3)
consecutive months prior to the time of the adjustment or, if Customer
has less than three (3) consecutive months usage, during the period of
Customer's actual usage prior to the time of the adjustment. The
Monthly Commitment Adjustment shall be measured at the rates in effect
at the time of the adjustment and [*].
4.2.3 If the Monthly Commitment Adjustment results in a decrease in
Customer's Monthly Commitment of [*], the parties may elect to
negotiate a new agreement or either party may terminate this Agreement
without liability by providing the other party with no fewer than
thirty (30) day prior written notice and such termination shall not be
considered a breach of this Agreement.
_______________________
[*] Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
MCI CONFIDENTIAL
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<PAGE>
4.3 MCI International Rate Review. MCI may, at its option, revise the
-----------------------------
rates for any International Services contained herein by providing written
notice to Customer given not fewer than thirty (30) days prior to the
effective date of the rate revision ("Rate Review") in accordance with the
following:
4.3.1 If Customer demonstrates to MCI that the International Rate
Review results in (i) a rate increase to any country [*] the rates in
effect at the time of the adjustment, or (ii) a rate increase that [*]
measured at the rates in effect at the time of the adjustment,
Customer will have the option to cease traffic to that country and
move such traffic to another carrier.
4.3.2 If, pursuant to Paragraph 4.3.1 above, Customer elects to move
such traffic to another carrier, MCI will reduce Customer's Monthly
Commitment by an amount equal to the "Monthly Commitment Adjustment."
The Monthly Commitment Adjustment shall be calculated by obtaining
Customer's monthly average usage of International Prism I,
International Toll Free DAL and/or Canadian Toll Free Service to the
country in which Customer elects to move traffic during the three (3)
consecutive months prior to the time of the adjustment or, if Customer
has less than three (3) consecutive months usage, during the period of
Customer's actual usage prior to the time of the adjustment. The
Monthly Commitment Adjustment shall be measured at the rates in effect
at the time of the adjustment and [*][*].
4.4 Service Limitations. The following provisions are applicable to
-------------------
Customer's use of MCI Service, in addition to all applicable
provisions of the Tariff governing the use and misuse of MCI Service.
If MCI detects the use of MCI Services for international call-back
offerings using uncompleted call signaling, or detects the use of
"polling" technique by Customer for signaling, setup or completion of
calls, MCI may, in its sole judgment and determination, and subject to
and without limitation upon the Tariff, block the applicable calls, or
block all service to the affected country or countries. MCI may, in
its independent judgment, immediately terminate this Agreement or any
affected services herein, without liability, if the FCC, any other
agency or body of the federal government, any agency or body of any
state or local government, any state or federal court, or any foreign
PTT, international authority, government, or regulatory body, or any
International Telecommunications Operator ("ITO") (each a "Regulatory
Entity"), takes action, or issues an order, ruling or judgment, or
threatens to do so pending corrective action by MCI, which has the
effect of preventing or impeding MCI from performing any material
obligation in this Agreement. No MCI action under this Paragraph
resulting from the action or threatened action of a Regulatory Entity
as described above shall be considered a breach of this Agreement by
MCI.
4.5 Payphone Surcharge. Pursuant to Section 276 of the Telecommunications
------------------
Act of 1996, and the regulations implementing Section 276, the FCC has
prescribed regulations that establish a compensation plan to ensure that
all payphone service providers are compensated for calls from a payphone
("Payphone Compensation Law"). MCI reserves the right to adjust its rates,
including the rates herein, or to impose additional charges or surcharges
in order to recover amounts MCI is required to pay to payphone service
providers pursuant to the Payphone Compensation Law, and any costs incurred
by MCI in connection with the Payphone Compensation Law.
_______________________
[*] Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
MCI CONFIDENTIAL
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<PAGE>
5. Security.
--------
5.1 Alternative or Additional Security. Nothing contained herein shall
----------------------------------
limit or be interpreted to limit MCI's rights as provided for in Section
B-7.04 of the Tariff to require, in MCI's sole discretion, alternative or
additional security from Customer. Customer's failure or refusal to comply
with such requirement upon MCI's request therefor may result in the
cancellation of this Agreement and Customer's service for cause pursuant to
Section B-11.01 of the Tariff. The security arrangements provided for
hereunder shall survive the expiration of the Service Term, as defined
herein, and shall remain in effect so long as Customer uses MCI Services or
has any outstanding balance due for use of MCI Services.
5.2 Letter of Credit. Consistent with Section B-7.04 of the Tariff and in
----------------
specific implementation of such Tariff provision, Customer shall be
required, as a condition precedent to receipt of MCI Services hereunder, to
provide within ten (10) days of executing this Agreement a security deposit
or unconditional and irrevocable stand-by letter of credit in a form and
from a bank acceptable to MCI in an amount equal to the greater of: [*]*.
MCI shall not accept any orders from Customer for MCI Services until the
security deposit or letter of credit described in this Paragraph 5.2 has
been provided by Customer.
6. Payment.
--------
6.1 Payment is due on or before 5:00 p.m. (eastern standard time) of the
third day of each month for the prior calendar month's MCI consolidated
invoice, with the amount due based on an MCI estimate or, if MCI does not
provide Customer with an estimate before the date on which payment is due,
then Customer's payment shall be equal to one hundred percent (100%) of the
amount of Customer's most recent MCI consolidated invoice, plus any
shortfall due thereunder. If, at the beginning of the Service Term,
Customer has not received an estimated amount from MCI or any prior MCI
consolidated invoice at the time payment is due, then Customer shall pay an
amount equal to Customer's reasonable estimate of Customer's usage of MCI
Services during the initial month. If Customer's estimated payment is less
than the amount of the prior calendar month's MCI consolidated invoice
("shortfall"), then Customer shall pay the shortfall amount within thirty
days (30) days from the original payment due date of the prior calendar
month's MCI consolidated invoice. If Customer's estimated payment is
greater than the amount of the prior calendar month's MCI consolidated
invoice ("excess"), then Customer shall deduct the excess amount from the
following month's estimated payment.
6.2 Customer's failure to pay either the amount due or any shortfall in
accordance with Paragraph 6.1 above may result in (i) the exercise of MCI's
rights under the security provisions contained in Paragraphs 5.1 and 5.2
immediately above; (ii) the exercise of MCI's rights under Tariff Section
B-11.01 or Paragraph 8.2.3 hereof with respect to termination of this
Agreement; and/or (iii) MCI's application of any amount owed by MCI to
Customer, whether under this Agreement or otherwise, to satisfy all or a
portion of the amounts owed by Customer under this Paragraph 6.
6.3 Billing Disputes. If Customer disputes in good faith any portion of a
----------------
monthly invoice, Customer may either pay the disputed amount in protest or
withhold the disputed amount from the payment otherwise due for such month,
provided Customer pays the balance of such invoice to MCI when due and
provides written notice and Complete Documentation of such claim to MCI at
the time that Customer pays the invoice on which such charge appears.
Complete Documentation shall mean documents which identify the charge(s)
disputed by the Customer (including corporate id, service location and
circuit level detail), the
_______________________
[*] Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
MCI CONFIDENTIAL
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<PAGE>
reason for such dispute, and the amount being withheld by Customer pending
resolution of such dispute. In addition, Customer must provide to MCI
additional information not later than five (5) business days following any
MCI request for additional information. If MCI determines that the disputed
portion is a valid charge, Customer shall, within five (5) business days of
such determination, remit such amount to MCI. The Customer shall be
responsible for any late payment or other charges which may be applicable
to such withheld payment. If MCI determines that any disputed charge is an
invalid charge, MCI shall credit Customer's invoice for such amount in the
next appropriate billing cycle.
7. Dispute Resolution. Any dispute arising out of or related to this
------------------
Agreement, including but not limited to tort claims, shall be submitted to
J.A.M.S./ENDISPUTE for final and binding arbitration pursuant to the
J.A.M.S./ENDISPUTE Arbitration Rules and Procedures in effect on the date
of commencement of arbitration, and as modified by this Paragraph. The
arbitration shall be conducted in accordance with the United States
Arbitration Act, 9 U.S.C. 1 et seq. ("USAA"), notwithstanding any choice of
law provision in this Agreement. Each party shall bear the fees and costs
it incurs in preparing and presenting its own case. The parties agree that
Washington, D.C., or Los Angeles, CA, at the option of the party filing
such claim, shall be the location for the arbitration hearing. Any
controversy over whether an issue is arbitrable shall be determined by the
arbitrator. The arbitrator shall have no authority to award punitive or
exemplary damages. The award may be confirmed and enforced in any court of
competent jurisdiction. All post-award proceedings shall be governed by the
USAA. Neither party may seek injunctive relief of any kind prior to the
confirmation of an arbitration award, except as expressly provided herein.
8. Termination.
-----------
8.1 Termination for Insolvency. If Customer becomes or is declared
--------------------------
insolvent or bankrupt, is the subject of any proceedings related to its
liquidation, insolvency or for the appointment of a receiver or similar
officer for it, makes an assignment for the benefit of all or substantially
all of its creditors, or enters into an agreement for the composition,
extension, or readjustment of all or substantially all of its obligations,
MCI may, upon ten (10) days prior written notice, terminate this Agreement
without liability as of the date specified in such notice.
8.2 Termination by MCI. In addition to the cancellation rights set
-------------------
forth in Section B-11 of the Tariff, MCI may, without incurring any
liability, terminate this Agreement in whole or in part, as follows:
8.2.1 MCI may terminate this Agreement, without termination liability
by Customer, if Customer experiences a change in ownership or control
or other transaction described in Paragraph 15.2 hereof, following the
notice provided therein.
8.2.2 If a Regulatory Entity takes or threatens action which give
rise to an MCI right to terminate service as described in Paragraph
4.4 hereof, or if MCI determines, in its sole discretion, that
continued provision of MCI Service would contravene any local, state,
national or international regulation, law, tariff or other legal
restriction, MCI may immediately terminate this Agreement or the
affected services, to be followed promptly by written notice to
Customer. If Customer's actions were a direct or primary contributing
cause of a Regulatory Entity's actions resulting in or otherwise
directly the cause of MCI's termination of service under this
Paragraph, such termination shall be for cause.
8.2.3 MCI may terminate this Agreement for cause if Customer fails to
meet any payment obligation hereunder or fails to provide any
requested security deposit or letter of credit and such failure is not
cured within three (3) business days after Customer's receipt of
written notice from MCI notifying Customer of such failure.
MCI CONFIDENTIAL
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8.2.4 MCI may terminate this Agreement for cause upon thirty (30)
days prior written notice, if Customer violates any applicable law,
order or regulation, including without limitation, all rules
pertaining to the sale or delivery of Customer's service(s) to end
users or the sale or delivery of operator services to detention
facilities, provided that MCI may immediately suspend service to
customer in advance of such termination date if reasonably necessary
in MCI's determination to prevent or limit potential loss or liability
to MCI.
8.2.5 MCI may terminate this Agreement for cause upon thirty (30)
days prior written notice if Customer fails to abide by the
requirements in Paragraph 9 (Nondisclosure), or Paragraph 17.1 (use of
MCI's name).
8.2.6 MCI may terminate this Agreement for cause if Customer shall
have failed to meet its Monthly Commitment for three (3) consecutive
monthly billing periods and fails to meet the Monthly Commitment for
the full monthly billing period following Customer's receipt of
written notice of termination under this Paragraph.
8.2.7 MCI may terminate this Agreement for cause upon thirty (30)
days written notice to Customer if Customer fails to comply with any
other material term of this Agreement and Customer does not cure such
failure within such 30 day period.
8.3 Termination by Customer.
-----------------------
8.3.1 In addition to the cancellation rights set forth in Section B-5
of the Tariff, Customer may terminate this Agreement for cause,
without incurring any liability except for payment of services
rendered, upon thirty (30) days written notice to MCI if MCI fails to
comply with a material term of this Agreement and does not cure such
failure with such 30-day period.
8.4. Transition Period. If MCI terminates the Agreement pursuant to
-----------------
Paragraph 8.2.1, 8.2.2, or 8.2.6, MCI shall provide Customer with a three
month period, beginning on the date Customer receives written termination
notice, to transition the MCI Services ("Transition Period"), provided
that, if MCI reasonably determines that the continued provision of MCI
Services during the Transition Period would expose MCI to significant legal
or financial liability or threaten MCI's good will and reputation, MCI may
restrict, suspend or terminate MCI Services prior to the end of the
Transition Period to the extent necessary to avoid such result. During
the Transition Period Customer shall be subject to the rates, terms and
conditions set forth in the Agreement provided, however, that
underutilization charges shall be waived and MCI will not accept any
orders for new MCI Services during such period. Upon expiration of the
Transition Period, Customer shall be fully subject to all the terms and
conditions set forth in the Tariff and respective state tariffs for MCI
Services received by Customer after such expiration, including without
limitation standard Tariff rates and charges.
8.5. Termination Liability. If this Agreement is terminated before
---------------------
the expiration of the Service Term, (i) by Customer other than as provided
in Paragraph 8.3; or (ii) by MCI for cause in accordance with Paragraph 8.2
above (other than Paragraph 8.2.1), or for cause pursuant to the Tariff,
then Customer shall pay MCI, within thirty (30) days of the effective date
of such termination, an amount equal [*]*. Such payment shall be in
addition to all unsatisfied payment obligations incurred by Customer under
this Agreement through such termination date. Customer shall also repay
MCI the credits received pursuant to the Attachment(s) and Exhibit(s) of
this Agreement, other than usage-based credits measured by intrastate usage
of MCI Services.
_______________________
[*] Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
MCI CONFIDENTIAL
-7-
<PAGE>
Charges payable by Customer under this Paragraph 8.5 are not exclusive of
any other rights or remedies to which MCI may be entitled with respect to
any breach or failure by Customer.
9. Confidential Information; Nondisclosure.
---------------------------------------
9.1 Confidential Information. As used in this Agreement, "Confidential
------------------------
Information" shall mean any of the terms and conditions set forth in this
Agreement, any information related to the performance of or subject matter
of this Agreement, or any information and materials that may be reasonably
understood (from legends, the nature of such information or the
circumstances of such information's disclosure) to be confidential and/or
proprietary to the party to this Agreement disclosing such information
("Discloser") or to third parties to whom Discloser owes a duty of
nondisclosure, which is disclosed to the other party to this Agreement
("Recipient"). Confidential Information shall include any product
descriptions or documentation, procedures, reports, software, databases,
customer information, notices, invoices or other communications related to
this Agreement and the Services provided hereunder, together with all
proposals, presentations, communications, or other material related to the
negotiation of this Agreement. "Proprietary Information" shall include such
Confidential Information disclosed under this Agreement as is by its nature
and the intent of its disclosure to be and remain the property of the owner
thereof (whether the Discloser or a third party), the disclosure of which
is intended to be only for temporary viewing or use by the Recipient. No
proprietary interest shall be obtained by a Recipient of Proprietary
Information hereunder or by any person or entity to whom Recipient may
transfer Proprietary Information, whether such transfer is in compliance
with this Agreement or otherwise.
9.2 Obligations.
-----------
9.2.1 Except as provided in Paragraph 9.3 below, Recipient shall not
disclose Confidential Information in its possession to any third party
during the Service Term of this Agreement, or during the three (3)
year period thereafter, without the prior written consent of the
Discloser.
9.2.2 Recipient shall protect Confidential Information received by it
from disclosure to others, using the same degree of care used to
protect its own confidential or proprietary information of like
importance, but in any case using no less than a reasonable degree of
care.
9.2.3 Recipient shall not make any copies of Confidential Information
received by it except to the extent necessary in connection with the
purposes of such disclosure or as otherwise expressly permitted by the
Discloser. Any copies of Confidential Information shall be made so as
to reproduce such proprietary legends or notices (whether of the party
providing the Confidential Information or of a third party owner
thereof) as are contained in or on the original.
9.2.4 Recipient shall use Confidential Information only in connection
with the services provided pursuant to or in performance of
obligations under this Agreement, except as otherwise expressly
permitted by the Discloser in writing.
9.2.5 Recipient shall return Proprietary Information and any copies
thereof upon written request, upon expiration or earlier termination
of this Agreement, or upon Recipient's discontinuation of use of the
related service, and such Proprietary Information shall not thereafter
be retained in any form by Recipient, its affiliates, or any employees
or independent contractors thereof.
MCI CONFIDENTIAL
-8-
<PAGE>
9.3 Exceptions.
-----------
9.3.1 A Recipient may disclose Confidential Information received
hereunder to its employees who have a need to know to perform
obligations or exercise rights under this Agreement, and who are bound
to protect the received Confidential Information from unauthorized use
and disclosure under the terms of a written confidentiality agreement
with Recipient (including without limitation a pre-existing written
agreement).
9.3.2 A Recipient may disclose Confidential Information if such
disclosure is lawfully required by any federal or state governmental
agency or is otherwise required by law or is necessary in any
proceeding establishing rights and obligations under this Agreement.
In the event Recipient is required by law, regulation or court order
to disclose any Confidential Information, to the extent permitted by
time and the governing authority compelling such disclosure, Recipient
will promptly notify Discloser in writing prior to making any such
disclosure in order to allow Discloser to seek a protective order or
other appropriate remedy from the proper authority. Recipient agrees
to cooperate with Discloser in seeking such order or other remedy, to
the extent legally permitted and commercially reasonable. Recipient
further agrees that, under any circumstances, Recipient will furnish
only that portion of the Confidential Information which is legally
required and will exercise all reasonable efforts to obtain reliable
assurances that confidential treatment will be accorded the
Confidential Information by the governing authority receiving such
information.
9.3.3 The restrictions set forth in this Agreement on the use and
disclosure of Confidential Information shall not apply to information
that: (a) was publicly known at the time of Discloser's communication
thereof to Recipient or subsequently becomes publicly known through no
fault of Recipient; (b) is in Recipient's possession free of any
obligation of confidentiality at the time of Discloser's communication
thereof to Recipient; (c) is developed by Recipient independently of
and without use of any Confidential Information previously disclosed
by Discloser to Recipient or to a third party under a condition of
confidentiality; (d) is rightfully obtained by Recipient without
restriction from third parties authorized by Discloser to provide such
information to Recipient or third parties; or (e) is identified by
Discloser in writing as no longer proprietary or confidential.
9.4 Additional Terms.
----------------
9.4.1 Disclosures of Confidential Information subject to this
Agreement shall include disclosures in written or other tangible form
(including on electronic, digital or magnetic media) or by audible,
visual, electronic or other means.
9.4.2 No licenses or rights, proprietary or otherwise, with respect
to any Proprietary Information, patent, copyright, trademark, or trade
secret are granted or are to be implied by this Agreement, except to
the extent expressly provided herein.
9.4.3 The Parties acknowledge that Confidential Information is unique
and valuable, and that disclosure in breach of this Agreement is
material and will result in irreparable injury to the owner thereof
for which monetary damages alone would not be an adequate remedy.
Therefore, the parties agree that in the event of a breach or
threatened breach of confidentiality, a party shall be entitled to
specific performance and injunctive or other equitable relief as a
remedy for any such breach or anticipated breach without the necessity
of posting a bond. Any such relief shall be in addition to and not in
lieu of any other applicable remedies or relief to which such party is
entitled, including termination of this Agreement and monetary
damages.
MCI CONFIDENTIAL
-9-
<PAGE>
10. Notices.
-------
All notices, reports and other communications pursuant to or in connection
with this Agreement shall be given by personal delivery, registered or
certified mail (return receipt requested), or courier service. Notice shall
be deemed received from the date the communications is delivered to the
applicable location at the address shown below:
If to MCI: If to Customer:
MCI Telecommunications Corporation Concentric Network Corporation
205 N. Michigan, Suite 2600 10590 N. Tantau Ave.
Chicago, IL 60601 Cupertino, CA 95014
ATTN.: Business Markets, ATTN.: Henry R. Nothhaft,
Legal Affairs Chairman, President, CEO
CC: MCI Account Team
MCI
100 S. Fourth Street; Suite 300
St. Louis, MS 63102
ATTN.: Mr. Edward C. Schneider
11. Letter of Agency.
----------------
Customer shall appoint MCI as its agent with respect to the ordering and
provisioning of service pursuant to a Letter of Agency in substantially the
form attached hereto and incorporated herein as Attachment 2 to this
Agreement. MCI will not be responsible for any delays or limitations in
the provision of services with local exchange carriers (LECs) resulting
from the failure of Customer to provide such agency or the failure of a LEC
to accept such authorization.
12. Surcharge Exemption and Tax Exemption.
--------------------------------------
12.1 When applicable, Customer shall certify that any special access
circuits provided in connection with MCI Services terminate in a device
that is not capable of interconnecting MCI's service with the local
exchange network and, as such, the special access circuits are surcharge
exempt from the Local Exchange Carrier's ("LECs") special access surcharge
("Surcharge Exempt"). If Customer is not Surcharge Exempt Customer shall
pay all applicable LEC surcharges.
12.2 When applicable, Customer shall provide MCI certifications that
Customer is exempt from federal, state, and/or local taxes.
13. Limitation of Liability; Indemnification.
----------------------------------------
13.1 Under no circumstances shall either party be liable for any indirect,
incidental, special, exemplary, punitive or consequential damages,
including, without limitation loss of use or lost business, revenue,
profits or goodwill, that results from MCI's provision of or failure to
provide, or Customer's use of or inability to use any of the MCI Services
provided under this Agreement, even if such party had been advised, knew or
should have known of the possibility of such damages,. The foregoing
limitation applies to all causes of actions and claims, including without
limitation breach of contract, breach of warranty, negligence, strict
liability, misrepresentation and other torts. Further, no cause of action
which arose more than one (1) year prior to the institution of a legal
proceeding alleging such cause of action may be asserted by either party
against the other.
MCI CONFIDENTIAL
-10-
<PAGE>
13.2 To the extent applicable, the terms and conditions of the Tariff
shall govern the extent of MCI's liability with respect to this Agreement
and the Services provided hereunder. With respect to any service, product,
action, obligation, facility or event not covered by the terms of the
Tariff, whether outside of the terms of the Tariff or determined not to be
covered under the Tariff by a final decision of a court of competent
jurisdiction, the total liability of MCI to Customer in connection
therewith shall be limited to the lesser of (a) direct damages proven by
Customer or (b) the aggregate amounts paid by Customer to MCI under this
Agreement for the one (1) month period prior to accrual of such cause of
action for the specific product or service which forms the basis for such
cause of action. The foregoing limitation applies to all causes of actions
and claims, including, without limitation, breach of contract, breach of
warranty, negligence, strict liability, misrepresentation and other torts.
Further, MCI's liability with respect to individual MCI services may also
be further limited pursuant to the terms and conditions of the applicable
Attachments and Exhibits to this agreement. Customer acknowledges and
accepts the reasonableness of the foregoing disclaimers and limitations of
liability.
13.3 In addition to any indemnification rights set forth in the
Attachments and Exhibits to this Agreement or in the Tariff, Customer
agrees to indemnify, defend at Customer's expense and hold harmless MCI,
its parent, affiliates, subsidiaries, directors, officers, employees, and
agents (collectively the "MCI Indemnitees") against any actions, claims,
suits, losses, expenses or damages asserted against or incurred by any of
the MCI Indemnitees arising out of or related to: (i) Customer's acts,
omissions and/or breach of its obligations hereunder; (ii) the violation of
any FCC or other applicable international, federal, state or local law or
regulation by Customer; (iii) the accuracy of or authorization for any
service orders submitted by Customer hereunder; or (iv) Customer's
connection of any MCI facility, product, or service to any third party
facility, service or network, including without limitation damages
resulting from unauthorized use of, or access to, MCI's network.
Notwithstanding any other provision of this Agreement, Customer shall pay
all damages, settlements, expenses and costs, including costs of
investigation, court costs and reasonable attorneys' fees and costs
(including allocable costs of in-house counsel) incurred by MCI Indemnitees
as set forth in this Paragraph, including, without limitation, reasonable
attorneys' fees and costs (including allocable costs of in-house counsel)
incurred in enforcing this Agreement.
13.4 Customer shall be fully responsible to MCI for all acts or omissions
of Customer's employees, customers, end-users (whether authorized users or
otherwise), vendors, subcontractors, and agents with respect to the
ordering or use of the MCI Services provided hereunder, or in any respect
related to the provisions or subject matter of this Agreement.
14. Governing Law.
-------------
This Agreement, including all matters relating to the validity,
construction, performance and enforcement thereof, shall be governed by the
laws of the Communications Act of 1934, as amended and as interpreted and
applied by the FCC, except to the extent matters must be governed by state
law, in which case such matters shall be governed by the laws of the State
of New York without giving reference to its principles of conflicts of law.
15. Assignment.
----------
15.1 This Agreement shall be binding on Customer and its respective
successors and assigns. Customer may not assign this Agreement, whether by
operation of law or otherwise, without the prior written consent of MCI,
which shall not be unreasonably withheld. Any attempted assignment to
which MCI does not consent shall be void.
15.2 If Customer undergoes a merger, sale or corporate reorganization
involving a change of control, or a change of more than fifty percent (50%)
of Customer's ownership or management, or if Customer sells,
MCI CONFIDENTIAL
-11-
<PAGE>
divests,transfers or leverages more than fifty percent (50%) of Customer's
assets, telecommunications facilities or customer base, MCI may elect to
terminate this Agreement by providing written notice of such election to
Customer at least thirty (30) days prior to the date designated by MCI for
such termination.
15.3 This Agreement shall be binding on MCI and its respective successors
and assigns.
16. No Waiver.
---------
No waiver of any of the provisions of this Agreement shall be binding
unless it is in writing and signed by both parties. The failure of either
party to insist on the strict enforcement of any provision of this
Agreement shall not constitute a waiver of any provision and all terms
shall remain in full force and effect.
17. Resale of MCI Services.
----------------------
17.1 In reselling MCI Services under this Agreement, Customer will
observe the highest standard of integrity and fair dealing with members of
the public. Customer agrees to sell and bill its own services under
Customer's own name, identity or mark, and Customer further agrees not to
reference MCI's name or marks in any context involving Customer's
furnishing of services to the public. In addition to other applicable
remedies, MCI shall be entitled to seek injunctive relief with respect to
any violation of this Paragraph 17.1. Any opportunity to cure a breach of
this Paragraph shall be subject to MCI's reasonable satisfaction as to the
curability of the original injury caused by such breach and the
effectiveness of any attempted cure. MCI's right to enforce this Paragraph
as a material provision of this Agreement shall not in any manner require a
showing of financial, legal or other loss or injury to MCI of any kind.
17.2 Customer agrees that it will obtain and maintain any and all
approvals to resell MCI Services hereunder from the FCC, including
requirements imposed by Section 214 of the Communications Act of 1934, as
amended, and state regulatory bodies. In the event Customer fails to obtain
or maintain the appropriate approvals, MCI shall not be liable for any
suspension of service or other delay or failure to provide MCI Services.
17.3 Customer shall have sole responsibility for interacting with its
customers in all matters pertaining to service, including the placing and
handling of service orders, service installation, operation and
termination, dispute handling and resolution, and billing and collection
matters. MCI shall incur no obligation, nor shall it be deemed to have any
obligation, to interact with Customer's customers and end users ("End
Users") for any reason or purpose. Customer shall cooperate with MCI as
necessary to address and resolve service-related issues and problems and
shall impose upon its customers an obligation to cooperate with Customer in
addressing and resolving service-related issues and problems.
17.4 Customer understands and accepts that, as part of MCI's normal
business policy and practices and its obligations under law, MCI will
engage in extensive marketing efforts in an attempt to sell its services to
the public and that such efforts will result in active competition with
Customer for the business of users who are Customer's End Users or
prospects, provided MCI will not use Confidential Information to actively
compete with Customer. Accordingly, Customer further understands and
accepts that such competition by MCI is in all respects fair and proper and
that Customer shall not complain, nor be heard to complain, of business
lost to MCI. Under no circumstance shall any inference be derived that
MCI's entry into this Agreement with Customer means that MCI will restrict
its efforts to compete against Customer in any way.
17.5 Customer understands and accepts that no fiduciary relationship
arises by virtue of this Agreement and that, accordingly, MCI incurs none
of the obligations that arise in such relationship as an incident of its
fulfilling its obligations under this Agreement. Further, Customer
understands and accepts that MCI neither
MCI CONFIDENTIAL
-12-
<PAGE>
insures the profits for Customer nor guarantees the success of Customer's
business as a result of Customer's receipt of service(s) under this
Agreement.
17.6 If Customer violates or fails to abide by its obligations in this
Paragraph 17 during the Service Term (or any extension of the Service Term) of
the Agreement, then MCI in its discretion may terminate the Agreement without
liability upon five (5) business days notice to Customer. Customer agrees to
indemnify and hold MCI harmless for any actions, claims, suits, losses or
damages (including attorneys' fees), arising out of or relating to any violation
or breach by Customer of its obligations under this Paragraph 17.
18. Signature Authorization.
-----------------------
The parties have duly executed and agreed to be bound by this Agreement as
evidenced by the signatures of their authorized representatives below.
Each party represents and warrants to the other that the signatory
identified beneath its name below has full authority to execute this
Agreement on its behalf.
19. Entire Agreement; Amendments.
----------------------------
This Agreement shall be valid only if signed by Customer by August 14,
1998, and if subsequently accepted by MCI. This Agreement, including the
Exhibits and Attachments hereto, constitutes the entire agreement between
the parties with respect to its subject matter. Any and all prior or
contemporaneous offers, agreements, representations and understandings with
respect thereto, whether written or oral, are hereby superseded. Exclusive
of any Tariff or state tariff modifications initiated by MCI, once this
Agreement has been executed, any amendments hereto must be made in writing
and signed by both parties.
IN WITNESS WHEREOF, the parties hereto each acting with proper authority have
executed this Agreement.
MCI TELECOMMUNICATIONS CORPORATION
By:
------------------------------
Print Name: Jon McGuire
---------------------
Title: Vice President
---------------------------
Date:
---------------------------
CONCENTRIC NETWORK CORPORATION
By:
------------------------------
Print Name:
----------------------
Title:
----------------------------
Date:
----------------------------
(carrier/chicago/tgc/concentriccarriertgc7/8-10-98)
MCI CONFIDENTIAL
-13-
<PAGE>
ATTACHMENT 1
GENERAL
- -------
The rates set forth in this Agreement do not include the following: charges
for MCI Services other than those set forth herein; non-Tariffed products;
access or egress (or related) charges, including without limitation, tariffed
access charges and access charges imposed by third parties; standard Tariffed
non-recurring charges; installation; taxes or tax-like surcharges, and other
tariffed charges, including without limitation, Universal Service Fund charges,
Primary Interexchange Carrier charges, National Access Fees, and payphone use
charges; which, to the extent applicable, are additional. Except as expressly
provided to the contrary, the rates set forth herein are in lieu of, and not in
addition to, any other discounts, promotions, and/or credits (tariffed or
otherwise).
1. Definitions
-----------
1.1 "ECC Locations" shall mean locations tariffed by MCI as extended call
coverage locations, including, without limitation, Alaska, Hawaii, Puerto Rico,
the U.S. Virgin Islands, Guam, the Northern Mariana Islands (Saipan), and
American Samoa.
1.2 For purposes of this Agreement, "LEC Groups" shall mean collectively the
groups set forth in Exhibit AA of this Attachment. Each LEC Group shall be
known by the heading assigned to it in Exhibit AA of this Attachment and shall
be comprised of the entity or entities ("Members") listed under said heading,
subject to the Program Review (as defined in Paragraph 4.2 above). The headings
in Exhibit AA of this Agreement are for reference and convenience only, and in
no way shall they define or limit the scope of each LEC Group. Any LEC which is
not listed in Exhibit AA of this Attachment shall be deemed a member of the
"All Other LECs " group, subject to the Program Review.
1.3 "Terminating LEC" and "Originating LEC" will mean the LEC to which an
outbound call terminates or an inbound call originates, based upon NPA/NXX
designations, or complete ANI information when systems capability is developed
to process such information, as determined in the Local Exchange Routing Guide
("LERG").
1.4 "Customer Location" shall mean a switch owned and operated or leased and
operated by Customer or a Customer-owned and operated point of presence (POP)
(i.e., a physical location at which a long distance carrier's or cellular
provider's network interfaces with the network of a LEC, to which the LEC
terminates subscribers circuits for cellular or long distance service).
1.5 "postalized rates" shall mean the non-distance sensitive per minute rates
set forth in this Agreement.
1.6 "Peak" period shall apply during business day or standard rate periods and
"Off Peak" shall apply during all other times.
2. Product Rates.
--------------
Customer shall receive the following rates during the Service Term for MCI
Services which outbound traffic originates and inbound traffic terminates at a
Customer Location. For all Intrastate Services, Customer shall pay the standard
Tariff rates.
MCI CONFIDENTIAL
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<PAGE>
2.1 MCI PRISM I Service.
2.1.1 Domestic Interstate PRISM 1 Service. For domestic interstate
switched outbound service originating via dedicated access from a Customer
Location to an MCI point of presence ("POP") (MCI PRISM I Service), except
for MCI PRISM I Service terminating to ECC Locations, which will be billed
at Tariff less applicable Tariff discounts (see Option H in the Tariff),
Customer will pay the following non-distance sensitive ("postalized") rate
per minute as determined by the terminating LEC Group and the applicable
rate period.
- ------------------------------------------------------------------
LEC Peak Off-Peak
- ------------------------------------------------------------------
AMERITECH [*]* [*]
AMERITECH IL [*] [*]
BELL ATLANTIC [*] [*]
BELL SOUTH [*] [*]
NYNEX [*] [*]
PAC BELL-CA [*] [*]
PAC BELL NV [*] [*]
SWB [*] [*]
US WEST [*] [*]
GTE 1 [*] [*]
GTE 2 [*] [*]
GTE 3 [*] [*]
GTE 4 [*] [*]
GTE 5 [*] [*]
MCI [*] [*]
NECA 1 [*] [*]
NECA 2 [*] [*]
NECA 3 [*] [*]
NECA 4 [*] [*]
ALIANT [*] [*]
CENTEL [*] [*]
CONTEL 1 [*] [*]
CONTEL 2 [*] [*]
SNET* [*] [*]
UNITED 1 [*] [*]
UNITED 2 [*] [*]
UNITED 3 [*] [*]
OTHER** [*] [*]
- ------------------------------------------------------------------
_______________________
[*] Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
MCI CONFIDENTIAL
-15-
<PAGE>
2.1.2 MCI PRISM I Service Credits. For domestic intrastate MCI PRISM I
Service, Customer shall pay standard tariff rates in each applicable MCI state
tariff. Customer shall receive an additional debit or credit determined by
subtracting the following rates from the applicable MCI domestic intrastate
tariffed rates for each minute of usage:
-----------------------------------
State Rate Per
Minute
-----------------------------------
Alabama [*]*
Arizona [*]
Arkansas [*]
California [*]
Colorado [*]
Connecticut [*]
Delaware [*]
Florida [*]
Georgia [*]
Idaho [*]
Illinois [*]
Indiana [*]
Iowa [*]
Kansas [*]
Kentucky [*]
Louisiana [*]
Maine [*]
Maryland [*]
Massachusetts [*]
Michigan [*]
Minnesota [*]
Mississippi [*]
Missouri [*]
Montana [*]
Nebraska [*]
Nevada [*]
New Hampshire [*]
New Jersey [*]
New Mexico [*]
New York [*]
North Carolina [*]
North Dakota [*]
Ohio [*]
Oklahoma [*]
Oregon [*]
_______________________
[*] Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
MCI CONFIDENTIAL
-16-
<PAGE>
Pennsylvania [*]*
Rhode Island [*]
South Carolina [*]
South Dakota [*]
Tennessee [*]
Texas [*]
Utah [*]
Vermont [*]
Virginia [*]
Washington [*]
West Virginia [*]
Wisconsin [*]
Wyoming [*]
The debit or credit amount shall be applied to Customer's domestic
interstate monthly usage charges. Such amount shall not exceed Customer's
domestic interstate monthly charges (excluding applicable taxes,
surcharges, and pass-through access/egress or related charges) and may not
be carried forward to the next month.
2.1.3 MCI International PRISM I Service. For MCI International PRISM I
Service originating via dedicated access from a Customer Location and
terminating in international countries, Customer shall pay the rates set
forth in Exhibit A of this Attachment 1. Where rates are not provided for
specific countries in Exhibit A, Customer shall pay Tariff rates less
applicable Tariff discounts.
2.2 MCI Toll Free Service.
2.2.1 Domestic Interstate MCI Toll Free DAL Service. For domestic
interstate inbound services terminating via dedicated access from an MCI
POP to a Customer Location (MCI Toll Free DAL Service), except for MCI Toll
Free DAL Service originating from ECC Locations as provided below, and
except for Peak toll free traffic as noted below, Customer will pay the
following postalized rate per minute as determined by the originating LEC
Group and Customer's Monthly Usage:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
[*] [*] [*]
--------------------------------------------------------------------------------------------------------
Originating LEC Peak Off-Peak Peak Off-Peak Peak Off-Peak
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AMERITECH [*]
AMERITECH IL
BELL ATLANTIC
BELL SOUTH
NYNEX
PAC BELL-CA
PAC BELL NV
SWB
US WEST
GTE 1
--------------------------------------------------------------------------------------------------------
</TABLE>
_______________________
[*] Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
MCI CONFIDENTIAL
-17-
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
[*] [*] [*]
--------------------------------------------------------------------------------------------------------
Originating LEC Peak Off-Peak Peak Off-Peak Peak Off-Peak
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GTE 2 [*]*
GTE 3
GTE 4
GTE 5
MCI
NECA 1
NECA 2
NECA 3
NECA 4
ALIANT
CENTEL
CONTEL 1
CONTEL 2
SNET
UNITED 1
UNITED 2
UNITED 3
OTHER
-------------------------------------------------------------------------------------------------------
</TABLE>
For MCI Toll Free DAL Service originating from ECC locations, Customer will
pay standard MCI tariffed rates, less applicable tariffed discounts (see
Option F in the Tariff).
2.2.2 Peak Surcharge. Customer agrees that during each month of the
Service Term, Customer's peak domestic interstate traffic for MCI Toll Free
DAL Service shall not exceed [*] of Customer's total domestic interstate
traffic for such service ("Peak Traffic Threshold"). Customer shall pay an
additional charge of $[*] per minute on all traffic exceeding the Peak
Traffic Threshold.
2.2.3 MCI Toll Free DAL Service Credits. For domestic intrastate MCI Toll
Free DAL Service, Customer shall pay standard tariff rates in each
applicable MCI state tariff. Customer shall receive a debit or credit
determined by subtracting the following rates from the applicable MCI
domestic intrastate tariffed rates for each minute of usage:
State Rate Per
Minute
------------------------------
Alabama [*]
Arizona [*]
Arkansas [*]
California [*]
Colorado [*]
Connecticut [*]
Delaware [*]
Florida [*]
_______________________
[*] Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
MCI CONFIDENTIAL
-18-
<PAGE>
Georgia [*]*
Idaho [*]
Illinois [*]
Indiana [*]
Iowa [*]
Kansas [*]
Kentucky [*]
Louisiana [*]
Maine [*]
Maryland [*]
Massachusetts [*]
Michigan [*]
Minnesota [*]
Mississippi [*]
Missouri [*]
Montana [*]
Nebraska [*]
Nevada [*]
New Hampshire [*]
New Jersey [*]
New Mexico [*]
New York [*]
North Carolina [*]
North Dakota [*]
Ohio [*]
Oklahoma [*]
Oregon [*]
Pennsylvania [*]
Rhode Island [*]
South Carolina [*]
South Dakota [*]
Tennessee [*]
Texas [*]
Utah [*]
Vermont [*]
Virginia [*]
Washington [*]
West Virginia [*]
Wisconsin [*]
Wyoming [*]
The debit or credit amount shall be applied to Customer's domestic
interstate monthly usage charges. Such amount in any month shall not exceed
Customer's domestic interstate monthly usage charges (excluding taxes,
_______________________
[*] Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
MCI CONFIDENTIAL
-19-
<PAGE>
surcharges, and pass through access/egress or related charges) and may not
be carried forward to the next month.
2.2.4 MCI Toll Free DAL Service Charges. For the domestic interstate MCI
Toll Free DAL Features noted below, Customer shall pay the charges listed
in Table A below, per each 800 number, except that Customer shall pay no
more than the maximum amount indicated in Table B below for the Toll Free
Features, for each Corporate I.D. For any Toll Free Feature not listed in
Table A below, Customer shall pay the Tariff rates in Sections 3.086 and
3.088 of the Tariff (or successor Tariff sections):
A.
--------------------------------------------------------------------
FEATURE (Charge is per 800 Monthly Install Changes
number):
-------------------------------------------------------------------
Basic Routing Feature Package: $[*]* $[*] $[*]
. Point of Call Routing
. MCI Exchange Routing
. Day of Week Routing
. Time Interval Routing
. Percentage Allocation Routing
. Sequential Allocation Routing
. MCI Quota Routing
. MCI Profile Routing
. Most Available Agent Routing
. MCI Rules Based Routing
Tailored Call Coverage
Holiday Routing
ID Codes (per 100)
DNIS
---------------------------------------------------------------------
B.
--------------------------------------------------------------------
Maximum Amounts on MCI Toll Free DAL Features (per Corporate ID):
--------------------------------------------------------------------
Monthly Recurring Charges: $[*]/Corp ID
Non-Recurring Install Charges: $[*]/Corp ID
Non-Recurring Change Order Charges: $[*]/Corp ID/month
--------------------------------------------------------------------
2.2.5 MCI International Toll Free DAL Service. For MCI Toll Free DAL
Service calls that originate in an international country and terminate in
the domestic United States via dedicated access (excluding service to ECC
Locations for which Customer shall pay Tariff rates less applicable Tariff
discounts), Customer shall receive a [*] discount off the standard Tariff
rates in Option F, Section 3.082121 (or any successor Tariff section) for
such service. Customer is not eligible to receive the MCI Toll Free Service
Value Insurance Plan Plus ("VIP Plus") or the MCI Toll Free Service Multi-
Option Discount ("Toll Free MOD") discounts set forth in the Tariff, for
MCI International Toll Free DAL Service.
2.2.6 International Toll Free DAL Service Originating in Canada. For
International Toll Free DAL Service traffic terminating via dedicated
access and originating in Canada, Customer will pay the postalized rate per
minute of $[*].
2.3 MCI Domestic Interstate Private Line Services.
_______________________
[*] Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
MCI CONFIDENTIAL
-20-
<PAGE>
2.3.1 DS-O, TDS 1.5 and TDS-45 (collectively or individually referred to
herein as "Private Line Service" or "Private Line Circuits") with [*]* or
greater domestic interstate traffic shall be deemed MCI domestic interstate
Private Line Service and Customer shall receive the rates set forth below.
Private Line Circuits with less than [*] domestic interstate traffic shall
be deemed MCI domestic intrastate Private Line Service and shall receive
standard tariff rates and shall contribute to Customer's Monthly Commitment
and any applicable subcommitments.
2.3.2 The following pricing is only for channelized or non-channelized
point to point Private Line Circuits. For channelized Private Line
Circuits, additional charges may apply. For domestic interstate Private
Line Service terminating at a Customer Location, Customer will pay, in
addition to all taxes and tax-related surcharges, the Inter-Office Channel
("IOC") monthly charges based on circuit mileage as set forth in the tables
below.
A. DS-0
Circuit Length Rate
-------------- ----
1-99 miles $[*] flat
100-599 miles $[*] per DS0 mile
600+ miles $[*] per DS0 mile
B. TDS 1.5
Circuit Length Rate
-------------- ----
1-49 miles $[*] flat
50-99 miles $[*] per DSO mile
100+ miles $[*] per DS0 mile
C. TDS 45
Circuit Length Rate
-------------- -----
1-50 miles $[*] flat
51-114 miles $[*] flat
115-250 miles $[*] per DSO mile
251+ miles $[*] per DS0 mile
2.3.3 In addition to all other charges described in this section, Customer
shall pay the following installation charge and monthly charges to cross
connect Private Line Circuits:
Access Type Monthly Rate Installation
------------ ------------ ------------
Per channel of
a T-1 [*] [*]
T-1 [*] [*]
DS-3 [*] [*]
2.3.4 The IOC monthly charges for domestic interstate Private Line
Services include all monthly recurring Central Office Connection ("COC")
and monthly recurring Access Coordination ("AC") and exclude all monthly
recurring access charges and monthly non-recurring charges for Private Line
Services. The rates for
_______________________
[*] Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
MCI CONFIDENTIAL
-21-
<PAGE>
domestic interstate Private Line Services provided herein are in lieu of
any promotions and discounts available from MCI in the Tariff or applicable
state tariff for the AC, COC and IOC portion of such service including,
without limitation, the Network Pricing Plan(s) specified in the Tariff.
2.3.5 Rates for domestic interstate Private Line Services are based on a
least mileage routing and the mileage per route is determined by using the
airline mileage between the two applicable MCI Dedicated Leased Line cities
in accordance with the calculation as set forth in Section C-11, Table I,
Part A of the Tariff. Rates for domestic interstate Private Line Service
shall apply only to circuits that are wholly-owned and operated end-to-end
by MCI. MCI will be under no obligation to obtain or provide, by lease or
otherwise, any circuit not available on MCI's network at the time an order
is placed by Customer for such circuit. If MCI, in its discretion, elects
to obtain a circuit for Customer where MCI circuits are otherwise
unavailable, the rates herein will not apply and the parties shall agree
upon applicable charges for such circuit prior to MCI obtaining such
circuit.
2.3.6 The rates for domestic interstate Private Line Services provided
herein are in lieu of any rates, charges, promotions and discounts
available from MCI in the Tariff or applicable state tariff for the AC, COC
and IOC portion of such service including, without limitation, the Network
Pricing Plan(s) specified in the Tariff.
2.3.7 The provisioning of domestic interstate Private Line Service is
based upon service availability, as determined by MCI. The availability of
domestic interstate Private Line Service is limited and MCI does not
guarantee the provisioning of such service. Customer's ability to comply
with the Monthly Commitment set forth in Paragraph 2, shall not be
contingent upon the provisioning of domestic interstate Private Line
Service.
2.3.8 Customer shall receive a recurring monthly discount of [*]* on
Customer's total monthly usage for dedicated Private Line Service (Local
Loop), e.g., dedicated Private Line and dedicated voice services, utilizing
T-1 and DS-3 circuits, provided, Customer has such circuits located at MCI
facilities or locations or has otherwise provided for local access.
Customer shall not be obligated to pay any AC or COC charges as set forth
in the Tariff for such circuits.
3. Domestic HyperStream Frame Relay Service.
Customer will receive the standard hpp discount associated with a [*] Monthly
Minimum and two (2) year term of service as set forth in the Tariff. This
discount shall not apply to the following: charges for MCI services other than
those described in Section 2; non-tariffed products; access or egress (or
related) charges imposed by third parties; Directory Assistance charges;
standard tariffed non-recurring charge; taxes and tax-related surcharges; and
government surcharges.
4. Directory Assistance.
For domestic interstate directory assistance, Customer will pay, in addition to
all applicable federal, state and local taxes and surcharges, $[*] per
call. in each month in which Customer's total number of domestic interstate
directory assistance calls equals or exceeds [*], the above postalized rate
for directory assistance shall be reduced by $[*] per call.
5. MCI Carrier Debit Card.
_______________________
[*] Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
MCI CONFIDENTIAL
-22-
<PAGE>
5.1 Customer shall utilize MCI for the debit card platform and transport
of Customer's domestic interstate termination of debit card traffic. Debit
card units shall be as defined in the Tariff (hereinafter "Debit Card
Units"). The rates below shall include access to the MCI debit card
platform, transport, order entry and debit card activation. customer shall
pay the following rate per Debit Card Unit, as determined by the number of
Debit Card Units purchased by customer in each individual purchase, and not
determined by the aggregate number of debit card units purchased throughout
the service term. The rates listed below do not include operator services.
If Customer chooses to purchase mci operator services, pursuant to the
terms and conditions of the tariff, an additional $[*]* per Debit Card Unit
shall be added to the rates below. The rates listed below do not include
customer services. If Customer chooses to purchase MCI customer services,
pursuant to the terms and conditions of the Tariff, an additional $[*] per
Debit Card Unit shall be added to the rates below.
Total Units
Per Order Rate Per Unit
----------- -------------
50,000 - 300,000 [*]
300,001 - 600,000 [*]
600,001 - 900,000 [*]
900,001 - 2,000,000 [*]
2,000,001 - 5,000,000 [*]
5.2 Customer shall order a minimum of [*] Units per order. Notwithstanding
Paragraph 6 of the Agreement, Customer shall pay MCI for all orders under
this Paragraph 5 before fulfillment of such orders.
5.3 Customer's Debit Card Units will only be reduced by the Debit Card
Units utilized by completed calls (calls that are answered at the ultimate
destination). MCI shall determine the number of Debit Card Units necessary
to receive one minute of international calling ("Depletion Schedule").
Presently the depletion schedule is in accordance with Option Y, Section
C.3.2.6 of the Tariff (or any successor Tariff section) ("Tariff depletion
schedule"). MCI retains the right to develop and implement (upon thirty
(30) day prior notice) a separate and distinct depletion schedule which
shall supersede the Tariff depletion schedule. Customer shall receive no
refund or reimbursement for unused Debit Card Units.
5.4 In addition to the above rates, Customer shall pay an additional [*]
charge for each customized script identifying Customer to its end user.
5.5 Unless otherwise provided herein, Customer shall be solely responsible
for all debit card fulfillment, customer service and any operator services.
5.6 Customer shall not include MCI's name or logo on any Customer debit
card.
5.7 The debit card is a non-replenishable promotion card.
6. MCI Feature Card Service.
Customer will receive the rates, terms and conditions for MCI Feature Card
Service set forth in Exhibit B of this Attachment 1 and the Attachment to
Exhibit B.
7. Network MCI Conferencing.
_______________________
[*] Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
MCI CONFIDENTIAL
-23-
<PAGE>
7.1 If Customer elects to use network MCI Conferencing, Customer agrees
that during each monthly billing period of the Service Term Customer will
purchase from MCI at [*]* of networkMCI Conferencing Service (net of taxes
and tax-related surcharges) ("Conference Calling Subcommitment"). If
Customer fails to equal or exceed such subcommitment, Customer will pay the
amount billed plus the difference between the amount billed and the
Conference Calling Subcommitment. In no event shall this amount exceed the
Conference Calling Subcommitment.
7.2 For the types of domestic interstate networkMCI Conferencing
("Conferencing") specified below, Customer shall pay (in addition to all
applicable taxes and tax-related surcharges), the following postalized
rates per minute per bridge port used, with rounding to the next higher
full minute. The per minute rates shall not include Tariff set-up fees,
which are waived. Such rates for domestic interstate networkMCI
Conferencing are in lieu of Tariff rates described in Section C.17211 and
C.1741, and also in lieu of any volume discounts or promotions. All other
fees and charges for the service shall be at Tariff rates.
7.3 For domestic interstate Toll Meet Me Service, Customer shall
pay (in addition to all applicable taxes and tax-related surcharges) the
postalized rate of $[*] per minute per bridge port used during all
conference calling.
7.4 For domestic interstate Dial-Out Service and Toll Free Meet Me
Services, Customer shall pay (in addition to all applicable taxes and tax-
related surcharges), the following postalized rates per minute per bridge
port used, on all networkMCI Conferencing and as determined by Customer's
total monthly net networkMCI Conferencing usage measured at the postalized
rate of $[*] per minute per bridge port.
Total Monthly Net
networkMCI Rate
Conferencing Usage Per Minute
------------------ ----------
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
7.5 For domestic interstate Unattended Meet Me Service, Customer shall pay
(in addition to all applicable taxes and tax-related surcharges), the
following postalized rates per minute per bridge port used during all
Conferencing as determined by Customer's total monthly net networkMCI
Conferencing usage measured at the postalized rate of [*] per minute per
bridge port.
_______________________
[*] Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
MCI CONFIDENTIAL
-24-
<PAGE>
Total Monthly Net
networkMCI Rate
Conferencing Usage Per Minute
------------------ ----------
[*]* [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
7.6 In order to receive the rates set forth in subsections 7.3, 7.4
and 7.5 above, Customer must fulfill the following criteria throughout the
term:
(a) Customer shall provide a toll free line to Customer's end-users
exclusively used for customer service purposes; and
(b) Customer shall provide a toll free line to the MCI Conference
Center exclusively used for reservations; and
(c) Customer shall provide its own customer service personnel and
access.
7.7 MCI shall provide to Customer: (i) generic branding for inbound
conference calls; and (ii) customized branding for inbound calls for
reservation services. However, MCI shall not provide billing services to
Customer's end-users.
8. Credits and Additional Discounts.
---------------------------------
8.1 MCI Private Line Discount. During each monthly period of the Service Term
in which Customer meets its Monthly Commitment, Customer will receive a
discount on that months IOC charges for MCI domestic interstate Private
Line Services relating to usage of domestic interstate T-1 and DS-3
circuits as set forth in Section 2.3 of this Attachment 1, net of access
charges, taxes and tax-related surcharges ("Monthly Private Line Revenue").
This discount will be a percentage of Customer's Monthly Private Line
Revenue, as determined by the following schedule:
Monthly Private
Line Revenue Discount
------------ --------
[*] [*]
8.2 Installation Credit.
Customer shall receive a credit of up to [*] which shall be applied to the
one-time installation and other non-recurring MCI Tariff charges (not
including local exchange carrier or other third party access provider
charges) associated with the implementation of DS-0, TDS 1.5 and TDS-45
Private Line Service. Customer will be entitled to the credits specified in
this paragraph, provided that (i) the credits shall only apply to circuits
ordered and installed during the Service Term of this Agreement; and (ii)
each circuit must remain in service
_______________________
[*] Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
MCI CONFIDENTIAL
-25-
<PAGE>
with MCI for at least twelve (12) months after the date of initial
installation, unless terminated to be replaced by another circuit with MCI
of equal or greater length. Customer shall reimburse MCI for the prorated
portion of any credits received for any such circuits terminated and not
replaced by another circuit with MCI of equal or greater length.
8.3 MCI Private Line Discount. All MCI OC-3 or OC-12 point to point
Private Line circuits provided to Customer under this Agreement will
receive any applicable standard Tariff discounts.
-26-
<PAGE>
EXHIBIT AA
LEC GROUPS
----------
MCI CONFIDENTIAL
A-1
<PAGE>
EXHIBIT A
Prism I International Rates
Customer will receive the following rates based on total monthly usage.
- --------------------------------
COUNTRY [*]*
Angola
Anguilla
Antigua
Argentina
Aruba
Australia
Austria
Bahamas
Bahrain
Bangladesh
Barbados
Belgium
Belize
Benin
Bermuda
Bolivia
Brazil
British Virgin Islands
Cambodia
Cameroon
Canada
Cayman Islands
Chile
China
Colombia
Costa Rica
Croatia
Cyprus
Czech Republic
Denmark
Dominica
Dominican Republic
Ecuador
Egypt
El Salvador
Ethiopia
Finland
France
- -------------------------------
_______________________
[*] Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
MCI CONFIDENTIAL
A-2
<PAGE>
- -------------------------------
Gambia [*]*
Germany
Ghana
Greece
Grenada
Guadeloupe
Guam
Guatemala
Guinea
Guyana
Haiti
Honduras
Hong Kong
Hungary
Iceland
India
Indonesia
Iran
Iraq
Ireland
Israel
Italy
Ivory Coast
Jamaica
Japan
Jordan
Kenya
Korea, South
Kuwait
Lebanon
Liberia
Luxembourg
Malaysia
Mexico Band 1 Day
Mexico Band 1 Night
Mexico Band 2 Day
Mexico Band 2 Night
Mexico Band 3 Day
Mexico Band 3 Night
Mexico Band 4 Day
Mexico Band 4 Night
Mexico Band 5 Day
Mexico Band 5 Night
Mexico Band 6 Day
Mexico Band 6 Night
- -------------------------------
_______________________
[*] Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
MCI CONFIDENTIAL
A-3
<PAGE>
- -------------------------------------------
Mexico Band 7 Day [*]*
Mexico Band 7 Night
Mexico Band 8 Day
Mexico Band 8 Night
Morocco
Mozambique
Myanmar
Netherlands
Netherlands Antilles
New Caledonia
New Zealand
Nicaragua
Nigeria
Norway
Oman
Pakistan
Panama
Paraguay
Peru
Philippines
Poland
Portugal
Qatar
Romania
Russia
Sao Tome And Principe
Saudi Arabia
Senegal
Sierra Leone
Singapore
South Africa
Spain
Sri Lanka
St. Kitts
St. Lucia
St. Vincent And Grenadines
Suriname
Sweden
Switzerland
Syria
Taiwan
Tanzania
Thailand
Togo
Trinidad And Tobago
- ---------------------------------------
_______________________
[*] Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
MCI CONFIDENTIAL
A-4
<PAGE>
- -------------------------------------------
Tunisia [*]*
Turkey
Turks And Caicos Islands
Uganda
Ukraine
United Arab Emirates
United Kingdom
Uruguay
Venezuela
Vietnam
Yemen
Zaire
Zambia
Zimbabwe
- -------------------------------------------
[*] Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
MCI CONFIDENTIAL
A-5
<PAGE>
EXHIBIT B
MCI FEATURE CARD SERVICE AND
ASSOCIATED FEATURE SERVICES DISCOUNT
A. MCI Feature Card Service (Option T).
When used under this Paragraph A, MCI Feature Card Service shall refer to
such service only as accessed by dialing the unique 800 access number
assigned by MCI to the MCI Feature Card Service.
1) For domestic (i.e., within the U.S., but excluding ECC Locations)
interstate usage of MCI Feature Card (exclusive of monthly recurring
charges, taxes, surcharges, installation charges, MCI Feature Card
surcharges, Directory Assistance charges, charges for local access/egress
services or facilities, and enhanced feature charges associated with MCI
Feature Card Service), Customer shall pay a postalized rate of $[*]* per
minute.
2) (a) For domestic intrastate usage of MCI Feature Card (exclusive of
monthly recurring charges, taxes, surcharges, installation charges, MCI
Feature Card surcharges, Directory Assistance charges, charges for local
access/egress services or facilities, and enhanced feature charges
associated with MCI Feature Card Service), Customer shall pay standard
tariff rates for MCI Feature Card Service in each applicable MCI state
tariff.
(b) Customer shall receive a credit for domestic intrastate usage of
MCI Feature Card Service, which when combined with the rates identified in
2(a) above, shall yield the postalized rate of $[*] per minute (exclusive
of monthly recurring charges, taxes, surcharges, installation charges, MCI
Feature Card surcharges, Directory Assistance charges, charges for local
access/egress services or facilities, and enhanced feature charges
associated with MCI Feature Card Service).
(c) The credit amount in 2(b) above shall be applied to Customer's
domestic interstate monthly usage charges (exclusive of monthly recurring
charges, taxes, surcharges, installation charges, MCI Feature Card
surcharges, Directory Assistance charges, charges for local access/egress
services or facilities and enhanced feature charges associated with the MCI
Feature Card Service). The credit amount in any month shall not exceed such
interstate monthly usage charges and shall not be carried forward to any
subsequent month.
3) During each month of the Service Term, Customer shall receive a
credit calculated by multiplying [*] times Customer's domestic interstate,
intrastate (after application of the credit described in Paragraph 2(b)
above) and international usage charges of MCI Feature Card Service
(exclusive of monthly recurring charges, taxes, surcharges, installation
charges, MCI Feature Card surcharges, Directory Assistance charges, charges
for local access/egress services or facilities, and enhanced feature
charges associated with MCI Feature Card Service). The credit amount shall
be applied to Customer's domestic interstate monthly usage charges
(exclusive of monthly recurring charges, taxes, surcharges, installation
charges, MCI Feature Card surcharges, Directory Assistance charges, charges
for local access/egress services or facilities and enhanced feature charges
associated with the MCI Feature Card Service). The credit amount in any
month shall not exceed such interstate monthly usage charges and shall not
be carried forward to any subsequent month.
4) The following MCI Feature Card surcharges shall be charged
according to the following schedule:
_______________________
[*] Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
MCI CONFIDENTIAL
-1-
<PAGE>
<TABLE>
<CAPTION>
FROM TO Direct
---- -- ------
Dial
------
<S> <C> <C>
United States ("U.S") U.S. [*]*
U.S. U.S., within the same State(domestic intrastate)
U.S. ECC Locations
ECC Locations U.S.
ECC Locations Canada
ECC Locations International Locations (other than Canada)
Canada ECC Locations
Canada International Locations
</TABLE>
5) The above discounts for MCI Feature Card Service are in lieu of any
Tariff discounts including, without limitation, the discounts for MCI
Feature Card Service available under MCI VIP, MCI VIP Plus, MCI MOD and MCI
CAS Service.
6) For MCI Feature Card Service, if Customer elects to use MCI for
fulfillment, Customer shall pay MCI the fulfillment costs associated with
Customer's usage of MCI Feature Card Service plus an administrative charge
for handling fulfillment in an amount equal to fifteen percent (15%) of the
fulfillment costs.
7) For MCI Feature Card Service, MCI shall provide the fraud detection
procedures set forth in the Attachment to Exhibit B attached hereto, and
incorporated herein by reference. Customer shall be responsible for all
fraud associated with its usage of MCI Feature Card Service, except as set
forth in the Attachment to Exhibit B.
B. Discounts on Non-Tariffed Feature Services.
1) Customer will be entitled to the following applicable incremental
discounts on Customer's usage of non-tariffed Feature Card Services (MCI
Messenger Service, *3 Flexible Routing for Voice Mail, Voice News Network
and Speed Dialing) as determined by Customer's Non-Tariffed Feature
Services Monthly Usage (as defined below):
Non-Tariffed
Feature Services
Monthly Usage Discount
---------------- --------
[*]
The above discounts shall apply only to Customer's usage of non-tariffed
Feature Services provided pursuant to MCI's standard terms and conditions
for such services, but not to charges for installation, taxes or
_______________________
[*] Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
MCI CONFIDENTIAL
-2-
<PAGE>
surcharges, and charges for local access/egress services or facilities
associated with non-tariffed Feature Services.
2) Non-Tariffed Feature Services Monthly Usage shall mean Customer's
monthly combined recurring and usage charges for non-tariffed Feature
Services at standard pricing but not including taxes (and gross receipts
taxes), surcharges, and any charges for MCI Tariff or state tariff
services.
C. Discounts on Tariffed Feature Services.
1) Customer will be entitled to the following applicable incremental
discounts on Customer's usage of tariffed Feature Card Services (i.e.,
conference calling) as determined by Customer's Tariffed Feature Services
Monthly Usage (as defined below):
Tariffed
Feature Services
Monthly Usage Discount
------------- --------
[*]*
The above discounts shall apply only to Customer's usage of tariffed
Feature Services provided pursuant to MCI's standard terms and conditions
for such services, but not to charges for installation, taxes or
surcharges, and charges for local access/egress services or facilities
associated with tariffed Feature Services.
2) Tariffed Feature Services Monthly Usage shall mean Customer's
monthly combined recurring and usage charges for tariffed Feature Services
at standard pricing but not including taxes (and gross receipts taxes),
surcharges, and any charges for MCI Tariff or state tariff services.
_______________________
[*] Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
MCI CONFIDENTIAL
-3-
<PAGE>
ATTACHMENT TO EXHIBIT B
MCI FEATURE CARD FRAUD DETECTION PROCEDURES
-------------------------------------------
All calling card calls will be validated by MCI to permit only those calls
authorized or facilitated by Customer or legitimate card holders. MCI will, at
the direction of Customer, preclude all calls utilizing expired or terminated
calling card numbers compared against an authorized list provided by Customer
and will be responsible for all fraudulent use, unauthorized use, misuse, or
abuse of calling cards occurring after MCI receives actual notice of the
expiration or termination of a calling card or receives specifically detailed
written notification concerning any card which has been lost, stolen,
compromised or which Customer has reason to believe is or may be used
fraudulently. MCI will deactivate a calling card within four (4) hours of
receipt by MCI's Consumer Markets Fraud Detection of a request by Customer.
In addition, all calling card calls will be monitored by MCI for fraudulent use,
unauthorized use, misuse or abuse on a twenty four (24) hour a day, seven (7)
days a week basis. MCI shall establish fraud prevention, detection and
minimization procedures so that fraudulent use arising from lost or stolen
calling cards and potential disruption to authorized card holders will be
minimized.
MCI will not hold the Customer responsible for "service fraud" associated with
the unauthorized use of an MCI calling card. "Service fraud" can best be
described as unauthorized use of an MCI calling card following the involuntary
theft or loss of a card which was not intentionally facilitated or impliedly
authorized by Customer or an authorized user. "Service fraud" often follows the
theft of a wallet, purse or briefcase, or sometimes is the result of "shoulder
surfing" (thieves observing/recording authorization codes) which occurs at
payphones located in airports, bus terminals, train stations and the like. MCI
shall not be responsible for losses caused by fraudulent information submitted
by a card holder in subscribing for calling card services or for usage which was
intentionally facilitated or impliedly authorized by an authorized user.
In the event that MCI is unable to contact Customer of suspected abuse of the
calling card, in order to minimize potential abuse, MCI will deactivate any
calling card which has exceeded established fraud detection parameters or which
MCI has reason to believe is or may be used fraudulently.
MCI CONFIDENTIAL
B-1
<PAGE>
ATTACHMENT 2
LETTER OF AGENCY
----------------
ATTENTION: Concerned Local Operating Companies, AT&T and other Common Carriers
and All Equipment Vendors
The undersigned appoints MCI Telecommunications Corporation or any of its
affiliated companies ("MCI") as agent for the purpose of ordering, in connection
with MCI's provision of service to the undersigned, changes in and/or
maintenance on specific telecommunications service that you provide to the
undersigned including, without limitation, removing, adding to or rearranging
such telecommunications service.
You are hereby released from any and all liability for making pertinent
information available to MCI and for following MCI's instructions with respect
to any changes to or maintenance on the undersigned's telecommunications
service. You may deal directly with MCI on all matters pertaining to
telecommunications service and should follow instructions with respect thereto.
This authorization will remain in effect until modified or rescinded in writing
by the undersigned.
Signed this _______ day of ___________, 1998.
CONCENTRIC NETWORK CORPORATION
By:
--------------------------
Authorized Customer Signature
- -----------------------------
Name/Title
- -----------------------------
Date
MCI CONFIDENTIAL
I-1
<PAGE>
LEC Exhibit
[*]
- ------------
* Certain information in this exhibit has been omitted and filed
separately with the Securities and Exchange Commission. A total of 25 pages has
been omitted. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE>
Execution Copy
Exhibit 10.60
STOCK PURCHASE AGREEMENT
by and between
CONCENTRIC NETWORK CORPORATION, As Issuer
and
SOUTHWESTERN BELL INTERNET SERVICES, INC.,
As Investor
October 19, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
SECTION 1. Definitions................................................ -1-
1.1. Defined Terms........................................ -1-
1.2. Other Terms.......................................... -4-
1.3. Other Definitional Provisions........................ -5-
SECTION 2. Issuance and Sale of Common Stock.......................... -5-
SECTION 3. Representations and Warranties of
---------------------------------
the Company................................................ -6-
-----------
(a) Organization; Corporate Power........................ -6-
(b) Capital Stock and Related Matters.................... -6-
(c) Subsidiaries; Investments............................ -7-
(d) Authorization; No Breach............................. -8-
(e) Company Reports; Financial
Statements........................................... -9-
(f) No Material Adverse Change.......................... -10-
(g) Absence of Certain Developments..................... -10-
(h) Contracts and Commitments........................... -11-
(i) Intellectual Property Rights........................ -12-
(j) Litigation, etc. ................................... -14-
(k) Brokerage........................................... -14-
(l) Compliance with Laws................................ -14-
(m) Affiliated Transactions............................. -15-
SECTION 4. Representations and Warranties of
--------------------------------
the Investor.............................................. -15-
------------
(a) Execution; Authorization; No
Contravention....................................... -16-
(b) Securities Act...................................... -16-
(c) Brokerage........................................... -17-
SECTION 5. Covenants................................................. -17-
---------
(a) Inspection Rights................................... -17-
(b) Confidentiality..................................... -17-
(c) Filings............................................. -18-
(d) Reservation of Common Stock......................... -18-
(e) Further Assurances.................................. -18-
(f) Board Representations............................... -18-
(g) Repurchases by the Company.......................... -19-
SECTION 6. Conditions................................................ -19-
----------
6.1. Conditions to Each Party's Obligation to
Effect the Closing.................................. -19-
(a) Regulatory Consents........................... -19-
(b) Litigation.................................... -19-
-i-
<PAGE>
(c) Trial Agreement............................... -20-
6.2. Conditions to Obligations of
Investor............................................ -20-
(a) Representations and Warranties................ -20-
(b) Performance of Obligations of the
Company....................................... -20-
(c) Legal Opinion................................. -20-
6.3. Conditions to Obligation of the
Company............................................. -20-
(a) Representations and Warranties................ -20-
(b) Performance of Obligations of
Investor...................................... -21-
SECTION 7. Termination............................................... -21-
-----------
7.1. Termination by Mutual Consent....................... -21-
7.2. Termination by Either Investor or the Company....... -21-
7.3. Termination by the Company.......................... -21-
7.4. Termination by Investor............................. -21-
7.5. Effect of Termination and
Abandonment......................................... -22-
SECTION 8. Investor's Transfer Restrictions.......................... -22-
--------------------------------
SECTION 9. The Company's Right of First Refusal...................... -23-
------------------------------------
SECTION 10. Survival and Indemnification.............................. -24-
----------------------------
Survival of Representations, Warranties,
Covenants and Agreement Knowledge of Breach;
Indemnification........................................... -24-
SECTION 11. Miscellaneous............................................. -25-
-------------
(a) Expenses............................................ -25-
(b) Public Disclosure................................... -25-
(c) Successors and Assigns; Assignment.................. -26-
(d) Remedies............................................ -26-
(e) Amendments and Waivers.............................. -26-
(f) Severability........................................ -26-
(g) Counterparts........................................ -26-
(h) Descriptive Headings................................ -26-
(i) Governing Law....................................... -27-
(j) Notices............................................. -27-
(k) Entire Agreement.................................... -27-
(l) Definition of Knowledge............................. -28-
<PAGE>
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (the "Agreement") is entered into as of
---------
October 19, 1998 by and between CONCENTRIC NETWORK CORPORATION, a Delaware
corporation (the "Company"), and SOUTHWESTERN BELL INTERNET SERVICES, INC., a
-------
Delaware corporation (the "Investor").
--------
RECITALS:
--------
WHEREAS, the Company desires to issue and sell to the Investor, and
the Investor desires to purchase and acquire from the Company the shares of
Common Stock and Warrants (as defined herein).
AGREEMENT:
---------
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties to this Agreement hereby agree as follows:
SECTION 1. Definitions.
-----------
1.1. Defined Terms. For the purposes of this Agreement, the
-------------
following terms have the meanings set forth below:
"Affiliate" means any Person that directly or indirectly, through one
---------
or more intermediaries, has control of or is controlled by, or is under common
control with, the Person specified.
"Agreement" shall have the meaning set forth in the first paragraph
---------
of this Agreement.
"Antitrust Authorization Condition" shall have the meaning set forth
---------------------------------
in Section 2(b).
"Antitrust Division" shall mean the Antitrust Division of the United
------------------
States Department of Justice.
"Audit Date" shall have the meaning set forth in Section 3(e).
----------
<PAGE>
"Balance Sheet Data" shall have the meaning set forth in Section
------------------
3(e).
"Business" means all business operations and activities currently
--------
conducted by the Company and its Subsidiaries.
"Common Stock" means the common stock, par value $0.001 per share,
------------
of the Company.
"Company" shall have the meaning set forth in the first paragraph of
-------
this Agreement.
"Company Reports" shall have the meaning set forth in Section 3(e).
---------------
"Contracts" shall have the meaning set forth in Section 3(i).
---------
"Deductible" shall have the meaning set forth in Section 8.
----------
"FTC" shall mean the Federal Trade Commission.
---
"GAAP" shall have the meaning set forth in Section 3(e).
----
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements
-------
Act of 1976, as amended.
"Intellectual Property Rights" means all (i) patents, patent
----------------------------
applications, patent disclosures and inventions, (ii) trademarks, service marks,
trade dress, trade names, logos and corporate names and registrations and
applications for registration thereof together with all of the goodwill
associated therewith, (iii) copyrights (registered or unregistered) and
copyrightable works and registrations and applications for registration thereof,
(iv) mask works and registrations and applications for registration thereof, (v)
computer software, data, data bases and documentation thereof and (vi) trade
secrets and other confidential information (including, without limitation,
tangible and intangible proprietary information, ideas, formulas, compositions,
inventions (whether patentable or unpatentable and whether or not reduced to
practice), processes, know-how, manufacturing and production
-2-
<PAGE>
processes and techniques, research and development information, drawings,
schematics, specifications, designs, plans, proposals, technical data,
technology, copyrightable works, financial and marketing plans and customer and
supplier lists and information).
"Internex" shall mean Internex Information Services, Inc.
--------
"Investor" shall have the meaning set forth in the first paragraph
--------
of this Agreement.
"Lien" means any mortgage, pledge, security interest, encumbrance,
----
lien or charge of any kind (including, without limitation, any conditional sale
or other title retention agreement or lease in the nature thereof), any filing
or agreement to file a financing statement as debtor under the Uniform
Commercial Code of the applicable jurisdiction or any similar statute other than
to reflect ownership by a third party of property leased to the Company or any
Subsidiaries under a lease which is not in the nature of a conditional sale or
title retention agreement.
"Material Adverse Effect" shall mean a material adverse effect on the
-----------------------
financial condition, operating results, assets, operations or prospects of the
Company and its Subsidiaries taken as a whole.
"Person" means any individual, partnership, corporation, association,
------
joint stock company, trust, joint venture, unincorporated organization or
governmental entity or department, agency or political subdivision thereof.
"Preferred Stock" shall have the meaning set forth in Section 3(b).
---------------
"Purchase Price" shall have the meaning set forth in Section 2(a).
--------------
"Regulatory Relief Date" shall mean the date on which Investor or its
----------------------
Affiliates have, in their sole reasonable judgment, obtained any or all
necessary federal and/or state regulatory approvals to provide landline,
interLATA long-distance service in any of Investor's or its Affiliates' in-
region states pursuant to the Communications Act of 1934, as amended by the
Telecommunications Act of 1996.
-3-
<PAGE>
"SEC" shall mean the Securities and Exchange Commission.
---
"Securities Act" means the Securities Act of 1933, as amended, and the
--------------
rules and regulations of the Securities and Exchange Commission promulgated
thereunder.
"Securities Exchange Act" means the Securities Exchange Act of 1934,
-----------------------
as amended, and the rules and regulations of the Securities and Exchange
Commission promulgated thereunder.
"Subsidiary" of any specified Person or entity means a corporation or
----------
other entity of which the majority of the voting power of the equity securities
or other equity interests is owned, directly or indirectly, by such specified
Person or entity or any Subsidiary of such specified Person or entity.
"Transaction Documents" means this Agreement and the Warrant
---------------------
Certificate.
"Warrant Certificate" shall mean the certificate evidencing the
-------------------
Warrants, substantially in the form of Exhibit A.
"Warrants" shall mean the warrants to purchase Common Stock at an
--------
exercise price of $21.00 per share, evidenced by the Warrant Certificate to be
issued to the Investor.
"Year 2000 Issue" with respect to any person shall mean any
---------------
significant risk that computer hardware, software or equipment containing
embedded microchips utilized in the business or operations of such person will
not, in the case of dates or time periods occurring after December 31, 1999,
function at least as effectively and reliably as in the case of times or time
periods occurring before January 1, 2000, including the making of accurate leap
year calculations.
1.2. Other Terms. Other terms may be defined elsewhere in the text
-----------
of this Agreement and, unless otherwise indicated, shall have such meaning
indicated throughout this Agreement.
-4-
<PAGE>
1.3. Other Definitional Provisions. (a) The words "hereof",
-----------------------------
"herein", and "hereunder" and words of similar import, when used in this
Agreement, shall refer to this Agreement as a whole and not to any particular
provision of this Agreement.
(b) The terms defined in the singular shall have a comparable
meaning when used in the plural, and vice versa.
(c) The terms "dollars" and "$" shall mean United States Dollars.
SECTION 2. Issuance and Sale of Common Stock.
---------------------------------
(a) At the closing of the transactions contemplated hereby (the
"Closing"), (i) the Company will issue and sell to the Investor 906,679 shares
of Common Stock, subject to a reduction by the number of shares of Common Stock
the Investor purchases on the open market prior to the Closing and 906,679
Warrants and will deliver to the Investor the certificate(s) for such Common
Stock and the Warrant Certificate and (ii) the Investor will purchase such
shares and Warrants from the Company for an aggregate consideration consisting
of $21,896,297.85 (less $24.15 times the number of shares of Common Stock
purchased on the open market) (the "Purchase Price"), and will pay at the
--------------
Closing the Purchase Price by wire transfer to the Company into the account
designated by the Company no later than seven business days prior to the Closing
Date (as hereinafter defined).
(b) Subject to Section 6 hereof, the Closing will occur at the
Company's executive offices at 10:00 a.m. on the later of thirty days from the
execution of this Agreement or five business days after satisfaction of the
Antitrust Authorization Condition (the "Closing Date"). As used herein, the
term "Antitrust Authorization Condition" shall mean that the waiting period
applicable under the HSR Act to the issuance to the Investor of shares of Common
Stock and the exercise of the Warrants shall have expired or early termination
shall have been granted with respect thereto.
-5-
<PAGE>
SECTION 3. Representations and Warranties of the Company.
---------------------------------------------
As a material inducement to the Investor to enter into this Agreement
and purchase the Common Stock and Warrants hereunder, the Company hereby
represents and warrants that as of the date hereof and as of the Closing:
(a) Organization; Corporate Power. The Company is a corporation
-----------------------------
duly organized, validly existing and in good standing under the laws of the
State of Delaware and is qualified to do business in every jurisdiction in which
it is required to be qualified, except where the failure to so qualify has not
had and would not reasonably be expected to have a Material Adverse Effect. The
Company possesses all requisite corporate power and authority and all licenses,
permits and authorizations necessary to own and operate its properties and to
carry on the Business, subject to such exceptions as have not had and are not
reasonably expected to have a Material Adverse Effect. The Company has delivered
to Investor correct and complete copies of the Company's certificate of
incorporation and by-laws reflecting all amendments made thereto at any time
prior to the date of this Agreement.
(b) Capital Stock and Related Matters.
---------------------------------
(i) The authorized capital stock of the Company consists of
110,000,000 shares of Common Stock, of which 14,899,822 shares were issued and
outstanding as of the date hereof and 10,000,000 shares of Preferred Stock,
$.001 par value, of which 154,657 shares of Series B Preferred Stock (the
"Preferred Stock") were issued and outstanding as of the date hereof. Except as
contemplated by the Transaction Documents and except for 3,441,044 shares of
Common Stock reserved for issuance pursuant to employee and director stock
option grants, 890,686 shares of Common Stock reserved pursuant to employee and
director stock and option plans (as to which grants have not been made) and
warrants to purchase 2,512,757 shares of Common Stock, neither the Company nor
any Subsidiary has outstanding any stock or securities convertible or
exchangeable for any shares of its capital stock, nor does it have outstanding
any rights, options or warrants to subscribe for or to purchase its capital
stock or any stock or securities convertible into or exchangeable for its
capital stock or any stock appreciation rights or phantom stock plans, nor has
it reserved any shares of capital stock for issuance upon exercise or conversion
of any
-6-
<PAGE>
rights, options or warrants to subscribe for or to purchase its capital stock or
any stock or securities convertible into or exchangeable for its capital stock.
Neither the Company nor any Subsidiary is subject to any obligation (contingent
or otherwise) to repurchase or otherwise acquire or retire any shares of its
capital stock or any warrants, options or other rights to acquire its capital
stock. All of the outstanding shares of the Company's capital stock are, and the
shares of Common Stock to be issued hereunder and upon exercise of the Warrants
will be upon such issuance and receipt by the Company of payment therefor, duly
authorized, validly issued, fully paid and nonassessable.
(ii) There are no statutory stockholders preemptive rights or
similar contractual rights to which the Company is subject or rights of refusal
to which the Company is subject with respect to the issuance of capital stock of
the Company. Except as set forth in the Company Reports, the Company has not
violated any applicable federal or state securities laws in connection with the
offer, sale or issuance of any of its capital stock, and the offer, sale and
issuance of the Common Stock hereunder do not require registration under the
Securities Act, assuming the Investor's representation in Section 4(b) is true
in all respects. There are no agreements to which the Company or, to the
knowledge of the officers of the Company, any holders of the capital stock of
the Company is a party with respect to the voting or transfer of the Company's
capital stock.
(iii) The Company has authorized the issuance and sale to the
Investor of the shares of Common Stock being sold to the Investor pursuant to
Section 2 hereof (including those shares issuable upon exercise of the
Warrants).
(c) Subsidiaries; Investments. Each of the Company's
-------------------------
Subsidiaries, which are listed on Exhibit B hereto, is wholly owned by the
Company and is duly organized, validly existing and in good standing under the
laws of the state of its incorporation, possesses all requisite corporate power
and authority and, except for such exceptions as have not had and are not
reasonably expected to have a Material Adverse Effect, all licenses, permits and
authorizations necessary to own its properties and to carry on its businesses as
now being conducted and is qualified to do business in every jurisdiction in
which it is required to be qualified, except where the failure to so qualify has
not had and is not reasonably expected to have a Material Adverse Effect. All of
the outstanding shares of capital
-7-
<PAGE>
stock of each Subsidiary are duly authorized, validly issued, fully paid and
nonassessable, and all such shares are owned by the Company free and clear of
any Lien. Neither the Company nor any Subsidiary owns or holds the right to
acquire any shares of stock or any other security or interest in any other
Person.
(d) Authorization; No Breach. The execution, delivery and
------------------------
performance of the Transaction Documents by the Company have been duly
authorized by the Company. Each of the Transaction Documents has been duly
executed by the Company and constitutes a valid and legally binding obligation
of the Company, enforceable in accordance with its terms subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights and to general
equity principles. The execution and delivery of the Transaction Documents, and
the fulfillment of and compliance with the terms thereof by the Company, do not
and shall not (i) conflict with or result in a breach of the terms, conditions
or provisions of, (ii) constitute a default under, (iii) result in the creation
of any Lien upon the Company's or any Subsidiary's capital stock or assets
pursuant to, (iv) give any third party the right to modify, terminate or
accelerate any obligation under, (v) result in a violation of, or (vi) require
any authorization, consent, approval, exemption or other action by or notice or
declaration to, or filing with, any court or administrative or governmental body
or agency or other Person pursuant to, the charter or bylaws of the Company or ,
any Contract (as defined in Section 3(i)) or any law, statute, rule, regulation,
order, judgment, decree, agreement, license or instrument to which the Company
or any Subsidiary is subject, except for (A) any such conflict, breach, default,
Lien or right of modification, termination or acceleration (other than any of
the foregoing arising pursuant to the charter or bylaws of the Company) which
would not reasonably be expected to have a Material Adverse Effect or prejudice
in any material respect the rights of the Investor under any of the Transaction
Documents or (B) the requirement to obtain any authorizations or take or make
any related actions and filings required under state securities or "blue sky"
laws or to obtain any other authorization, consent, approval, action, notice,
declaration or filing if the failure to do so would not reasonably be expected
to have a Material Adverse Effect or prejudice in any material respect the
rights of the Investor under any of the Transaction Documents.
-8-
<PAGE>
(e) Company Reports; Financial Statements. The Company has
-------------------------------------
delivered or made available to the Investor (i) each registration statement,
report, proxy statement or information statement filed with the SEC since
December 31, 1997 (the "Audit Date"), including the Company's Annual Report on
----------
Form 10-K for the year ended December 31, 1997, the Company's Quarterly Reports
on Form 10-Q for the quarters ended March 31, 1998 and June 30, 1998 and the
Company's proxy statement with respect to its 1998 annual meeting, the Company's
reports on Form 8-K filed June 11, 1998, April 17, 1998 and February 18, 1998,
in each case in the form (including exhibits, annexes and any amendments
thereto) filed with the SEC (collectively, the "Company Reports"). As of their
---------------
respective dates, the Company Reports complied in all material respects with the
requirements of the Securities Act and the Securities Exchange Act and did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances in which they were made, not misleading. Each of
the balance sheets included in or incorporated by reference into the Company
Reports (including the related notes and schedules) fairly presents in all
material respects the financial position of the Company or Internex, as the case
may be, as of its date and each of the statements of operations, stockholders
equity and cash flows included in or incorporated by reference into the Company
Reports (including any related notes and schedules) fairly presents in all
material respects the results of operations, net losses and cash flows, as the
case may be, of the Company or Internex, as the case may be, for the periods set
forth therein (subject, in the case of unaudited statements, to the absence of
notes and normal year-end audit adjustments), in each case in accordance with
generally accepted accounting principles ("GAAP") consistently applied during
----
the periods involved, except as may be noted therein (the date of the most
recently filed balance sheet of the Company is hereinafter referred to as the
"Balance Sheet Date").
(f) No Material Adverse Change. Since the Balance Sheet Date,
--------------------------
there has been no material adverse change in the financial condition, operating
results, assets, operations, employee relations or customer or supplier
relations of the Company and its Subsidiaries, taken as a whole.
-9-
<PAGE>
(g) Absence of Certain Developments.
-------------------------------
(i) Except as expressly contemplated by the Transaction
Documents or as disclosed in the Company Reports since the Audit Date, neither
the Company nor any Subsidiary has:
(A) issued any notes, bonds or other debt securities or any
capital stock or other equity securities or any securities convertible,
exchangeable or exercisable into any capital stock or other equity
securities (other than employee stock options and shares of Common Stock
issued upon the exercise thereof, shares of the Company's Series A
Preferred Stock and Series B Preferred Stock issued in connection with the
Company's dividend payment and exchange offer related to its outstanding
Shares of Preferred Stock and shares issued in connection with the
acquisition of its Subsidiaries);
(B) borrowed any amount or incurred or become subject to any
liabilities, except liabilities incurred in the ordinary course of business
and liabilities under contracts entered into in the ordinary course of
business (including any capital lease obligations);
(C) discharged or satisfied any material Lien or paid any material
obligation or liability, other than in the ordinary course of business;
(D) declared or made any payment or distribution of cash or other
property to its stockholders with respect to its capital stock or other
equity securities or purchased or redeemed any shares of its capital stock
or other equity securities (including, without limitation, any warrants,
options or other rights to acquire its capital stock or other equity
securities) other than dividend payments made with respect to the Company's
Preferred Stock;
(E) sold, assigned or transferred any material Intellectual
Property or disclosed any proprietary confidential information to any
Person (other than any such disclosure in the ordinary conduct of business
operations or which disclosure
-10-
<PAGE>
was subject to a confidentiality agreement, which in either case does not
have a Material Adverse Effect);
(F) suffered any extraordinary losses, waived any rights of
material value or canceled any material debts or claims, other than in the
ordinary course of business and consistent with past practice;
(G) changed its accounting principles, practices or methods,
except as required by GAAP; or
(H) suffered any loss, or threatened loss, of any supplier or
customer or group of related suppliers or customers which is reasonably
expected to have a Material Adverse Effect.
(h) Contracts and Commitments.
-------------------------
(i) All of the contracts, agreements and instruments (a) filed as
exhibits to the Company Reports which have not expired in accordance with their
terms or (b) which have been entered into since the Audit Date and which will be
filed as exhibits to the Form 10-K for the year ended December 31, 1998 (the
"Contracts") are valid and legally binding obligations of the Company or its
Subsidiaries, as the case may be, and, to the knowledge of the Company, the
other parties thereto, and, to the knowledge of the Company or the applicable
Subsidiary, are enforceable in accordance with their terms subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
and to general equity principles. To the knowledge of the Company or the
applicable Subsidiary: (i) the Company and its Subsidiaries have performed in
all material respects all obligations required to be performed by them under the
Contracts and are not in material default under or in material breach of any
Contract or in receipt of any claim of such default or breach; (ii) no event has
occurred which with the passage of time or the giving of notice or both would
result in a material default, material breach or event of material noncompliance
by the Company or any Subsidiary under any Contract; (iii) neither the Company
nor any Subsidiary has any present expectation or intention of not fully
performing all its material obligations under the Contracts; (iv) neither the
Company nor any Subsidiary has knowledge of any
-11-
<PAGE>
material breach or anticipated material breach by the other parties to any
Contract; and (v) neither the Company nor any Subsidiary has any written notice
or other communication to the effect that any other party to any Contract
intends to terminate such contract, agreement or instrument prior to the
expiration of the maximum stated term of such contract, agreement or instrument.
(ii) A true and correct copy of each of the Contracts which are
referred to in (i)(b) hereof, together with all amendments, waivers or other
changes thereto has been supplied or made available to the Investor through the
SEC's EDGAR filing system.
(i) Intellectual Property Rights.
----------------------------
(i) To the Company's knowledge, neither the Company nor any
Subsidiary is, or as a result of the execution and delivery of this Agreement or
the performance of the Company's obligations hereunder will be, in violation of
any license, sublicense or other agreement applicable to it and, to the
Company's knowledge, the Company or one of its Subsidiaries owns all right,
title and interest to, or has the right to use pursuant to a valid license, all
Intellectual Property Rights used in the Business, subject to such exceptions as
have not had and are not reasonably expected to have a Material Adverse Effect.
(ii) To the Company's knowledge (A) there have been no claims made
against the Company or any Subsidiary or threatened or, to the Company's
knowledge, likely to be threatened by any Person, asserting the invalidity,
misuse or unenforceability of any Intellectual Property Rights referred to in
(i) above or challenging the ownership, validity or effectiveness of any of the
Intellectual Property Rights, which, if successful, would reasonably be expected
to have a Material Adverse Effect, (B) to the Company's knowledge, neither the
Company nor any Subsidiary has received any notices of any material unauthorized
use, infringement or misappropriation by, or conflict with, any present or
former employee of the Company, principal shareholders, strategic partners or
any other third party with respect to such Intellectual Property Rights
(including, without limitation, any demand or request that the Company or any
Subsidiary license any rights from a third party) which, if successful, would
reasonably be expected to have a Material Adverse Effect, (C) to the Company's
knowledge, the conduct of the Business has not
-12-
<PAGE>
infringed, misappropriated or conflicted with and does not infringe,
misappropriate or conflict with any Intellectual Property Rights of other
Persons, and (D) to the Company's knowledge, the Intellectual Property Rights
owned by or licensed to the Company or its Subsidiaries have not been infringed,
misappropriated or conflicted by other Persons, except in the case of the clause
(A) (B), (C) or (D) above for any infringement, misappropriation or conflict
that has not had and is not reasonably expected to have a Material Adverse
Effect. No Intellectual Property Right or product is subject to any Lien and the
Company does not know of any fact that would render the Intellectual Property
Rights invalid. Except with respect to Intellectual Property Rights licensed by
the Company from third parties in the ordinary course of business, to the
Company's knowledge, no Intellectual Property Right is subject to any
outstanding order, judgment, decree, stipulation or agreement restricting in any
manner the licensing or exploitation thereof by the Company or any Subsidiary.
Except for license agreements for the Company's products executed in the
ordinary course of business, without alteration or amendment of any material
term therein, and in accordance with the Company's past practices, to the
Company's knowledge neither the Company nor any Subsidiary has entered into any
agreement to indemnify any other person against any charge of infringement
relating to any Intellectual Property Right. To the Company's knowledge, no
employee of the Company or any Subsidiary is in violation of any term of any
confidentiality or invention assignment agreement, employment contract (whether
written or verbal), patent disclosure agreement or any other contract or
agreement relating to the relationship of any such employee with the Company or
any Subsidiary or any other party (including prior employers) because of the
nature of the business conducted or proposed to be conducted by the Company or
any Subsidiary. To the Company's knowledge, all registered trademarks, service
marks and copyrights held by the Company or its Subsidiaries are valid and
subsisting.
(j) Litigation, etc. Except as set forth in the Company Reports,
----------------
there are no actions, suits, proceedings, orders, investigations or claims
pending (other than any such actions, suits, proceedings, orders, investigations
and claims which may be pending but of which none of the Company, any of its
Subsidiaries and their respective representatives have received notice) or, to
the Company's knowledge, threatened against the Company or any Subsidiary (or
to the Company's knowledge, pending or threatened
-13-
<PAGE>
against any of the officers or directors of the Company or any Subsidiary) at
law or in equity, or before or by any governmental department, commission,
board, bureau, agency or instrumentality which seek to enjoin or prevent the
consummation of or otherwise relate specifically to the transactions
contemplated by the Transaction Documents or which have had or are reasonably
expected to have a Material Adverse Effect; neither the Company nor any
Subsidiary is subject to any pending arbitration proceedings under collective
bargaining agreements or otherwise or, to the Company's knowledge, any
governmental investigations or inquiries (including, without limitation,
inquiries as to the qualification to hold or receive any license or permit)
which have had or are reasonably expected to have a Material Adverse Effect.
Neither the Company nor any Subsidiary is subject to any judgment, order or
decree of any court or other governmental agency that requires or prohibits any
conduct on the part of the Company or its Subsidiaries that affects the Business
in a manner that would have a Material Adverse Effect.
(k) Brokerage. Except as set forth on Schedule 3(n) hereto,
---------
there are no claims for brokerage commissions, finders' fees or similar
compensation in connection with the transactions contemplated by the Transaction
Documents for which the Investor will have any liability or responsibility based
on any arrangement or agreement binding upon the Company or any of its
Subsidiaries.
(l) Compliance with Laws. To the Company's knowledge, neither the
--------------------
Company nor any Subsidiary has violated any law or any governmental rule, order
or regulation or requirement which violation through the date hereof has had or
would reasonably be expected to have a Material Adverse Effect, and neither the
Company nor any Subsidiary has received notice of any such violation. To the
knowledge of the Company, the operation of the Business by the Company and its
Subsidiaries complies and has complied in all material respects with the
Communications Act of 1934, as amended, and the rules, orders, regulations and
other applicable requirements of the Federal Communications Commission and the
public utility commissions of the states in which the Business is conducted
having jurisdiction over the Company or any of its Subsidiaries; provided,
however, that no representation or warranty is made regarding the effect of
future pronouncements or rulings by any applicable governmental body.
-14-
<PAGE>
(m) Affiliated Transactions. Except as disclosed in the Company
-----------------------
Reports hereto, no officer, director or Affiliate of the Company or any
Subsidiary or, to the knowledge of the Company, any individual related by blood,
marriage or adoption to any such individual or any entity in which any such
Person or individual owns a greater than 10% beneficial interest, is a party to
any agreement, contract, commitment or transaction with the Company or any
Subsidiary that is material to the Company and its Subsidiaries, taken as a
whole, or has any material interest in any material property used by the Company
or any Subsidiary which is required to be filed or disclosed in the Company
Reports pursuant to Item 404 of Regulation S-K of the Act.
(n) Year 2000. The Company has reviewed its operations and those
---------
of its Subsidiaries with a view to assessing whether it or its Subsidiaries'
respective businesses, networks or products will, in the receipt, transmission,
processing, manipulation, storage, retrieval, retransmission or other
utilization of data, be vulnerable to a Year 2000 Issue and reasonably
anticipates that it will on a timely basis successfully resolve any Year 2000
Issue. Based on such review, the Company has no reason to believe that a
Material Adverse Effect will occur with respect to it or any Subsidiary's
businesses or operations resulting from a Year 2000 Issue.
SECTION 4. Representations and Warranties of the Investor.
----------------------------------------------
As a material inducement to the Company to enter into this Agreement
and issue and sell the Common Stock and Warrants hereunder, the Investor hereby
represents and warrants that:
(a) Execution; Authorization; No Contravention. The Investor has
------------------------------------------
duly executed and delivered to the Company each Transaction Document to which it
is a party, and each such Transaction Document constitutes a valid and legally
binding obligation of the Investor, enforceable against the Investor in
accordance with its terms subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles. The
execution, delivery and performance by the Investor of each Transaction
-15-
<PAGE>
Document to which it is a party and the consummation of the transactions
contemplated thereby: (a) are within the Investor's corporate power and
authority and have been duly authorized by all necessary corporate action on the
part of the Investor; (b) do not and will not conflict with or contravene the
terms of the Investor's certificate of incorporation or bylaws; (c) do not and
will not violate, conflict with or result in any breach or contravention of or
require any consent, authorization, approval, exemption or other action by or
notice or declaration to, or filing with, any court or administrative or
governmental body or agency or other Person pursuant to (i) any material
agreement, lease or contract of such Investor, or (ii) any applicable statute or
any rule or regulation of any governmental authority or any order or decree
applicable to such Investor (other than as required by the HSR Act.
(b) Securities Act. The Investor is acquiring the Common Stock
--------------
solely for the purpose of investment and not with a view to, or for sale in
connection with, any distribution thereof in violation of the Securities Act.
The Investor acknowledges that the shares of Common Stock are not registered
under the Securities Act, and that such shares may not be transferred or sold
except pursuant to the registration provisions of such Securities Act or
pursuant to an applicable exemption therefrom and pursuant to state securities
laws and regulations as applicable and are subject to substantial restrictions
on transferability under the terms of the Stockholders' Agreement. The Investor
is knowledgeable, sophisticated and experienced in business and financial
matters of the type contemplated by the Transaction Documents and is able to
bear the economic risks associated with its investment in the Company. The
Investor has been afforded access to information regarding the Company and its
Subsidiaries and their respective financial condition, operating results,
properties, liabilities, operations and management sufficient to enable it to
evaluate the risks and merits of its investment in the Company.
(c) Brokerage. There are no claims for brokerage commissions,
---------
finders' fees or similar compensation in connection with the transactions
contemplated by the Transaction Documents for which the Company will have any
liability or responsibility based on any arrangement or agreement binding upon
the Investor.
SECTION 5. Covenants.
---------
-16-
<PAGE>
(a) Inspection Rights. The Company shall permit, and cause its
-----------------
Subsidiaries to permit, the representatives designated by the Investor upon
reasonable notice and during normal business hours, to (x) visit and inspect any
of the properties of the Company and its Subsidiaries, (y) examine the corporate
and financial records of the Company and its Subsidiaries and to make copies
thereof, and (z) discuss the affairs, finances and accounts of any such
corporations with the directors, officers, key employees and (with the prior
consent of the Company, which will not be unreasonably withheld) independent
accountants of the Company.
(b) Confidentiality. The Investor shall hold in confidence all
---------------
information and data obtained by it from the Company or any Subsidiary (whether
in connection with the negotiation of the transactions contemplated by the
Transaction Documents, pursuant to Section 5(a) or otherwise) and shall not
disclose such information to any Person without the prior written consent of the
Company (except that the Investor may disclose such information to those of its
Affiliates, directors, officers and other representatives who require access to
such information and who has executed a copy of the Company's standard
Confidentiality and Proprietary Information Agreement, previously provided to
Investor, in order to enable the Investor to exercise its rights under the
Transaction Documents and who agree to be subject to the restrictions set forth
in this Section 5(b)); provided, however, that the provisions of this Section
5(b) shall not apply to any information or data that can be shown (i) to be
generally available to the public through no fault of the Investor or its
Affiliates, directors, officers and other representatives or (ii) to have been
lawfully obtained by the Investor from other sources not subject to a
confidentiality obligation to the Company.
(c) Filings. The Company and the Investor will promptly file
-------
with the FTC and the Antitrust Division a notification and report form and
related documentary materials if and when required by the HSR Act in connection
with any of the transactions contemplated by this Agreement and the Transaction
Documents and promptly file any additional information requested as soon as
reasonably practicable after receipt of request thereof. Each of the Company and
the Investor will use their reasonable best efforts to obtain as promptly as
practicable after the date
-17-
<PAGE>
hereof early termination or expiration of any waiting period applicable under
the HSR Act to the transactions contemplated hereby.
(d) Reservation of Common Stock. The Company shall at all times
---------------------------
reserve and keep available out of its authorized but unissued shares of Common
Stock, solely for the purpose of the exercise of the Warrants, the number of
shares of its Common Stock issuable upon the exercise of the Warrants. All
shares of Common Stock which are so issuable shall, when issued upon the
exercise of the Warrants, be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and charges.
(e) Further Assurances. If at any time after the Closing any
------------------
further action is necessary or desirable to carry out the purposes of this
Agreement or the Transaction Documents, the proper officers or directors of the
Company or the Investor, as the case may be, shall execute and deliver any
further instruments or documents and take all such necessary action that may
reasonably be requested by the other party.
(f) Board Representations. The Investor shall be entitled to
---------------------
designate, at its option, either (i) one non-director delegate who shall be
entitled to receive notice of and to attend all meetings of the Company's Board
of Directors, as well as to receive all materials received by directors, but who
shall not be a member of the Board of Directors, shall have no fiduciary duties
to the Company, to the Board of Directors or stockholders of the Company and
shall not be entitled to vote at meetings of the Board of Directors (an
"Observer") or (ii) a designee that the Company agrees to use its best efforts
to have the Company's Board of Directors nominate to serve on the Company's
Board of Directors. Any Observer shall execute and deliver to the Company a
copy of the Company's standard Proprietary Information and Nondisclosure
Agreement as a condition to receiving the information provided for hereunder.
(g) Repurchases by the Company. Provided that the Investor has
--------------------------
not purchased any equity securities of the Company, except as contemplated
hereby (including the Warrants), until the Regulatory Relief Date, the Company
will not reacquire or redeem any capital stock so that the ownership by Investor
and its Affiliates would equal or exceed on a fully diluted basis 10% of all
equity of the Company.
-18-
<PAGE>
SECTION 6. Conditions.
----------
6.1. Conditions to Each Party's Obligation to Effect the Closing.
-----------------------------------------------------------
The respective obligation of each party to effect the Closing is subject to the
satisfaction or waiver at or prior to the Closing of each of the following
conditions:
(a) Regulatory Consents. The Antitrust Authorization Condition
-------------------
shall have been satisfied and all notices, reports and other filings required to
be made prior to the Closing by the Company or Investor or any of their
respective Subsidiaries with, and all consents, registrations, approvals,
permits and authorizations required to be obtained prior to the Closing by the
Company or Investor or any of their respective Subsidiaries from, any government
or regulatory authority, agency, commission, body or other governmental entity
("Governmental Entity") in connection with the execution and delivery of this
-------------------
Agreement and the consummation of the transactions contemplated hereby by the
Company and Investor shall have been made or obtained (as the case may be).
(b) Litigation. No court or Governmental Entity of competent
----------
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
statute, law, ordinance, rule, regulation, judgment, decree, injunction or other
order (whether temporary, preliminary or permanent) that is in effect and
restrains, enjoins or otherwise prohibits the Closing or the exercise of the
Warrants (collectively, an "Order"), and no Governmental Entity shall have
-----
instituted any proceeding or threatened to institute any proceeding seeking any
such Order.
(c) Trial Agreement. At the time of Closing, no federal or state
---------------
regulatory agency or court shall have ruled that the Trial Agreement, executed
on the date hereof, violates any federal, state or local statute, rule or
regulation, provided that there is no reasonable prospect that the Trial
Agreement can be conformed to the ruling, while satisfying the original intent
of the parties to the Trial Agreement.
6.2. Conditions to Obligations of Investor. The obligations of
-------------------------------------
Investor to effect the Closing are also subject to the satisfaction or waiver at
or prior to the Closing of the following conditions:
-19-
<PAGE>
(a) Representations and Warranties. The representations and
------------------------------
warranties of the Company set forth in this Agreement shall be true and correct
as of the date of this Agreement and as of the Closing Date as though made on
and as of the Closing Date (except to the extent any such representation or
warranty expressly speaks as of an earlier date), and Investor shall have
received a certificate signed on behalf of the Company by the President or
Executive Vice President of the Company to such effect.
(b) Performance of Obligations of the Company. The Company shall
-----------------------------------------
have performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Closing Date.
(c) Legal Opinion. Investor shall have received an opinion of
-------------
Wilson Sonsini Goodrich & Rosati, counsel to the Company, dated the Closing
Date, regarding the due authorization, validity and fully paid and nonassessable
status of the shares of Common Stock.
6.3. Conditions to Obligation of the Company. The obligation of the
---------------------------------------
Company to effect the Closing is also subject to the satisfaction or waiver by
the Company at or prior to the Closing Date of the following conditions:
(a) Representations and Warranties. The representations and
------------------------------
warranties of Investor set forth in this Agreement shall be true and correct in
all respects as of the date of this Agreement and as of the Closing Date as
though made on and as of the Closing Date, (except to the extent any such
representation and warranty expressly speaks as of an earlier date).
(b) Performance of Obligations of Investor. Investor shall have
--------------------------------------
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date.
SECTION 7. Termination.
-----------
7.1. Termination by Mutual Consent. This Agreement may be
-----------------------------
terminated at any time prior to the Closing, by mutual written consent of the
Company and Investor.
-20-
<PAGE>
7.2. Termination by Either Investor or the Company. This Agreement
---------------------------------------------
may be terminated at any time prior to the Closing by either Investor or the
Company if (i) the Closing shall not have occurred by April 30, 1999, or (ii)
any Order permanently restraining, enjoining or otherwise prohibiting the
Closing shall become final and non-appealable; provided, that the right to
--------
terminate this Agreement pursuant to clause (i) above shall not be available to
any party that has breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure of the Closing to occur.
7.3. Termination by the Company. This Agreement may be terminated
--------------------------
at any time prior to the Closing, by action of the Company if there has been a
material breach by Investor of any representation, warranty, covenant or
agreement contained in this Agreement that is not curable or, if curable, is not
cured within 15 days after written notice is given by the Company to Investor.
7.4. Termination by Investor. This Agreement may be terminated at
-----------------------
any time prior to the Closing, by action of Investor if there has been a
material breach by the Company of any representation, warranty, covenant or
agreement contained in this Agreement that is not curable or, if curable, is not
cured within 15 days after written notice is given by Investor to the Company.
7.5. Effect of Termination and Abandonment. In the event of
-------------------------------------
termination of this Agreement, this Agreement shall become void and of no effect
with no liability on the part of any party hereto (or of any of its directors,
officers, employees, agents, legal and financial advisors or other
representatives); provided, however, except as otherwise provided herein, no
-------- -------
such termination shall relieve any party hereto of any liability or damages
resulting from any breach of this Agreement.
SECTION 8. Investor's Transfer Restrictions.
--------------------------------
(a) The Investor shall not, directly or indirectly, sell,
transfer, pledge, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise dispose of, any (x) shares of Common Stock purchased
hereunder or upon exercise of the Warrant or (y) Warrants except: (i) to the
Company; (ii) to an
-21-
<PAGE>
Affiliate of Investor, so long as such Affiliate agrees to hold such shares
subject to all of the provisions of Sections 8 and 9 of this Agreement, and
agrees to transfer such shares of Common Stock to the Investor or another
Affiliate of Investor if it ceases to be an Affiliate; (iii) pursuant to a
rights offering, dividend or other pro rata distribution to the stockholders of
the Investor; (iv) after the date which is the one year anniversary of the
Closing, pursuant to Rule 144 promulgated under the Securities Act (including
the observance of the requirements of paragraph (f) of such rule, whether or not
otherwise applicable to such disposition, solely with respect to transactions
that would otherwise constitute a First Refusal Sale (as defined below)); (v)
after the date which is the one year anniversary of the Closing, in private
placement transactions exempt from the registration requirements of the
Securities Act; provided that in the event of a proposed transfer to one of the
parties listed on Exhibit C hereto pursuant to this subsection (v) in one or
more transactions occurring during a 90-day period of 100,000 or more shares of
Common Stock or Warrants to acquire 100,000 shares or more of Common Stock (a
"First Refusal Sale"), such transfer shall be subject to the provisions of
Section 9 below; or (vi) in response to a bona fide public tender offer or
exchange offer subject to Regulation 14D or Rule 13e-3 promulgated under the
Exchange Act for cash or other consideration which is made by or on behalf of
the Company.
(b) Any attempted sale, transfer or other disposition by Investor
or an Affiliate of Investor which is not in compliance with this Section 8 or
Section 9 below shall be null and void.
SECTION 9. The Company's Right of First Refusal.
------------------------------------
(a) Prior to the Investor effecting a First Refusal Sale pursuant
to Section 8(a)(v), the Company shall have a first refusal right to purchase
such shares on the following terms and conditions:
(i) The Investor shall give prior notice (the "Transfer Notice")
to the Company in writing of such intention, specifying the name of the proposed
purchaser or transferee, the number of shares of Common Stock proposed to be
sold or transferred, the proposed price therefor and the other material terms
upon which such disposition is proposed to be made.
-22-
<PAGE>
(ii) The Company shall have the right, exercisable by written
notice given by the Company to the Investor within five (5) business days after
receipt of such Transfer Notice (the "Response Notice"), to purchase all, but
not less than all of the shares of Common Stock specified in such Transfer
Notice for cash at the price per share or, if consideration other than cash is
specified in the Transfer Notice, in an amount in cash equal to the Fair Market
Value of such non-cash consideration, as specified in the Transfer Notice. Fair
Market Value shall, with respect to securities which are traded, constitute the
average closing price over the twenty trading days prior to the date of the
Transfer Notice and with respect to other consideration, shall be determined in
good faith by the Investor.
(iii) If the Company exercises its right of first refusal hereunder,
the closing of the purchase of the shares of Common Stock with respect to which
such right has been exercised shall take place within thirty (30) calendar days
after the Company gives the Response Notice to the Investor. Upon exercise of
its right of first refusal, the Company and the Investor shall be legally
obligated to consummate the purchase and sale contemplated thereby and shall use
their best efforts to secure any approvals required in connection therewith.
(iv) If the Company does not exercise its right of first refusal
hereunder within five business days or fails to close within the time period
specified in (iii) above (providing that nothing contained herein should relieve
the Company of liability for such breach), the Investor shall be free, during
the period of sixty (60) calendar days following (A) the expiration of such
five-day period or (B) such failure to close, to sell the shares of Common Stock
specified in such Transfer Notice to the proposed purchaser or transferee
specified in such Transfer Notice and on terms not less favorable to the
Investor than the terms specified in such Transfer Notice.
(b) The Company may assign its right of first refusal hereunder to
any other person.
SECTION 10. Survival and Indemnification.
----------------------------
-23-
<PAGE>
Survival of Representations, Warranties, Covenants and Agreements;
------------------------------------------------------------------
Knowledge of Breach; Indemnification. Notwithstanding any otherwise applicable
- ------------------------------------
statute of limitations, the representations and warranties of each of the
Investor and the Company, respectively, included or provided for herein shall
survive the execution and delivery of this Agreement thirty (30) days after the
receipt by the Investor or the Company, as the case may be, of audited
consolidated financial statements for the other party, as of and for the year
ending December 31, 1998, together with a report thereon by the other party's
independent public accountants provided, however, that any representation,
-------- -------
warranty, covenant or agreement contained in Sections 3(n) and 4(c) shall
survive the execution and delivery of this Agreement until the expiration of the
applicable statute of limitations (including any waivers or extensions thereof)
with respect to such matters; provided, however, that the provisions of this
Section 10 shall constitute the exclusive remedy on the part of any party hereto
in respect of a breach of the representations and warranties of the other party
contained in this Agreement. The covenants and other agreements contained in
this Agreement shall survive the execution and delivery of this Agreement
except that covenants or agreements with a term specified therein shall
terminate at the end of such term. Investor and the Company shall indemnify each
other for breaches of the foregoing representations, warranties and covenants as
to which the indemnified party has given notice during the periods of survival
set forth above, provided, that, in no event shall the Investor be liable to the
-------- ----
Company or the Company be liable to the Investor, as the case may be, pursuant
to this Section 10, for any breach of the representations, warranties, covenants
and agreements included or provided for herein or in any schedule or certificate
or other document delivered pursuant to this Agreement, unless and until all
claims for which damages are recoverable hereunder by the Investor or the
Company, as the case may be, exceed $500,000 (the "Deductible"), in which case
----------
the Investor or the Company, as the case may be, shall be entitled to damages
equal to such excess, but not more than the Purchase Price plus the charges and
expenses (including reasonable attorneys' fees and expenses) incurred by the
party sustaining such damages in connection with the Transaction Documents and
the transactions thereby. Any payments pursuant to this Section 10 shall be
treated as an adjustment to the Purchase Price for all tax purposes. The
indemnification provided for by this Section 10 shall apply
-24-
<PAGE>
notwithstanding any investigation made by or on behalf of any party.
SECTION 11. Miscellaneous.
-------------
(a) Expenses. Except as otherwise expressly provided in this
--------
Agreement, the parties shall bear their own respective expenses (including, but
not limited to, all compensation and expenses of counsel, financial advisors,
consultants, actuaries and independent accountants) incurred in connection with
this Agreement and the transactions contemplated hereby and by the Transaction
Documents.
(b) Public Disclosure. Each party to this Agreement hereby agrees
-----------------
with the other party hereto that, except as may be required to comply with the
requirements of applicable law or the rules and regulations of each stock
exchange or of the Nasdaq National Market or other automated quotation system
upon which the securities of one of the parties is listed or to which such
securities are admitted for trading no press release or similar public
announcement or communication will be made or caused to be made concerning the
execution or performance of this Agreement unless specifically approved in
advance by both parties hereto.
(c) Successors and Assigns; Assignment. Except as otherwise
----------------------------------
expressly provided herein, all covenants and agreements contained in this
Agreement by or on behalf of any of the parties hereto shall bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not. No party to this Agreement may assign any of its
rights or obligations under this Agreement without the prior written consent of
the other party hereto, except that the Investor may designate, by written
notice to the Company, an Affiliate to acquire some or all of the shares of
Common Stock or Warrants hereunder; provided, however, that no such designation
of an Affiliate shall relieve the Investor of its obligations under this
Agreement. The Investor, any Affiliate and any sucessors and assigns shall be
treated as one entity for the purposes of this Agreement.
(d) Remedies. Any Person having any rights under any provision of
--------
this Agreement will be entitled to proceed to enforce such rights specifically,
to recover damages by reason of any breach of any provision of this Agreement
and to exercise all other rights granted by law.
-25-
<PAGE>
(e) Amendments and Waivers. This Agreement and any of the terms
----------------------
contained herein may only be amended or modified by the Company and the Investor
or their successor and assigns in writing.
(f) Severability. In the event that any one or more of the
------------
provisions contained herein, or the application thereof in any circumstances, is
held invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions contained herein shall not be in any way
impaired thereby.
(g) Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to constitute one and the same agreement.
(h) Descriptive Headings. The headings of the sections contained
--------------------
in this Agreement are solely for the purpose of reference, are not part of the
agreement of the parties and shall not affect the meaning or interpretation of
this Agreement.
(i) Governing Law. This Agreement shall be governed by, and
-------------
construed in accordance with, the internal laws of the State of Delaware without
giving effect to the conflict of laws provisions thereof.
(j) Notices. All notices, demands or other communications to be
-------
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally
to the recipient, sent to the recipient by reputable overnight courier service
(charges prepaid) or mailed to the recipient by certified or registered mail,
return receipt requested and postage prepaid. Such notices, demands and other
communications shall be sent to the Investor and to the Company at the addresses
indicated below:
if to the Investor, to: Southwestern Bell Internet
- ---------------------- Services, Inc.
175 E. Houston
San Antonio, Texas 78205
Attention: Thomas W. Hartmann
Facsimile: (210) 351-3488
-26-
<PAGE>
with a copy to: Sullivan & Cromwell
-------------- 1701 Pennsylvania Ave., N.W.
Washington, D.C. 20006-5805
Attention: Janet T. Geldzahler
Facsimile: (202) 956-7515
if to the Company, to: Concentric Network Corporation
- --------------------- 10590 N. Tantau Avenue
Cupertino, CA 95014
Attention: Michael Anthofer
Facsimile: (408) 342-2876
with copy to: Wilson Sonsini Goodrich & Rosati
------------ 650 Page Mill Road
Palo Alto, CA 94304
Attention: David Segre
Facsimile: (650) 496-7556
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
(k) Entire Agreement. This Agreement and the Schedules hereto
----------------
and the other Transaction Documents represent the entire agreement between the
Investor and the Company with respect to the subject matter hereof, and such
agreements supersede all prior agreements between such parties with respect to
the subject matter hereof.
(l) Definition of Knowledge. For the purpose of this Agreement,
-----------------------
"knowledge of the Company" or "known" or a similar phrase shall mean the actual
knowledge of those individuals listed on Exhibit D.
-27-
<PAGE>
IN WITNESS WHEREOF, the undersigned parties have duly executed this
Agreement as of the date first above written.
CONCENTRIC NETWORK CORPORATION
By: /s/ Michael F. Anhofer
-------------------------
Name: Michael F. Anhofer
Title: Senior V.P. and C.E.O.
SOUTHWESTERN BELL INTERNET SERVICES, INC.
By: /s Steven C. Hubbard
-------------------------
Name: Steven C. Hubbard
Title: CEO/President
-28-
<PAGE>
EXHIBIT A
CONCENTRIC NETWORK CORPORATION
Warrants for the Purchase of Shares of
Common Stock of Concentric Network Corporation
-----------------------------------------------------------------------
No. 1A 906,679 Warrants
FOR VALUE RECEIVED, CONCENTRIC NETWORK CORPORATION, a Delaware
corporation (the "Company"), hereby certifies that Southwestern Bell Internet
Services, Inc., a Delaware corporation ("SBIS"), or permitted assigns
(collectively, the "Holder") is entitled, subject to the provisions of this
warrant certificate (including any substitute certificate issued pursuant to the
terms hereof, this "Warrant Certificate") representing 906,679 warrants
("Warrants"), to purchase from the Company, at the times specified herein, one
fully paid and non-assessable shares of Common Stock (as hereinafter defined) at
the Exercise Price, as defined below. The number of shares of Common Stock to
be received upon the exercise of a Warrant and the Exercise Price are subject to
adjustment from time to time, but only as hereinafter set forth.
Concurrently with the issuance of the Warrants, SBIS is purchasing
906,679 shares of Common Stock, par value $.001 per share, of the Company
pursuant to a Stock Purchase Agreement, dated as of October 19, 1998 (the
"Purchase Agreement").
1. Definitions. The following terms, as used herein, have the
-----------
following meanings:
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person.
"Aggregate Exercise Price shall have the meaning set forth in Section
2(a) hereof.
"Common Stock" means the common stock, $0.001 par value, of the
Company, and (in accordance with Section 8 hereof) capital stock of any class or
classes into which such Common Stock or any such other class may thereafter be
changed or reclassified.
"Exercise Price" means $21.00 per share.
"Exercise Subscription Form" shall have the meaning set forth in
Section 2(a) hereof.
<PAGE>
"Expiration Date" means 4:00 p.m., New York City time, on _______,
2001; provided, however, that if such day is a day on which banking institutions
in the City of New York are authorized by law to close, the "Expiration Date"
shall be on the next succeeding day that shall not be such a day.
"Person" means any individual, corporation, partnership, joint stock
company, joint venture, association, trust, unincorporated organization,
government or any agency, department or political subdivision thereof, or any
other entity.
"Regulatory Relief" means that SBC Communications Inc. or its
Affiliates, in their sole reasonable judgment, have obtained any or all
necessary federal and/or state regulatory approvals to provide landline,
interLATA long-distance service in any of SBIS' or its Affiliates' in-region
states pursuant to the Communications Act of 1934, as amended by the
Telecommunications Act of 1996.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the Securities and Exchange Commission promulgated
thereunder.
2. Exercise and Duration of Warrants.
---------------------------------
(a) The Holder of this Warrant Certificate shall have the right to
exercise any or all of the Warrants (but not as to a fractional share of Common
Stock) at any time, or from time to time until the Expiration Date by
presentation and surrender hereof to the Company with the appropriate Exercise
Subscription Form annexed hereto (the "Exercise Subscription Form") and an
Investment Representation Statement annexed hereto duly executed and accompanied
by proper payment of the Exercise Price, as the case may be, multiplied by the
number of shares of Common Stock specified in such form (the "Aggregate Exercise
Price"), all subject to the terms and conditions hereof. Notwithstanding the
foregoing, prior to receipt of Regulatory Relief, the Holder may only exercise
Warrants to the extent that the total equity securities in the Company held by
Holder and its Affiliates is consistent with the restrictions contained in the
Communications Act of 1934, as amended by the Telecommunications Act of 1996.
Each Warrant not exercised prior to the Expiration Date shall become void and
all rights in respect thereof shall cease as of such time.
(b) The Aggregate Exercise Price must be paid in U.S. dollars in
cash, wire transfer of immediately available funds, bank cashier's check or bank
draft payable to the order of the Company. Upon receipt by the Company of this
Warrant Certificate and a properly executed Exercise Subscription Form, together
with the Aggregate Exercise Price at the Company's office designated for such
purpose, the Holder shall be deemed to be the holder of record of the shares of
Common Stock receivable upon such exercise, notwithstanding that the stock
transfer books of the Company shall then be closed or that certificates
representing such shares of Common Stock shall not then be actually delivered to
the Holder. The Holder shall pay any and all documentary, stamp or similar
issue taxes of the United States or any state thereof payable in respect of the
issue or delivery of such shares of Common Stock. The Company shall not be
required to pay any tax or other charge that may be payable in respect of any
transfer
-2-
<PAGE>
involved in the issuance and delivery of any certificate in a name
other than that of the record holder of the Warrants being exercised and in such
case the Company shall not be obligated to issue or deliver any stock
certificate until such tax or charge has been paid in full or it has been
established to the satisfaction of the Company that no such tax or charge is
due.
(c) Notwithstanding Sections 2(a) and 2(b) above, at the option of
the Holder of the Warrants, the Warrants may be exercised in the manner set
forth in paragraph (2)(a) above, except that the Holder may, in lieu of paying
the Aggregate Exercise Price in the manner set forth in Section 2(b) above,
exercise, without making any payment in cash, Warrants for that number of shares
of Common Stock determined by dividing (i) the difference between (x) the
current market price per share of Common Stock (as defined in Section 8(b)
below) on the day of exercise multiplied by the number of shares of Common Stock
specified in the Exercise Subscription Form and (y) the Aggregate Exercise Price
by (ii) the current market price per share of Common Stock on the day of
exercise.
(d) If the Holder exercises less than all the Warrants, this Warrant
Certificate shall be surrendered by the Holder to the Company and a new Warrant
Certificate of the same tenor and for the unexercised number of Warrants which
was not surrendered shall be executed by the Company. Subject to the provisions
hereof regarding transfer of the Warrants, the Company shall register the new
Warrant Certificate in such name or names as may be directed in writing by the
Holder and deliver the new Warrant Certificate to the person or persons entitled
to receive the same.
(e) Upon surrender of this Warrant Certificate in conformity with the
foregoing provisions, the Company shall transfer to the Holder of this Warrant
Certificate appropriate evidence of ownership of any shares of Common Stock or
other securities or property (including any money) to which the Holder is
entitled, registered or otherwise placed in, or payable to the order of, such
name or names as may be directed in writing by the Holder, and shall deliver
such evidence of ownership and any other securities or property (including any
money) to the person or persons entitled to receive the same, together with an
amount in cash in lieu of any fraction of a share of Common Stock as provided in
Section 5 below.
(f) Notwithstanding anything to the contrary contained herein, no
Holder of these Warrants shall be entitled to exercise the same unless, at the
time of exercise, (i) either a registration statement under the Securities Act,
shall have been filed with, and declared effective by, the Securities and
Exchange Commission or the issuance of shares of Common Stock upon the exercise
of the Warrants is permitted pursuant to an available exemption from the
registration requirements of the Securities Act and (ii) all applicable
requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, with respect to the issuance of shares of Common Stock upon the
exercise of the Warrants shall have been satisfied.
-3-
<PAGE>
3. Restrictive Legend. Any substitute Warrant Certificate and any
------------------
certificates evidencing shares of Common Stock issued pursuant to exercise of
Warrants shall bear the following legend, unless such securities have been
registered under the Securities Act or unless the Company determines otherwise
in compliance with applicable law:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR SECURITIES LAWS
OF ANY STATE, AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE
SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
APPLICABLE EXEMPTION THEREUNDER."
4. Reservation of Shares. The Company hereby agrees that at all
---------------------
times there shall be reserved for issuance and delivery upon exercise of the
Warrants such number of its authorized but unissued shares of its Common Stock
or other securities of the Company from time to time issuable upon exercise of
the Warrants as will be sufficient to permit the exercise in full of the
Warrants. All such shares of Common Stock shall be duly authorized and, when
issued upon such exercise, shall be validly issued, fully paid and non-
assessable, free and clear of all liens, security interests, charges and other
encumbrances or restrictions on sale (other than restrictions on resale imposed
under applicable law) and free and clear of all preemptive or similar rights,
except for any of the foregoing that may be imposed by or through the Holder of
the Warrants or the Person to whom shares of Common Stock or other securities
are issued upon the exercise thereof.
5. Fractional Shares. No fractional shares or scrip representing
-----------------
fractional shares shall be issued upon the exercise of any Warrant. With
respect to any fraction of a share called for upon any exercise hereof, the
Company shall pay to the Holder an amount in cash equal to such fraction
multiplied by the current market price per share of Common Stock on the day of
exercise.
6. Transfer, Loss of Warrant Certificate.
-------------------------------------
(a) Subject to the provisions of this Section 6 and Section 15, the
Company will, from time to time, register the transfer of any outstanding
Warrant Certificate upon its records. Each taker and Holder of this Warrant
Certificate by taking or holding the same, consents and agrees that prior to any
transfer of this Warrant Certificate, the holder hereof shall give written
notice to the Company of such holder's intention to effect such transfer. Each
such notice shall describe the manner and circumstances of the proposed transfer
in sufficient detail. The Company shall register such transfer upon surrender
of such Warrant Certificate to the Company for transfer, accompanied by
appropriate instruments of transfer duly executed by the holder or the holder's
duly authorized attorney. Upon any such registration of transfer, a new Warrant
Certificate shall be issued in the name of the transferee, and the surrendered
Warrant Certificate shall be canceled. Each Warrant Certificate evidencing the
transferred Warrants shall bear,
-4-
<PAGE>
unless the same has been registered under the Securities Act, the restrictive
legend set forth in Section 3 herein.
(b) Notwithstanding anything to the contrary contained in Section
6(a), the Company shall not be obligated to register the transfer of any
outstanding Warrant Certificate unless a registration statement under the
Securities Act, shall have been filed with, and declared effective by, the
Securities and Exchange Commission with respect to the transfer of the
applicable Warrants or such transfer is permitted pursuant to an available
exemption from the registration requirements of the Securities Act.
(c) Any attempted or purported Transfer of Warrants in violation of
paragraph 6(b) above shall not be effective to Transfer ownership of such
Warrants to the purported Transferee thereof, who shall not be entitled to any
rights as a Holder with respect to the Warrants purported to be Transferred.
All rights with respect to any Warrants attempted or purported to be Transferred
in violation of the aforementioned provisions shall remain the property of the
Person who initially attempted or purported to transfer such Warrants in
violation thereof. Upon a determination by the Board of Directors of the
Company that there has been or is threatened an attempted or purported Transfer
of Warrants in violation of the aforementioned provisions, the Board of
Directors of the Company may take such action as it deems advisable, including,
but not limited to, refusing to give effect on the books of the corporation to
such attempted or purported Transfer or instituting legal proceedings to enjoin
or rescind the same.
(d) Upon receipt by the Company of evidence satisfactory to it (in
the exercise of its reasonable discretion) of the loss, theft, destruction or
mutilation of this Warrant Certificate, and (in the case of loss, theft or
destruction) of reasonably satisfactory indemnification, and upon surrender and
cancellation of this Warrant Certificate, if mutilated, the Company shall
execute and deliver a new Warrant Certificate of like tenor and date. Any such
new Warrant Certificate executed and delivered shall constitute an additional
contractual obligation on the part of the Company, whether or not the warrant so
lost, stolen, destroyed or mutilated shall be at any time enforceable by anyone.
The provisions of this Section 6 are exclusive and shall preclude (to the extent
lawful) all other rights or remedies with respect to the replacement of
mutilated, lost, stolen, or destroyed Warrant Certificates.
7. Rights of the Holder. Prior to the exercise of any Warrant, the
--------------------
Holder shall not, by virtue hereof, be entitled to any rights of a stockholder
of the Company, including, without limitation, the right to vote, to give or
withhold consent to any corporate action of the Company, to receive dividends or
other distributions, to exercise any preemptive or similar right or to receive
any notice of meetings of stockholders or any notice of any proceedings of the
Company except as may be specifically provided for herein.
8. Anti-Dilution Provisions. The Exercise Prices in effect at any
------------------------
time, and the number of shares of Common Stock which may be purchased upon the
exercise hereof, shall be subject to change or adjustment as follows:
-5-
<PAGE>
(a) In case the Company shall (i) pay a dividend or make any other
distribution on or in respect of its Common Stock in shares of Common
Stock, (ii) subdivide its outstanding Common Stock, (iii) combine its
outstanding Common Stock into a smaller number of shares of Common Stock,
or (iv) issue by reclassification of its Common Stock (whether pursuant to
a merger or consolidation or otherwise) any other shares representing
common equity of the Company, then (x) the number of shares of Common Stock
theretofore issuable upon exercise of a Warrant shall be appropriately
adjusted so that the Holder of each Warrant exercised after the record date
fixing stockholders to be affected by such event shall be entitled to
purchase at the Exercise Price, as adjusted below, the number of shares of
Common Stock (or other shares representing common equity of the Company)
which he would have owned or have been entitled to receive after the
happening of any of the events described above, had such Warrant been
exercised immediately prior to such record date and (y) the Exercise
Price shall be adjusted by multiplying the Exercise Price by a fraction,
the numerator of which is equal to the number of shares of Common Stock
purchasable prior to the adjustment specified in (x) above and the
denominator of which is equal to the number of shares of Common Stock
purchasable after such adjustment. An adjustment made pursuant to this
subparagraph shall become effective immediately after the record date in
the case of a dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision,
combination or reclassification.
(b) The "current market price per share of Common Stock" at any date
shall be deemed to be the average of the daily Closing Prices (as defined
below) for 30 consecutive Trading Days (as defined below) immediately
preceding the day in question, after appropriate adjustment for stock
dividends, distributions, subdivisions, combinations or reclassifications
occurring within such 30-day period. The term "Closing Price" on any day
shall mean the reported last sale price per share of Common Stock on such
day or, in case no such sale takes place on such day, the average of the
reported closing bid and asked prices, in each case on the principal
national securities exchange on which the Common Stock is listed or
admitted to trading, or, if the Common Stock is not listed or admitted to
trading on any national securities exchange, the last quoted sale price or,
if not so quoted, the average of the closing bid and asked prices quoted on
the Nasdaq National Market or, if not so quoted, the average of the closing
bid and asked prices as furnished by any member of the National Association
of Securities Dealers, Inc. selected from time to time by the Company for
that purpose; and the term "Trading Day" shall mean a day on which the
principal national securities exchange on which the Common Stock is listed
or admitted to trading or, if the Common Stock is quoted on the Nasdaq
National Market, then the Nasdaq National Market, is open for the
transaction of business or, if the Common Stock is not listed or admitted
to trading on any national securities exchange or quoted on the Nasdaq
National Market, a Monday, Tuesday, Wednesday,
-6-
<PAGE>
Thursday, or Friday on which banking institutions in the City of New York,
New York are not authorized or obligated by law or executive order to
close.
(c) In the event that at any time, as a result of an adjustment made
pursuant to Sections 8(a) above, the Holder shall become entitled to
receive any shares of the capital stock of the Company other than Common
Stock, thereafter the number of such other shares so receivable upon
exercise of the Warrants shall be subject to adjustment from time to time
in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in Section 8(a).
(d) In case:
(i) the Company shall authorize the issuance to all holders of
its Common Stock of rights or warrants to subscribe for or
purchase shares of its Common Stock or of any other
subscription rights or warrants; or
(ii) the Company shall authorize the distribution to all holders
of its Common Stock (whether pursuant to a merger or
consolidation or otherwise) of evidences of its
indebtedness or assets (other than dividends paid in or
distributions of the Company's capital stock for which the
Exercise Price shall have been adjusted pursuant to Section
8(a) above); or
(iii) of any capital reorganization or reclassification of the
Common Stock (other than a change in par value of the
Common Stock) or of any consolidation or merger to which
the Company is a party and for which approval of any
stockholders of the Company is required (other than a
consolidation or merger in which the Company is the
continuing corporation and that does not result in any
reclassification or change of the Common Stock
outstanding), or of the conveyance or transfer of the
properties and assets of the Company substantially as an
entirety; or
(iv) of the voluntary or involuntary dissolution, liquidation or
winding-up of the Company; or
(v) the Company proposes to take any action (other than actions
of the character described in Section 8(a) above) that
would require an adjustment of the Exercise Prices pursuant
to this Section 8;
-7-
<PAGE>
then the Company shall cause to be mailed by registered mail or overnight
courier to the Holder, at the earliest practicable time (and in any event
not less than 20 days prior to the applicable record or effective date
hereinafter specified), a notice stating (A) the date as of which the
holders of Common Stock of record to be entitled to receive any such
rights, warrants or distributions are to be determined, or (B) the date on
which any such reorganization, reclassification, consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding-up is expected to
become effective, and the date as of which it is expected that holders of
Common Stock of record shall be entitled to exchange their shares of Common
Stock for securities or other property, if any, deliverable upon such
reorganization, reclassification, consolidation, merger, conveyance,
transfer, dissolution, liquidation or winding-up.
(e) Whenever reference is made in this Section 8 to the issuance of
shares of Common Stock, the term "Common Stock" shall include any equity
securities of any class of the Company hereafter authorized which shall not
be limited to a fixed sum or percentage in respect of the right of the
holders thereof to participate in dividends or distributions of assets upon
the voluntary or involuntary liquidation, dissolution or winding-up of the
Company.
(f) Notwithstanding any provision to the contrary in this Section 8,
the Exercise Price in effect at any time, and the number of shares of
Common Stock which may be purchased upon the exercise hereof, shall not be
subject to change or adjustment in either of the following cases:
(i) In case the Company shall issue shares of Common Stock to
any Person, or rights, options or warrants to any Persons entitling
such Persons to subscribe for or purchase shares of Common Stock, at a
price per share at least equal to or greater than the current market
price per share of Common Stock as of the issue date such shares of
Common Stock or rights, options or warrants to any such Person; or
(ii) In case the Company purchases any assets or securities (a
"Purchase") and provides all or some of the consideration for such
Purchase in shares of Common Stock.
Notwithstanding any other provision contained in this Section 8, no adjustment
to the Exercise Price need be made unless the adjustment would require an
increase or decrease of at least 1% in the Exercise Price as then in effect.
Any adjustments that are not made as a result of this Section 8(g) shall be
carried forward and taken into account in any subsequent adjustment.
9. Officers' Certificate. Whenever any adjustment in the Exercise
---------------------
Price is made, the Company (A) shall as soon as reasonably practicable file in
the custody of its Secretary at its
-8-
<PAGE>
principal office, a statement describing the adjustment and the method of
calculation used, and may obtain the certificate of any independent firm of
public accountants of national recognition selected by the Board of Directors of
the Company which, if obtained, shall be presumptive evidence of the correctness
of any such calculation that such adjustment was properly calculated in
accordance with the provisions of Section 8 and (B) shall cause a copy of such
statement to be mailed by first class mail postage prepaid to the Holder.
10. Consolidation or Merger. In case of any consolidation of the
-----------------------
Company with, or merger of the Company into, any other Person or any merger of
another Person into the Company (other than a consolidation or merger in which
the Company is the continuing corporation and that does not result in any
reclassification or change of the Common Stock outstanding), the Holder of this
Warrant Certificate shall have the right thereafter to exercise the Warrants for
the kind and amount of securities, cash and other property receivable upon such
consolidation or merger by a holder of the number of shares of Common Stock of
the Company for which the Warrants may have been exercised immediately prior to
such consolidation or merger, assuming such holder of Common Stock of the
Company (i) is not a Person with which the Company consolidated or into which
the Company merged or which merged into the Company, as the case may be
("Constituent Person"), or an Affiliate of a Constituent Person and (ii) failed
to exercise his rights of election, if any, as to the kind or amount of
securities, cash and other property receivable upon such consolidation or merger
(provided that if the kind or amount of securities, cash and other property
receivable upon such consolidation or merger is not the same for each share of
Common Stock of the Company held immediately prior to such consolidation or
merger by other than a constituent Person or an Affiliate thereof and in respect
of which such rights of election shall not have been exercised ("non-electing
share"), then for the purpose of this Section 10 the kind and amount of
securities, cash and other property receivable upon such consolidation or merger
by each non-electing share shall be deemed to be the kind and amount so
receivable per share by a plurality of the nonelecting shares). Adjustments for
events subsequent to the effective date of such a consolidation or merger shall
be as nearly equivalent as may be practicable to the adjustments provided for in
this Warrant Certificate. In any such event, effective provisions shall be made
in the certificate or articles of incorporation of the resulting or surviving
corporation or otherwise so that the provisions set forth herein for the
protection of the rights of Warrant holders shall thereafter continue to be
applicable; and any such resulting or surviving corporation shall expressly
assume the obligation to deliver, upon exercise, such shares of stock, other
securities, cash and property. The provisions of this Section 10 shall
similarly apply to successive consolidations or mergers.
11. Notices. Any notice or other communication required or permitted
-------
hereunder shall be in writing and shall be delivered personally, sent by
facsimile transmission or sent by certified, registered or express mail, postage
prepaid. Any notice shall be deemed given when so delivered personally, sent by
facsimile transmission or, if mailed, three (3) business days after the date of
deposit in the United States mail, by certified mail return receipt requested,
as follows:
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<PAGE>
If to the Company: Concentric Network Corporation
10590 N. Tantau Avenue
Cupertino, CA 95014
Attention: Michael Anthofer
Facsimile: (408) 342-2876
If to the Holder: Southwestern Bell Internet Services, Inc.
175 E. Houston
San Antonio, Texas 78205
Attention: General Attorney,
Mergers & Acquisitions
Facsimile: (210) 351-3488
or such other address as shall have been furnished to the party giving or making
such notice, demand or delivery.
12. APPLICABLE LAW. THIS WARRANT CERTIFICATE AND ALL RIGHTS ARISING
--------------
HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAW
OF THE STATE OF DELAWARE WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS
PROVISIONS THEREOF.
13. Amendments; Waivers. Any provision of this Warrant Certificate
-------------------
may be amended or waived if, and only if, such amendment or waiver is in writing
and signed, in the case of an amendment, by the Holder and the Company, or in
the case of a waiver, by the party against whom the waiver is to be effective.
No failure or delay by either party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof nor shall any single or partial
exercise thereof preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. The rights and remedies herein provided
shall be cumulative and not exclusive of any rights or remedies provided by law.
14. Agreement of Holder. By acceptance of this Warrant Certificate
-------------------
and the Warrants represented thereby the Holder hereby agrees to be bound by the
terms and conditions contained herein.
15. Transfers. Transfers of the Warrants shall be made in accordance
---------
with Section 8 of the Purchase Agreement.
-10-
<PAGE>
IN WITNESS WHEREOF, the Company has duly caused this Warrant
Certificate to be signed and attested by its duly authorized officers and to be
dated as of ____________, 1998.
CONCENTRIC NETWORK CORPORATION
By:___________________________
Name:
Title:
Attest:
By:__________________________
Name:
Title:
Consented to and Accepted:
SOUTHWESTERN BELL INTERNET SERVICES, INC.
By:__________________________
Name:
Title:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR
SECURITIES LAWS OF ANY STATE, AND NEITHER THE SECURITIES NOR ANY INTEREST
THEREIN MAY BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION
OR AN APPLICABLE EXEMPTION THEREUNDER. NO HOLDER OF WARRANTS EVIDENCED BY THIS
CERTIFICATE MAY TRANSFER SUCH WARRANTS OR ANY INTEREST THEREIN TO ANY PERSON
OTHER THAN SBC COMMUNICATIONS INC. OR AN AFFILIATE OF SBC COMMUNICATIONS INC.
-11-
<PAGE>
ASSIGNMENT FORM
(To be executed if Holder desires to transfer a Warrant)
For Value Received, the undersigned hereby sells, assigns and
transfers to _________________________________________.
________________________________________________________________________________
Please insert social security or other identifying number
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Please print name and address including zip code)
Warrants represented by this Warrant Certificate, and does hereby irrevocably
appoint _______________________ Attorney, to transfer such rights on the books
of the Company with full power of substitution.
Date: ____________________.
________________________________(1)
(Signature of Owner)
___________________________________
(Street Address)
___________________________________
(City) (State) (Zip Code)
(1) The signature must correspond with the name as written upon the face of the
within Warrant Certificate in every particular, without alteration or
enlargement or any change whatever.
-12-
<PAGE>
EXERCISE SUBSCRIPTION FORM
(To be executed only upon exercise for cash of Warrants at the Exercise Price)
To: Concentric Network Corporation
The undersigned irrevocably exercises Warrants for the purchase of
__________ shares of common stock, $0.001 par value, of Concentric Network
Corporation (the "Common Stock") at the Exercise Price and herewith makes
payment of $__________________________ (such payment being made in U.S. dollars
in cash, wire transfer of immediately available funds, bank cashier's check or
bank draft payable to the order of Concentric Network Corporation), all on the
terms and conditions specified in the attached Warrant Certificate, and
surrenders this Warrant Certificate and all right, title and interest in the
Warrants exercised hereby to Concentric Network Corporation and directs that the
shares of Common Stock deliverable upon the exercise of these Warrants be
registered or placed in the name and at the address specified below and
delivered thereto.
Date: __________________.
________________________________(1)
(Signature of Owner)
___________________________________
(Street Address)
___________________________________
(City) (State) (Zip Code)
(1) The signature must correspond with the name as written upon the face of the
within Warrant Certificate in every particular, without alteration or
enlargement or any change whatever.
-13-
<PAGE>
Securities and/or check to be issued to:
Please insert social security or identifying number:
Name:
Street Address:
City, State and Zip Code:
Any unexercised Warrants evidenced by the
within Warrant Certificate to be issued to:
Please insert social security or identifying number:
Name:
Street Address:
City, State and Zip Code:
-14-
<PAGE>
EXERCISE SUBSCRIPTION FORM
(To be executed only upon cashless exercise of Warrants at the Exercise Price)
To: Concentric Network Corporation
The undersigned irrevocably exercises Warrants for the purchase of
__________ shares of common stock, $0.001 par value, of Concentric Network
Corporation (the "Common Stock") at the Exercise Price without any cash payment
pursuant to Section 2(c) of the attached Warrant Certificate and on the other
terms and conditions specified therein, and surrenders this Warrant Certificate
and all right, title and interest in the Warrants exercised hereby to Concentric
Network Corporation and directs that the shares of Common Stock deliverable upon
the exercise of these Warrants be registered or placed in the name and at the
address specified below and delivered thereto.
Date: ________________.
________________________________(1)
(Signature of Owner)
___________________________________
(Street Address)
___________________________________
(City) (State) (Zip Code)
(1) The signature must correspond with the name as written upon the face of the
within Warrant Certificate in every particular, without alteration or
enlargement or any change whatever.
-15-
<PAGE>
Securities and/or check to be issued to:
Please insert social security or identifying number:
Name:
Street Address:
City, State and Zip Code:
Any unexercised Warrants evidenced by the
within Warrant Certificate to be issued to:
Please insert social security or identifying number:
Name:
Street Address:
City, State and Zip Code:
-16-
<PAGE>
EXHIBIT B
SUBSIDIARIES
InterNex Information Services, Inc.
Delta Internet Services, Inc.
AnaServe, Inc.
<PAGE>
EXHIBIT C
[Omitted]
<PAGE>
EXHIBIT D
[Omitted]
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 171,235 171,235
<SECURITIES> 17,251 17,251
<RECEIVABLES> 10,706 10,706
<ALLOWANCES> 453 453
<INVENTORY> 0 0
<CURRENT-ASSETS> 209,915 209,915
<PP&E> 95,792 95,792
<DEPRECIATION> 37,778 37,778
<TOTAL-ASSETS> 315,571 315,571
<CURRENT-LIABILITIES> 42,186 42,186
<BONDS> 0 0
150,806 150,806
0 0
<COMMON> 186,389 186,389
<OTHER-SE> (220,924) (220,924)
<TOTAL-LIABILITY-AND-EQUITY> 315,571 315,571
<SALES> 21,579 57,725
<TOTAL-REVENUES> 21,579 57,725
<CGS> 22,906 60,834
<TOTAL-COSTS> 40,147 104,778
<OTHER-EXPENSES> 0 6,491
<LOSS-PROVISION> 14 133
<INTEREST-EXPENSE> 2,390 10,885
<INCOME-PRETAX> (26,237) (70,985)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (26,237) (70,985)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 3,042
<CHANGES> 0 0
<NET-INCOME> (26,237) (67,943)
<EPS-PRIMARY> (1.79) (4.71)
<EPS-DILUTED> (1.79) (4.71)
</TABLE>
